ch 2 learning goals content and format of income statement and balance sheet. uses of financial...
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Ch 2 Learning GoalsCh 2 Learning Goals
Content and format of income statement and balance sheet.
Uses of financial ratios.Calculate and interpret financial ratios.DuPont analysis.
Financial StatementsFinancial Statements
Income statement: a summary of
◦__________________
◦and __________________
during a specified period.
The Income Statement
Financial StatementsFinancial Statements
Balance sheet: summary of a firm’s financial
position at a given ___________________ in time.
◦Assets: what the firm ________________
◦Liabilities: what the firm ________________
Assets – liabilities = ______________
____________________ represents the owners’ investment.
The Balance Sheet
Using Financial Ratios
• Ratio analysis: calculating and ________________
financial ratios to assess a firm’s financial condition
and performance.
• It is of interest to shareholders, creditors, and the
firm’s own management.
Interested Parties
Trend or time-series analysis
Used to evaluate a firm’s performance over time
Using Financial Ratios
Types of Ratio Comparisons
• cross-sectional analysis
Used to compare different firms at the same point in time
Using Financial Ratios
Types of Ratio Comparisons
To do a cross-sectional analysis,
compare the firm’s ratios with:
________________ norms
industry _______________
Using Financial Ratios
Cross-sectional analysis
Using Fin’l RatiosUsing Fin’l Ratios
There are no ____________________ _____________________ for ratios!◦Example: the current ratio should be 2.◦Not necessarily! ◦Ratios should be interpreted in comparison to
other similar firms (same industry, similar size, etc)
• Ratios must be considered together; a single ratio by
itself means little.
• Financial statements being compared should be from
the same time.
• Use audited financial statements if possible.
• The financial data being compared should have been
developed in the same way.
• Inflation distorts the results.
Using Financial RatiosCautions for Doing Ratio Analysis
• Liquidity Ratios
• Activity (efficiency) Ratios
• Leverage Ratios
• Profitability Ratios
• Common-size statements
• DuPont Analysis
Ratio Analysis
DuPont System of AnalysisDuPont System of Analysis
The DuPont system is not a method of calculating ROA and ROE, rather it is a technique for _____________________ financial performance.
DuPont System of AnalysisDuPont System of Analysis
DuPont analysis merges the income statement and balance sheet into two summary measures of profitability: _________ and ____________.
DuPont System of AnalysisDuPont System of Analysis
The DuPont system breaks ROE into:◦A ___________________________ component ◦An __________________________ component◦A ___________________________ (financing) component.
DuPont AnalysisDuPont Analysis
ROA = NPM X TATOAndROE = ROA X FLMWhere:FLM = Financial Leverage Multiplier = Total Assets / Common Equity
DuPont AnalysisDuPont Analysis
The two formulas can be combined to get:
NPM X TATO X FLM = ROE
By putting the values for this formula for both the firm and the industry into a table, we can determine why a firm’s ROA and ROE are higher or lower than its competition.