Chapter 3 - Chapter 3 Working with Financial Statements We...

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Chapter 3 Working with Financial Statements We conclude our discussion of financial statements with a short discussion of financial ratios. Almost all financial ratios use the accounting balance sheet and income statement. In finance, we are more concerned with using the market value balance sheet rather than the accounting balance sheet (e.g., we are more interested in what a balance sheet item is worth than what it cost). In addition, a firm’s income tax statement contains more information than the firm’s accounting income statement (i.e., the income tax statement determines the amount of tax a firm has to pay – an important cash flow for the firm). However, financial ratios based on accounting financial statements are still useful, especially when it is difficult to determine market values. We will only discuss some of the financial ratios in class. However, I expect you to know all of the ratios discussed in the textbook (see Table 3.5 on page 63). You can skip section 3.3 (the Du Pont Identity) and section 3.4 (internal and sustainable growth). Concentrate on the remaining sections.
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Why look at financial ratios? Internal uses 1) Measuring performance to determine compensation for managers Firms want to reward managers who increase the firm’s market value. The market value of a firm’s equity is easy to determine if the firm is publicly traded. Financial ratios are used when: The firm is private Measuring performance for a division or for a particular project
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This note was uploaded on 04/29/2008 for the course FINANCE 3320 taught by Professor Wigmans,f during the Spring '08 term at Texas Tech.

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Chapter 3 - Chapter 3 Working with Financial Statements We...

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