Chapter04 - Chapter4 LearningObjectives , ,

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Chapter 4 Analysis of Financial Statements Learning Objectives After reading this chapter, students should be able to: Explain why ratio analysis is usually the first step in the analysis of a company’s financial statements. List the five groups of ratios, specify which ratios belong in each group, and explain what information each  group gives us about the firm’s financial position. State what trend analysis is, and why it is important. Describe how the basic Du Pont equation is used, and how it may be modified to form the extended Du  Pont equation, which includes the effect of financial leverage. Explain “benchmarking” and its purpose. List several limitations of ratio analysis. Identify some of the problems with ROE that can arise when firms use it as a sole measure of  performance. Identify some of the qualitative factors that must be considered when evaluating a company’s financial  performance. Chapter 4:  Analysis of Financial Statements Learning Objectives 73
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Lecture Suggestions Chapter 4 shows how financial statements are analyzed to determine firms’ strengths and weaknesses.  On  the basis of this information, management can take actions to exploit strengths and correct weaknesses. At Florida, we find a significant difference in preparation between our accounting and non-accounting  students.  The accountants are relatively familiar with financial statements, and they have covered in depth in  their financial accounting course many of the ratios discussed in Chapter 4.  We pitch our lectures to the non- accountants, which means concentrating on the use of statements and ratios, and the “big picture,” rather than  on details such as seasonal adjustments and the effects of different accounting procedures.   Details are  important, but so are general principles, and there are courses other than the introductory finance course  where details can be addressed. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case  solution for Chapter 4, which appears at the end of this chapter solution.  For other suggestions about the  lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER:  3 OF 58 DAYS (50-minute periods) 74 Lecture Suggestions Chapter 4:  Analysis of Financial Statements
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Answers to End-of-Chapter Questions 4-1 The emphasis of the various types of analysts is by no means uniform nor should it be.  Management  is interested in all types of ratios for two reasons.  First, the ratios point out weaknesses that should be 
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