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Financial Statements - Chapter4 LearningObjectives ,...

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Chapter 4 Analysis of Financial Statements Learning Objectives After reading this chapter, students should be able to: Explain what ratio analysis is. List the five groups of ratios and identify, calculate, and interpret the key ratios in each group.  In  addition, discuss each ratio’s relationship to the balance sheet and income statement. Discuss why ROE is the key ratio under management’s control, how the other ratios affect ROE, and  explain how to use the DuPont equation to see how the ROE can be improved. Compare a firm’s ratios with those of other firms (benchmarking) and analyze a given firm’s ratios  over time (trend analysis). Discuss the tendency of ratios to fluctuate over time, which may or may not be problematic.  Explain  how they can be influenced by accounting practices and other factors and why they must be used  with care. Chapter 4:  Analysis of Financial Statements Learning Objectives 41
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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) 42 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 strengthened; second, management recognizes that the other parties 
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