Financial Statements - Chapter 4 Analysis of Financial...

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Unformatted text preview: 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 ratios relationship to the balance sheet and income statement. Discuss why ROE is the key ratio under managements 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 firms ratios with those of other firms (benchmarking) and analyze a given firms 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 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 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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This note was uploaded on 09/21/2011 for the course ECON 101 taught by Professor Flah during the Spring '10 term at Punjab Engineering College.

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Financial Statements - Chapter 4 Analysis of Financial...

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