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($75,000 + $25,000) ÷ 20,000 shares = $5.00This ratio in theleast understood and therefore the most likely to mislead an investor. FASB ASC 230-10-45-3 strongly recommends against the isolated disclosure of this ratio.q.Payout ratio to common shareholders.Common dividends ÷ net income less preferred dividendsMeasures portion of net income to common shareholders paid out on dividends.$10,000 ÷ ($75,000 −$15,000) = 0.17Income does not necessarily measure cash available for dividend payment. Heavily influenced by management policy, nature of business, and stage of development, all of which diminish comparability.
RatioDefinitionSignificanceComputationLimitationsr.Cash from operating activities to net incomeNet cash provided by operating activities ÷ net incomeShows cash flow effects of the company’snet income forthe period.$100,000 ÷ $75,000 = 1.33Net income includes noncash revenues and expenses recognized by accrual accounting principles.Dupont AnalysisReturn on Equity = (Net Income ÷ Sales) × (Sales ÷ Average Total Assets) × (Average Totalassets ÷ Average Equity)