Operating activities are the core activities of a

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from operating and nonoperating activities is important and plays a key role in our analysis. Operating activities are the core activities of a company. They consist of those activities required to deliver a company's products or services to its customers. A company engages in operating activities when it conducts research and development, establishes supply chains, assembles administrative support, produces and markets its products, and follows up with after- sale customer services. The asset side of a company's balance sheet reflects resources devoted to operating activi- ties with accounts such as receivables, inventories, and property, plant and equipment (PPE). Operating activities are reflected in liabilities with accounts such as accounts payable, accrued expenses, and long-term operating liabilities such as pension and health care obligations. The income statement reflects operating activities through accounts such as revenues, costs of goods sold, and operating expenses such as selling, general, and administrative expenses that include wages, advertising, depreciation, occupancy, insurance, and research and development. Operating activities create the most long-lasting (persistent) effects on future profitability and cash flows of the company. Operations provide the primary value drivers for company stakeholders. It is for this reason that operating activities play such a prominent role in assessing profitability. Nonoperating activities relate to the investing of cash in marketable securities and in other nonoperating investments. Nonoperating activities also relate to borrowings through accounts such as short- and long-term debt. These nonoperating assets and liabilities expand and contract to buffer fluctuations in operating asset and liability levels. When operating assets grow faster than operating liabilities, companies typically increase their nonoperating liabilities to fund the
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Module 3 I Profitability Analysis and Interpretation 3-4 ~cit. Later, these liabilities decline when operating assets decline. When companies have cash excess of what is needed for operating activities, they often invest the cash temporarily in etable securities or other investments to provide some return until those funds are needed operations. The income statement reflects nonoperating activities through accounts such as interest and idend revenue, capital gains or losses relating to investments, and interest expense on bor- ed funds. Nonoperating expenses, net of any nonoperating revenues, provide a nonoperating for a company. Although nonoperating activities are important and must be managed well, )"are not the main value drivers for company stakeholders. We begin this module by explaining the return on equity (ROE). We then discuss in more . how ROE consists of both an operating return (RNOA) and a nonoperating return. Next, discuss the two RNOA components that measure profitability and asset turnover. We conclude - module with a discussion of nonoperating return, focusing on the notion that companies can se ROE through judicious use of debt.
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