Textbook Notes (368,401)
Canada (161,862)
Finance (37)
MGFB10H3 (19)
Derek Chau (11)
Chapter 4

Chapter 4 Notes

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Derek Chau

Chapter 4 Financial Statement Analysis and Forecasting Notes 4.1 Consistent Financial Analysis despite efforts to harmonize accounting standards, important differences in GAAP still persist these GAAP differences have forced users of financial statements to attempt an external reconciliation of GAAP this is important because users need to be able to compare statements of companies in the same industry from different countries the transition to International Financial Reporting Standards (IFRS) by 2011 will complicate issues in the short term on the other hand, as more countries adopt these standards, comparability should be enhanced in the long term aside from the use of different principles (i.e., different forms of GAAP) in preparing financial standards, an additional complication arises because there are generally accepted financial ratios 4.2 A Framework for Financial Analysis Return on Equity (ROE) and the DuPont System return on equity (ROE) return earned by equity holders on investment in firm; net income divided by shareholders equity ROE is not a pure financial ratio because it involves dividing an income statement (flow) item by a balance sheet (stock) item as a result, some people calculate the ROE as NI over the average SEthe average of the starting and ending SE this adjustment acknowledges that NI is earned throughout the year, so it makes sense to divide by an average of SE to recognize that not all of those funds were invested throughout the year return on asset (ROA) net income divided by total assets if the ROE is multiplied by TA and divided by SE, the TAs cancel out and produce the ROE leverage ratio total assets divided by shareholders equity; it measures how many dollars of total assets are supported by each dollar of shareholders equity, or how many times the firm has leveraged capital provided by shareholders into total financing financial leverage the use of capital provided by shareholders to increase total financing net profit margin part of return on assets; net income divided by revenues turnover ratio art of return on assets; revenues divided by total assets ROA = NI TA = NI Rev
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