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Lecture Accounting: What the numbers mean (2/e) - Chapter 10: Fundamental interpretations made from financial statement data

Chapter 10 - Fundamental interpretations made from financial statement data. Learning objectives of this chapter include: Explain why financial statement ratios are important, explain the importance of and calculate the return on assets (ROA), calculate and interpret margin and turnover using the adapted dupont model, explain the significance of and calculate the return on equity (ROE),. | CHAPTER 10 Fundamental Interpretations made from Financial Statement Data 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Slides prepared by John Tretola Learning Objectives Explain why financial statement ratios are important. Explain the importance of and calculate the return on assets (ROA). Calculate and interpret margin and turnover using the adapted DuPont model. Explain the significance of and calculate the return on equity (ROE). Explain the meaning and importance of liquidity. Calculate working capital, the current ratio and the quick ratio and explain their significance. Demonstrate the effective use of trend analysis. 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Slides prepared by John Tretola Overview Current and potential shareholders are interested in making their own assessments about management’s stewardship of the resources made available by the owners. Creditors assess the ability of the entity to repay loans and pay for products and services. These relationships about profitability and debt-paying ability involve interpreting the relationships between amounts reported in the financial statements. 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Slides prepared by John Tretola Financial Statement Ratios The large dollar amounts reported in the financial statements and the varying size of companies make ratio analysis the only sensible method of evaluating the various financial characteristics of companies. A ratio is simply the relationship between 2 numbers. A single ratio will not tell us very much. Need to undertake trend analysis (using industry averages). 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & . | CHAPTER 10 Fundamental Interpretations made from Financial Statement Data 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Slides prepared by John Tretola Learning Objectives Explain why financial statement ratios are important. Explain the importance of and calculate the return on assets (ROA). Calculate and interpret margin and turnover using the adapted DuPont model. Explain the significance of and calculate the return on equity (ROE). Explain the meaning and importance of liquidity. Calculate working capital, the current ratio and the quick ratio and explain their significance. Demonstrate the effective use of trend analysis. 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Slides prepared by John Tretola Overview Current and potential shareholders are interested in making their own assessments about .