Chapter 3 - Fundamental interpretations made from financial statement data. After reading this chapter, you should be able to answer the following questions: Why are financial statement ratios important? How is return on investment calculated and why is it important? What is the DuPont model and what do margin and turnover mean? What is the significance of return on equity and how is it calculated?. | © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Accounting: What The Numbers Mean Tenth Edition Marshall, McManus, and Viele Chapter 3 Fundamental Interpretations Made from Financial Statement Data PowerPoint Authors: Susan Coomer Galbreath, ., CPA Charles W. Caldwell, ., CMA Jon A. Booker, ., CPA, CIA Cynthia J. Rooney, ., CPA Chapter 3: Fundamental Interpretations Made from Financial Statement Data Financial Ratios and Trend Analysis A ratio is simply the relationship between two numbers. The large dollar amounts reported on the financial statements of many companies, and the varying size of companies, make ratio analysis the only sensible method of evaluating various financial characteristics. LO 1 3- Learning Objective 1: Discuss why financial statement ratios are important. A ratio is simply the relationship between two numbers. The large dollar amounts reported on the financial statements of many companies, and the varying size of companies, make ratio analysis the only sensible method of evaluating various financial characteristics. Trend Analysis Trend analysis compares a single observation over several years. LO 1 3- Trend analysis can help to identify improving or deteriorating conditions. Rate of Return This ratio provides the return on a given investment alternative. All other things being equal, the higher the rate of return, the more profitable the alternative. Rate of return Amount of return Amount of investment = The rate of return calculation is derived from the interest calculation. Interest = Principal × Rate × Time Higher rates of return are associated with greater risk! LO 2 3- Learning Objective 2: Explain the importance and show the calculation of return on investment. To calculate the rate of return ratio, the amount of return on an investment is divided by the amount of the investment. The rate of return ratio provides the return on a given investment alternative. All other things being equal, the | © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Accounting: What The Numbers Mean Tenth Edition Marshall, McManus, and Viele Chapter 3 Fundamental Interpretations Made from Financial Statement Data PowerPoint Authors: Susan Coomer Galbreath, ., CPA Charles W. Caldwell, ., CMA Jon A. Booker, ., CPA, CIA Cynthia J. Rooney, ., CPA Chapter 3: Fundamental Interpretations Made from Financial Statement Data Financial Ratios and Trend Analysis A ratio is simply the relationship between two numbers. The large dollar amounts reported on the financial statements of many companies, and the varying size of companies, make ratio analysis the only sensible method of evaluating various financial characteristics. LO 1 3- Learning Objective 1: Discuss why financial statement ratios are important. A ratio is simply the relationship between two numbers. The large dollar amounts reported on the financial statements of many companies, and the varying size of companies, .
