0. Content and format of income statement and balance sheet.
Uses of financial ratios.
Calculate and interpret financial ratios.
DuPont analysis.
Ch 2 Learning Goals

1. Financial Statements The Income Statement
Income statement: a summary of
__________________
and __________________
during a specified period.

2. Financial Statements The Balance Sheet
Balance sheet: summary of a firm’s financial position at a given ___________________ in time.
Assets: what the firm ________________
Liabilities: what the firm ________________
Assets – liabilities = ______________
____________________ represents the owners’ investment.

3. Using Financial Ratios
Interested Parties
Ratio analysis: calculating and ________________ financial ratios to assess a firm’s financial condition and performance.
It is of interest to shareholders, creditors, and the firm’s own management.

4. Types of Ratio Comparisons
Using Financial Ratios
Types of Ratio Comparisons
Trend or time-series analysis
Used to evaluate a firm’s performance over time

5. Types of Ratio Comparisons
Using Financial Ratios
Types of Ratio Comparisons
cross-sectional analysis
Used to compare different firms at the same point in time

6. Cross-sectional analysis
Using Financial Ratios
Cross-sectional analysis
To do a cross-sectional analysis, compare the firm’s ratios with:
________________ norms
industry _______________

7. There are no ____________________ _____________________ for ratios!
Example: the current ratio should be 2.
Not necessarily!
Ratios should be interpreted in comparison to other similar firms (same industry, similar size, etc)
Using Fin’l Ratios

8. Cautions for Doing Ratio Analysis
Using Financial Ratios
Cautions for Doing Ratio Analysis
Ratios must be considered together; a single ratio by itself means little.
Financial statements being compared should be from the same time.
Use audited financial statements if possible.
The financial data being compared should have been developed in the same way.
Inflation distorts the results.

9. Ratio Analysis Liquidity Ratios Activity (efficiency) Ratios
Leverage Ratios
Profitability Ratios
Common-size statements
DuPont Analysis

10. DuPont System of Analysis
The DuPont system is not a method of calculating ROA and ROE, rather it is a technique for _____________________ financial performance.

11. DuPont System of Analysis
DuPont analysis merges the income statement and balance sheet into two summary measures of profitability: _________ and ____________.

12. DuPont System of Analysis
The DuPont system breaks ROE into:
A ___________________________ component
An __________________________ component
A ___________________________ (financing) component.

13. ROA = NPM X TATO And ROE = ROA X FLM Where: FLM = Financial Leverage Multiplier = Total Assets / Common Equity
DuPont Analysis

14. The two formulas can be combined to get: NPM X TATO X FLM = ROE By putting the values for this formula for both the firm and the industry into a table, we can determine why a firm’s ROA and ROE are higher or lower than its competition.
DuPont Analysis