Content and format of income statement
and balance sheet.
 Uses of financial ratios.
 Calculate and interpret financial ratios.
 DuPont analysis.

Ch 2 Learning Goals
Financial Statements
The Income Statement

Income statement: a summary of
◦ __________________
◦ and __________________
during a specified period.
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.
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.
Using Financial Ratios
Types of Ratio Comparisons

Trend or time-series analysis
Used to evaluate a firm’s performance
over time
Using Financial Ratios
Types of Ratio Comparisons
• cross-sectional analysis
Used to compare different firms at the
same point in time
Using Financial Ratios
Cross-sectional analysis
To do a cross-sectional analysis,
compare the firm’s ratios with:
________________ norms
industry _______________

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
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.
Ratio Analysis
• Liquidity Ratios
• Activity (efficiency) Ratios
• Leverage Ratios
• Profitability Ratios
• Common-size statements
• DuPont Analysis
DuPont System of Analysis

The DuPont system is not a method of
calculating ROA and ROE, rather it is a
technique for _____________________
financial performance.
DuPont System of Analysis

DuPont analysis merges the income statement
and balance sheet into two summary measures
of profitability: _________ and ____________.
DuPont System of Analysis

The DuPont system breaks ROE into:
◦ A ___________________________ component
◦ An __________________________ component
◦ A ___________________________ (financing)
component.
ROA = NPM X TATO
And
ROE = ROA X FLM
Where:
FLM = Financial Leverage Multiplier
= Total Assets / Common Equity
DuPont Analysis
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