WGU C213 – Accounting for Decision Makers
Competency: 3014.1.1 Financial Analysis
Topic 1: Introduction to Financial Analysis Definitions:
1. Financial statement analysis (is the examination of relationships among
financial statement numbers “across time” for the same company and
“across companies” at the same point in time. Financial statement
analysis is used (1) to predict a company's future profitability and cash
flows from its past performance and (2) to evaluate the performance of a
company with an eye toward identifying problem areas. The
informativeness of financial ratios is greatly enhanced when they are
compared with past values and with values for other firms in the same
industry).
2. DuPont framework (the DuPont framework {also known as the
DuPont equation, DuPont Model, or the DuPont method} is an equation
that allows the company’s stakeholders to understand the return on
equity {net income/equity}
through multiplying three parts:
1- Profitability {profit margin = net profit/sales} {Return on Sales}
identifies the
company’s ability to produce net income per dollar of sales.
2- Operating efficiency {asset turnover = sales/assets} {Asset
Turnover} how the
company creates sales through utilizing its assets.
3- Financial leverage {equity multiplier = assets/equity} {Assets-to-Equity
Ratio} how
much a company relies on borrowed funds rather than invested funds.
Throughout the DuPont framework, stakeholders such as management,
creditors, and investors are more able to analyze and compare different
firms across different
measures that ultimately relate to profitability).
, 3. Common-size financial statements (this is the single most efficient
technique in financial statements analysis. As the company gets larger
{or smaller}, it is difficult to compare the financial results from one year
to the next because of ‘scale issues’.
Competency: 3014.1.1 Financial Analysis
Topic 1: Introduction to Financial Analysis Definitions:
1. Financial statement analysis (is the examination of relationships among
financial statement numbers “across time” for the same company and
“across companies” at the same point in time. Financial statement
analysis is used (1) to predict a company's future profitability and cash
flows from its past performance and (2) to evaluate the performance of a
company with an eye toward identifying problem areas. The
informativeness of financial ratios is greatly enhanced when they are
compared with past values and with values for other firms in the same
industry).
2. DuPont framework (the DuPont framework {also known as the
DuPont equation, DuPont Model, or the DuPont method} is an equation
that allows the company’s stakeholders to understand the return on
equity {net income/equity}
through multiplying three parts:
1- Profitability {profit margin = net profit/sales} {Return on Sales}
identifies the
company’s ability to produce net income per dollar of sales.
2- Operating efficiency {asset turnover = sales/assets} {Asset
Turnover} how the
company creates sales through utilizing its assets.
3- Financial leverage {equity multiplier = assets/equity} {Assets-to-Equity
Ratio} how
much a company relies on borrowed funds rather than invested funds.
Throughout the DuPont framework, stakeholders such as management,
creditors, and investors are more able to analyze and compare different
firms across different
measures that ultimately relate to profitability).
, 3. Common-size financial statements (this is the single most efficient
technique in financial statements analysis. As the company gets larger
{or smaller}, it is difficult to compare the financial results from one year
to the next because of ‘scale issues’.
