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This 3 page Class Notes was uploaded by Petey Martin on Friday October 2, 2015. The Class Notes belongs to ACC 201 at University of Rochester taught by WOJDAT K in Summer 2015. Since its upload, it has received 24 views. For similar materials see FINANCIAL ACCOUNTING in Accounting at University of Rochester.
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Date Created: 10/02/15
Petey Martin 0 Notes 92915 In reality many adjustments to nancial statements require signi cant and complex judgments assumptions and estimates which allow for signi cant management discretion 0 Analysis 0 0 Asset Turnover Ratio Sales Average Total Assets However different industries and even different rms within an industry have different levels of asset turnover that correlate to efficient management One perspective is to compare charges in asset turnover within a rm over time An increase in the asset turnover ratio over time indicates more efficient asset management all else gum al A decrease in the ratio over time indicates less efficient asset management all else equal Second perspective is to compare asset turnover ratio of one rm to that of other rms in the same industry Another perspective is to compare asset turnover ratio of one rm to that of other rms in the same industry over time Return on Assets ROA net income average total assets ROA is an accounting measure of how much is earned by a rm for each dollar invested in the rm A higher ROA is preferred all else equal However because it is an accounting measure a high ROA need not always correlate to better business practices Returns on assets can be decomposed Return on Assets Net Pro t Margin Asset Turnover Net Income Average Total Assets Net Income Net Sales Net Sales Average Total Assets So rate of return on assets can be improved by 0 improved net pro t margin 0 improved asset turnover Return on Equity ROE net income average stockholders equity ROE is an accounting measure of how much is earned by a rm for its owners for each dollar the owners have left invested in the rm A higher ROE is preferred all else equal However because it is an accounting measure a high ROE need not always correlate to better business practices 0 Returns on equity can be decomposed Return on Equity Net Pro t Margin Asset Turnover Financial Leverage Net IncomeAverage Stockholders Equity Net Income Net Sales Net Sales Average Total Assets Average Total Assets Average Stockholders Equity 0 So rate of return on equity can be improved by 0 improved net pro t margin 0 improved asset turnover 0 higher leverage More assets funded by debt offset by effect of interest on net pro t marm Petey Martin Notes 10115 Review of Practice Problems 0 See Blackboard under Course Materials and Solutions for Solutions to practice problems in our textbook Financial Accounting 8th edition by Libby Libby and Short
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