DuPont Analysis of Return on Equity
Return on Equity (ROE), i.e., net income divided by average shareholders’ equity, measures the return that a company generates on its equity capital. DuPont analysis is a technique that can be used to decompose ROE into its constituent parts. The…
Activity, Liquidity, Solvency, Profitability, and Valuation Ratios
Financial ratios are used to express one financial quantity with reference to another. Financial ratios can assist with company and security valuations, as well as stock selections, and forecasting. A variety of categories may be used to classify financial ratios….
Calculate and Interpret Leverage and Coverage Ratios
Solvency describes a company’s ability to meet its long-term debt obligations. Leverage ratios and coverage ratios are the two primary types of solvency ratios that are used in evaluating a company’s level of solvency. Leverage ratios focus on the balance…
Presentation of Defined Benefit Pension Plans
Under a defined contribution plan, a company contributes a defined amount, i.e., pension expense into the plan. Under a defined-benefit plan, a company commits to pay future benefits to employees during their retirement. Presentation and Disclosure Related to DC and DB…
Measurement of Finance Leases
Introduction In a finance lease, the lessor transfers substantially all the risks and rewards incidental to legal ownership of a leased asset. A finance lease is also economically similar to borrowing money and buying an asset. Initial recognition, measurement, and…
Leases from a Lessee’s Perspective
A finance (or capital) lease is equivalent to a lessee’s purchase of an asset that is directly financed by the lessor. An operating lease, on the other hand, is an agreement that allows a lessee to use an asset for…
Explain the Derecognition of Debt
At maturity, the discount or premium on bonds is fully amortized and the carrying amount is equal to the face value. Upon repayment, bonds payable are reduced by the carrying amount (face value), and cash is reduced by the same…
Reported and Common-size Cash Flow Statements
Users of financial statements can obtain useful information about a company by analyzing its cash flow statement. This can help them to understand the company’s business and earnings as well as predict its future cash flows. The common-size analysis of…
Non-cash Investing and Financing Activities
In addition to activities that generate cash flows (operating, investing, and financing), companies also engage in investing and financing activities that do not generate any cash flows. These activities are therefore not reported on the cash flow statement. Non-Cash Investing…
Analyze and Intperret Financial Statement Disclosures
Users of financial statements can use financial statement disclosures to deepen their understanding of a company’s investments in tangible and intangible assets. Financial statement disclosures divulge such details as how those investments have changed during a reporting period, how the…
