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Review: Financial Accounting Statements
1. Statement of Financial Performance
– also known as the Income(?) or Profit and Loss Statement
– Shows how much profit the business generated over a given period
2. Statement of Financial Position
– also known as the Balance sheet
– Shows the financial position at a given point in time
3. Statement of Changes in Owners’ Equity:
– Shows all changes in owner’s interest in net assets
from transactions during the period (not examinable)
4. Statement of Cash Flows:
– Shows cash movements over a given period of time
Public companies need to produce these Financial Reports every year.
They need to be audited independently and presented to shareholders
in the companies Annual Report.
Four different methods for analysing capital investments:
1. The Accounting Rate of Return (ARR % pa):
ARR = Average profit / Average investment … similar to ROA.
2. The Payback Period (PP years):
Time to receive return of initial investment.
3. Net Present Value (NPV $):
NPV = Sum of ALL cash flows discounted to the present
Use calculator, spreadsheet or discount tables.
The discount rate (r%) or cost of capital (interest rate) used to
calculate the NPV depends on the opportunity cost of interest
rt, the inflation rate rp, and the specific risk premium r,
r=rp + rp+r,
4. Internal Rate of Return (IRR % pa): not examinable
The exact discount rate which gives the NPV = 0.
ROI – Du Pont analysis
Further analysis can be conducted using Du Pont ROI.
Du Pont ROI
= Profit margin x Investment turnover
Profit X Sales
$2 200 000
Return on sales
$2 200 000
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