74 PART 1 Introduction to Managerial Finance
SUMMARY
FOCUS ON VALUE
Financial managers review and analyze the firm’s financial statements periodically, both to
uncover developing problems and to assess the firm’s progress toward achieving its goals.
These actions are aimed at preserving and creating value for the firm’s owners.Financial
ratios enable financial managers to monitor the pulse of the firm and its progress toward its
strategic goals. Although financial statements and financial ratios rely on accrual concepts,
they can provide useful insights into important aspects of risk and return (cash flow) that
affect share price, which management is attempting to maximize.
REVIEW OF LEARNING GOALS
to dissect Bartlett’s overall returns as measured by its ROE, we found that slow
collections of receivables caused the below-industry-average ROE. Clearly, the
firm needs to manage its credit operations better.Review Questions
2–16 Financial ratio analysis is often divided into five areas: liquidity, activity,
debt, profitability,and marketratios. Differentiate each of these areas of
analysis from the others. Which is of the greatest concern to creditors?
2–17 Describe how you would use a large number of ratios to perform a com-
plete ratio analysis of the firm.
2–18 What three areas of analysis are combined in the modified DuPont for-
mula?Explain how the DuPont system of analysisis used to dissect the
firm’s results and isolate their causes.Review the contents of the stockholders’ re-
port and the procedures for consolidating in-
ternational financial statements.The annual stock-
holders’ report, which publicly owned corporations
are required to provide to stockholders, documents
the firm’s financial activities during the past year.
It includes the letter to stockholders and various
subjective and factual information, as well as four
key financial statements: the income statement, the
balance sheet, the statement of retained earnings,
and the statement of cash flows. Notes describing
the technical aspects of the financial statements fol-
low them. Financial statements of companies that
have operations whose cash flows are denominated
in one or more foreign currencies must be trans-
LG1
lated into dollars in accordance withFASB
Standard No. 52.Understand who uses financial ratios, and how.
Ratio analysis enables present and prospective
stockholders and lenders and the firm’s manage-
ment to evaluate the firm’s financial performance. It
can be performed on a cross-sectional or a time-
series basis. Benchmarking is a popular type of
cross-sectional analysis. Key cautions for applying
financial ratios are: (1) Ratios with large deviations
from the norm only indicate symptoms of a prob-
lem. (2) A single ratio does not generally provide
sufficient information. (3) The ratios being com-
pared should be calculated using financial state-LG2