Much of the analysis done by financial managers is based on numbers that are dif
ID: 2739339 • Letter: M
Question
Much of the analysis done by financial managers is based on numbers that are different from what would seem to be the corresponding numbers presented in the financial statements. This difference is not due to any kind of cooking the books or other attempts to mislead anyone. One example is the use of market value rather than historical cost in the valuation of assets. For your first post, define financial management. What are some other examples of the differences between financial management and financial accounting? Give examples.
For your next post, explain the DuPont identity. How is it used in finance? Locate the financial statements for two firms in the same industry. Calculate all four terms of the DuPont identity, and present the results but do not analyze them.
For an additional post, analyze the results that another student has posted. If you were the appropriate financial manager of one of the firms that you analyzed, what would be your observations and recommendations?
Explanation / Answer
. For your first post, define financial management. What are some other examples of the differences between financial management and financial accounting? Give examples.
Financial management is managing the funds in such a efficient and effective manner that the financial objective of the organization is achieved . It is the top management ‘s specialized function
Differences between financial management and financial accounting
Financial accounting is reporting financial information of business organization to third parties such as creditors , potential share holder , govt . Some eg are P&L statement or Income statement , Balance sheet
Financial management cover everything that involves finance . Focuses on financial planning , control decision making eg estimating how much funds will be required , determining the capital structure , good investments plans
For your next post, explain the DuPont identity. How is it used in finance? Locate the financial statements for two firms in the same industry. Calculate all four terms of the DuPont identity, and present the results but do not analyze them.
DuPont identity is the expression that analyzes the Return on Equity into below 3parts
Profit margin which measures the Operating Efficiency =Profit/sales
Total asset turn over which measures Asset use efficiency =sales/assets
Equity multiplier which measures the financial leverage =assets/equity
Dupont identity= Operating Efficiency *Total asset turn over*Equity multiplier
=Profit/sales*sales/assets*assets/equity
=Profit/Equity
Dupont identity for Cocacola , Pepsico 2011
Cocacola
Pepsico
NI =8572
NI =6443
SALES =46542
SALES =66504
ASSETS=76447.50
ASSETS=70517.50
EQUITY = 31365
EQUITY=20588
Profit Margin=8572/46542=0.1842
Profit margin =6443/66504=0.0969
Asset turn over =46542/76447.50=.609
Asset Turnover =66504/70517.50=0.9431
Equity multiplier = 76447.50/31365=2.437
Equity multiplier =70517.50/20588=3.425
Dupont =.1842*.609*2.437=.2733
Dupont=0.0969*0.9431*3.425=0.313
Analysis
Profit margin of pepsico is lesser compared to cocacola due to higher sales and lower NI
Asset turnover is higher for pepsico is due to higher sales and lesser assets
Financial leverage is higher due to less of equity and assets
Recommendation
NI should be increased , assets and equity show be kept low
Cocacola
Pepsico
NI =8572
NI =6443
SALES =46542
SALES =66504
ASSETS=76447.50
ASSETS=70517.50
EQUITY = 31365
EQUITY=20588
Profit Margin=8572/46542=0.1842
Profit margin =6443/66504=0.0969
Asset turn over =46542/76447.50=.609
Asset Turnover =66504/70517.50=0.9431
Equity multiplier = 76447.50/31365=2.437
Equity multiplier =70517.50/20588=3.425
Dupont =.1842*.609*2.437=.2733
Dupont=0.0969*0.9431*3.425=0.313
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