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Author: Accounting Tutor

Activity ratios Formulas and Interpretation

Meaning of Activity Ratios Activity ratios are also known as asset management ratios, they measure how efficiently a company is using its assets to generate sales. These ratios help determine if the amount of each type of asset is reasonable, too high, or too low in view of current and projected sales. Below we show […]

What is liquidity ratio in Accounting

Liquidity ratios are all about figuring out if a company can pay its bills in the short term. It’s like checking if you have enough cash on hand to cover your immediate expenses. Current Ratio Current Ratio Formula Current Assets / Current Liabilities Interpretation of Current Ratio (What it tells you) This is a basic […]

What is a firm’s intrinsic value and current stock price?

Question What is a firm’s intrinsic value? Its current stock price? Is the stock’s “true” long-run value more closely related to its intrinsic value or to its current price? Intrinsic Value Definition of Intrinsic value A firm’s intrinsic value is an estimate of its “true” value. It’s based on the company’s expected future cash flows […]

5-Step DuPont Analysis – Formula and Examples

Overview of the 5-Step DuPont Analysis The 5-step DuPont Analysis expands on the 3-step model by further dissecting the net profit margin into three additional components: tax burden, interest burden, and EBIT margin. The full formula can be expressed as: ROE=Tax Burden×Interest Burden×EBIT Margin×Asset Turnover×Equity Multiplier Get Online Accounting Tutoring for Graduate Students   Components […]

DuPont Analysis and How it Works

DuPont Analysis is a powerful financial framework used to assess a company’s return on equity (ROE) by breaking it down into its component parts. This method allows analysts and investors to understand the underlying factors driving a company’s profitability and efficiency. Here’s an in-depth look at how DuPont Analysis works, its components, and its practical […]

Introduction to Financial Statement Analysis

Definition and Importance of Financial Statement Analysis Financial statement analysis involves evaluating a company’s financial statements to understand its performance, profitability, liquidity, and solvency. The primary purpose of this analysis is to make informed economic decisions regarding investments, lending, or management strategies. By scrutinizing financial statements, stakeholders can gain insights into a company’s operational efficiency […]

Key differences between Accrual basis and a Cash basis

Differences between Accrual basis and a Cash basis The key differences between accrual basis and cash basis accounting are fundamental to understanding how financial transactions are recorded and reported. Each method has its own approach to recognizing revenues and expenses, which can significantly affect the financial statements of a business. Here’s a breakdown of the […]

How do the three financial statements work together

How do the three financial statements work together The three main financial statements—income statement, balance sheet, and cash flow statement—work together to provide a complete picture of a company’s financial health. Each statement serves a unique purpose, but they are interconnected, allowing stakeholders to gain insights into the company’s performance and stability. Here’s how they work together: […]

How Financial Statements are Constructed and Interpreted

How Financial Statements Are Constructed and Interpreted Financial statements are crucial documents that show how a company is doing financially. They help investors, managers, and other stakeholders understand the company’s performance and make informed decisions. There are three main types of financial statements: the income statement, the balance sheet, and the cash flow statement. Let’s […]