Much of the analysis done by financial managers is based on

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.

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Solution

Definition: Financial management is the managerial activity concerned with acquiring, financing and managing planning assets to accomplish the overall goal of the business organization.

Differences:

Financial management is an activity or process while financial accounting is a method in which all financial transactions are recorded

Financial management is not guided by any principles or rules whereas financial accounting is to be done as per applicable GAAP.

Financial management is a managerial activity whereas financial accounting is done an accountant.

DuPont analysis is the most popular technique being used for calculating return on equity (ROE).

ROE        = Profit margin × Asset turnover × Equity multiplier

                = (Net income/Total sales) × (Total sales/Total assets) × (Total assets/Total equity)

Microsoft

Profit margin

Asset turnover

Equity multiplier

30/6/2017

Net income/Total sales

Total sales/Total assets

Total assets/Total equity

21204000/89950000

89950000/241086000

241086000/72394000

0.2357

0.3731

3.3302

ROE = 0.29

Apple

Profit margin

Asset turnover

Equity multiplier

30/9/2017

Net income/Total sales

Total sales/Total assets

Total assets/Total equity

48351000/229234000

229234000/375319000

375319000/134047000

0.2109

0.6108

2.7999

ROE = 0.36