After this video, learners will be able to describe the three parts of the DuPont framework, and how they help illuminate profitability of a company.
- When it comes to return on equity, … it is a general overall measure of a company's performance … for a given period of time, … and it is the foundation … for one of the most amazing creations in accounting history, … the DuPont framework. … Now, the DuPont framework has three components: … profitability, efficiency, and leverage. … Let's start with leverage … because that's the thing we do first. … When it comes to leverage, … that's an indication of how much money have we borrowed … to purchase assets. … And why do we purchase assets? … We purchase assets in hopes of generating sales. … The leverage measure tells us, of our assets, … how many were acquired with the equity … that's been put into the company. … We've borrowed to buy. … It gives us a measure of how much we've borrowed … to buy assets, and why do we buy assets? … To generate sales. … That's what the efficiency ratio is measuring. … We buy assets to generate sales. … The more sales we can generate … per dollar of assets, the better. …
- Describe how decision-makers use accounting in a business.
- Recognize limitations in financial statement analysis.
- Relate the purpose of financial ratio analysis.
- Determine the primary reason for managing cash through the operating cycle.
- Define the role of efficiency in creating budgets.
- Identify differences between federal income tax and other taxes, such as state sales tax.