2. Participation Rights Contractual rights of security holders to receive dividends or returns from the security issuer’s profits, cash flows, or returns on investments. 3. Preferred Stock A security that has preferential rights compared to common stock. C. What information about securities must companies disclose?
Since debt and equity levels are closely related there is an analysis called the “DuPont model” that systematically breaks ROE into components so that each can be evaluated. ROE = NI x EBT x EBIT x Sales x Total assets EBT EBIT Sales Total assets Common equity EBT = earnings before taxes. The first ratio measures the proportion of earnings before tax that is kept by the company. EBIT = earnings before interest and taxes. The second ratio measures the effect of interest; it indicates the proportion of earnings before interest and tax that is retained after paying interest.
Measurement and recognition concepts such as assumptions, principles, and constraints b. Qualitative characteristics of accounting information c. Elements of financial statements d. Objectives of financial reporting 27. The underlying theme of the conceptual framework
They should rely on the additivity within financial statements- the analyst can rely on the internal discipline of accounting across the three primary financial statements to reduce the possibility of errors from inconsistent assumptions. Seven step forecasting game plan 1. Project revenues from sales and other operating activities 2. Project operating expenses and derive projected operating income 3. Project the operating assets that will be necessary to support the level of operations projected in steps 1 and 2.