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1、ExcellenceinFinancialManagementCourse1:EvaluatingFinancialPerformancePreparedby:MattH.Evans,CPA,CMA,CFMThiscourseprovidesabasicunderstandingofhowtouseratioanalysisforevaluatingfinancialperformance.Thiscourseisrecommendedfor2hoursofContinuingProfessionalEducation.I
2、nordertoreceivecredit,youwillneedtopassamultiplechoiceexamwhichisadministeredovertheinternetatwww.exinfm.com/trainingAcompaniontollfreecoursecanbeaccessedusingyourtouchtonephone.Dial1-877-689-4097,press3forVoiceonDemandandthenpress754forthequicktollfreecourse.Revi
3、sedMarch5,2000www.LisAri.comChapter1ReturnonEquityWhyuseratios?Ithasbeensaidthatyoumustmeasurewhatyouexpecttomanageandaccomplish.Withoutmeasurement,youhavenoreferencetoworkwithandthus,youtendtooperateinthedark.Onewayofestablishingreferencesandmanagingthefinanciala
4、ffairsofanorganizationistouseratios.Ratiosaresimplyrelationshipsbetweentwofinancialbalancesorfinancialcalculations.Theserelationshipsestablishourreferencessowecanunderstandhowwellweareperformingfinancially.Ratiosalsoextendourtraditionalwayofmeasuringfinancialperfo
5、rmance;i.e.relyingonfinancialstatements.Byapplyingratiostoasetoffinancialstatements,wecanbetterunderstandfinancialperformance.CalculatingReturnonEquityForpubliclytradedcompanies,therelationshipofearningstoequityorReturnonEquityisofprimeimportancesincemanagementmus
6、tprovideareturnforthemoneyinvestedbyshareholders.ReturnonEquityisameasureofhowwellmanagementhasusedthecapitalinvestedbyshareholders.ReturnonEquitytellsusthepercentreturnedforeachdollar(orothermonetaryunit)investedbyshareholders.ReturnonEquityiscalculatedbydividing
7、NetIncomebyAverageShareholdersEquity(includingRetainedEarnings).EXAMPLE—NetIncomefortheyearwas$60,000,totalshareholderequityatthebeginningoftheyearwas$315,000andendingshareholderequityfortheyearwas$285,000.ReturnonEquityiscalculatedbydividing$60,000by$300,000(aver
8、ageshareholdersequitywhichis$315,000+$285,000/2).ThisgivesusaReturnonEquityof20%.Foreachdollarinvestedbyshareholders,20%wasreturnedintheformofearnings.S
