Simple question, but I keep getting conflicting answers. Are the balance sheet items that we use in the DuPont model (assets & equity) averages like with other financial ratios or do we use end of year numbers? Thanks for your help.
i think i have never had to use avergaes for ROE problems… just my two cents.
Good question. The ratios by themselves often have average total assets or average common equity, for example. But the problems tend to only have the year-end numbers. Intuitively, it seems like you should be using averages on B/S items for whatever period the sales and NI are for. But if they only give you year-end numbers in the totals … Also, I think all of the practice problems I’ve done have just used year-end. Maybe just for simplicity?
thanks! Guess we’ll go with what the question gives (hopefully just one number for the applicable NI period).
Conceptually you would want to use averages for balance sheet amounts and end of year for income statement stuff. Remember that the income statement is like a videotape…it is showing all the activity for a period (say one year). The balance sheet is like a picture…taking only a snapshot on a certain date (say Dec 31, 20XX). So when using a ratio over a year you would want to use the average amount for the balance sheet and the year end value for the income statement. As others pointed out just go with what the question give you though. I don’t remember really having any questions that were ambiguous on the June exam.