Question

1.What is the use of Income Statement for bank managers?

2.Why financial firm's ROE (Return on Equity) is divided into its component parts?

Answer 1

1. The income statement divided the sales proceeds and the expenditures of the company into subparts to attest to the origin of the company's net earnings. The income statement enables the bank manager to answer such questions as to how valuable the product or service is to implement, as a percentage of the sale cost, or how much the fixed costs bite into profits. The income statement exhibits whether the company provides a premium product with a high-profit margin but comparatively low volume or perseveres a reduced price/high volume strategy. These exhibit whether the profit figures are sustainable over the following days and years.

2. By breaking ROE into three parts,

i.profit margin

ii. asset turnover

iii. financial leverage

companies can more easily understand changes in their returns on equity over time. As profit margin increments, each sale will produce more money to a business’s baseline, resulting in a greater overall return on equity. As asset turnover rises, a firm will produce more sales per asset retained, resulting in a higher overall return on equity. Elevated financial leverage will also lead to an uptick in return on equity, since accepting more debt financing brings on greater interest payments, which are tax-deductible.