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Date Posted: 07:16:53 02/02/00 Wed
Author: Charles Hodges
Subject: Re: Du Pont Equation
In reply to: Jerome Roberts 's message, "Du Pont Equation" on 16:03:29 01/31/00 Mon

> If we are not responsible for the Du Pont Equation,
> why do we have homework problems on it?

I make a distinction between something that will be tested, versus something that reinforces a concept. From chapter 3, you are responsible for being able to use and understand ratios and for recognizing the linkages that exist within financial statements (i.e., that a change in one part of the balance sheet or income statement will impact other parts of the various statements).

The Dupont equation says that your returns are a function of your profitability, how efficiently you use your assets, and how much you have invested in the business. This is a useful concept, but one that is difficult to test.

I also assign many of the end of chapter problems because they reinforce the relationships that occur within statements. The problems assigned are ratio algebra problems, in that you are given certain information and asked to derive other information. One does not need to know the DuPont equation to solve the problem, one need only know certain ratios and how to manipulate these ratios. If you recognize that a problems is using the Dupont equation, this is well and good. However, one does not need to know the Dupont equation to solve the problem. An understanding of the structure of financial statements is sufficient.

Hope this helps.

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