Accounting: What the Numbers Mean
Case Study 12.31 and 12.32
This paper addresses the solutions to Case Study 12.31 and 12.32 in the textbook authored by David Marshall, Wayne McManus, and Daniel Viele “Accounting; What the numbers mean.” Both case studies bring about a better understanding of operating and financial leverage. This discussion includes the return on investment, return on equity, contribution margin, and break-even point. All these terms associate with the two types of leverage.
The exertion of a force that creates an advantage describes the action of leverage. In engineering, this force creates a mechanical advantage like the action of a pry bar. In the world of accounting, leverage describes the use of borrowed capital that is expected to bring in a greater profit (advantage ) over the interest payable. This description of leverage applies to both financial and operating leverage.
So what is financial leverage? Marshall defines financial leverage as “the use of debt (with a fixed interest rate) that causes a difference between the return on investment and the return on equity”. (Marshall, McManus, & Viele, 2014). Both the return on investment in the return on equity play an important role in determining a company’s profitability as well as the calculation for financial leverage. The return on investment represents as a relationship between that net income and the total average of the assets where the net income is divided by the average assets and then converted to a percentage. In some cases the operating income is used in place of the net income to express the return on investment. This variation to the return on investment equation gives a better look at how well the company utilizes its assets. The return on investment reflects management’s abilities to use assets in order to produce a profit. As a rule of thumb, the ROI for most American
This paper addresses the solutions to Case Study 12.31 and 12.32 in the textbook authored by David Marshall, Wayne McManus, and Daniel Viele “Accounting; What the numbers mean.” Both case studies bring about a better understanding of operating and financial leverage. This discussion includes the return on investment, return on equity, contribution margin, and break-even point. All these terms associate with the two types of leverage.
The exertion of a force that creates an advantage describes the action of leverage. In engineering, this force creates a mechanical advantage like the action of a pry bar. In the world of accounting, leverage describes the use of borrowed capital that is expected to bring in a greater profit (advantage ) over the interest payable. This description of leverage applies to both financial and operating leverage.
So what is financial leverage? Marshall defines financial leverage as “the use of debt (with a fixed interest rate) that causes a difference between the return on investment and the return on equity”. (Marshall, McManus, & Viele, 2014). Both the return on investment in the return on equity play an important role in determining a company’s profitability as well as the calculation for financial leverage. The return on investment represents as a relationship between that net income and the total average of the assets where the net income is divided by the average assets and then converted to a percentage. In some cases the operating income is used in place of the net income to express the return on investment. This variation to the return on investment equation gives a better look at how well the company utilizes its assets. The return on investment reflects management’s abilities to use assets in order to produce a profit. As a rule of thumb, the ROI for most American