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For a levered firm (a firm that uses debt financing), which of the following ratios would ideally indicate the highest return to equity shareholders?
A levered firm uses debt, which creates a financial leverage effect. When a firm earns more on borrowed funds than it pays in interest, the surplus accrues to equity shareholders — amplifying returns. Return on Common Equity (ROE) $= \dfrac{\text{Net Income}}{\text{Shareholders' Equity}}$ captures this magnified return because the denominator (equity) is smaller when the firm uses debt. ROA and ROCE use total assets or capital employed (including debt) as the base, which dilutes the leverage effect.
In the $xy$-plane, line $k$ has equation $3x - 2y = 0$. Compare:
Quantity A: The $x$-intercept of line $k$
Quantity B: The $y$-intercept of line $k$
Find the intercepts of $3x - 2y = 0$:
x-intercept (set $y = 0$): $3x = 0 \Rightarrow x = 0$.
y-intercept (set $x = 0$): $-2y = 0 \Rightarrow y = 0$.
Both intercepts are $0$ (the line passes through the origin).
Quantity A $= 0 =$ Quantity B. The two quantities are equal.
Which accounting principle requires that expenses be matched to the revenues they helped generate, within the same accounting period?
The Matching Principle (also called the matching concept) states that expenses must be recognized in the same period as the revenues they helped produce. For example, cost of goods sold is matched against the sales revenue of the same period. The revenue recognition principle deals with when to record revenue; the cost principle is about recording at historical cost; and the full disclosure principle requires reporting of all relevant information.
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