Confused about which units to use in a formula

Quadratic

New member
Joined
Sep 10, 2021
Messages
2
Hi guys,
I've got a really basic question about which units I should be using in a financial formula. Usually in financial reports, large figures are often expressed with, say, 6 zeros removed for the sake of legibility (for example, "total assets: $113,000,000,000" would appear as "total assets: $113,000"). When ratio analysis or the like is performed using numbers from the same table, there's no need to perform conversion, since the difference washes out (or is "normalized", as the smart people say).

OK, so far so good.
Now, let's imagine a formula that uses the total assets figure AND a general price index for the economy (you know, a number expressing the change in prices with respect to a base year of 100). Let's say the index for the year in question is 113.

The formula calls for dividing total assets by the GNP price level for that year. In that case, should I divide $113,000,000,000 by 113, or $113,000 by 113?
 

lev888

Senior Member
Joined
Jan 16, 2018
Messages
2,354
Hi guys,
I've got a really basic question about which units I should be using in a financial formula. Usually in financial reports, large figures are often expressed with, say, 6 zeros removed for the sake of legibility (for example, "total assets: $113,000,000,000" would appear as "total assets: $113,000"). When ratio analysis or the like is performed using numbers from the same table, there's no need to perform conversion, since the difference washes out (or is "normalized", as the smart people say).

OK, so far so good.
Now, let's imagine a formula that uses the total assets figure AND a general price index for the economy (you know, a number expressing the change in prices with respect to a base year of 100). Let's say the index for the year in question is 113.

The formula calls for dividing total assets by the GNP price level for that year. In that case, should I divide $113,000,000,000 by 113, or $113,000 by 113?
Please post the formula.
 

Quadratic

New member
Joined
Sep 10, 2021
Messages
2
Please post the formula.
Sorry, forgot about that.
This is a bankruptcy prediction formula.

{\displaystyle {\begin{aligned}T={}&-1.32-0.407\log(TA_{t}/GNP)+6.03{\frac {TL_{t}}{TA_{t}}}-1.43{\frac {WC_{t}}{TA_{t}}}+0.0757{\frac {CL_{t}}{CA_{t}}}\\[10pt]&{}-1.72X-2.37{\frac {NI_{t}}{TA_{t}}}-1.83{\frac {FFO_{t}}{TL_{t}}}+0.285Y-0.521{\frac {NI_{t}-NI_{t-1}}{|NI_{t}|+|NI_{t-1}|}}\end{aligned}}}

where

 

JeffM

Elite Member
Joined
Sep 14, 2012
Messages
6,835
Hi guys,
I've got a really basic question about which units I should be using in a financial formula. Usually in financial reports, large figures are often expressed with, say, 6 zeros removed for the sake of legibility (for example, "total assets: $113,000,000,000" would appear as "total assets: $113,000"). When ratio analysis or the like is performed using numbers from the same table, there's no need to perform conversion, since the difference washes out (or is "normalized", as the smart people say).

OK, so far so good.
Now, let's imagine a formula that uses the total assets figure AND a general price index for the economy (you know, a number expressing the change in prices with respect to a base year of 100). Let's say the index for the year in question is 113.

The formula calls for dividing total assets by the GNP price level for that year. In that case, should I divide $113,000,000,000 by 113, or $113,000 by 113?
You cannot be absolutely sure unless you can get your hands on the original article. However, I suspect that you should use
113,000,000,000. If the formula is supposed to apply generally, the number of significant figures shown in the financial statements of DIFFERENT corporations will not be identical.
 

Subhotosh Khan

Super Moderator
Staff member
Joined
Jun 18, 2007
Messages
25,219
Hi guys,
I've got a really basic question about which units I should be using in a financial formula. Usually in financial reports, large figures are often expressed with, say, 6 zeros removed for the sake of legibility (for example, "total assets: $113,000,000,000" would appear as "total assets: $113,000"). When ratio analysis or the like is performed using numbers from the same table, there's no need to perform conversion, since the difference washes out (or is "normalized", as the smart people say).

OK, so far so good.
Now, let's imagine a formula that uses the total assets figure AND a general price index for the economy (you know, a number expressing the change in prices with respect to a base year of 100). Let's say the index for the year in question is 113.

The formula calls for dividing total assets by the GNP price level for that year. In that case, should I divide $113,000,000,000 by 113, or $113,000 by 113?
I would do it both ways and see which number makes "better" sense!
 
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