8 - 8 - 1 1 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell

Analyzing Financial
Analyzing Financial
Statements for
Statements for
Proftability, Liquidity,
Proftability, Liquidity,
and Solvency
and Solvency
Chapter
Chapter
8 - 8 - 2 2 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ectives #
Learning !b"ectives #
and $
and $
%istinguish among
%istinguish among
proftability, liquidity, and
proftability, liquidity, and
solvency&
solvency&
Calculate fnancial ratios
Calculate fnancial ratios
designed to measure a
designed to measure a
company's proftability,
company's proftability,
liquidity, and solvency&
liquidity, and solvency&
8 - 8 - 3 3 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Introduction
Introduction
Ratio analysis
Ratio analysis
is a technique for analyzing
is a technique for analyzing
the relationshi !et"een t"o ite#s fro# a
the relationshi !et"een t"o ite#s fro# a
co#any$s %nancial state#ents for a gi&en eriod'
co#any$s %nancial state#ents for a gi&en eriod'
Ratio analysis
Ratio analysis
is a technique for analyzing
is a technique for analyzing
the relationshi !et"een t"o ite#s fro# a
the relationshi !et"een t"o ite#s fro# a
co#any$s %nancial state#ents for a gi&en eriod'
co#any$s %nancial state#ents for a gi&en eriod'
Financial statements analysis
Financial statements analysis
is the rocess
is the rocess
of loo(ing !eyond the face of the %nancial
of loo(ing !eyond the face of the %nancial
state#ents to gain additional insight
state#ents to gain additional insight
into a co#any$s %nancial health'
into a co#any$s %nancial health'
Financial statements analysis
Financial statements analysis
is the rocess
is the rocess
of loo(ing !eyond the face of the %nancial
of loo(ing !eyond the face of the %nancial
state#ents to gain additional insight
state#ents to gain additional insight
into a co#any$s %nancial health'
into a co#any$s %nancial health'
8 - 8 - ) ) 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
*le&ation +orts, Inc'
*le&ation +orts, Inc'
,alance +heet
,alance +heet
-ay 31, 200)
-ay 31, 200)
Assets( Assets(
Current assets Current assets
Cash Cash )#$,*+ )#$,*+
Accounts receivable Accounts receivable ),,,-- ),,,--
Less( Allo.ance for doubtful accounts Less( Allo.ance for doubtful accounts / +0- / +0- ,,+0- ,,+0-
1erchandise inventory 1erchandise inventory +,*,2 +,*,2
3a. materials inventory 3a. materials inventory $,*#0 $,*#0
4or56in6process inventory 4or56in6process inventory #+,7+ #+,7+
Finished goods inventory Finished goods inventory #*,7*+ #*,7*+
Supplies inventory Supplies inventory 0,* 0,*
Prepaid rent Prepaid rent #$,--- #$,---
Prepaid insurance Prepaid insurance 0,--- 0,---
8otal current assets 8otal current assets )#,-,7*2 )#,-,7*2
Assets( Assets(
Current assets Current assets
Cash Cash )#$,*+ )#$,*+
Accounts receivable Accounts receivable ),,,-- ),,,--
Less( Allo.ance for doubtful accounts Less( Allo.ance for doubtful accounts / +0- / +0- ,,+0- ,,+0-
1erchandise inventory 1erchandise inventory +,*,2 +,*,2
3a. materials inventory 3a. materials inventory $,*#0 $,*#0
4or56in6process inventory 4or56in6process inventory #+,7+ #+,7+
Finished goods inventory Finished goods inventory #*,7*+ #*,7*+
Supplies inventory Supplies inventory 0,* 0,*
Prepaid rent Prepaid rent #$,--- #$,---
Prepaid insurance Prepaid insurance 0,--- 0,---
8otal current assets 8otal current assets )#,-,7*2 )#,-,7*2
8 - 8 - 5 5 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
*le&ation +orts, Inc'
*le&ation +orts, Inc'
,alance +heet
,alance +heet
-ay 31, 200)
-ay 31, 200)
Property, plant, and equipment Property, plant, and equipment
Administrative equipment Administrative equipment ) 0,#-- ) 0,#--
Selling furniture and f9tures Selling furniture and f9tures ,+-- ,+--
Production equipment Production equipment ,,7-- ,,7-- )#-*,#-- )#-*,#--
Less( Accumulated depreciation Less( Accumulated depreciation / #2,-- / #2,--
8otal property, plant, and equipment 8otal property, plant, and equipment ) 0,*-- ) 0,*--
:ntangible assets :ntangible assets
Patents Patents ) #-,-* ) #-,-*
Copyrights Copyrights 02- 02-
8rademar5s 8rademar5s #,+$0 #,+$0
8otal intangible assets 8otal intangible assets ) ) #$,-2 #$,-2
8otal assets 8otal assets )$,-#0 )$,-#0
Property, plant, and equipment Property, plant, and equipment
Administrative equipment Administrative equipment ) 0,#-- ) 0,#--
Selling furniture and f9tures Selling furniture and f9tures ,+-- ,+--
Production equipment Production equipment ,,7-- ,,7-- )#-*,#-- )#-*,#--
Less( Accumulated depreciation Less( Accumulated depreciation / #2,-- / #2,--
8otal property, plant, and equipment 8otal property, plant, and equipment ) 0,*-- ) 0,*--
:ntangible assets :ntangible assets
Patents Patents ) #-,-* ) #-,-*
Copyrights Copyrights 02- 02-
8rademar5s 8rademar5s #,+$0 #,+$0
8otal intangible assets 8otal intangible assets ) ) #$,-2 #$,-2
8otal assets 8otal assets )$,-#0 )$,-#0
8 - 8 - . . 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
*le&ation +orts, Inc'
*le&ation +orts, Inc'
,alance +heet
,alance +heet
-ay 31, 200)
-ay 31, 200)
Liabilities and stoc5holders' equity( Liabilities and stoc5holders' equity(
Current liabilities Current liabilities
Accounts payable Accounts payable ) 7,,+$ ) 7,,+$
!ther accounts payable !ther accounts payable ##,#$ ##,#$
:nterest payable :nterest payable 7,--- 7,---
Payroll ta9es payable Payroll ta9es payable #,+-- #,+--
Sales ta9es payable Sales ta9es payable 07- 07-
:ncome ta9es payable :ncome ta9es payable +$,#$- +$,#$-
Current portion of long6term note payable Current portion of long6term note payable #0,--- #0,---
8otal current liabilities 8otal current liabilities ) *,*+ ) *,*+
Long6term liabilities( Long6term liabilities(
;ote payable / <ail ;ational =an5 ;ote payable / <ail ;ational =an5 ) 7-,--- ) 7-,---
Less( Current portion Less( Current portion #0,--- #0,---
8otal long6term liabilities 8otal long6term liabilities +0,--- +0,---
8otal liabilities 8otal liabilities )#$,*+ )#$,*+
Liabilities and stoc5holders' equity( Liabilities and stoc5holders' equity(
Current liabilities Current liabilities
Accounts payable Accounts payable ) 7,,+$ ) 7,,+$
!ther accounts payable !ther accounts payable ##,#$ ##,#$
:nterest payable :nterest payable 7,--- 7,---
Payroll ta9es payable Payroll ta9es payable #,+-- #,+--
Sales ta9es payable Sales ta9es payable 07- 07-
:ncome ta9es payable :ncome ta9es payable +$,#$- +$,#$-
Current portion of long6term note payable Current portion of long6term note payable #0,--- #0,---
8otal current liabilities 8otal current liabilities ) *,*+ ) *,*+
Long6term liabilities( Long6term liabilities(
;ote payable / <ail ;ational =an5 ;ote payable / <ail ;ational =an5 ) 7-,--- ) 7-,---
Less( Current portion Less( Current portion #0,--- #0,---
8otal long6term liabilities 8otal long6term liabilities +0,--- +0,---
8otal liabilities 8otal liabilities )#$,*+ )#$,*+
8 - 8 - / / 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
*le&ation +orts, Inc'
*le&ation +orts, Inc'
,alance +heet
,alance +heet
-ay 31, 200)
-ay 31, 200)
Stoc5holders' equity Stoc5holders' equity
Paid6in capital( Paid6in capital(
Common stoc5, )#- par value, Common stoc5, )#- par value,
#--,--- shares authorized, +,--- #--,--- shares authorized, +,---
shares issued and outstanding shares issued and outstanding ) 7-,--- ) 7-,---
Paid6in capital in e9cess of par Paid6in capital in e9cess of par
/ / common stoc5 common stoc5 +-,--- +-,---
8otal paid6in capital 8otal paid6in capital )#--,--- )#--,---
3etained earnings 3etained earnings 0,,## 0,,##
8otal stoc5holders' equity 8otal stoc5holders' equity #0,,## #0,,##
8otal liabilities and stoc5holders' equity 8otal liabilities and stoc5holders' equity )$,-#0 )$,-#0
Stoc5holders' equity Stoc5holders' equity
Paid6in capital( Paid6in capital(
Common stoc5, )#- par value, Common stoc5, )#- par value,
#--,--- shares authorized, +,--- #--,--- shares authorized, +,---
shares issued and outstanding shares issued and outstanding ) 7-,--- ) 7-,---
Paid6in capital in e9cess of par Paid6in capital in e9cess of par
/ / common stoc5 common stoc5 +-,--- +-,---
8otal paid6in capital 8otal paid6in capital )#--,--- )#--,---
3etained earnings 3etained earnings 0,,## 0,,##
8otal stoc5holders' equity 8otal stoc5holders' equity #0,,## #0,,##
8otal liabilities and stoc5holders' equity 8otal liabilities and stoc5holders' equity )$,-#0 )$,-#0
8 - 8 - 8 8 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
*le&ation +orts, Inc'
*le&ation +orts, Inc'
Inco#e +tate#ent
Inco#e +tate#ent
0or the 1ear *nded -ay 31,
0or the 1ear *nded -ay 31,
200)
200)
;et sales ;et sales )0$2,#+7 )0$2,#+7
Cost of goods sold Cost of goods sold $,0,*+ $,0,*+
>ross proft >ross proft )$*#,*#$ )$*#,*#$
Selling e9penses Selling e9penses )+,**+ )+,**+
Administrative e9penses Administrative e9penses 2$,#, 2$,#,
8otal operating e9penses 8otal operating e9penses #$-,0$* #$-,0$*
!perating income !perating income )##-,2, )##-,2,
!ther revenues and e9penses( !ther revenues and e9penses(
:nterest revenue :nterest revenue ) 0#$ ) 0#$
:nterest e9pense :nterest e9pense ?7,--- ?7,---@ @
8otal other revenues and e9penses 8otal other revenues and e9penses ?0,+ ?0,+@ @
:ncome before income ta9es :ncome before income ta9es )#-0,*-# )#-0,*-#
:ncome ta9es :ncome ta9es +$,#$- +$,#$-
;et income ;et income ) 7*,## ) 7*,##
Aarnings per share Aarnings per share ) #0&2, ) #0&2,
;et sales ;et sales )0$2,#+7 )0$2,#+7
Cost of goods sold Cost of goods sold $,0,*+ $,0,*+
>ross proft >ross proft )$*#,*#$ )$*#,*#$
Selling e9penses Selling e9penses )+,**+ )+,**+
Administrative e9penses Administrative e9penses 2$,#, 2$,#,
8otal operating e9penses 8otal operating e9penses #$-,0$* #$-,0$*
!perating income !perating income )##-,2, )##-,2,
!ther revenues and e9penses( !ther revenues and e9penses(
:nterest revenue :nterest revenue ) 0#$ ) 0#$
:nterest e9pense :nterest e9pense ?7,--- ?7,---@ @
8otal other revenues and e9penses 8otal other revenues and e9penses ?0,+ ?0,+@ @
:ncome before income ta9es :ncome before income ta9es )#-0,*-# )#-0,*-#
:ncome ta9es :ncome ta9es +$,#$- +$,#$-
;et income ;et income ) 7*,## ) 7*,##
Aarnings per share Aarnings per share ) #0&2, ) #0&2,
8 - 8 - 2 2 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
3ro%ta!ility ratios #easure a %r#$s
3ro%ta!ility ratios #easure a %r#$s
ast erfor#ance and hel redict
ast erfor#ance and hel redict
its future ro%ta!ility le&el'
its future ro%ta!ility le&el'
3ro%ta!ility ratios #easure a %r#$s
3ro%ta!ility ratios #easure a %r#$s
ast erfor#ance and hel redict
ast erfor#ance and hel redict
its future ro%ta!ility le&el'
its future ro%ta!ility le&el'
3ro%ta!ility is the ease "ith "hich
3ro%ta!ility is the ease "ith "hich
a co#any generates inco#e'
a co#any generates inco#e'
3ro%ta!ility is the ease "ith "hich
3ro%ta!ility is the ease "ith "hich
a co#any generates inco#e'
a co#any generates inco#e'
8 - 8 - 10 10 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio #easures ho" e5ciently the
This ratio #easures ho" e5ciently the
co#any uses its assets to roduce ro%ts'
co#any uses its assets to roduce ro%ts'
This ratio #easures ho" e5ciently the
This ratio #easures ho" e5ciently the
co#any uses its assets to roduce ro%ts'
co#any uses its assets to roduce ro%ts'
4eturn on assets 6
4eturn on assets 6
7et inco#e !efore ta8es 9 Total assets
7et inco#e !efore ta8es 9 Total assets
4eturn on assets 6
4eturn on assets 6
7et inco#e !efore ta8es 9 Total assets
7et inco#e !efore ta8es 9 Total assets
:105,301 9 :288,015 6 3.'5.;
:105,301 9 :288,015 6 3.'5.;
:105,301 9 :288,015 6 3.'5.;
:105,301 9 :288,015 6 3.'5.;
8 - 8 - 11 11 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio #easures the ercentage of
This ratio #easures the ercentage of
inco#e !efore inco#e ta8es roduced
inco#e !efore inco#e ta8es roduced
!y a gi&en le&el of re&enue'
!y a gi&en le&el of re&enue'
This ratio #easures the ercentage of
This ratio #easures the ercentage of
inco#e !efore inco#e ta8es roduced
inco#e !efore inco#e ta8es roduced
!y a gi&en le&el of re&enue'
!y a gi&en le&el of re&enue'
3ro%t #argin !efore inco#e ta8 6
3ro%t #argin !efore inco#e ta8 6
7et inco#e !efore ta8es 9 +ales
7et inco#e !efore ta8es 9 +ales
3ro%t #argin !efore inco#e ta8 6
3ro%t #argin !efore inco#e ta8 6
7et inco#e !efore ta8es 9 +ales
7et inco#e !efore ta8es 9 +ales
:105,301 9 :52/,1). 6 12'28;
:105,301 9 :52/,1). 6 12'28;
:105,301 9 :52/,1). 6 12'28;
:105,301 9 :52/,1). 6 12'28;
8 - 8 - 12 12 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio calculates the a#ount of sales
This ratio calculates the a#ount of sales
roduced for a gi&en le&el of assets used'
roduced for a gi&en le&el of assets used'
This ratio calculates the a#ount of sales
This ratio calculates the a#ount of sales
roduced for a gi&en le&el of assets used'
roduced for a gi&en le&el of assets used'
Total asset turno&er 6
Total asset turno&er 6
+ales 9 Total assets
+ales 9 Total assets
Total asset turno&er 6
Total asset turno&er 6
+ales 9 Total assets
+ales 9 Total assets
:52/,1). 9 :288,015 6 1'83 ti#es
:52/,1). 9 :288,015 6 1'83 ti#es
:52/,1). 9 :288,015 6 1'83 ti#es
:52/,1). 9 :288,015 6 1'83 ti#es
8 - 8 - 13 13 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
4eturn on
4eturn on
assets
assets
4eturn on
4eturn on
assets
assets
3ro%t #argin
3ro%t #argin
!efore inco#e ta8
!efore inco#e ta8
3ro%t #argin
3ro%t #argin
!efore inco#e ta8
!efore inco#e ta8
6
6
7et inco#e
7et inco#e
!efore ta8es
!efore ta8es
9 Total assets
9 Total assets
7et inco#e
7et inco#e
!efore ta8es
!efore ta8es
9 Total assets
9 Total assets
6
6
7et inco#e
7et inco#e
!efore ta8es
!efore ta8es
9 +ales
9 +ales
7et inco#e
7et inco#e
!efore ta8es
!efore ta8es
9 +ales
9 +ales
+ales 9
+ales 9
Total assets
Total assets
+ales 9
+ales 9
Total assets
Total assets
<
<
Total asset
Total asset
turno&er
turno&er
Total asset
Total asset
turno&er
turno&er
<
<
8 - 8 - 1) 1) 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio #easures the a#ount of after-ta8
This ratio #easures the a#ount of after-ta8
net inco#e generated !y a dollar of sales'
net inco#e generated !y a dollar of sales'
This ratio #easures the a#ount of after-ta8
This ratio #easures the a#ount of after-ta8
net inco#e generated !y a dollar of sales'
net inco#e generated !y a dollar of sales'
3ro%t #argin after inco#e ta8 6
3ro%t #argin after inco#e ta8 6
7et inco#e after ta8es 9 +ales
7et inco#e after ta8es 9 +ales
3ro%t #argin after inco#e ta8 6
3ro%t #argin after inco#e ta8 6
7et inco#e after ta8es 9 +ales
7et inco#e after ta8es 9 +ales
:.3,181 9 :52/,1). 6 11'28;
:.3,181 9 :52/,1). 6 11'28;
:.3,181 9 :52/,1). 6 11'28;
:.3,181 9 :52/,1). 6 11'28;
8 - 8 - 15 15 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio indicates ho" #uch after-ta8 inco#e
This ratio indicates ho" #uch after-ta8 inco#e
"as generated for a gi&en le&el of equity'
"as generated for a gi&en le&el of equity'
This ratio indicates ho" #uch after-ta8 inco#e
This ratio indicates ho" #uch after-ta8 inco#e
"as generated for a gi&en le&el of equity'
"as generated for a gi&en le&el of equity'
4eturn on equity after ta8es 6
4eturn on equity after ta8es 6
7et inco#e after ta8es 9 +toc(holders$ equity
7et inco#e after ta8es 9 +toc(holders$ equity
4eturn on equity after ta8es 6
4eturn on equity after ta8es 6
7et inco#e after ta8es 9 +toc(holders$ equity
7et inco#e after ta8es 9 +toc(holders$ equity
:.3,181 9 :152,1816 38'.2;
:.3,181 9 :152,1816 38'.2;
:.3,181 9 :152,1816 38'.2;
:.3,181 9 :152,1816 38'.2;
8 - 8 - 1. 1. 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
3ro%ta!ility 4atios
3ro%ta!ility 4atios
This ratio calculates ho" #uch !efore-ta8 inco#e
This ratio calculates ho" #uch !efore-ta8 inco#e
"as generated for a gi&en le&el of equity'
"as generated for a gi&en le&el of equity'
This ratio calculates ho" #uch !efore-ta8 inco#e
This ratio calculates ho" #uch !efore-ta8 inco#e
"as generated for a gi&en le&el of equity'
"as generated for a gi&en le&el of equity'
4eturn on equity !efore ta8es 6
4eturn on equity !efore ta8es 6
=7et inco#e after ta8es > Inco#e ta8es?
=7et inco#e after ta8es > Inco#e ta8es?
9 +toc(holders$ equity
9 +toc(holders$ equity
4eturn on equity !efore ta8es 6
4eturn on equity !efore ta8es 6
=7et inco#e after ta8es > Inco#e ta8es?
=7et inco#e after ta8es > Inco#e ta8es?
9 +toc(holders$ equity
9 +toc(holders$ equity
:105,301 9 :152,1816 ..'15;
:105,301 9 :152,1816 ..'15;
:105,301 9 :152,1816 ..'15;
:105,301 9 :152,1816 ..'15;
8 - 8 - 1/ 1/ 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
@iquidity ratios e&aluate a %r#$s a!ility
@iquidity ratios e&aluate a %r#$s a!ility
to generate su5cient cash to
to generate su5cient cash to
#eet its short-ter# o!ligations'
#eet its short-ter# o!ligations'
@iquidity ratios e&aluate a %r#$s a!ility
@iquidity ratios e&aluate a %r#$s a!ility
to generate su5cient cash to
to generate su5cient cash to
#eet its short-ter# o!ligations'
#eet its short-ter# o!ligations'
An asset$s liquidity descri!es the ease
An asset$s liquidity descri!es the ease
"ith "hich it can !e con&erted to cash'
"ith "hich it can !e con&erted to cash'
An asset$s liquidity descri!es the ease
An asset$s liquidity descri!es the ease
"ith "hich it can !e con&erted to cash'
"ith "hich it can !e con&erted to cash'
8 - 8 - 18 18 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
This ratio #easures the co#any$s a!ility to
This ratio #easures the co#any$s a!ility to
#eet its current lia!ilities "ith current assets'
#eet its current lia!ilities "ith current assets'
This ratio #easures the co#any$s a!ility to
This ratio #easures the co#any$s a!ility to
#eet its current lia!ilities "ith current assets'
#eet its current lia!ilities "ith current assets'
Burrent ratio 6
Burrent ratio 6
Burrent assets 9 Burrent lia!ilities
Burrent assets 9 Burrent lia!ilities
Burrent ratio 6
Burrent ratio 6
Burrent assets 9 Burrent lia!ilities
Burrent assets 9 Burrent lia!ilities
:120,.3/ 9 :83,83) 6 2'2/ to 1
:120,.3/ 9 :83,83) 6 2'2/ to 1
:120,.3/ 9 :83,83) 6 2'2/ to 1
:120,.3/ 9 :83,83) 6 2'2/ to 1
8 - 8 - 12 12 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
This ratio is a stringent test of liquidity
This ratio is a stringent test of liquidity
that co#ares highly liquid current
that co#ares highly liquid current
assets to current lia!ilities'
assets to current lia!ilities'
This ratio is a stringent test of liquidity
This ratio is a stringent test of liquidity
that co#ares highly liquid current
that co#ares highly liquid current
assets to current lia!ilities'
assets to current lia!ilities'
Acid-test ratio 6 =Bash > 4ecei&a!les
Acid-test ratio 6 =Bash > 4ecei&a!les
> Trading securities? 9 Burrent lia!ilities
> Trading securities? 9 Burrent lia!ilities
Acid-test ratio 6 =Bash > 4ecei&a!les
Acid-test ratio 6 =Bash > 4ecei&a!les
> Trading securities? 9 Burrent lia!ilities
> Trading securities? 9 Burrent lia!ilities
=:128,38) > :2,)50 > :0? 9 :83,83)6 1'.) to 1
=:128,38) > :2,)50 > :0? 9 :83,83)6 1'.) to 1
=:128,38) > :2,)50 > :0? 9 :83,83)6 1'.) to 1
=:128,38) > :2,)50 > :0? 9 :83,83)6 1'.) to 1
8 - 8 - 20 20 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
This ratio indicates the le&el of sales
This ratio indicates the le&el of sales
generated for a gi&en le&el of "or(ing caital'
generated for a gi&en le&el of "or(ing caital'
This ratio indicates the le&el of sales
This ratio indicates the le&el of sales
generated for a gi&en le&el of "or(ing caital'
generated for a gi&en le&el of "or(ing caital'
7et sales to "or(ing caital 6 +ales 9
7et sales to "or(ing caital 6 +ales 9
=Burrent assets C Burrent lia!ilities?
=Burrent assets C Burrent lia!ilities?
7et sales to "or(ing caital 6 +ales 9
7et sales to "or(ing caital 6 +ales 9
=Burrent assets C Burrent lia!ilities?
=Burrent assets C Burrent lia!ilities?
:52/,1). 9 =:120,.3/ C :83,83)? 6 )'2) ti#es
:52/,1). 9 =:120,.3/ C :83,83)? 6 )'2) ti#es
:52/,1). 9 =:120,.3/ C :83,83)? 6 )'2) ti#es
:52/,1). 9 =:120,.3/ C :83,83)? 6 )'2) ti#es
8 - 8 - 21 21 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
It #easures ho" quic(ly a co#any
It #easures ho" quic(ly a co#any
collects its accounts recei&a!le'
collects its accounts recei&a!le'
It #easures ho" quic(ly a co#any
It #easures ho" quic(ly a co#any
collects its accounts recei&a!le'
collects its accounts recei&a!le'
Accounts recei&a!le turno&er 6
Accounts recei&a!le turno&er 6
7et credit sales 9 Accounts recei&a!le
7et credit sales 9 Accounts recei&a!le
Accounts recei&a!le turno&er 6
Accounts recei&a!le turno&er 6
7et credit sales 9 Accounts recei&a!le
7et credit sales 9 Accounts recei&a!le
7et credit sales 6 :151,.50 C :2,)2. 6 :1)2,22)
7et credit sales 6 :151,.50 C :2,)2. 6 :1)2,22)
7et credit sales 6 :151,.50 C :2,)2. 6 :1)2,22)
7et credit sales 6 :151,.50 C :2,)2. 6 :1)2,22)
8 - 8 - 22 22 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
4ecei&a!le turno&er 6
4ecei&a!le turno&er 6
:1)2,22) 9 :2,)50 6 15'/2 ti#es
:1)2,22) 9 :2,)50 6 15'/2 ti#es
4ecei&a!le turno&er 6
4ecei&a!le turno&er 6
:1)2,22) 9 :2,)50 6 15'/2 ti#es
:1)2,22) 9 :2,)50 6 15'/2 ti#es
A&erage collection eriod 6
A&erage collection eriod 6
3.5 9 15'/2 6 23'2/ days
3.5 9 15'/2 6 23'2/ days
A&erage collection eriod 6
A&erage collection eriod 6
3.5 9 15'/2 6 23'2/ days
3.5 9 15'/2 6 23'2/ days
8 - 8 - 23 23 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
This ratio indicates the nu#!er of ti#es
This ratio indicates the nu#!er of ti#es
total #erchandise in&entory is urchased
total #erchandise in&entory is urchased
=or %nished goods in&entory is roduced?
=or %nished goods in&entory is roduced?
and sold during a eriod'
and sold during a eriod'
This ratio indicates the nu#!er of ti#es
This ratio indicates the nu#!er of ti#es
total #erchandise in&entory is urchased
total #erchandise in&entory is urchased
=or %nished goods in&entory is roduced?
=or %nished goods in&entory is roduced?
and sold during a eriod'
and sold during a eriod'
In&entory turno&er 6
In&entory turno&er 6
Bost of sales 9 In&entory
Bost of sales 9 In&entory
In&entory turno&er 6
In&entory turno&er 6
Bost of sales 9 In&entory
Bost of sales 9 In&entory
8 - 8 - 2) 2) 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@iquidity 4atios
@iquidity 4atios
In&entory turno&er 6
In&entory turno&er 6
:225,83) 9 =:),32/ > :13,.3)? 6 1.')1 ti#es
:225,83) 9 =:),32/ > :13,.3)? 6 1.')1 ti#es
In&entory turno&er 6
In&entory turno&er 6
:225,83) 9 =:),32/ > :13,.3)? 6 1.')1 ti#es
:225,83) 9 =:),32/ > :13,.3)? 6 1.')1 ti#es
A&erage nu#!er of days
A&erage nu#!er of days
*le&ation +orts, Inc', holds its in&entory
*le&ation +orts, Inc', holds its in&entory
6 3.5 9 1.')1 6 22'2) days
6 3.5 9 1.')1 6 22'2) days
A&erage nu#!er of days
A&erage nu#!er of days
*le&ation +orts, Inc', holds its in&entory
*le&ation +orts, Inc', holds its in&entory
6 3.5 9 1.')1 6 22'2) days
6 3.5 9 1.')1 6 22'2) days
8 - 8 - 25 25 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
+ol&ency 4atios
+ol&ency 4atios
+ol&ency ratios are of #ost interest to
+ol&ency ratios are of #ost interest to
stoc(holders, long-ter# creditors,
stoc(holders, long-ter# creditors,
and co#any #anage#ent'
and co#any #anage#ent'
+ol&ency ratios are of #ost interest to
+ol&ency ratios are of #ost interest to
stoc(holders, long-ter# creditors,
stoc(holders, long-ter# creditors,
and co#any #anage#ent'
and co#any #anage#ent'
+ol&ency is a co#any$s a!ility to #eet the
+ol&ency is a co#any$s a!ility to #eet the
o!ligations created !y its long-ter# de!t'
o!ligations created !y its long-ter# de!t'
+ol&ency is a co#any$s a!ility to #eet the
+ol&ency is a co#any$s a!ility to #eet the
o!ligations created !y its long-ter# de!t'
o!ligations created !y its long-ter# de!t'
8 - 8 - 2. 2. 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
+ol&ency 4atios
+ol&ency 4atios
It #easures "hat roortion of a
It #easures "hat roortion of a
co#any$s assets is %nanced !y de!t'
co#any$s assets is %nanced !y de!t'
It #easures "hat roortion of a
It #easures "hat roortion of a
co#any$s assets is %nanced !y de!t'
co#any$s assets is %nanced !y de!t'


Assets 6 @ia!ilities > D"ners$ equity
Assets 6 @ia!ilities > D"ners$ equity


Assets 6 @ia!ilities > D"ners$ equity
Assets 6 @ia!ilities > D"ners$ equity


100; 6 +o#e ; > +o#e ;
100; 6 +o#e ; > +o#e ;
8 - 8 - 2/ 2/ 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
+ol&ency 4atios
+ol&ency 4atios
Total lia!ilities 9 Total assets
Total lia!ilities 9 Total assets
Total lia!ilities 9 Total assets
Total lia!ilities 9 Total assets
:128,83) 9 :288,015 6 ))'/3;
:128,83) 9 :288,015 6 ))'/3;
:128,83) 9 :288,015 6 ))'/3;
:128,83) 9 :288,015 6 ))'/3;
8 - 8 - 28 28 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
+ol&ency 4atios
+ol&ency 4atios
This ratio is also called the
This ratio is also called the
ti#es-interest-earned ratio'
ti#es-interest-earned ratio'
This ratio is also called the
This ratio is also called the
ti#es-interest-earned ratio'
ti#es-interest-earned ratio'
It indicates a co#any$s a!ility to
It indicates a co#any$s a!ility to
#a(e its eriodic interest ay#ents'
#a(e its eriodic interest ay#ents'
It indicates a co#any$s a!ility to
It indicates a co#any$s a!ility to
#a(e its eriodic interest ay#ents'
#a(e its eriodic interest ay#ents'
8 - 8 - 22 22 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
+ol&ency 4atios
+ol&ency 4atios
Bo&erage ratio 6
Bo&erage ratio 6
*arnings !efore interest e8ense
*arnings !efore interest e8ense
and inco#e ta8es 9 Interest e8ense
and inco#e ta8es 9 Interest e8ense
Bo&erage ratio 6
Bo&erage ratio 6
*arnings !efore interest e8ense
*arnings !efore interest e8ense
and inco#e ta8es 9 Interest e8ense
and inco#e ta8es 9 Interest e8ense
=:105,301 > :.,000? 9 :.,000 6 18'55 ti#es
=:105,301 > :.,000? 9 :.,000 6 18'55 ti#es
=:105,301 > :.,000? 9 :.,000 6 18'55 ti#es
=:105,301 > :.,000? 9 :.,000 6 18'55 ti#es
8 - 8 - 30 30 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ective *
Learning !b"ective *
Locate industry averages&
Locate industry averages&
8 - 8 - 31 31 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Industry A&erages
Industry A&erages
The
The
Almanac
Almanac
includes all
includes all
co#anies, u!lic and ri&ate'
co#anies, u!lic and ri&ate'
The
The
Almanac
Almanac
includes all
includes all
co#anies, u!lic and ri&ate'
co#anies, u!lic and ri&ate'
Infor#ation ro&ided in the
Infor#ation ro&ided in the
Almanac
Almanac
for each industry is four ages'
for each industry is four ages'
Infor#ation ro&ided in the
Infor#ation ro&ided in the
Almanac
Almanac
for each industry is four ages'
for each industry is four ages'
It consists of t"o ta!les'
It consists of t"o ta!les'
It consists of t"o ta!les'
It consists of t"o ta!les'
This chater e#hasizes the
This chater e#hasizes the
Almanac of
Almanac of
Business and Industrial Financial Ratios
Business and Industrial Financial Ratios
'
'
This chater e#hasizes the
This chater e#hasizes the
Almanac of
Almanac of
Business and Industrial Financial Ratios
Business and Industrial Financial Ratios
'
'
8 - 8 - 32 32 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Industry A&erages
Industry A&erages
Ta!le II ro&ides the sa#e infor#ation
Ta!le II ro&ides the sa#e infor#ation
ite#s as Ta!le I, !ut it considers
ite#s as Ta!le I, !ut it considers
only co#anies that sho"ed
only co#anies that sho"ed
a net inco#e for the year'
a net inco#e for the year'
Ta!le II ro&ides the sa#e infor#ation
Ta!le II ro&ides the sa#e infor#ation
ite#s as Ta!le I, !ut it considers
ite#s as Ta!le I, !ut it considers
only co#anies that sho"ed
only co#anies that sho"ed
a net inco#e for the year'
a net inco#e for the year'
Ta!le I ro&ides an analysis of all
Ta!le I ro&ides an analysis of all
co#anies in the articular industry,
co#anies in the articular industry,
regardless of "hether they had
regardless of "hether they had
any net inco#e for the year'
any net inco#e for the year'
Ta!le I ro&ides an analysis of all
Ta!le I ro&ides an analysis of all
co#anies in the articular industry,
co#anies in the articular industry,
regardless of "hether they had
regardless of "hether they had
any net inco#e for the year'
any net inco#e for the year'
8 - 8 - 33 33 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ective +
Learning !b"ective +
Avaluate a company's
Avaluate a company's
ratios
ratios
using a comparison to
using a comparison to
industry averages&
industry averages&
8 - 8 - 3) 3) 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Bo#arison of *le&ation
Bo#arison of *le&ation
+orts, Inc', to Industry
+orts, Inc', to Industry
A&erages
A&erages
3eturn on assets 3eturn on assets
Proft margin before income ta9es Proft margin before income ta9es
8otal asset turnover 8otal asset turnover
Proft margin after income ta9 Proft margin after income ta9
3eturn on equity after income ta9es 3eturn on equity after income ta9es
3eturn on equity before income ta9es 3eturn on equity before income ta9es
Current ratio Current ratio
Buic5 ratio Buic5 ratio
;et sales to .or5ing capital ;et sales to .or5ing capital
3eceivables turnover 3eceivables turnover
:nventory turnover :nventory turnover
%ebt ratio %ebt ratio
Coverage ratio Coverage ratio
*7&7C *7&7C
$-&-C $-&-C
#& #&
#$&-C #$&-C
*,&2C *,&2C
+*&0C +*&0C
$&* $&*
#&2 #&2
+&, +&,
#0& #0&
#7&+ #7&+
++&2C ++&2C
#&7 #&7
#-&#C #-&#C
+&$C +&$C
#&, #&,
*&+C *&+C
#,&*C #,&*C
$*&,C $*&,C
#&7 #&7
-&+ -&+
2&* 2&*
$&7 $&7
$&0 $&0
70&C 70&C
0&* 0&*
#7&#C #7&#C
7&#C 7&#C
$&* $&*
0&2C 0&2C
+-&0C +-&0C
+*&#C +*&#C
#&, #&,
-&0 -&0
0&, 0&,
*#&2 *#&2
$&# $&#
7&$C 7&$C
7&2 7&2
3atio 3atio
Alevation Alevation
Sports, :nc& Sports, :nc&
8otal 8otal
:ndustry :ndustry
:ndustry :ndustry
.ith Assets .ith Assets
)$0-6)0--,--- )$0-6)0--,---
8 - 8 - 35 35 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Bo#any Analysis
Bo#any Analysis
Bo#are ratios to the industry a&erages'
Bo#are ratios to the industry a&erages'
Bo#are ratios to the industry a&erages'
Bo#are ratios to the industry a&erages'
@oo( for co#any trends'
@oo( for co#any trends'
@oo( for co#any trends'
@oo( for co#any trends'
Bonsider the industry en&iron#ent'
Bonsider the industry en&iron#ent'
Bonsider the industry en&iron#ent'
Bonsider the industry en&iron#ent'
Era" conclusions'
Era" conclusions'
Era" conclusions'
Era" conclusions'
8 - 8 - 3. 3. 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ective 0
Learning !b"ective 0
Dse ratio values from
Dse ratio values from
consecutive time periods
consecutive time periods
to evaluate the proftability,
to evaluate the proftability,
liquidity, and solvency
liquidity, and solvency
of a business&
of a business&
8 - 8 - 3/ 3/ 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Trend Analysis of
Trend Analysis of
+elected 4atios
+elected 4atios
3eturn on assets 3eturn on assets
Proft margin before ta9es Proft margin before ta9es
8otal asset turnover 8otal asset turnover
Proft margin after ta9es Proft margin after ta9es
3eturn on equity after ta9es 3eturn on equity after ta9es
3eturn on equity before ta9es 3eturn on equity before ta9es
Current ratio Current ratio
Buic5 ratio Buic5 ratio
;et sales to .or5ing capital ;et sales to .or5ing capital
3eceivables turnover 3eceivables turnover
:nventory turnover :nventory turnover
%ebt ratio %ebt ratio
8otal liabilities to net .orth 8otal liabilities to net .orth
#0-&+ #0-&+
#+#&* #+#&*
#-7&+ #-7&+
#+7&* #+7&*
#+0&# #+0&#
#++&$ #++&$
,0&+ ,0&+
7,&* 7,&*
#+-&* #+-&*
- -
#*0&* #*0&*
2&# 2&#
#&$ #&$
#0*&2 #0*&2
#0-&# #0-&#
#-$&+ #-$&+
#00&+ #00&+
#0&* #0&*
#07& #07&
+&- +&-
#*#&+ #*#&+
#+2&2 #+2&2
- -
#$,&- #$,&-
,,&$ ,,&$
,&2 ,&2
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
#--&- #--&-
- -
#--&- #--&-
#--&- #--&-
#--&- #--&-
3atio 3atio $--# $--# $--- $--- #,,7 #,,7
#*2&+ #*2&+
#+$&0 #+$&0
,7&+ ,7&+
#+2&0 #+2&0
#*2&, #*2&,
#*7&2 #*7&2
,#&2 ,#&2
0#0& 0#0&
#$7&0 #$7&0
- -
#++&0 #++&0
,+&7 ,+&7
,#&2 ,#&2
$--$ $--$
8 - 8 - 38 38 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ective 7
Learning !b"ective 7
%ra. conclusions about the
%ra. conclusions about the
credit6.orthiness and
credit6.orthiness and
investment6attractiveness
investment6attractiveness
of a company&
of a company&
8 - 8 - 32 32 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Era" Bonclusions
Era" Bonclusions
1' 0a#ily Eollar +tores, Inc', is an industry
1' 0a#ily Eollar +tores, Inc', is an industry
leader in ro%ta!ility and sol&ency'
leader in ro%ta!ility and sol&ency'
1' 0a#ily Eollar +tores, Inc', is an industry
1' 0a#ily Eollar +tores, Inc', is an industry
leader in ro%ta!ility and sol&ency'
leader in ro%ta!ility and sol&ency'
2' 0a#ily Eollar has i#ro&ed the
2' 0a#ily Eollar has i#ro&ed the
distri!ution ele#ent of its suly chain'
distri!ution ele#ent of its suly chain'
2' 0a#ily Eollar has i#ro&ed the
2' 0a#ily Eollar has i#ro&ed the
distri!ution ele#ent of its suly chain'
distri!ution ele#ent of its suly chain'
The e&aluation rocess !y nature
The e&aluation rocess !y nature
deends uon indi&idual ercetion'
deends uon indi&idual ercetion'
The e&aluation rocess !y nature
The e&aluation rocess !y nature
deends uon indi&idual ercetion'
deends uon indi&idual ercetion'
8 - 8 - )0 )0 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Era" Bonclusions
Era" Bonclusions
3' 3art of the co#any ro%ta!ility and
3' 3art of the co#any ro%ta!ility and
liquidity "ill deend uon its increasing
liquidity "ill deend uon its increasing
the in&entory turno&er ratio'
the in&entory turno&er ratio'
3' 3art of the co#any ro%ta!ility and
3' 3art of the co#any ro%ta!ility and
liquidity "ill deend uon its increasing
liquidity "ill deend uon its increasing
the in&entory turno&er ratio'
the in&entory turno&er ratio'
)' If "e choose to in&est in a general
)' If "e choose to in&est in a general
#erchandise discounter, 0a#ily Eollar
#erchandise discounter, 0a#ily Eollar
+tores, Inc', #ight !e one to consider'
+tores, Inc', #ight !e one to consider'
)' If "e choose to in&est in a general
)' If "e choose to in&est in a general
#erchandise discounter, 0a#ily Eollar
#erchandise discounter, 0a#ily Eollar
+tores, Inc', #ight !e one to consider'
+tores, Inc', #ight !e one to consider'
8 - 8 - )1 )1 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
Learning !b"ective 2
Learning !b"ective 2
State the limitations
State the limitations
of ratio analysis&
of ratio analysis&
8 - 8 - )2 )2 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@i#itations of 4atio Analysis
@i#itations of 4atio Analysis
2' The %nancial state#ents used to co#ute
2' The %nancial state#ents used to co#ute
the ratios are !ased on historical cost'
the ratios are !ased on historical cost'
2' The %nancial state#ents used to co#ute
2' The %nancial state#ents used to co#ute
the ratios are !ased on historical cost'
the ratios are !ased on historical cost'
3' 0igures fro# the !alance sheet used to
3' 0igures fro# the !alance sheet used to
calculate the ratios are year-end nu#!ers'
calculate the ratios are year-end nu#!ers'
3' 0igures fro# the !alance sheet used to
3' 0igures fro# the !alance sheet used to
calculate the ratios are year-end nu#!ers'
calculate the ratios are year-end nu#!ers'
1' Atte#ting to redict the future using ast
1' Atte#ting to redict the future using ast
results deends uon the redicti&e
results deends uon the redicti&e
&alue of the infor#ation used'
&alue of the infor#ation used'
1' Atte#ting to redict the future using ast
1' Atte#ting to redict the future using ast
results deends uon the redicti&e
results deends uon the redicti&e
&alue of the infor#ation used'
&alue of the infor#ation used'
8 - 8 - )3 )3 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
@i#itations of 4atio Analysis
@i#itations of 4atio Analysis
5' @ac( of unifor#ity concerning "hat is
5' @ac( of unifor#ity concerning "hat is
to !e included in the nu#erators and
to !e included in the nu#erators and
deno#inators #a(e co#arisons
deno#inators #a(e co#arisons
e8tre#ely di5cult'
e8tre#ely di5cult'
5' @ac( of unifor#ity concerning "hat is
5' @ac( of unifor#ity concerning "hat is
to !e included in the nu#erators and
to !e included in the nu#erators and
deno#inators #a(e co#arisons
deno#inators #a(e co#arisons
e8tre#ely di5cult'
e8tre#ely di5cult'
)' Industry eculiarities create di5culty
)' Industry eculiarities create di5culty
in co#aring the ratios of a co#any
in co#aring the ratios of a co#any
in one industry "ith those of a
in one industry "ith those of a
co#any in another industry'
co#any in another industry'
)' Industry eculiarities create di5culty
)' Industry eculiarities create di5culty
in co#aring the ratios of a co#any
in co#aring the ratios of a co#any
in one industry "ith those of a
in one industry "ith those of a
co#any in another industry'
co#any in another industry'
8 - 8 - )) )) 2005 2005 Accounting 1/e Accounting 1/e, Terrell/Terrell , Terrell/Terrell
And of Chapter
And of Chapter