February 11, 2013
The relationship between two variables is defined by ratios. When dividing the dollar amount of one item on a financial statement by the amount of another item on the financial statement a financial ratio is computed. Expressing the relationship of two variables for ease of comparison and interpretation of other information is the purpose of ratio analysis. A ratio analysis computation allows a look at a particular time period in a financial statement. Ratios present a true picture of a company’s financial health, which serves as a control. In analyzing a business one would want to know if enough funds are being generated, if there is a chance of the company defaulting on obligations, if the company assets were being utilized properly and if there were projected short term and long term cash flow positions. To answer some of these questions several ratios related to the assets, liabilities, revenue, and expense categories on a financial statement will be evaluated. Financial Statement Category - Assets
Current ratio and total debts to asset ratio are two of the ratios used to evaluate the strength, of a business. Current assets divided by current liabilities will yield the current ratio. In an example from the financial statement of the University of Chicago Medical Center (UOCMC), of June 30, 2012 and 2011 the total current assets of $356,442 divided by the total liabilities of $190,257 in 2012 yielded a current ratio of 1.87. A current ratio of 1.5 is considered good in most industries. As the number reaches or goes under one, this identifies the company has a negative working capital (Kennon, J. 2013). The total debt to total assets ratio identifies the company’s financial risk by showing how much of the assets of a company is financed by debt. Usually the lower this ratio figure is the better off the company. The formula can be displayed by showing the...
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