Financial Midterm Review

Topics: Balance sheet, Asset, Generally Accepted Accounting Principles Pages: 18 (479 words) Published: December 5, 2013
Financial
 Ratios
 


Profitability:
 generation
 of
 revenues
 in
 excess
 of
 the
 expenses
 associated
 
 
o Profit
 margin
 (net
 profit/net
 sales)
 
 
§

Percentage
 of
 sales
 left
 over
 after
 all
 other
 expenses
 

§

Decreasing
 trendàearnings
 declined
 more
 than
 sales
 

o Return
 on
 assets
 (net
 profit/total
 assets)
 
§

Indicates
 how
 well
 the
 assets
 are
 at
 generating
 profit
 

o Return
 on
 equity
 (net
 profit/avg
 equity)
 
§

Effectiveness
 of
 owners’
 investment
 at
 generating
 profit
 

o Vertical
 Analysis
 (SOE
 item/sales)
 
§


Percentage
 of
 sales
 used
 for
 that
 item
 
 

Efficiency:
 efficient
 use
 of
 assets
 
o Age
 of
 accounts
 receivable
 (AR/avg
 daily
 sales=net
 sales/365)
 
§

Days
 of
 sales
 owed
 by
 customers
 

§

Greater
 the
 age,
 the
 more
 $$
 required
 to
 operate
 because
 the
 
customers
 have
 the
 extended
 use
 of
 the
 company’s
 $$
 
 

o Age
 of
 accounts
 payable
 (AP/avg
 daily
 purchases=purchases/365)
 
§

Days
 of
 purchases
 owed
 to
 customers
 

§

Indicates
 whether
 company
 depends
 too
 much
 on
 trade
 credit
 

§

Trend
 of
 increasing
 age
 may
 indicate
 excessive
 inventory
 for
 
its
 sales
 or
 that
 inventory
 is
 obsolete
 

o Age
 of
 inventory
 (ending
 inventory/avg
 daily
 COGS=COGS/365)
 
§


Number
 of
 days
 of
 sales
 before
 running
 out
 of
 inventory
 

Liquidity:
 ability
 to
 meet
 short-­‐term
 obligations
 
o Current
 ratio
 (total
 current
 assets/total
 current
 liabilities)
 
§

Would
 the
 sale
 of
 assets
 pay
 for
 current
 liabilities?
 

§

Rule
 of
 thumb
 is
 2:1
 

o Acid
 test
 or
 quick
 ratio
 (cash
 +
 MS
 +
 AR/current
 liabilities)
 
§

Would
 assets
 cover
 current
 liabilities
 if
 inventory
 won’t
 sell?
 

§

Rule
 of
 thumb
 is
 1:1
 

o Working
 capital
 (current
 assets-­‐current
 liabilities)
 
§


Measures
 the
 excess
 of
 current
 assets
 over
 liabilities
 

Stability:
 business’s
 overall
 financial
 structure
 
o Net
 worth
 to
 total
 assets
 (total
 equity/total
 assets)
 
§

Proportion
 of
 assets
 financed
 by
 the
 owners
 

§

Higher
 ratioàmore
 attractive
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