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CH 20] Calculating Business 20-1

CHAPTER 20

NOTE TO INSTRUCTOR: Solutions
to Homework are in that section.

Avg. time for Students to read &
complete homework: 4.0 hrs. 20

Profitability & Performance Measures

Objectives

Mastering the material in this chapter and you will be able to:
 Calculate merchandise turnover based on cost or selling price
 Compute the current ratio, acid-test ratio, and other important business ratios
 Determine Owners' Equity to Creditors' Equity Ratio
 Evaluate and calculate claims against the total assets
 Evaluate the Liquidity Ratios of a business from Financial Statements
 Calculate Solvency Ratios and Investment ratios from Financial Statements
 Determine Efficiency Ratios
 Calculate Profitability and Profitability Ratios
 Evaluate Market Prospect Ratios for Publicly traded companies
 Analyze and determine Coverage Ratios

The purpose of this chapter is demonstrate how to extract helpful information from
financial statements and reports.

FINANCIAL STATEMENT RATIOS

Financial ratios are the most common and widespread tools used to analyze a business’s
financial standing, performance and efficiency. Ratios are easy to understand and simple to
compute. They are also used to compare different firms in different industries. Since a ratio
is simply a mathematically comparison based on proportions, big and small companies use
the same ratios to compare their financial information.
Ratios help managers understand how well a business is performing and identify areas
needing improvement. These same ratios are used by creditors to determine credit
worthiness, how secure their loan will be. Investors use these ratios predict growth and
returns on their investments.
The ratios are derived from both income statements and balance sheet statements and as
comparisons within these statements. Financial ratios studied here are divided into six main
categories: liquidity; solvency and investment leverage; efficiency; profitability; market
prospect; and coverage.
Calculating a ratio. A ratio is a quantitative relation between two amounts showing the
number of times one value contains or is contained within the other. The simplest ratios

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