Chapter 18-1 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Illustration

Chapter 18-2 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis

Chapter 18-3 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis All sales were on account. The allowance for doubtful accounts was $3,200 on December 31, 2009, and $3,000 on December 31, 2008.

Chapter 18-4 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Current Ratio for The ratio of 1.82:1 means that for every dollar of current liabilities, the company has $1.82 of current assets. Current Assets Current Liabilities = Current Ratio $369,900 $203,500 = 1.82 : 1 Liquidity Ratios

Chapter 18-5 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Acid-Test Ratio for The acid-test ratio measures immediate liquidity. Cash + Short-Term Investments + Receivables (Net) Current Liabilities Acid-Test Ratio $60,100 + $69,000 + $107,800 $203,500 = 1.16 : 1 = Liquidity Ratios

Chapter 18-6 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Receivables Turnover ratio for It measures the number of times, on average, the company collects receivables during the period. $1,818,500 ($107,800 + $102,800) / 2 = 17.3 times Net Credit Sales Average Net Receivables Receivables Turnover = Liquidity Ratios

Chapter 18-7 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis A variant of the receivables turnover ratio is to convert it to an average collection period in terms of days. This means that receivables are collected on average every 21 days. $1,818,500 ($107,800 + $102,800) / 2 = 17.3 times Liquidity Ratios 365 days / 17.3 times = every 21.1 days Receivables Turnover

Chapter 18-8 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Inventory Turnover ratio for Inventory turnover measures the number of times, on average, the inventory is sold during the period. $1,011,500 ($133,000 + $115,500) / 2 = 8.1 times Cost of Good Sold Average Inventory Inventory Turnover = Liquidity Ratios

Chapter 18-9 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis A variant of inventory turnover is the days in inventory. Inventory turnover ratios vary considerably among industries. Liquidity Ratios 365 days / 8.1 times = every 45.1 days $1,011,500 ($133,000 + $115,500) / 2 = 8.1 times Inventory Turnover

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Profit Margin ratio for Measures the percentage of each dollar of sales that results in net income. $199,000 $1,818,500 = 10.9% Net Income Net Sales Profit Margin = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Asset Turnover ratio for Measures how efficiently a company uses its assets to generate sales. $1,818,500 ($970,200 + $852,800) / 2 = 2.0 times Net Sales Average Assets Asset Turnover = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Return on Assets ratio for An overall measure of profitability. $199,000 ($970,200 + $852,800) / 2 = 21.8% Net Income Average Assets Return on Assets = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Return on Common Stockholders’ Equity ratio for Shows how many dollars of net income the company earned for each dollar invested by the owners. $199,000 - $0 ($566,700 + $465,400) / 2 = 38.6% Net Income – Preferred Dividends Average Common Stockholders’ Equity Return on Common Stockholders’ Equity = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Earnings Per Share for A measure of the net income earned on each share of common stock. $199,000 57,000 (given) = $3.49 per share Net Income Weighted Average Common Shares Outstanding Earnings Per Share = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Price Earnings Ratio for The price-earnings (P-E) ratio reflects investors’ assessments of a company’s future earnings. $25 (given) $3.49 = 7.16 times Market Price per Share of Stock Earnings Per Share Price Earnings Ratio = Profitability Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Payout Ratio for Measures the percentage of earnings distributed in the form of cash dividends. $77,700 $199,000 = 39% Cash Dividends Net Income Payout Ratio = Profitability Ratios * * From analysis of retained earnings.

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Debt to Total Assets Ratio for Measures the percentage of the total assets that creditors provide. $403,500 $970,200 = 41.6% Total Debt Total Assets Debt to Total Assets Ratio = Solvency Ratios

Chapter LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Times Interest Earned ratio for Provides an indication of the company’s ability to meet interest payments as they come due. $199,000 + $84,000 + $18,000 $18,000 = 16.7 times Income before Income Taxes and Interest Expense Interest Expense Times Interest Earned = Solvency Ratios