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

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

3. 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.

4. 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 2009. 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

5. 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 2009. 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

6. 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 2009. 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

7. 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

8. 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 2009. 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

9. 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

10. Chapter 18-10 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Profit Margin ratio for 2009. 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

11. Chapter 18-11 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Asset Turnover ratio for 2009. 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

12. Chapter 18-12 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 2009. An overall measure of profitability. $199,000 ($970,200 + $852,800) / 2 = 21.8% Net Income Average Assets Return on Assets = Profitability Ratios

13. Chapter 18-13 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 2009. 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

14. Chapter 18-14 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Earnings Per Share for 2009. 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

15. Chapter 18-15 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Price Earnings Ratio for 2009. 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

16. Chapter 18-16 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Payout Ratio for 2009. 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.

17. Chapter 18-17 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 2009. 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

18. Chapter 18-18 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 2009. 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