AOF Managerial Accounting Unit 5 Lesson 12 Financial

AOF Managerial Accounting Unit 5, Lesson 12 Financial Ratios Copyright © 2009– 2016 NAF. All rights reserved.

The income statement and the balance sheet have all the information you need to calculate ratios Wilhelm's Widgets Corp. Income Statement For Year Ended December 31, 2013 Operating Revenue Net Sales Cost of Merchandise Sold Gross Profit on Operations Operating Expenses Selling Expenses Advertising Expense Delivery Expense Supplies Expense--Sales Total Selling Expenses Administrative Expenses Depr. Expense--Office Equipment Depr. Expense--Computer System Insurance Expense Payroll Taxes Expense Rent Expense Salary Expense--Administrative Supplies Expense--Administrative Uncollectible Accounts Expense Utilities Expense Total Administrative Expenses Total Operating Expenses Income from Operations Other Revenue and Expenses Interest Revenue Net Income before Federal Income Tax Expense From the income statement, you’ll use: • Net Sales • Cost of Merchandise Sold • Income from Operations • Net Income After Federal Income Tax Net Income after Federal Income Tax Wilhelm's Widgets Corp. Balance Sheet December 31, 2013 Assets Current Assets Cash Notes Receivable Accounts Receivable Merchandise Inventory Supplies Total Current Assets Plant Assets Equipment minus Depreciation Building minus Depreciation Total Plant Assets Total Assets Liabilities Current Liabilities Notes Payable Accounts Payable Federal Income Tax Payable Salaries Payable Total Current Liabilities Long-Term Liability Mortgage Payable Total Liabilities Stockholders' Equity Common Stock, 40, 000 shares Retained Earnings Total Stockholders' Equity From the balance sheet, you’ll use: • Accounts Receivable • Total Current Assets • Total Current Liabilities • Total Liabilities • Common Stock • Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

Ratios simplify the process of evaluating a company’s financial performance Without simplifying raw results, it’s next to impossible to know at a glance which company is doing the best job of using its assets to earn profit.

Profitability ratios measure how effectively a company is generating profit The return on total assets ratio makes it easy to identify the company that’s doing the best job of using its assets to earn profit.

Debt ratios measure whether the company has chosen the best mix of funds Would current lenders be interested in a company’s debt ratios? Why? What about stockholders? Debt to Total Assets Ratio: Total Liabilities ÷ Total Assets Debt to Equity Ratio: Total Liabilities ÷ Total Stockholders’ Equity Wilhelm's Widgets Corp. Balance Sheet December 31, 2013 Assets Current Assets Cash Notes Receivable Accounts Receivable Merchandise Inventory Supplies Total Current Assets Plant Assets Equipment minus Depreciation Building minus Depreciation Total Plant Assets Total Assets Liabilities Current Liabilities Notes Payable Accounts Payable Federal Income Tax Payable Salaries Payable Total Current Liabilities Long-Term Liability Mortgage Payable Total Liabilities Stockholders' Equity Common Stock, 40, 000 shares Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

Asset-management ratios measure how efficiently a company uses its assets Wilhelm's Widgets Corp. Income Statement For Year Ended December 31, 2013 Wilhelm's Widgets Corp. Balance Sheet December 31, 2013 Operating Revenue Net Sales Cost of Merchandise Sold Gross Profit on Operations Operating Expenses Selling Expenses Advertising Expense Delivery Expense Supplies Expense--Sales Total Selling Expenses Administrative Expenses Depr. Expense--Office Equipment Depr. Expense--Computer System Insurance Expense Payroll Taxes Expense Rent Expense Salary Expense--Administrative Supplies Expense--Administrative Uncollectible Accounts Expense Utilities Expense Total Administrative Expenses Total Operating Expenses Income from Operations Other Revenue and Expenses Interest Revenue Net Income before Federal Income Tax Expense Assets Current Assets Cash Notes Receivable Accounts Receivable Merchandise Inventory Supplies Total Current Assets Plant Assets Equipment minus Depreciation Building minus Depreciation Total Plant Assets Total Assets Liabilities Current Liabilities Notes Payable Accounts Payable Federal Income Tax Payable Salaries Payable Total Current Liabilities Long-Term Liability Mortgage Payable Total Liabilities Stockholders' Equity Common Stock, 40, 000 shares Retained Earnings Total Stockholders' Equity Net Income after Federal Income Tax Total Liabilities and Stockholders' Equity Accounts Receivable Turnover Ratio: Net Sales (on account) ÷ Accounts Receivable Merchandise Inventory Turnover Ratio: Cost of Merchandise Sold ÷ Average Merchandise Inventory

Ratios are used by a variety of stakeholders to evaluate a variety of performance factors Financial ratios can answer stakeholders’ many questions: • Stockholder: Should I continue to invest in this company? • • Creditor: Should we call in the loan? • Potential investor: Which of these companies should I invest in? • Financial planner: Should I recommend this company to my clients? Manager: Are we doing better this year than last year? How are we performing compared with our competitors?