# Contemporary Mathematics for Business and Consumers Third Edition

Contemporary Mathematics for Business and Consumers Third Edition By: Robert A. Brechner COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. TM is a trademark used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems–without the written permission of the publisher. For permission to use material from this text or product, contact us by Tel (800) 730 -2214 Fax (800) 730 -2215 http: //www. thomsonrights. com

Chapter 15 Financial Statements and Ratios Copyright © 2003 by South-Western

Chapter 15, Financial Statements and Ratios n Section I The Balance Sheet 15 -1 Preparing the balance sheet 15 -2 Preparing a vertical analysis of a balance sheet. 15 -3 Preparing a horizontal analysis of a balance sheet. n Section II The Income Statement 15 -4 Preparing an income statement. 15 -5 Preparing a vertical analysis of an income statement. 15 -6 Preparing a horizontal analysis of an income statement.

Chapter 15, Financial Statements and Ratios (Cont. ) n Section III Financial Ratios and Trend Analysis 15 -7 Calculating financial ratios. 15 -8 Preparing a trend analysis chart and graph of financial data.

Everybody’s Business Don’t be overwhelmed by the amount of new terminology associated with financial statements. Start by understanding the function and basic structure of each statement. Next, learn the purpose of each major category. This should help you determine which category of the statement each component is listed.

Section I, The Balance Sheet 15 -1 Preparing a Balance Sheet Steps to Prepare a Balance Sheet: Step 1. Center at the top of the page, write the company name, type of statement, and date. Step 2. In a section labeled ASSETS, list and total all the Current Assets; Property, Plant, and Equipment; and Investments and Other Assets. Step 3. Add the three components of the Assets section to get Total Assets. Step 4. Double underline Total Assets. Step 5. In a section labeled LIABILITIES AND OWNERS EQUITY, list and total all Current Liabilities and Long term Liabilities.

Section I, The Balance Sheet (Cont. ) n 15 -1 Preparing a Balance Sheet Steps to Prepare a Balance Sheet: Step 5. Add the tow components of the Liabilities section to get total Liabilities. Step 7. List and total the Owner’s or Stockholders Equity. Step 8. Add the Total Liabilities and Owner’s Equity. Step 9. Double underline Total Liabilities and Owner’s equity. Assets = Liabilities + Owner’s Equity

Everybody’s Business The owners of a corporation are the stockholders; therefore, the owner’s equity on the balance sheet of a corporation is called stockholders equity.

15 -2 Preparing a Vertical Analysis of a Balance Sheet n 15 -1 Preparing a Vertical Analysis of a Balance Sheet Steps to Prepare a Balance Sheet: Step 1. Use the percentage formula, Rate = Portion / Base, to find the percentage of each item on the balance sheet. Use each individual item as the portion and the total asset as the base. Step 2. Round each answer to the nearest tenth percent. Step 3. List the percent of each balance sheet item in a column to the right of the monetary amount.

15 -5 Preparing a Vertical Analysis of a Income Statement Steps to Prepare a Vertical Analysis of an Income Statement: Step 1. Use the percentage formula, Rate = Portion / Base, to find the percentage of each item on the income statement. Use each individual item as the portion and the net sales as the base. Step 2. Round each answer to the nearest tenth percent. Step 3. List the percent of each income statement item in a column to the right of the monetary amount. –

Everybody’s Business In vertical analysis, remember that each individual item on the balance sheet is the portion, and Total Assets in the base.

Everybody’s Business The popular term bottom line literally comes from the structure of an income statement: Total revenue = Total expenses Income (loss) Bottom line

Section III, Financial Ratios and Trend Analysis n 15 -7 Calculating Financial Ratios Liquidity Ratios: Working Capital Working capital = Current assets – Current liabilities Current Ratio Current ratio = Current assts Current liabilities

Section III, Financial Ratios and Trend Analysis n 15 -7 Calculating Financial Ratios Efficiency Ratios: Average Collection Period Average collection period = Accounts receivable x 365 Credit sales Inventory Turnover: Average inventory = Beginning inventory + Ending inventory 2 Inventory turnover = Cost of goods sold Average inventory

Section III, Financial Ratios and Trend Analysis n 15 -7 Calculating Financial Ratios Leverage Ratios: Debt to Asset Ratio: Debt to asset ratio = Total liabilities Total assets Debt to Equity Ratio Debt too equity ratio = Total liabilities Owner’s equity

Section III, Financial Ratios and Trend Analysis n 15 -7 Calculating Financial Ratios Profitability Ratios: Gross Profit Margin Gross profit margin = Gross profit Net sales Net Profit Margin Net profit margin = Net income Return on Investment Net sales Return on investment = Net income Owner’s equity

Section III, Financial Ratios and Trend Analysis n 15 -7 Calculating Financial Ratios Leverage Ratios: Debt to Asset Ratio: Debt to asset ratio = Total liabilities Total assets Debt to Equity Ratio Debt too equity ratio = Total liabilities Owner’s equity

15 -8 Preparing a Trend Analysis Chart and Graph of Financial Data n Steps for Preparing a Trend Analysis Step 1. Choose a base year and let it equal 100%. Step 2. Calculate the index number for each succeeding year by using: Index number = Yearly amount Base year amount Step 3. Round each index number to the nearest percent.

Chapter 15, Financial Statements and Ratios Financial statements Balance sheet Creditor Owner’s equity Accounting equation Common-size balance sheet Comparative balance sheet Loss Expense Liquidity ratios Financial analysis Financial position Liabilities Assets Vertical analysis Horizontal analysis Income Revenue Profit or loss Efficiency ratios

Chapter 15, Financial Statements and Ratios (Cont. ) Common size income statement Liquidity ratios Financial ratios Current ratio Asset turnover ratio Debit-to-asset ratio Profitability ratios Net profit margin Return on investment Inventory turnover Working capital Acid test Leverage ratios Debt-to-equity ratio Gross profit margin Index numbers Trend analysis

Chapter 15 Liquidity Ratios Working capital = Current assets - Current liabilities Current ratio = Current assets Current liabilities Quick assets = Cash + Marketable securities + Receivables Acid test ratio = Quick assets Current liabilities Copyright © 2003 by South-Western

Chapter 15 “Formulas” Efficiency Ratios Average collection period = Accounts receivable x 365 Credit sales Average inventory = Beginning inventory + Ending inventory 2 Cost of goods sold Inventory turnover = Average inventory Asset turnover = Net Sales / Total assets Copyright © 2003 by South-Western

Chapter 15 “Formulas” Leverage Ratios Debt-to-assets ratio = Total liabilities / Total assets Debt-to-equity ratio = Total liabilities / Owner’s equity Profitability Ratios Gross profit margin = Gross profit / Net sales Net profit margin = Net income / Net sales Return on investment = Net income / Owner’s equity Copyright © 2003 by South-Western

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