WGU C201 Business Acumen Chapter 15 & 16: Accounting and Financial Statements – Ratios

WGU C201 Business Acumen Chapter 15 & 16: Accounting and Financial Statements – Ratios Current assets / current liabilities Current Ratio Current assets - minus inventory / current liabilities Acid Test (Quick) Ratio Current assets $250 Inventory $20 Current Liabilities $=230 230/100=2.2 $2.20 assets for every $1 in liabilities Acid Test (Quick) Ratio and Current Ratio Liquidity Ratios Inventory Turnover, Receivables Turnover, and Total Asset Turnover Activity Ratios Cost of goods sold / average inventory Inventory Turnover. Equals the number of times inventory moves through a business. Cost of Goods Sold $200,000 Average Inventory $20,000 /20000 = 10 Compare these to industry averages for industry. Credit sales / average accounts receivable Receivables Turnover Sales / Average Total Assets Total Asset Turnover. Equals how much sales each dollar invested in assets generates. Debt Ratio and Long Term Debt to Equity Leverage Ratios Total Liabilities / Total Assets Debt Ratio Exact opposite of liquidity. Long-Term Debt / Owner's Equity Long Term Debt to Equity Gross Profit Margin, Net Profit Margin and Return on Equity Profitability Ratios Gross profit / sales Gross Profit Margin. Equals firm's realized profit. What's left over after our cost of goods sold. Net income / sales Net Profit Margin. How much of each dollar earned is turned into profit.. Very important for investors. Net Income / average equity Return on Equity. How much do we earn with the money shareholders invest. Higher is better.