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RAno FgRuuA tlcNlFlaNcE
Cunent Ratio or
Working Capital
Ratio or Bankers'
Ratio
Cunent AsseE
Current Liabilities
Test of short-term
debt paying ability.
Acid Test or
Quick
Ratio
Quict Assets*
Cunent Liabiiiiies
Quick
Asefs= C-ash +
Cash Equivalents +
Net Receilrables +
Marketable Securities
Measures the firm's
ability to pay its
short-term debts from
its most liquid assets
without having to rely
on inventory.
> Cash Ratio
Gsh + Cash
Equivalents +
Marketable
Securihes
Current UabiliUes
A more conservative
variation in Ouick
Ratio. It tests shori-
term liquidity without
having to rely on
receivables and
inventory.
me
.atrl
> Cash to
Current
Assets Ratio
Cash + Cash
Equivaients +
Marketable
Securities
Current Assets
Meaqrres trle llquuiry
oF current assebs.
P Cash Flow
Ratio
Operating Cash
Flow
Cunent Liabilities
Shows the
significance of cash
flcw for settlin-o
current obligations as
thev become due.
,crl1
3. Defensive
Interval
Cash Equivalents
f
Net Rreivables +
Marketable
Securities
Daily Operating
Cash Flow
Reflects the
percentage of near-
cash items to the
daily operating cash
flow,
Pn'mary gocrl
of
Tin. n1mt'.
i
-v harimize
the clock on'ce I
,I
x oet incom e I
sis and tnterpretation of Financiar statements 61 9 sis and tnterpretation of Financial Statements 6 l 9
42
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ATtoS
-
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nt obligations and continue operations.
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620
PART 2
-
FOUNOATIONS
OF MANAGEMENT
ACCOUNI'ING
b
'well
as the risk that the firm may not be able tb ,..i it,
maturing
obligations,
increases.
increase,s
the cornpany,s
return
when it is profitable.
*
Solvency
-
the firm,s
financial
ability to pay
long_terrn
obligations
and survive
in the long_term.
KEy lnenrorctrs
or SolvrNcy
1. CAptrAt
SIRucruns _
the sources of financing
Chapter 11
-
Analysis and lnterpretation of Financial Statements 621
Eanrutrue PowER
-
the capacity of the firm's operations tr.r
produce cash inflows
Equity (tlr.
risk capitar
of the firm)
-
the ownership
rrrtcrcsl in the firm
Debl
lhc interest
of creditors
in the firm
RATD
Financial
Leverage
Ratio or Equity
Multiplier or
Leverage
Factor
2. Financial
Leverage
Index
Average
Total Assets
Average
Common
Equity
ttcNtt lcANc
Arnount of total
assets financed by
eqLrty. The hiqher
the ratio, the qroater
is the leverage
(assets financed lry
debt) and the
greater the risk
Return on
Common
_
Equity
Return on
Asseb
Interest-
bearing Debt
Ratio
'
Interest-
.-U9e!!9
!sE-
Equity +
Interest-
bearing Debt
----Total
-
Liabilities
Total Assets
If the index exceeds
1.0, it is favorable
and the use of
financial leverage is
successful.
Measures the extent
to which the assets
havinq explicit cost
(total capital) are
financed by interest-
-Qg4lgqett.
___
Measures the
percentage of funds
provided by
creditors.
Debt to Equity
Ratio
_l
Debt to
Tangible Net
Worth Ratio
Total
-
_u_a!!I!!99_
Equity
-
Intangible
Assets
Earnings
.
trefore
lnterest .rnd
-I!L(ESD_
Interest
Expense
Interest-
Earned Ratio
br lnterest
Coverage
Ratio
Compares resources
provided by creditors
wrth resources
provided by
A more conservative
measure of long-
term debt-payment
ability than the debt
ratio or debt to
equity ratio
Indicates the marqrn
oI s.rfcty for
l)ayrnent
of fixed
inierest charges.
622 PART 2
-
FOUNDATIONS OF MANAGEMENT ACCOUNTING
EBIT +
Interest
portion of
Operating
Leases
Interest +
Interest
portion of
Operating
c. AssET MANAGEMEITT RATlos
-
measure how the firm uses its assets to
generate
revenue and income
1. Finished Goods or
./Merdtandise
'/ Inventory Tumover
R4rb
IMicatesithe margin
of safety fot
paylnent of all fixed
charges.
Measures the portion
of total liabilities that
can be paid out of
the cash flows fronr
FoRuuLA
--__
Jqst of Sales
Average Inventory
Chapter 1'l
-
Analysis and lnterpretation of Financial Statements
3.
-,4,eceivables
/
Tumover Ratio
Number of Days in
____
a Year
Irrventory Tumover
Ratio
or
Average Inventory
Average Daily Cost
of Sales
Indicates if a firm holds
excdssive stocks of inventorits
that are unproductive and tnt
lessen the company's
profitability.
I
I
I
I
{
3
ttovrtauc
Average Age of
Receivables or
Number of
Days of
Receivable or
Average
Collection
Period
. ryg!_qed{_sales__
Average Accounts
Measures the average number
of dap tlat inventory is heftl
before sale.
Number of Days
rn a Year
Receivables
Turnover Raho
or
Average Accounts
Receivable
Average Daily
Sales
5. Operating
,,/
cvcle or.
-
Lonvergon
Period
6. Average Age of
Accounts
Payable
Measure the average number
of days to collect a receivaUe.
Average Age of
Inventories + Average
Age of Receivables
7. Fixed Assets
Turnover Ratio
Measures the average
number of days to collcrt
a receivable.
8. Tatal Assets
Turnover Ratio
Average
Accounts Payable_
Average Daily
9. Total Capital
Tumover iatio
Net Sales
Avrlrage Net.
Fixed Assets
Measures the average
number of days to convert
inventoriG to cash.
Net Sales
Average Total
Assets
Determines whether the
hrm is paying rts invoices
on a timely basis.
10. Investment
Rate
Net Sales
Total Capital*
*Total
Chpital
=
lolal
assels having explicit
costs (equity +
inl'prpst-hparino dpht)
Measures the level of use
of property, plant, and
eq.uipment.
Measures the level of
capital investment relatjve
to sales volume.
11. Plowback Ratio
Total Capital,
2008t
-.Total
Capit;rl" 200A
Total
(hpital,
2t)0A
Measures the level of
total assets having
explicit costs relative to
sales volume.
Arrrount
Available for
Reinvestment
Net lncorne
Measures the percentage
change in total capital.
Measure the percentage
of net income available for
investment.
*
A high rate means less
external financing.
624 PART 2
-
FOUNDATIONS OF MANAGEMENT ACOOUNTING
d. Cosr IVIANAGEMENT RATtos
-
measure how well a firm controls lts
costs
RAno
l. Gross Profit
Rate or Gross
Profit
Percentage
2. Labor Cost
Ratio
FoRNULA
Net Sales
-
Cost
of Sales
Net Sales
3. Employment
Growth Rate
e. PRorrestLtry Retros
-
tlleasure earnings in relation to some bas
such as assets, sales, or capital
Labor Cost
Net Sales
(otraYn o"
Number of
Workers, 2008
-
Number of
Workers,200A
Number of
Workers, 200A
Measures how much can
be spent for marketing,
R&D, and administrative
costs while still readting
taroeted inbome.
t?MEMNCE
0yovaVn9
Measures he
percentage
of labor cost to sales.
Chapter.ll-AnalysisandlnterpretaticlnofFinancialStatements
Used as a measure of
operational growth. It is
compared with the
invesfnent rate to
determine whether
capital is being
substituted for labor.
_
Net Income
Net Sales
5. Marginal.
ProfitabilitY
Bate
EBIT
Net Sales
Eii.
6. Return on
Common
Equity
Net Operalingl
Income trr
Total Capital
5taruflcaNe
7. Marginal
refurn on
Common
Eouitv
,l
Measures the percentage
of operating income to
sales
Net Income -
Preferred
---qivrqg!q!-
Average
Comrnon Eouitv
EBIT
Equity + Interest-
bearing Debt
8.-.Return on
y'
Totalequity
Indicates wheher
management is using
funds wisety.
\\
625\
Change in
Net Income
Change in
Common EouiN
A variation of the Net
Operating Income to
Total_Gpital
.1"j1"
Measures the return on
the carrying amount of
equity.
9. Econbmic
Value Added
(EVA)
A variation of the Retunr
on.Total Assets that
excludes non-interest-
bearing debt from to.tal
assets.
Net Income -
Dividends on
Redeemable
Preferred Stock
Average Total EquitY
f.GRoWTHRettos-measurethechangesintheeconomicstatusof
a firm over a
Period
of time
Net Operating Profit
.
after Taxes less CaPital
Charge* or
Jotal
{Jost of CaPital
+Capital
Charge
=tolal
capital employed x
Weighted Average Cost
of Caoital
A variation of the return
on common equitY.
A measure of the
shareholder value
creation.
Basic Earnings
per Share
.(BEPS)
Reflects the comPanY's
earning
power, i.e., its
ability to generate
income from normal
operations.
Shows the relationshiP of
eanlutgs
per slrare to Lhe
market
price
Per
share.