Financial Ratio

Basic Accounting Equation

Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

Assets

Resources owned by a business used in activities like production and sales, providing future benefits.

Liabilities

Claims against assets, including debts and obligations, often incurred through borrowing or purchasing on credit.

Owner’s Equity

Ownership claim on total assets, calculated as assets minus liabilities, affected by investments, revenues, withdrawals, and expenses.

Transactions

Business economic events recorded by accountants, can be external or internal.

Transaction 1: Investment by Owner

+Cash, +Owner’s Capital

Transaction 2: Purchase of Equipment for Cash

-Cash, +Equipment

Transaction 3: Purchase of Supplies on Credit

+Supplies, +Liabilities

Transaction 4: Services Performed for Cash

+Cash, +Revenues

Transaction 5: Purchase of Advertising on Credit

+Accounts Payable, -Expenses

Transaction 6: Services Performed for Cash and Credit

+Cash, +Accounts Receivable, +Revenues

Transaction 7: Payment of Expenses

-Cash, -Expenses

Transaction 8: Payment of Accounts Payable

-Cash, -Accounts Payable

Transaction 9: Receipt of Cash on Account

+Cash, -Accounts Payable

Transaction 10: Withdrawal of Cash by Owner

-Cash, -Owner’s Drawings

Financial Ratios

Express relationships among financial statement data, showing mathematical relationships in percentages, rates, or proportions.

Liquidity Ratios

Measure a company's short-term ability to pay debts and meet cash needs.

Current Ratio

Evaluates a company's short-term debt-paying ability.

Acid Test Ratio

Measures immediate short-term liquidity.

Accounts Receivable Turnover

Assesses the liquidity of receivables.

Inventory Turnover

Measures how many times inventory is sold on average, indicating liquidity.

Profitability Ratio

Measures a company's income or operating success over a period.

Profit Margin

Indicates the percentage of each sale dollar resulting in net income.

Asset Turnover

Measures how efficiently a company uses assets to generate sales.

Return on Assets

Overall profitability measure.

Return on Common Stockholders Equity

Shows net income earned per dollar invested by owners.

Earnings Per Share (EPS)

Measures net income earned per share of common stock.

Price-Earnings Ratio

Ratio of market price per share to earnings per share.

Payout Ratio

Percentage of earnings distributed as cash dividends.

Solvency Ratio

Measures a company's ability to survive long-term.

Debt to Assets Ratio

Percentage of total assets provided by creditors.

Times Interest Earned

Indicates the company's ability to meet interest payments.