ACCT 201 Test 4

Current Ratio

How well a company can pay liabilities coming within the year

Current Ratio Formula

Current Assets / Current Liabilities

Return on Equity

How well a company is using equity invested in a company to produce income

Return on Equity Formula

Net Income / Average Shareholders Equity

Debt to Equity

Tell us how much a company is leaning on debt financing vs equity financing

Debt to Equity Formula

Total Liabilities / Total Shareholders Equity

Return on Investment

How much profit a company earns for every dollar of assets

Return on Investment Formula

Operating Income / Average Total Assets

Book Value

Value of company based on B/S

Book Value Formula

Assets - Liabilities (Equity)

Market Value

Value of company based on stock market

Market Value Formula

Shares Outstanding x Price per Share

% Change Formula

(Current Year - Prior Year) / Prior Year

Trend Analysis Formula

Current year / Base year (oldest given)

Horizontal Analysis

% Change and Trend Analysis

Common - Size / Vertical Analysis

Used to compare companies of different sizes

Common - Size / Vertical Analysis Formula

Specific / Base (B/S = Assets, I/S = Net Revenue)

Centralized

Small scale, owner makes all day-to-day decisions

Decentralized

Large scale, operations divided into smaller segments with delegated duties

Investment Center

Responsible for Revenue, Cost, and Capital Improvement

Profit Center

Responsible for only generating profit

Cost Center

Responsible for only generating costs

Information must be:

Relevant, Accurate, Timely

Relevant

Pertains to future decisions, differs between alternatives

Accurate

Bad information leads to bad decisions

Timely

Information needed before decision has to be made

Avoidable costs

Relevant costs, can be avoided if alternative option implemented

Sunk costs

Irrelevant costs, costs occurred in the past that can’t be changed