Exam II Flashcards
Assets = _________ + _______
On the balance sheet
Assets = liabilities + shareholder’s equity
Some assets are….
Cash
Accounts Receivable
Inventory
PP&E
Some liabilities are…
Accounts payable
Long term debt
Shareholder’s equity consists of…
Retained earnings
Common stock
Return on Sales Ratio
Net income / Sales
Investment (asset) turnover
Sales / average assets
Return on Assets
Net Income / average assets
Financial structure leverage
average assets / average shareholder’s equity
Return on Equity
Net income / Average shareholder’s equity
The two main liquidity ratios
Quick ratio and current ratio
Quick ratio
(current assets - inventory) / current liabilities
Current ratio
current assets / current liabilities
The two main activity ratios
Inventory turnover
Accounts Rec. turnover
Inventory turnover =
Cost of goods sold / average inventory
Accounts Rec. turnover =
net credit sales / average accounts rec.
The three leverage ratios
debt to equity
debt to assets
interest coverage ratio
Debt to equity ratio =
total liabilities / total shareholder’s equity
Debt to assets ratio =
total liabilities / total assets
Interest Coverage ratio (solvency) =
Operation income before interest & taxes / interest expense
The main Profitability ratio is
Contribution margin
Contribution Margin =
CM / sales
Where CM = price - cost of labor and materials
