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Contemporary Mathematics
for Business and Consumers
Third Edition
By: Robert A. Brechner
COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. Thomson Learning TM is a
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Chapter 15
Financial Statements and Ratios
Copyright © 2003 by South-Western
Chapter 15, Financial Statements and Ratios
Section I The Balance Sheet
15-1 Preparing the balance sheet
15-2 Preparing a vertical analysis of a balance sheet.
15-3 Preparing a horizontal analysis of a balance sheet.
Section II The Income Statement
15-4 Preparing an income statement.
15-5 Preparing a vertical analysis of an income statement.
15-6 Preparing a horizontal analysis of an income
statement.
Chapter 15, Financial Statements and Ratios (Cont.)
Section III Financial Ratios and Trend
Analysis
15-7 Calculating financial ratios.
15-8 Preparing a trend analysis chart and graph of financial
data.
Everybody’s Business
Don’t be overwhelmed by the amount of new
terminology associated with financial statements.
Start by understanding the function and basic
structure of each statement.
Next, learn the purpose of each major category.
This should help you determine which category of
the statement each component is listed.
Section I, The Balance Sheet
15-1 Preparing a Balance Sheet
Steps to Prepare a Balance Sheet:
Step 1. Center at the top of the page, write the company
name, type of statement, and date.
Step 2. In a section labeled ASSETS, list and total all the
Current Assets; Property, Plant, and Equipment; and
Investments and Other Assets.
Step 3. Add the three components of the Assets section to
get Total Assets.
Step 4. Double underline Total Assets.
Step 5. In a section labeled LIABILITIES AND
OWNERS EQUITY, list and total all Current Liabilities
and Long term Liabilities.
Section I, The Balance Sheet (Cont.)
15-1 Preparing a Balance Sheet
Steps to Prepare a Balance Sheet:
Step 5. Add the tow components of the Liabilities section
to get total Liabilities.
Step 7. List and total the Owner’s or Stockholders Equity.
Step 8. Add the Total Liabilities and Owner’s Equity.
Step 9. Double underline Total Liabilities and Owner’s
equity.
Assets = Liabilities + Owner’s Equity
Everybody’s Business
The owners of a corporation are the stockholders;
therefore, the owner’s equity on the balance sheet
of a corporation is called stockholders equity.
15-2 Preparing a Vertical Analysis of a Balance
Sheet
15-1 Preparing a Vertical Analysis of a Balance Sheet
Steps to Prepare a Balance Sheet:
Step 1. Use the percentage formula, Rate = Portion / Base,
to find the percentage of each item on the balance sheet.
Use each individual item as the portion and the total asset
as the base.
Step 2. Round each answer to the nearest tenth percent.
Step 3. List the percent of each balance sheet item in a
column to the right of the monetary amount.
15-5 Preparing a Vertical Analysis of a Income
Statement
Steps to Prepare a Vertical Analysis of an Income
Statement:
Step 1. Use the percentage formula, Rate = Portion /
Base, to find the percentage of each item on the income
statement. Use each individual item as the portion and
the net sales as the base.
Step 2. Round each answer to the nearest tenth percent.
Step 3. List the percent of each income statement item in
a column to the right of the monetary amount.
Everybody’s Business
In vertical analysis, remember that each
individual item on the balance sheet is the
portion, and Total Assets in the base.
Everybody’s Business
The popular term bottom line literally comes from
the structure of an income statement:
Total revenue
= Total expenses
Income (loss)
Bottom line
Section III, Financial Ratios and Trend Analysis
15-7 Calculating Financial Ratios
Liquidity Ratios:
Working Capital
Working capital = Current assets – Current liabilities
Current Ratio
Current ratio = Current assts
Current liabilities
Section III, Financial Ratios and Trend Analysis
15-7 Calculating Financial Ratios
Efficiency Ratios:
Average Collection Period
Average collection period = Accounts receivable x 365
Credit sales
Inventory Turnover:
Average inventory = Beginning inventory + Ending inventory
2
Inventory turnover = Cost of goods sold
Average inventory
Section III, Financial Ratios and Trend Analysis
15-7 Calculating Financial Ratios
Leverage Ratios:
Debt to Asset Ratio:
Debt to asset ratio = Total liabilities
Total assets
Debt to Equity Ratio
Debt too equity ratio = Total liabilities
Owner’s equity
Section III, Financial Ratios and Trend Analysis
15-7 Calculating Financial Ratios
Profitability Ratios:
Gross Profit Margin
Gross profit margin = Gross profit
Net sales
Net Profit Margin
Net profit margin = Net income
Return on Investment
Net sales
Return on investment = Net income
Owner’s equity
Section III, Financial Ratios and Trend Analysis
15-7 Calculating Financial Ratios
Leverage Ratios:
Debt to Asset Ratio:
Debt to asset ratio = Total liabilities
Total assets
Debt to Equity Ratio
Debt too equity ratio = Total liabilities
Owner’s equity
15-8 Preparing a Trend Analysis Chart and
Graph of Financial Data
Steps for Preparing a Trend Analysis
Step 1. Choose a base year and let it equal 100%.
Step 2. Calculate the index number for each succeeding year by
using:
Index number = Yearly amount
Base year amount
Step 3. Round each index number to the nearest percent.
Chapter 15, Financial Statements and Ratios
Financial statements
Balance sheet
Creditor
Owner’s equity
Accounting equation
Common-size balance sheet
Comparative balance sheet
Loss
Expense
Liquidity ratios
Financial analysis
Financial position
Liabilities
Assets
Vertical analysis
Horizontal analysis
Income
Revenue
Profit or loss
Efficiency ratios
Chapter 15, Financial Statements and Ratios
(Cont.)
Common size income statement
Liquidity ratios
Financial ratios
Current ratio
Asset turnover ratio
Debit-to-asset ratio
Profitability ratios
Net profit margin
Return on investment
Inventory turnover
Working capital
Acid test
Leverage ratios
Debt-to-equity ratio
Gross profit margin
Index numbers
Trend analysis
Chapter 15
Liquidity Ratios
Working capital = Current assets - Current liabilities
Current ratio =
Current assets
Current liabilities
Quick assets = Cash + Marketable securities + Receivables
Acid test ratio =
Quick assets
Current liabilities
Copyright © 2003 by South-Western
Chapter 15
“Formulas”
Efficiency Ratios
Average collection period = Accounts receivable x 365
Credit sales
Average inventory = Beginning inventory + Ending inventory
2
Cost of goods sold
Inventory turnover =
Average inventory
Asset turnover = Net Sales / Total assets
Copyright © 2003 by South-Western
Chapter 15
“Formulas”
Leverage Ratios
Debt-to-assets ratio = Total liabilities / Total assets
Debt-to-equity ratio = Total liabilities / Owner’s equity
Profitability Ratios
Gross profit margin = Gross profit / Net sales
Net profit margin = Net income / Net sales
Return on investment = Net income / Owner’s equity
Copyright © 2003 by South-Western