1 ©William G. Donohoo 7/28/2014 Business Arithmetic In business, we use many different measurements to confirm our performance and to do comparisons . What follows are a series of arithmetic calculations that are commonly used. I will be using the following Income Statement and Balance Sheet to illustrate the calculations. Income Statement Balance Sheet Assets (Tools) Liabilities (Outside Owners) Sales $ 1,000,000 Cash $ 25,000 Accounts Payable $ 45,000 Cost of Goods $ 550,000 Accounts Receivable $ 110,000 Payroll Payable $ 20,000 Gross Profit $ 450,000 Inventory $ 125,000 Taxes Payable $ 4,500
2 ©William G. Donohoo 7/28/2014 Total Current Assets $ 260,000 Total Current Liabilities $ 69,500 Less: Bank & Other LTD $ 75,000 Selling $ 100,000 Gross Fixed Assets $ 250,000 Total Liabilities $144,50 0 General Expense $ 250,000 Less: Accum Deprec $ (150,000) Deprec Expense $ 35,000 Net Fixed Assets $ 100,000 Equity (Inside Owners) Total Expense $ 385,000 Cap Investment $125,00 0 Profit before Tax $ 65,000 Deps & Other Assets $ 25,000 Retned Earn $ 76,500
3 ©William G. Donohoo 7/28/2014 Income Tax $ 26,000 Total Assets $ 385,000 Current Period Earnings $ 39,000 Profit after Tax $ 39,000 Total Equity $240,50 0 Total Liabilities and Equity $385,00 0 It is one thing to know how to do the arithmetic and another to know how to use the results. In the following Table, I will illustrate common measurements used in business. I want you to write in the blank cells on the right hand side of the page how you think the results of the calculation could be used to confirm performance or to compare performance between time periods or between companies. Do you think the number values generated are “good” or “bad”? As a manager, what could you do to make them “ better ” ? How could you use the information to make business decisions? If you look on the Internet, you can find sites that show these same business measures. Some will even have explanations of how they are used. Almost universally these sites merely show only definitions. If they show how to use the results it is almost always
4 ©William G. Donohoo 7/28/2014 from the securities analyst point of view, and not how a business manager would apply the information to improve the business You learn nothing by copying these internet definitions into the blank cells. If this is what you choose to do, merely enter the URL and don’t bother copying the text from the site. This is the Rosie Ruiz approach (look her up on Google). My desire is that you work out the meaning of each of these sets of calculations on your own. Think it through. I am less worried about the correctness of the answer you derive than I am that you have to stretch your mind. I encourage you to work through these calculations on your own. Note that values have been rounded so you will find trivial variations in calculations as you check my work. This slight loss of precision is fine for our type of work. Generally, we are attempting to get close to the “right” answer. All the values we work with are constantly moving so any calculation is only a close approximation.
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- Fall '08