RatioExamples

RatioExamples - Ratios Example 1 Profit margin (Net...

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Ratios – Example 1 Profit margin (Net income/Sales) 3.0% Current ratio (Current assets/Current liabilities) 1.5 × Return on equity (Net income/Total equity) 15.0% Debt ratio (Total liabilities/Total assets) 40.0% Inventory turnover (Sales/Inventory) 20.0 × Interest rate on long-term debt 12.0% Income Statement 2008 Sales Cost of Goods Sold Operating Expenses -\$600,000 EBIT Interest Expense -\$18,000 EBT Taxes (40%) Net Income Balance Sheet 2008 2008 Cash Accounts payable Accounts Receivable \$40,000 Long-term debt (12%) Inventory Total Liabilities Current Assets \$150,000 Fixed Assets Stockholders' Equity Total Assets Ratio Examples - Solutions Page 1

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Ratios used to create financial statements (1) Accounts Payable = Current assets/Current ratio = \$150,000/1.5 Accounts Payable = \$100,000. (2) Long-term debt = (Interest / Interest rate) = \$18,000/0.12 = \$150,000. (3) Total liabilities = Long-term debt + Accounts payable = \$250,000. (4) Total assets = Total liabilities/Debt ratio = \$250,000/0.4 = \$625,000. (5) Stockholders’ equity = Total assets - Total liabilities = \$375,000. (6)
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This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

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RatioExamples - Ratios Example 1 Profit margin (Net...

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