Calculation Results How do you think this can be used in business? Are each of the values generated “good” or “bad”? How can they be improved? Income Statement . ©William G. Donohoo 7/28/2014
4 . (1.) Return on or % of X where X is any line entry on the Income statement. E.g. Profit Return on Sales = Net Profit/Sales = % [You could use Pretax or Profit After Tax. Just use it consistently from one period to another and from one company to another] This calculation can be done for every line item on the Income Statement [I.E. line item/Sales = %] If Sales and Return % are known, then Profit = Sales X Return % If Profit and Return % are known then Sales = Profit/ Return % 39000/1000000 = 3.9% 1000000 X 3.9% = 39000 39000/3.9% = 1000000 Bad. The 3.9% is a too low percent of profit in comparison to the sales. As a manger, I would work to reduce the cost incurred in the production and seek tax relief from the government. The company makes tremendous sales but uses much of the funds obtained to cater for expenses Balance Sheet . . ©William G. Donohoo 7/28/2014
5 (2.) Allocation of Assets by Asset Title to Total Assets E.g. Cash/Total Assets = % 25000/385000 = 6.5% Good. The rate shows the ability of the company to use its assets in generating cash. 6.5% is considerably low and may be improved through investing the company’s assets into more profitable investments. (3.) Allocation of (an account or account group in Total Liabilities and Equity) to (Total Liabilities and Equity) by Account Title = % E.G. Current Liabilities/(Total Liabilities and Equity) = % Equity/(Total Liabilities and Equity) = % Long Term Debt/(Total Liabilities and Equity) = % Total Liabilities (both Current Liabilities and 69500/385000 = 18% 240500/385000 = 63% 75000/385000 = 19.5% 144500/385000 = 37.5% Good. The ration measure the company’s ability to settle its debt. The ratio is high indicating that the company can comfortably its short term and long term debts. The ratios can be improved by reducing the amount of borrowing and sale of shares but ensuring that the action does not inhibit investment. ©William G. Donohoo 7/28/2014
6 Long Term Debt)/(Total Liabilities and Equity) = % Note: 1. Both Assets and Liabilities are subtotaled as “Current” and “Fixed” or “Long Term”. Current refers to items that turn into cash (for example, Collecting Accounts Receivable) or require cash (for example, paying Accounts Payable) to be paid out in the next 12 months. 2. Total Liabilities and Equity finance the Assets. (4.) Long Term Debt to Equity = % If Long Term Debt and Long Term Debt as a % of Equity is known, Equity = Long Term 75000/240500 = 31% 75000/31% =240500 Bad. The ratio compares the long term debt to equity. 31% means that the company’s long term debt is large and should be reduced through controlled borrowing. ©William G. Donohoo 7/28/2014
7 Debt/Long Term Debt as a % of Equity If Equity and Long Term Debt as a % of Equity is known , Long Term Debt = Equity X Long Term Debt as a % of Equity 240500 X 31% = 75000 (5.) Current Ratio = Current Assets/Current Liabilities If Current Assets and Current Ratio is known, Current Liabilities = Current Assets/Current Ratio If Current Liabilities and Current Ratio is known, Current Assets = Current Liabilities X Current Ratio 250000/69500 = 3.6 250000/3.6 = 69500 69500 X 3.6 = 250000
You've reached the end of your free preview.
Want to read all 15 pages?
- Fall '08