Calculation results how do you think this can be used

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

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.
(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

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(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

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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

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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