Page 424 - Business Principles and Management

Chapter 15 • Business Financial Records

FINANCIAL RATIOS FIGURE 15-10 Working capital can be calculated using
Managers use ratios to examine different areas information on current assets and current liabilities
of the business for possible financial problems. from the balance sheet.
Figure 15-11 describes some important ratios and
their uses. The data for these ratios come from Crown Corporation
Working Capital
Crown Corporation’s financial statements: Figure December 31, 20--
15-6 (balance sheet), Figure 15-7 (income state-
ment), and Figure 15-10 (working capital). Finan- Current Assets:
cial ratios for current financial statements can be Cash $24,000
compared with the same ratios from prior periods, Accounts Receivable 8,000
with ratios from other firms, and with other types Merchandise Inventory 64,000 $96,000
of ratios. Organizations such as Dun & Bradstreet Current Liabilities:
publish a standard list of average ratios for vari- Accounts Payable 32,000
ous types of businesses. Companies can use those Total Working Capital $64,000
published ratios to compare with their own ratios
to get a sense of how they are doing in relation to
other companies in their industry.
Lenders use ratios to decide whether a company is a good loan risk. Managers
use ratios to identify possible problems needing corrective action. For example, if

FIGURE 15-11 Financial ratios are an important tool for management
decision making and investment decisions.

Frequently Used Financial Ratios
RATIO CALCULATION CROWN PURPOSE
CORPORATION*

Return on Net Profit 80,000 Shows how profit-
= .10
Sales Sales 800,000 able a firm was for
a specified period
of time.
Inventory Cost of Goods Sold 440,000 Shows whether the
Turnover Ave. Mdse. 64,000 = 6.88 average monthly
Inventory inventory might be
too large or small.
Current Current Assets 96,000 Shows whether a
= 3.0
Ratio firm can meet its
Current Liabilities 32,000
current debts
comfortably.
Return on Net Profit 80,000 Shows whether the
= .20
Owners’ Owners’ Equity 400,000 owners are making
Equity a fair return on
their investment.
Return on Net Profit 80,000 Shows rate of
= .149
Investment Total Assets 536,000 return on the total
money invested
by owners and
others in a firm.

* See Fig. 15-6, 15-7, and 15-10 for sources of figures for calculations.

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