chapter 9

return on sales

Business owners use the return on sales ratio to examine the portion of each sales dollar that represents profit. To calculate this ratio, divide net income by sales. For example the return on sales for roadrunner delivery service is calculated as follows, 1150$ net income/ total revenue= 43.4%

Financial Statements

Financial statements are summarizing the changes resulting from business transactions that occur during an accounting period.

Profitability ratios

Profitability ratios are used to evaluate the earnings performance of the business during the accounting period. The earning power of a business is an important measure of its ability to grow and continue to earn revenue.

ratio analysis

Ratio analysis is the process of evaluating the relationship between varous amounts in the financial statements. Owners and managers use ratio analysis to determine the financial strength, acitivity and debt paying ability of a business.

report form

Roadrunners balance sheet is prepared in report form, listing the balance sheet sections one under the other. 1. Write the word assets on the first line in the center of the column containing the account names. 2. On the following lines, list each asset account name and its balance in the same order as they appear in the balance sheet section of the work sheet. Enter the account balances in the first amount column. Draw a single rule under the last account balance. 3. On the next line, write the words total assets, indented about hals an inch. Ass the individual asset balances and enter the total in the second amount column.

current ratio

The current ratio reflects the relationship between current assets and current liabilities. the current ratio is calculated by dividing the dollar amount of current assets and current liabilities, the current ratio for roadrunner based on the balance sheet

statement of cash flows

The statement of cash flows summarizes the following information: the amount of cash in the business took in the sources of cash the amount of cash the business paid out the uses of cash

quick ratio

a quick ratio is a measure of the relationship between short term assets and current liabilities. Short term liquid assets those that can be quickly converted to cash - are cash and net receivables. the quick ratio is computed by dividing the total cash and receivables by total current liabilities.

income statement

an income statement reports the net income or net loss for a specific period of time.

current assets

current assets are those used up or converted to cash during the normal operating cycle of the business. these might include accounts receivable, cash in bank, and supplies.

Current liabilities

current liabilities are debts of the business that must be paid within the next accounting period. Accounts payable is an example of a current liabilities.

liquidity ratio

liquidity ratio is a measure of the ability of a business to pay its current debts as they become due and to provide for an unexpected need for cash.

statement of changes in owner's equity

statement of changes in owner's equity summarizes changes in the owner's capital account as a result of business transactions that occur during the period.

working capital

the amount by which current assets exceed current liabilities is known as working capital. Because current liabilities are usually paid out of current assets, working capital represents the excess assets available to continue operations. current assets - current liabilities=working capital

balance sheet

the balance sheet is a report of the balances in the permanent accounts at the end of the period. The main purpose of the balance sheet is to report the assets of the business and the claims against those assets on a specific date. In other words, the balance sheet states the financial position of a business at a specific point in time. The balance sheet summariyes the following informations: what a business owns, what a business owes, what a business is worth