Accounting and Financial Ratios: Expanding the Vintage Lily

With that in mind, how would you calculate the number of times your inventory has turned over or sold during the year?

Cost of goods sold divided by average inventory.

Okay, first ratio, Mr. Johnson needs is the current ratio. What is the formula for this one?

Current assets divided by current liabilities.

How would you characterize financial ratios?

Financial ratios are calculated numbers that identify various performance aspects of a business.

How did this amount of money get calculated on this income statement?

Revenue - COGS - Expenses - Taxes

I'll need to know your overall net worth to establish if we can move forward with the commercial loan. Which financial statement will show me your net worth?

The balance sheet.

The balance sheet does indeed clue us in on a person's or a company's net worth, because it is structured around which equation?

The fundamental accounting equation.

How would you calculate the debt-to-owner's-equity ratio?

Total liabilities divided by owner's equity.

Hi there! I hear you are considering buying that building on North Chestnut Avenue to open a storefront to your business. That's a big move, but I am here to help. You're familiar with the three major financial statements, right?

Yes, the balance sheet, income statement, and statement of cash flows.

Now, for the debt-to-owners'-equity ratio, what does it measure?

the amount of debt the business has in comparison to how much equity the owners have.

By analyzing the income statement, what amount of money is left over at the end of the year from the business once everything is accounted for?

(Look at NET INCOME AFTER TAXES) $29,707.50

Lastly, what is your inventory turnover?

2.58

What is the actual number for your current ratio?

3.43

Now, what is your debt-to-owner's-equity ratio?

32%

So, what is this fundamental accounting equation?

Assets = Liabilities + Owner's Equity

The last ratio Mr. Johnson is wanting is the inventory turnover ratio. What is this ratio actually telling us?

It is demonstrating how many times we are selling our inventory of merchandise each year or over a given period of time. A higher number would be better.

And, how would you describe a current asset?

It's all the stuff that can be converted into cash in less than one year if needed.