Chapter 9

Liquidity Ratio

A measure of the ability of a business to pay its current debts as they became due and to provide for an unexpected need for cash. A current ratio and a quick ratio are two types used to determine a liquidity ratio.

Quick Ratio

A measure of the relationship between short-term assets and current liabilities. The quick ratio is computed by dividing the total cash and receivables by the total current liabilities.

Return on Sales

A ratio used to examine the portion of each sales dollar that represents profit. The return on sales is found by dividing net income by sales.

Balance Sheet

A report of the balances in the permanent accounts at the end of the period. The purpose of the balance sheet is to report the assets of the business and the claims against those assets on a specific date.

Current Liabilities

Debts of the business that must be paid within the next accounting period. An example of a current liability is Accounts Payable.

Report Form

Listing the balance sheet sections one under the other. Report form is the form used to prepare balance sheets.

Current Ratio

Reflects the relationship between current assets and current liabilities. The current ratio is calculated by dividing the dollar amount of current assets by the dollar amount of current liabilities.

Income Statement

Reports the net income or net loss for a specific period of time. The income statement is sometimes called a profit-and-loss statement or an earnings statement.

Financial Statements

Summarize the changes resulting from business transactions that occur during an accounting period. Preparing financial statements is the seventh step in the accounting cycle.

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. The statement of changes in owner's equity is prepared at the end of the accounting period.

Statement of Cash Flows

Summarizes the amount of cash the business took in, the sources of cash, the amount of cash the business paid out, and the uses of cash. The statement of cash flows covers a single accounting period.

Working Capital

The amount by which current assets exceed current liabilities. Working capital represents the excess assets available to continue operations.

Ratio Analysis

The process of evaluating the relationship between various amounts in the financial statements. Owners and managers use ratio analysis to determine the financial strength, activity, and debt-paying ability of a business.

Profitability Ratio

Used to evaluate the earnings performance of the business during the accounting period. Profitability ratios are an important measure of a business and their ability to grow and continue to earn revenue.

Current Assets

Used up or converted to cash during the normal operating cycle of the business. Current assets might include Accounts Receivable, Cash in Bank, and Supplies.