Managerial Accounting Chapter 12

Average Collection Period

365 Days in a Year/Accounts Receivable Turnover (Ability to Convert Accounts Receivable into Cash) The approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

Average Days to Sell Inventory

365 Days in a Year/Inventory Turnover (Ability to Sell Inventory)

Acid-Test(Quick) Ratio

Cash+Cash Equivalents+Accounts Receivable/Current Liabilities (Ability to Pay Current Liabilities) In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

Inventory Turnover

Cost of Goods Sold/Average Inventory Balance (Ability to Sell Inventory) In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year.

Working Capital

Current Assets - Current Liabilities (Ability to Pay Current Liabilities) Indicates whether a company has enough short term assets to cover its short term debt

Current Ratio

Current Assets/Current Liabilities (Ability to Pay Current Liabilities) The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company's total liabilities.

Dividend Payout Ratio

Dividends per Share/Earnings per Share The dividend payout ratio provides an indication of how much money a company is returning to shareholders, versus how much money it is keeping on hand to reinvest in growth, pay off debt or add to cash reserves. This latter portion is known as retained earnings.

Times Interest Earned Ratio

Earnings Before Interest Expense and Income Taxes/Interest Expense (Ability to Meet Debt Obligations) Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. It may be calculated as either EBIT divided by the total interest payable. Interest Charges = Traditionally "charges" refers to interest expense found on the income statement.

Gross Margin Percentage

Gross Margin/Net Sales Revenue (Profitability) The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations

Price/Earnings Ratio

Market Price per Share/Earnings per Share (Measures Investment Potential) The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings.

Accounts Receivable Turnover

Net Credit Sales/Average Accounts Receivable Balance (Ability to Convert Accounts Receivable into Cash) An accounting measure used to quantify a firm's effectiveness in extending credit and in collecting debts on that credit. The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.

Return on Assets

Net Income+[Interest ExpenseX(1-tax rate)]/Average Total Assets (Profitability) An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

Return on Common Stockholders' Equity

Net Income-Preferred Dividends/Average Common Stockholders' Equity (Profitability) Return on common stockholders' equity ratio measures the success of a company in generating income for the benefit of common stockholders. It is computed by dividing the net income available for common stockholders by common stockholders' equity. The ratio is usually expressed in percentage.

Earnings Per Share

Net Income-Preferred Dividends/Average Number of Shares Outstanding (Measures Investment Potential) The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

Debt Ratio

Total Liabilities/Total Assets (Ability to Meet Debt Obligations) A financial ratio that measures the extent of a company's or consumer's leverage. The debt ratio is defined as the ratio of total - long-term and short-term - debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

Debt-to-Equity Ratio

Total Liabilities/Total Stockholder's Equity (Ability to Meet Debt Obligations) A debt ratio used to measure a company's financial leverage, calculated by dividing a company's total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders' equity.