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Financial Ratios (Crossword Puzzles)

Author:
Harold Averkamp, CPA, MBA

Financial Ratios #1

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Financial ratios are part of the broader topic financial statement analysis. Since most of the financial ratios are calculated from amounts reported on recent financial statements, they are historic in nature.

The following financial ratios are calculated by using amounts reported on the balance sheet:

  • Working capital
  • Current ratio
  • Quick ratio
  • Debt to equity ratio
  • Debt ratio

The first three ratios are indicators of a corporation's liquidity. The latter two ratios are indicators of a corporation's degree of leverage.

The following financial ratios use amounts from both the balance sheet and the income statement:

  • Inventory turnover
  • Accounts receivable turnover
  • Return on equity
  • Return on assets

For example, the inventory turnover ratio is calculated by dividing the cost of goods sold (from the income statement) by the average inventory amounts that are found on the balance sheets.

Examples of financial ratios that use amounts only from the income statement include:

  • Gross margin ratio (gross profit divided by net sales)
  • Return on sales (net income divided by net sales)

These financial ratios are indicators of a company's profitability.

In addition to financial ratios, another tool in financial statement analysis is common-size financial statements. A common-size balance sheet results when every amount on the balance sheet is divided by the amount of total assets. A common-size income statement is the result of dividing each item on the income statement by the amount of net sales. Common-size financial statements allow for a comparison between companies of any size and also with industry averages. For example, a corporation's common-size balance sheet might indicate that its current assets are 40% of its total assets. That percentage can then be compared to a competitor's percentage and to the percentage for its industry.

If a corporation's stock is publicly traded, the Management Discussion section of its annual report to the Securities and Exchange Commission Form 10-K provides helpful information behind the financial ratios.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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