Prepared by: Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

C H A P T E R 5 Appendix 5A Ratio Analysis—A Reference

Learning Objectives Appendix 5A – Ratio Analysis 1.Identify the major types of financial ratios and what they measure.

Ratios Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: – percentages – rates – proportions

Types of Ratios TypeWhat is measuredExamples Liquidity ratios Short-run ability to pay maturing obligations Current ratio Acid-Test (Quick) ratio Coverage ratios Degree of protection for long-term creditors and investors Debt to Total assets Times interest earned Profitability ratios Degree of success or failure for a given period Rate of return on assets Earnings per share Activity ratios Effectiveness in using assets employed Receivables turnover Inventory turnover

Ratio Analysis Consider the following when applying ratio analysis to a company’s performance: –Type of industry: compare only to companies within the same industry –Past performance: look for trends – improvements or declines –Current economic conditions: recent economic trends local, national (and in some cases international) economic indicators –Other ratios: compare the current ratio to the acid-test (quick) ratio

Common Ratios Current Ratio: Current Assets  Current Liabilities Acid-Test Ratio: Cash + Cash Equivalents + Accounts Receivable + Temporary Investments  Current Liabilities Accounts Receivable Turnover: Net Credit Sales  Average Accounts Receivable Inventory Turnover: COGS  Average Inventory

Common Ratios Rate of Return on Assets: Net Income  Average Total Assets Earnings Per Share: Net Income – Preferred Dividends  Weighted Average Number of Common Shares Outstanding Times Interest Earned: Income before Interest and Taxes (EBIT)  Interest Charges Debt to Total Assets: Total Debt  Total Assets

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