Chapter 4

RATIO ANALYSIS INVENTORY TURNOVER

- ratio analysis compares line item data from ● Inventory turnover measures the activity or
company's financial statements to reveal liquidity of a firm's inventory.
insights regarding profitability, liquidity, FORMULA: cost of goods sold
operational efficiency and solvency. /inventory inventory turnover

STOCKHOLDERS REPORT If the cost of goods sold of abc company is

- The stockholders report places the
company's man achievements on display for
shareholders, while highlighting future plans
and disclosing the financial well being of the
company.
ratio analysis formula
liquidity ratios
current ratio = current assets/ current
liabilities
solvency ratios
debt ratio = total debt/ total assets
efficiency ratios
debt ratio = total debt/ total assets
profitability ratios
net margin = net income/sales
The current ratio measures the ability of the firm to
meet its short term obligations.
FORMULA: current ratio= current assets /
current liabilities..
If the current assets of abc company is $1,223,000
and the liability is $620,000 what is the current
ratio?
- 1.97%
$2,088,000 and the inventory is $289,000 what is
the inventory turnover?
$2,088,000/$289,000 = 7.2
The AVERAGE AGE OF INVENTORY is the
average number of days sales in inventory
FORMULA: 365/inventory turnover
365/7.2 50.7 days
QUICK RATIO
● If the current assets of abc company is
$1,223,000 abd the inventory is$289,000
and current liabilities is $620,000 what is the
quick ratio?
FORMULA: current
assets-inventory/ current liabilities
$1,223,000-$289,000 = $934,000
$934,000/$620,000 = 1.51%, it means to say that
ABC can only 1.5 percent of their existing one year
obligations with their current liquid assets. 1.51

NET MARGIN
- Net margin measures how much net income
or profit is generated as a percentage of
revenue for a company.
FORMULA: net income / sales =
net margin

ABC company has a net income of $1,500,000 and

a total sales of $2,899,000 what is the net margin?
$1,500,000/$2,899,000 = 0.517 or 51.7%