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Chapter 1Chapter 1

Accounting and Business

1-2

Bell Ringer………Bell Ringer………

1. Pick up and complete vocabulary matching worksheet.

2. Pick up a copy of Formula Guide and outline.

3. Pick up a vocabulary flashcard and stand under the appropriate financial statement poster that relates to your flash card.

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Essential QuestionsEssential Questions

1. How does financial ratios help users of financial statements? Explain.

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Students will be able to:Students will be able to:

• Explain the purpose of financial ratios.• Define and calculate the current ratio and

debt-equity ratio.• Define and calculate return on sales (net

profit margin) and return on equity.• Examine and discuss calculated financial

ratios.

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What are the Purposes of the Ratios? How do they help users of financial statements?What are the Purposes of the Ratios? How do they help users of financial statements?

• Current ratio - Relationship between current assets and

current liabilities Measures Liquidity and reflects company’s

ability to satisfy its current obligations/ debt. CURRENT ASSETS

CURRENT LIABILITIES Example: Apple 2008 $34,690 = 2.46

$ 14,092

Apple had 2.46 of current assets for every $1.00 of current liabilities

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What are the Purposes of the Ratios? How do they help users of financial statements?What are the Purposes of the Ratios? How do they help users of financial statements?

• Return on sales Relationship between net income and sales;

measure of profitability (ability to generate profit from sales)

NET INCOME

SALES

Example: Apple $4,834 = 14.88%

32,479

Apple generated 14.88% profit per $1 sales or .15 of every $1 is profit.

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What are the Purposes of the Ratios? How do they help users of financial statements?What are the Purposes of the Ratios? How do they help users of financial statements?

• Debt to equity ratio Relationship between liabilities and owners’

equity; measure of company solvency (ability to pay both short- and long-term obligations)

More debt a company has, more profits it must generate to pay the interest on debt and the greater risk for shareholders.

TOTAL DEBT

TOTAL SHAREHOLDERS’ EQUITY

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What are the Purposes of the Ratios? How do they help users of financial statements?What are the Purposes of the Ratios? How do they help users of financial statements?

• Debt to equity ratio TOTAL DEBT

TOTAL SHAREHOLDERS’ EQUITY

Example: Apple $18,542 = $.88

21,030 Apple had .88 of current and long-term debt for every

$1.00 of shareholders’ equity.

Ratio 1 to 1 = half company’s assets are financed with debt and half with shareholders’ equity.

Lecture ExamplesLecture Examples

3.Using the amounts shown in Lecture Example #2, calculate the current ratio, the debt to equity ratio, and the return on sales ratio.

Answer:

Current ratio:

Debt to equity ratio:

Return on sales ratio:

Lecture ExamplesLecture Examples

2.Describe each of the following items and determine which financial statement it appears on.

Accounts payable, $136 Building, $809

Accounts receivable, $876 Patent, $2

Cash received from customers, $13,074 Long-term bank loan, $716

Cash paid for inventory, $8,338 Common stock, $3,827

Cash paid to employees, $1,724 Retained earnings, $373

Cost of goods sold, $8,192 Cash balance, $2,211

Inventory, $908 Miscellaneous payables, $529

Miscellaneous operating expenses, $3,686

Sales, $13,353

Wage expense, $1,750

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Essential QuestionsEssential Questions

1. How does financial ratios help users of financial statements? Explain.

1-12

Students will be able to:Students will be able to:

• Explain the purpose of financial ratios.• Define and calculate the current ratio and

debt-equity ratio.• Define and calculate return on sales (net

profit margin) and return on equity.• Examine and discuss calculated financial

ratios.

HOMEWORK…….HOMEWORK…….

• Finish final section of skeletal outline page 6.

• Complete E1.9 & 1.17

• Complete Case 1A

• THANK YOU!!!!!!