assessing business performance
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Assessing Business Performance. Chapter 6. Structure of Balance Sheet. Page 127. Structure of Balance Sheet. Page 127. Structure of Balance Sheet. Balancing entry. Page 127. Analysis of Balance Sheet. Liquidity: Ability of the firm to convert its current assets to cash and retire - PowerPoint PPT PresentationTRANSCRIPT
AssessingBusiness
Performance
Chapter 6
Structure of Balance SheetCurrent assets $100
Other assets 500
Total assets $600
Page 127
Structure of Balance SheetCurrent assets $100 Current liabilities $75
Other assets 500 Other liabilities 200
Total liabilities 275
Equity 325
Total assets $600
Total liabilities plus equity $600
Page 127
Structure of Balance SheetCurrent assets $100 Current liabilities $75
Other assets 500 Other liabilities 200
Total liabilities 275
Equity 325
Total assets $600
Total liabilities plus equity $600
Balancing entryBalancing entry
Page 127
Analysis of Balance SheetLiquidity: Ability of the firm to convert its current assets to cash and retireall its current liabilities. The current ratio is a common measure of liquidity.
Current ratio = current assets ÷ current liabilities = $100 ÷ $75 = 1.33
Greater than 1.0
Greater than 1.0
Page 127
Analysis of Balance SheetLiquidity: Ability of the firm to convert its current assets to cash and retireall its current liabilities. The current ratio is a common measure of liquidity.
Current ratio = current assets ÷ current liabilities = $100 ÷ $75 = 1.33
Solvency:Ability of the firm to convert its total assets to cash and retireretire all its liabilities. The solvency ratio is a common measure of solvency.
Solvency ratio = total assets ÷ total liabilities = $600 ÷ $275 = 2.18
Greater than 1.0
Greater than 1.0
Greaterthan 1.0
Greaterthan 1.0
Page 127
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Page 129
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Page 129
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Page 129
$125 – $75 = $50$125 – $75 = $50
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Page 129
$125 – $75 = $50$125 – $75 = $50
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Page 129
$125 – $75 = $50$125 – $75 = $50
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Provision for taxes 10.
Page 129
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Provision for taxes 10.
Page 129
20% tax rate…20% tax rate…
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Provision for taxes 10.
Net income $40.
Page 129
Structure of Income StatementCash from sales $100.
Other revenue 25.
Total revenue 125.
Variable expenses 50.
Fixed expenses 25.
Total expenses 75.
Income before taxes 50.
Provision for taxes 10.
Net income $40.
Page 129The bottom line…The bottom line…
Analysis of Income StatementProfitability: Two measures of profitability are net income appearing on the Bottom of the income statement and the rate of return on equity or ROE. This latter measure is defined as follows:
ROE = net income ÷ equity = $40 ÷ $325 = 0.123 or 12.3%
Greater than zero
Greater than zero
Page 129
Analysis of Income StatementProfitability: Two measures of profitability are net income appearing on the Bottom of the income statement and the rate of return on equity or ROE. This latter measure is defined as follows:
ROE = net income ÷ equity = $40 ÷ $325 = 0.123 or 12.3%
Efficiency:A measure of economic efficiency is the gross ratio which indicatesThe expenses per dollar of revenue. This measure is found by:
Gross ratio = total expenses ÷ total revenue = $75 ÷ $125 = 0.60
Greater than zero
Greater than zero
Pre-tax profitmargin is 40%
Pre-tax profitmargin is 40%
Page 129
Accountant Vs. EconomistAccounting profit:Limited to a measure of explicit costs appearing on thebusiness’s income statement.
Accounting profit = total revenue – total cost = $125 - $75 = $50
Page 136
Accountant Vs. EconomistAccounting profit:Limited to a measure of explicit costs appearing on thebusiness’s income statement.
Accounting profit = total revenue – total cost = $125 - $75 = $50Economic profit:Includes measure of implicit costs, which is an opportunitycost a business charges itself for using its existing resourcesthat does not involve a payment of money.
Economic profit = total revenue – total cost – implicit cost
Page 136
Use of Financial StatementsHistorical analysis of
performance over timeComparative analysis
of performance with similar firms
Pro forma analysisInternal uses (e.g.,
investment decisionsExternal uses (e.g.,
credit decisions
What Lies Ahead?
What products should be produced, and how much should be produced?
What level of specific inputs will be needed to produce these products?
How should the acquisition of these inputs be financed?
How large should the business become?
Page 138
Problem 4 on Page 140
Given the following values, calculate the firm’s liquiditySolvency and profitability:
Current assets $100Other assets 500Current liabilities 75Total liabilities 275Variable expenses 50Provision for taxes 10Total expenses 75Total revenue 125
Problem 4 on Page 140
Given the following values, calculate the firm’s liquiditySolvency and profitability:
Current assets $100Other assets 500Current liabilities 75Total liabilities 275Variable expenses 50Provision for taxes 10Total expenses 75Total revenue 125
Current ratio = 100 ÷ 75 = 1.33
so the firm is liquid….
Current ratio = 100 ÷ 75 = 1.33
so the firm is liquid….
Problem 4 on Page 140
Given the following values, calculate the firm’s liquiditySolvency and profitability:
Current assets $100Other assets 500Current liabilities 75Total liabilities 275Variable expenses 50Provision for taxes 10Total expenses 75Total revenue 125
Total assets = 100+500 = $600Total liabilities = $275Solvency ratio = 600 ÷ 275 = 2.18
so the firm is solvent….
Total assets = 100+500 = $600Total liabilities = $275Solvency ratio = 600 ÷ 275 = 2.18
so the firm is solvent….
Problem 4 on Page 140
Given the following values, calculate the firm’s liquiditySolvency and profitability:
Current assets $100Other assets 500Current liabilities 75Total liabilities 275Variable expenses 50Provision for taxes 10Total expenses 75Total revenue 125
Net income = 125 – 75 – 10 = $40Total assets = $600Total liabilities = $275Total equity = 600 – 275 = $325ROE = 40 ÷ 325 = .123 or 12.3%
so the firm is profitable….
Net income = 125 – 75 – 10 = $40Total assets = $600Total liabilities = $275Total equity = 600 – 275 = $325ROE = 40 ÷ 325 = .123 or 12.3%
so the firm is profitable….