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## Chapter 1

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**Chapter 1**Accounting and Business**Bell Ringer………**• Pick up and complete vocabulary matching worksheet. • Pick up a copy of Formula Guide and outline. • Pick up a vocabulary flashcard and stand under the appropriate financial statement poster that relates to your flash card.**Essential Questions**• How does financial ratios help users of financial statements? Explain.**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.**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**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.**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**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 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 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**Essential Questions**• How does financial ratios help users of financial statements? Explain.**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…….**• Finish final section of skeletal outline page 6. • Complete E1.9 & 1.17 • Complete Case 1A • THANK YOU!!!!!!