Copyright © 2008, The McGraw-Hill Companies, Inc.
Chapter 12 Summary 521
Topic Key Ideas, Formulas, and Techniques Examples
Income Ratios, p. 508 • Gross profi t margin ^ ___________Gross profi t^
Net sales
- Net profi t margin ^ ___Net income^
Net sales
Calculate the gross and net profi t
margins based on given fi nancial
statements and interpret the results.
(Example 12.3.1)
Effectiveness Ratios,
p. 509 • ROA
___________Net income
To tal assets
- ROE __Owners’ equityNet income
Calculate the ROA and ROE based
on given fi nancial statement and
interpret the results. (Example 12.3.2)
Conversion Ratios,
p. 510 • Inventory turnover ^
Cost of goods sold
__________________Average inventory
- Average collection days ___Accounts receivableNet sales per day
Calculate the inventory turnover and
average collection days ratios based
on given fi nancial statements and
interpret the results. (Example 12.3.3)
Balance Sheet Ratios,
p. 511 • Current ratio ^
________________Current assets
Current liabilities
- Quick ratio
Current assets ___ inventory prepaid expenses
Current liabilities - Liabilities-to-equity ratio ___To tal liabilities
Owners’ equity
Calculate the balance sheet ratios
based on given fi nancial statements
and interpret the results.
(Example 12.3.4)
Valuation Ratios,
p. 512 • PE ^
________________________Price per share
Annual earnings per share^
- Price-to-book ____Annual earnings per sharePrice per share
Calculate the PE and price-to-book
ratios for a company given its fi nancial
statements, stock price, and number
of shares.
(Example 12.3.6)