The Mathematics of Money

(Darren Dugan) #1

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)
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