Profitability is the company’s ability to generate a profit.
|Financial Ratio Analysis Refresher|
As you complete your studies, the BUSN460 capstone course requires that you pull together all of your learning experiences to complete a business case. A part of that case requires you to review and analyze financial reports. The purpose of this refresher is to take you back to the basics and, within one hour, get you on the road to successfully completing the financial part of the case.
Instructions: In the following narrative we have embedded tutorials and videos for you to view. You need only read the narrative and click on the hyperlink, and you will be on your way. Make sure your speakers are on. If you feel uncomfortable with a given topic, feel free to revisit this refresher and watch the appropriate video.
There are six videos available to help you get up to speed on conducting a financial analysis:
1.) Introduction to Accounting
2.) Interrelationship of Financial Statements
3.) Current Ratio
4.) Inventory Turnover
5.) Debt Ratio
To start this activity, please view the Introduction To Accounting tutorial. It will help to answer the questions what is accounting, who developed it, how does it work, how does it fit into the business model, what are the rules and who generates them. You will learn about the basic accounting equation and some necessary terms. The financial reports that you will find in the case are also explained. (Transcript)
Now we move to the Interrelationships of Financial Statements tutorial to explore the Balance Sheet, Income Statement, and Statement of Cash Flows. These reports provide information about the financial position or health of the business, the success of business operations, and explains where the cash came in and where the cash went. Though this is a very basic look at the financial reports, it is a good starting place. To go beyond this tutorial, one could review the Annual Report of a business such as Wal-Mart available at the company’s web site and also download a copy of Wal-Mart’s 10k Report from the Securities & Exchange Commission as an exercise. The comparison of the two would provide an excellent view of the financial operation of the retail industry giant. (Transcript)
Prior to starting our videos on ratio analysis there are a few terms that one needs to know:
– Liquidity is the ability of the company to meet its current debt obligations.
– Solvency is the ability of the business to remain in business over a long period of time in terms of its ability to pay its long-term debts.
– Profitability is the company’s ability to generate a profit.
The Current Ratio tutorial includes the explanation of three ratios. The Current Ratio, Working Capital computation and the execution of the Quick Ratio are demonstrated. These are Liquidity ratios. (Transcript)
Next, we will review the Inventory Turnover In this tutorial, Inventory Turnover Ratio and Accounts Receivable Turnover are demonstrated. These are Liquidity ratios. (Transcript)
In the Debt Ratio tutorial, this Solvency ratio is demonstrated. (Transcript)
Moving on to the Profitability tutorial, Return on Net Sales and Return on Assets are demonstrated. These are Profitability ratios. (Transcript)
Hopefully you have found this one hour investment to be profitable!
IMPORTANT: Some ratios call for averages, (e.g. inventory turnover). Since CanGo has only one balance sheet available, you will not use an average, you will use the appropriate number from the most recent year’s financial statement. Also assume that there is no interest expense. Good luck!