Accounting Class 9 Terms

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Price/Earnings Ratio

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Calculated: market price of a share of stock divided by earnings per-share.

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Current Ratio

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A measure of the liquidity of a company. Calculated: current assets divided by current liabilities.

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Quick Ratio

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A more telling calculation of near-term liquidity which subtracts inventory from current assets then divides the results by current liabilities

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Acid Test Ratio

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An even more telling calculation of the absolute liquidity of a company where the current ratio is modified to eliminate all assets that cannot be liquidated on very short notice. Calculated: quick assets divided by current liabilities

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Accounts Receivable Turnover

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Calculated: Net sales / Accounts Receivable

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Days Sales Outstanding

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The calculation of the number of days of average sales yet not collected in Accounts Receivable. Calculate as follows:

A. Calculate the average sales per day by dividing the total revenue by 365 ( or monthly revenue by 30 ).

B. Divide accounts receivable by average sales per day or alternatively 365 days divided by Accounts Receivable turnover

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Inventory Turnover

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The measure of how quickly inventory is leaving the plants and being replaced by new inventory. Calculated: annual cost of goods sold divided by average inventory (beginning of month inventory plus end of month inventory divided by two or beginning of the year inventory plus end of year inventory divided by two)

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Gross Profit Margin

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Gross Profit / Gross Sales

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Net Profit Margin

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May be calculated as either a "pretax" or "after-tax "profit margin. Calculated: net profit divided by gross sales

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Expense as % of Sales

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Any expense item can be started as a percentage of sales (calculated: a given expense divided by gross sales), a calculation that is useful in comparing expense performance during different time periods e.g. One year to the next year over a period of years and also in budgeting

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Debt/Equity Ratio

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A measure that compares funding provided by the owners to that provided by creditors. Calculated: total debt divided by total equity.

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Interest Coverage

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A measurement of a company's ability to pay the interest on its interest bearing debt through its cash flow. Calculated: EBITDA divided by interest expense

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Return on Equity (ROE)

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Measures the rate of return on the stockholders investment in the company. Calculated: annual net income divided by stockholders equity. May also be calculated as return on average equity with average equity being calculated by adding beginning of year equity to end of your equity and dividing by two.

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Return on Assets

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Calculated: Operating Income divided by Total Assets

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"Sales per" Calculations

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Any number of calculations that measure the productivity of the sales effort – e.g. sales per customer, sales per employee, sales per square foot of floor space, sales per linear foot of shelf space, sales per store etc.

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Trend Analysis

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Analysis of the changes in business activity (i.e. revenues, costs, expenses, sales performance, pricing, etc.) over which can be useful in understanding what is working and what is broken and in predicting the future.

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Comparative Statements

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Presentation of financial statements from two or more time periods so that a company's performance in one period can be easily compared to others.

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Dividend Yield Ratio

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Calculated: Dividends per Share divided by Market Price per Share

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Dividend Payout Ratio

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Calculated: dividend paid divided by net income

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Simple Growth Rate

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The rate of growth from one period To another. Calculated: (amount period Two minus amount period One) divided by amount period One

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Compound Growth Rate

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A calculation of growth over multiple periods that not only calculates growth on the original base amount but each new period Calculates growth on the prior periods original amount plus the prior periods growth on that amount.