Business Ratios

Working capital can be improved by

1) earning profits

2) issuing common stock or preferred stock for cash

3) replacing short-term debt with long-term debt

4) selling long-term assets for cash

5) settling short-term debts for less than the stated amounts

6) collecting more of the accounts receivables than was anticipated and then reducing the balance required in the current asset account Allowance for Doubtful Accounts.

I use the term solvency to mean:

1) that a company is able to pay its obligations when they come due

2) that a company is able to continue in business.

A customer deposit could be an amount paid by a customer to a company prior to the company providing it with goods or services. In other words, the company receives the money prior to earning it. The company receiving the money has an obligation to provide the goods or services to the customer or to return the money.

Liquidity refers to a company's ability to pay its bills from cash or from assets that can be turned into cash very quickly.

A voided check is a check written or partially written but then canceled or deleted by the maker of the check.

The notation of "void" is used because checks are prenumbered for control purposes and every check needs to be accounted for.

Voided checks may require some adjustments when reconciling the bank statement. For example, if a check is written in December but is voided in January, the Cash account in the company's general ledger will need to be increased when the check is voided. (Another account will need to be credited because of double entry bookkeeping.)

Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading on equity. Below are two examples to illustrate the use of financial leverage, or simply leverage.

Turnover is used in some countries to mean sales.

Turnover is also used in certain financial ratios. For example, the inventory turnover ratio is calculated by dividing the cost of goods sold during a year by the average inventory during the same year. The accounts receivable turnover ratio is computed by dividing the credit sales during a year by the average balance in Accounts Receivable during the same year.

NOI is the acronym for net operating income. Net operating income is also referred to as income from operations.

NOI excludes discontinued operations, extraordinary items, and nonoperating (or other) items such as interest expense, interest revenues, gains, and losses.

The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt.

The tax advantage of issuing bonds (or other debt) instead of stock results from the interest paid by the company being a deductible expense on its federal and state income tax returns. Dividends paid to stockholders are not a deductible expense, since dividends are a distribution of profits to the owners of the corporation.

Included in this are payroll related items such as the amounts due to employees and the amounts to be remitted for payroll taxes.

This reports the amounts that a customer has prepaid and will be earned by the company within one year of the balance sheet date. An example is a retailer's unredeemed gift cards.

This reports the amounts that the company owes for items not recorded in accounts payable or accrued compensation. Examples include the interest expense that the company has incurred (but has not yet paid) and repairs that took place but the vendor's invoice has not been fully processed.

These are the amounts that are due to vendors who have supplied goods or services. The accounts payable are supported by the vendor invoices that have been approved and processed, but have not yet been paid.