Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College

C H A P T E R
5

Appendix 5A – Ratio Analysis
1. Identify the major types of financial ratios and what they measure.

• Ratio analysis expresses the relationship between selected financial data.
• These relationships can be expressed as:
– percentages
– rates
– proportions

Type
Liquidity ratios
What is measured
Short-run ability to pay maturing obligations
Examples
Current ratio
Acid-Test (Quick) ratio
Activity ratios
Profitability ratios
Coverage ratios
Effectiveness in using assets employed
Receivables turnover
Inventory turnover
Degree of success or failure for a given period
Rate of return on assets
Earnings per share
Degree of protection for long-term creditors and investors
Debt to Total assets
Times interest earned

• Consider the following when applying ratio analysis to a company’s performance:
– Type of industry:
• compare only to companies within the same industry
– Past performance:
• look for trends – improvements or declines
– Current economic conditions:
• recent economic trends
• local, national (and in some cases international) economic indicators
– Other ratios:
• compare the current ratio to the acid-test (quick) ratio

Current Ratio : Current Assets  Current Liabilities
Acid-Test Ratio : Cash + Cash Equivalents +
Accounts Receivable + Temporary Investments 
Current Liabilities
Inventory Turnover : COGS  Average Inventory
Accounts Receivable Turnover : Net Credit Sales 
Average Accounts Receivable

Rate of Return on Assets : Net Income  Average
Total Assets
Earnings Per Share : Net Income – Preferred
Dividends  Weighted Average Number of
Common Shares Outstanding
Debt to Total Assets : Total Debt  Total Assets
Times Interest Earned : Income before Interest and Taxes (EBIT)  Interest Charges

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