Financial Ratios Financial Analysis Finance Performance Objective Lesson Plan
Students calculate financial ratios to evaluate company performance. Specific Objective  Discuss the use of financial ratios in business finance  Calculate financial ratios  Identify problems and issues with financial statements Terms  Ratio – A comparison between two numbers showing how many times one number exceeds the other  Liquidity Ratios – Financial ratios that tell how well a company can pay off its short‐term debts and meet unexpected needs for cash.  Efficiency Ratios – Financial ratios that indicate how effectively a company uses its resources to generate sales.  Leverage Ratios – Financial ratios that show how and to what degree a company has financed its assets.  Profitability Ratios – Financial ratios that tell how much of each dollar of sales, assets, and owner’s investments resulted in net profit.  Working Capital – The difference between current assets and current liabilities at a point in time. The amount of money that would be left over if all the current liabilities were paid off by current assets  Current Ratio – The comparison of a firm’s current assets to current liabilities. The ratio indicates the amount of current assets available to pay off $1 of current debt.  Acid Test/Quick Ratio – Indicates a firm’s ability to quickly liquidate assets to pay off current debts.  Asset Turnover Ratio – Incidcates the number of dollars in sales the firm generates from each dollar it has invested in assets  Inventory Turnover – The number of times during an operating period that the average inventory was sold  Average Collection Period – Indicates how quickly a firm’s credit accounts are being collected and is a good measure of how efficiently a firm is managing its accounts receivable  Debt‐to‐Assets Ratio – Measures to what degree the assets of the firm have been financed with borrowed funds  Debt‐to‐Equity Ratio – Compares the total debt of the firm with the owner’s equity  Return on Investment – The amount of profit generated by the firm in relation to the amount invested by the owners Copyright © Texas Education Agency, 2013. All rights reserved.
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Time When taught as written, this lesson should take approximately 15 ‐20 days to teach. Preparation
TEKS Correlations: This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result in the elimination of any or all of the TEKS listed. 130.168. (c) Knowledge and Skills (5) The student calculates business ratios to evaluate company performance (A) Discuss the use of financial ratios in business finance; (4) The student manages financial resources to ensure solvency
(D) Calculate financial ratios; (G) Identify problems and issues with financial statements; Interdisciplinary Correlations: English‐English I  110.31(B)(1). Reading/Vocabulary Development. Students understand new vocabulary and use it when reading and writing.  110.3(B)(11). Reading/Comprehension of informational text/procedural texts. Students understand how to glean and use information in procedural texts and documents. Math‐Mathematical Models with Applications  111.36(C)(1)(A) Knowledge and Skills. …compare and analyze various methods for solving a real‐life problem.  111.36(C)(1)(C) Knowledge and Skills…select a method to solve a problem, defend the method, and justify the reasonableness of the results. Occupational Correlation (O*Net – www.onetonline.org/): Job Title: Financial Analysts O*Net Number: 13‐2051.00 Reported Job Titles: Financial Quantitative Analysts, Personal Financial Advisors, Financial Examiners, Credit Analysts Tasks: Draw charts and graphs, using computer spreadsheets, to illustrate technical data Inform investment decisions by analyzing financial information to forecast business, industry, or economic conditions Interpret data on price, yield, stability, future investment‐risk trends, economic influences, and other factors affecting investment programs. Copyright © Texas Education Agency, 2013. All rights reserved.
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Skills: Complex Problem Solving, Judgment and Decision Making, Mathematics Accommodations for Learning Differences It is important that lessons accommodate the needs of every learner. These lessons may be modified to accommodate your students with learning differences by referring to the files found on the Special Populations page of this website. Preparation  Review and familiarize yourself with the terminology in outlines, presentations, and handouts.  Locate and evaluate various resources and websites.  Prepare materials and websites prior to the start of the lesson. References http://www.thirteen.org/edonline/lessons/fe_start/b.html “Could You Start a Business?” This lesson plan will teach high school students the importance of financial management for a small business. It will help students learn the concepts of business costs, positive cash flow, credit, and proper financial management in running a business. Students will learn the tools for basic financial analysis, and will investigate why the business in the video segments was not successful. As an extension activity, they can brainstorm ideas for a model new business, given what they have learned about the financial needs of a new business. http://www.sec.gov/investor/pubs/begfinstmtguide.htm Beginner’s Guide to Financial Statements produced by the U.S. Securities and Exchange Commission Accounting: Real World Applications & Connections. (4th ed.). (2000). New York City, NY: Glencoe McGraw‐Hill Gilbert, Claudia B. & Lehman, Mark W. (2008). Accounting: Century 21. Stamford, CT: Cengage Learning. Advanced Accounting: Century 21, Chapters 16 and 17 Brechner, Robert A. (6th ed.). (2011). Contemporary Mathematics. Stamford, CT: CENGAGE Learning, Chapter 15. Instructional Aids 1. Websites for assignments 2. Class discussion 3. Assignment Worksheets 4. Textbooks Introduction
The main purpose of this lesson is to help students understand:  The use of financial ratios in business finance  How to calculate financial ratios Copyright © Texas Education Agency, 2013. All rights reserved.
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
How to identify problems and issues with financial statements Ask students if they understand the reason for using financial ratios. Ask students if they could look at a balance sheet or income statement and analyze whether the company was succeeding or not. Ask students to give examples of ways to analyze financial statements. Copyright © Texas Education Agency, 2013. All rights reserved.
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Outline
I.
Learn terminology about ratios A.
Type of Ratios: Liquidity, Efficiency, Leverage, Profitability B.
II.
Administer Pretest
Use Presentation 3.1
See Assignment 3.1
Meaning of each ratio Figure ratios III.
A.
Find missing figures in a comparative Balance Sheet and Income Statement B.
Figure ratios on comparative statements
C.
Analyze results of ratios found Complete Project A.
Create a company 1. Choose name, type, and location 2. Decide on competition, advertising, plans for growth, and recommendations to make the company unique B.
Set up financial statements for the company and figure ratios C.
Present to class Use Presentation 3.1
See Assignment 3.2
See Assignment 3.3
*Project handout
*Project Rubric
*Project Critique for
classmates
Multiple Intelligences Guide Existentialist Interpersonal Intrapersonal Kinesthetic/ Bodily Logical/ Mathematical Musical/Rhythmic Naturalist Verbal/Linguistic Copyright © Texas Education Agency, 2013. All rights reserved.
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Visual/Spatial Guided Practice 



Application
Search the internet to find examples of balance sheets and income statements Figure ratios for balance sheets and income statements Analyze the meaning of ratios for each business See Assignments Independent Practice 
See Assignments Review Summary
Explain why businesses use financial ratios Calculate financial ratios for businesses and analyze what each ratio means Create a business and complete a financial analysis of the business Informal Assessment Evaluation
Any and all of the following can be used as informal assessments :  Check vocabulary definitions  Pre‐test vocabulary  Research online for balance sheets and income statements  Analyze financial statements online Formal Assessment The following can be considered a formal evaluation in order to keep students engaged during both the pre‐test(s) and post‐test :  Evaluation of completed assignments/project  Post‐Test Enrichment
Extension Students contact local businesses and request copies of their balance sheets and income statements to analyze as a class. Figure each type of ratio. Copyright © Texas Education Agency, 2013. All rights reserved.
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FINANCIAL RATIOS
ASSIGNMENT 3.1
MATCHING:
a.
b.
c.
d.
e.
Inventory Turnover
Return on Investment
Acid Test Ratio
Working Capital
Average Collection Period
_____1.
_____2.
_____3.
_____4.
_____5.
_____6.
_____7.
_____8.
_____9.
____10.
a.
b.
c.
d.
f. Current Ratio
g. Debt-to-Assets Ratio
h. Debt-to-Equity Ratio
i. Ratio
j. Asset Turnover Ratio
A comparison between two numbers showing how many times one number exceeds the other
The difference between current assets and current liabilities at a point in time. The amount of
money that would be left over if all the current liabilities were paid off by current assets
The comparison of a firm’s current assets to current liabilities. The ratio indicates the amount of
current assets available to pay off $1 of current debt
Indicates a firm’s ability to quickly liquidate assets to pay off current debts.
Indicates how quickly a firm’s credit accounts are being collected and is a good measure of how
efficiently a firm is managing its accounts receivable
The number of times during an operating period that the average inventory was sold
Tells the number of dollars in sales the firm generates from each dollar it has invested in assets
Compares the total debt of the firm with the owner’s equity
Measures to what degree the assets of the firm have been financed with borrowed funds
The amount of profit generated by the firm in relation to the amount invested by the owners
Efficiency Ratios
Profitability Ratios
Leverage Ratios
Liquidity Ratios
____11. ____12.
____13.
____14.
Financial ratios that tell how well a company can pay off its short-term debts and meet
unexpected needs for cash
Financial ratios that indicate how effectively a company uses its resources to generate sales
Financial ratios that show how and to what degree a company has financed its assets
Financial ratios that tell how much of each dollar of sales, assets, and owner’s investment
resulted in net profit
Copyright © Texas Education Agency, 2013. All rights reserved.
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FINANCIAL RATIOS KEY
ASSIGNMENT 3.1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
i
d
f
c
e
a
j
h
g
b
d
a
c
b
Copyright © Texas Education Agency, 2013. All rights reserved.
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FINANCIAL RATIOS
ASSIGNMENT 3.2
1. Find the missing figures in the following Income Statement and Balance Sheet.
2. Find the results for the following ratios:
 Working Capital
 Current Ratio
 Acid Test/Quick Ratio
 Asset Turnover Ratio
 Debt-to-Assets Ratio
 Debt-to-Equity Ratio
 Gross Profit Margin
 Net Profit Margin
 Return on Investment
3. From your results, do the partners have
the income necessary should they choose to
expand? Explain your answer.
Mustang, Inc.
Comparative Income Statement
For Years Ended December 31, 2011 and 2012
2011
2012
Net Sales
3,100,650
3,855,000
Cost of Goods Sold
1,950,000
2,010,775
46,000
46,305
Gross Profit
Operating Expenses
Net Income
Mustang, Inc.
Comparative Balance Sheet
December 31, 2011 and 2012
Assets
Cash
2011
2012
3,000,000
4. What does the current ratio tell you? Does
Mustang, Inc. have a favorable current ratio?
Petty Cash
5. Based on your results, which year would
you say is the more productive year? Why?
Supplies
Account Receivables
Merchandise Inventory
Equipment
Land
2,000,000
500
500
895,000
795,000
6,500,000
7,250,000
175,100
201,000
235,565
245,045
2,000,000
2,500,000
6. Based on your results, would you invest in Total Assets
this company if given the chance? Why or
Liabilities
why not?
Current Liabilities
Accounts Payable
925,000
995,000
Long-Term Liabilities
Bonds Payable
Total Liabilities
925,000
995,000
Mustang Owner I, Capital
5,481,165
5,500,000
Mustang Owner II, Capital
4,900,000
5,296,545
Owner's Equity
Total Owner's Equity
Total Liabilities & Owner's Equity
Copyright © Texas Education Agency, 2013. All rights reserved.
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FINANCIAL RATIOS
ASSIGNMENT 3.2 KEY
Mustang, Inc.
Answers 3-6
will vary.
Comparative Income Statement
For Years Ended December 31, 2011 and 2012
2011
2012
Net Sales
3,100,650
3,855,000
Cost of Goods Sold
1,950,000
2,010,775
Gross Profit
1,150,650
Operating Expenses
46,000
Net Income
1,104,650
1,844,225
46,305
1,797,920
Mustang, Inc.
Comparative Balance Sheet
December 31, 2011 and 2012
Assets
2011
Cash
1,500,000
Petty Cash
500
Account Receivables
895,000
Merchandise Inventory
6,500,000
Supplies
175,100
Equipment
235,565
Land
2,000,000
2012
1,000,000 Working Capital
500 Current Assets ‐ Current Liabilities
795,000 Current Ratio
2011
2012
8,145,600 8,251,500
9.8
9.3
7,250,000 Current Assets/Current Liabilities
201,000 Asset Turnover Ratio
27.4%
32.1%
245,045 Net Sales/Total Assets
2,500,000 Net Profit Margin/Return on Sales
35.6%
46.6%
37.1%
47.8%
12.4%
18.4%
27.3%
22.4%
21.4%
18.3%
11,306,165 11,991,545 Net Income/Net Sales
Total Assets
Liabilities
Current Liabilities
Accounts Payable
925,000
995,000
Long-Term Liabilities
Bonds Payable
1,500,000
Total Liabilities
1,200,000
2,425,000
2,195,000
4,481,165
5,000,000
Owner's Equity
Mustang Owner I, Capital
Mustang Owner II, Capital
4,400,000
Gross Profit Margin
Gross Profit/Net Sales
Return on Investment
Net Income/Owner's Equity
Debt‐to‐Equity Ratio
Total Liabilities/Owner's Equity
Debt‐to‐Assets Ratio
Total Liabilities/Total Assets
4,796,545
Total Owner's Equity
8,881,165
Total Liabilities & Owner's Equity
11,306,165 11,991,545
9,796,545
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FINANCIAL RATIOS
STUDENT PROJECT 3.3
From the following case, prepare a slideshow and oral presentation with solutions to the questions
that follow.
Two other mid-level managers and you have recently been laid off from your positions at a major gas
company due to downsizing. The three of you have decided to branch out on your own and open a
small company together. You each have $20,000 in severance monies and savings that you plan to
use as well.
Your presentation is to be given to the class. Your job is to convince the class to loan you money, so
you will need to show them that you have a sound business plan that will produce profits.
You are asked to provide the needed information that will assist the class during your presentation to
decide whether to loan you money for your new company:
1.
2.
3.
4.
5.
6.
6.
7.
8.
10.
9.
10.
11.
12.
Business: Name, type, and location.
Need for business chosen and reason for location choice.
Specific competition which will be encountered and a comparison to your company.
Needs of the business: How many employees, types of supplies, equipment, inventory, etc.
Anticipated Budget. This should be specific numbers, including items such as salaries, rent,
supplies, advertising, cost of computers, inventory, and Internet access, etc. Set up in a
spreadsheet.
Breakdown of salaries to be paid. Make sure that you pay the three owners a realistic salary.
Anticipated Balance Sheet for first year of business. Use correct format.
Anticipated Income Statement for first year of business. Use correct format.
Include a breakdown of your expected revenue.
Two charts (different types) reflecting data that you have generated that will help convince the
class to loan you money. Label appropriately.
Ratios. From your income statement and balance sheet, figure working capital, current ratio,
debt-to-assets ratio, and debt-to-equity ratio.
Specific plans for growth in the next five years.
Recommendations to make the business unique.
Advertising plans. List specific methods of advertising planned. Be creative with this.
Convince the class and instructor to loan you money for your new business. ASK FOR LOAN.
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Be creative and provide details. This will count as two test grades. Your slideshow will be graded
based on details provided and creativity in your presentation. Your presentation to the class will be
graded based on your knowledge and professionalism.
Day 1:
Day 2:
Days 3, 4, 5:
Day 6:
Brainstorm name of company. Research locations for your business. Submit
name, type of company, and location of company.
Research dollar amounts for rent, salaries, equipment, etc. Submit numbers.
Figure the amount of savings each owner will use, and the amount of loan you
will request.
Prepare slideshow.
Last day to work on slideshow. Print and submit it.
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FINANCIAL RATIOS
STUDENT PROJECT 3.3 RUBRIC
_____(5) Organization (logical sequence of slides)
_____(5) Visuals/Graphics (relevant, appropriate size)
_____(5) Mechanics (grammar, spelling, capitalization)
_____(5) Backgrounds (relevant, don’t distract from writing)
_____(5) Name, type, and location of business
_____(5) Need for the business and reason for location choice
_____(5) Competition (be specific, show comparison)
_____(5) Needs (number of employees, types of supplies and equipment,
etc.)
_____(5) Anticipated Budget (in budget format)
_____(3) Breakdown of salaries
_____(10) Anticipated Balance Sheet for the year (in correct format)
_____(10) Anticipated Income Statement for the year (in correct format)
_____(10) Two charts reflecting data that you have generated
(5) Ratios (working capital, current ratio, debt-to-assets, debt-to-equity)
_____(3) Plans for growth in the next five years
_____(3) Recommendations to make the business unique
_____(3) Advertising plans
_____(3) Conclusion: ask for loan
_____(5) Creativity
_____Slideshow Test Grade
_____(100) Presentation Test Grade
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FINANCIAL RATIOS STUDENT PROJECT 3.3 CRITIQUE SHEET FOR STUDENTS Presenter____________________________________ Business Name________________________________ Strengths of Business Plan_______________________________________________________ Weaknesses of Business Plan_____________________________________________________ Would you invest in the business?____________ Why or why not?________________________________________________________________ Presenter____________________________________ Business Name________________________________ Strengths of Business Plan_______________________________________________________ Weaknesses of Business Plan_____________________________________________________ Would you invest in the business?____________ Why or why not?________________________________________________________________ Presenter____________________________________ Business Name________________________________ Strengths of Business Plan_______________________________________________________ Weaknesses of Business Plan_____________________________________________________ Would you invest in the business?____________ Why or why not?________________________________________________________________ Presenter____________________________________ Business Name________________________________ Strengths of Business Plan_______________________________________________________ Weaknesses of Business Plan_____________________________________________________ Would you invest in the business?____________ Why or why not?________________________________________________________________ Copyright © Texas Education Agency, 2013. All rights reserved.
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