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Business Mathematics Chapter 2, Section 1-4: Ratio Analysis

Business Mathematics Chapter 2: Managing Your Business
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Terms to Know:
Section 1: Ratio Analysis
  • The ratio analysis is used often by business management to analyze the financial position of the business.
  • A ratio compares two numbers or quantities by using division.
  • The first term in a ratio is called the antecedent.
  • The second term in a ration is called the consequent.
  • Liquidity of assets means turning your assets into cash.
  • Current ratio = Current Assets / Current Liabilities
  • Current assets are cash assets or assets that can be quickly converted to cash.
  • Current liabilities are debts due within one year.
  • The current ration should be a minimum of 2.00 for a business to be financially sound.
  • Quick ratio = Cash + receivables / Current Liabilities
Section 2: Percent Analysis
  • Percent means hundredth. Percent is another way to express a ration written as a ratio always has a consequent of 100.
  • The amount of sales is always the consequent, and the other amounts in the income statement are the antecedents.
Section 3: Percent Analysis and Proportions
  • A proportion is two equivalent ratios joined by an equal sign.
The 4 Algebraic Axioms To Solve Equations
  • (1) The same number may be added to both sides.
  • (2) The same number may be subtracted from both sides.
  • (3) Both sides may be multiplied by the same number.
  • (4) Both sides may be divided by the same number (except zero).
How To Set Up a Proportion
  • (1) Both antecedents in the proportion must name like quantities.
  • (2) Both consequents in the proportion must name like quantities.
  • (3) The proportion may be checked to see if it has been solved correctly by cross multiplication.
Section 4: Average Collection Turnover
  • The average collection turnover is a measure of the number of days needed to collect accounts receivable.
  • Average daily sales = Total annual sales / 365
  • Average collection turnover = Accounts receivable / Average daily sales
  • Too large of an average collection turnover indicated problems with collecting accounts since the business is having to wait too long before it receives cash for its services or products.
  • Find the reciprocal by turning the fraction upside down.
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