Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.
Mark plans to begin his coaching with the following topics:
- Making comparisons using standardized financial statements
- Calculating and understanding performance ratios
- Determining the company's profitability and growth
- Drawbacks associated with financial statement comparisons
Bob meets next month with a banker to secure a 60 day line of credit. He asks Mark which financial ratios will be of the most interest to the loan officer. How should Mark respond, any why?
- The total debt ratio, times interest earned ratio, or cash coverage ratio to discover the company's amount of long term debt
- The inventory turnover, receivables turnover, or asset turnover ratio to judge the firm's ability to use convert assets to sales
- The profit margin ratio, ROA ratio, or ROE ratio to understand the profitability of the company
- The current ratio, quick ratio, or cash ratio to determine the firm's liquidity