MGT 11A Chapter 2: CHAPTER 2
Document Summary
Chapter 2: financial statements and the accounting system. Liquidity: ability to meet short-term obligations and generate revenue. Efficiency: how productive a company is in using its assets. Can be measured by current ratio: current assets / current liabilities. Inefficient use of assets can cause liquidity problems. Solvency: focus on company"s ability to meet obligations & provide security to creditors over long run. Can be measured by debt ratio: total liabilities / total assets. Profitability: company"s ability to use its assets to make profits. Measured by profit margin (gross profit) ratio: net income / net sales. Market prospects: ability to generate positive market expectations. Useful for companies with publicly traded stock. Measures stock price, which reflects the market"s expectations for the company. Measured by price-to-earnings ratio: price per share / earnings per share. General ledger: a record of all accounts used by a company. Collection of all accounts and their balances.
