Every business buys on account whether it is a traditional vendor account like that found in retail or simply using a credit card. A third party provides credit which creates debt for the business. The debt ratio reflects the percentage of assets covered by debt.
Month: September 2017
The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio is only effective for business operations that are fixed asset intensive. So with service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical.
The activity ratios measure performance of a current asset on the balance sheet against a corresponding area of the income statement. The working capital turnover is the most encompassing of all the activity ratios; in effect, it is the most general of the activity ratios. This particular ratio measures the ability of management to efficiently utilize net current assets.
One of the goals of accounting is to report to management performance results, specifically financial performance. Since most businesses sell more than one product or render more than one service, management is interested in understanding the performance of the respective products or service. To successfully report this information, the accountant uses departmental accounting to divide the products or services into categories.