Accounting All-in-One For Dummies, with Online Practice, 2nd Edition

Chapter 6

Using Financial Formulas

IN THIS CHAPTER

Calculating profit margin and rate of return

Making the most of a company’s existing assets

Wrapping your brain around the concept of liquidity

Evaluating a company’s solvency

In business, information is most valuable when you can use it to make well-informed decisions. Financial information can help you reduce spending, operate more efficiently, and increase profits. This chapter covers some useful financial formulas that you can use to make financially sound data-based decisions.

Here, you find out how to gauge a company’s profitability, determine how efficiently the company is using its existing assets, manage cash more effectively, and keep an eye on long-term debt. (An asset is a resource owned by a company that’s used to generate revenue for that company. See Book 1, Chapter 4 for details.)

Analyzing Profitability

Profit is defined in the income statement formula as revenue less expenses, and profit can also be defined as net income. Although a company’s primary financial goal is to generate a profit, you need to dig deeper ...