1
Business Arithmetic
In business, we use many different measurements to confirm our performance and to do comparisons. What follows are a series of
arithmetic calculations that are commonly used. I will be using the following Income Statement and Balance Sheet to illustrate the calculations.
Income Statement Balance Sheet
Assets (Tools) Liabilities (Outside Owners)
Sales $ 1,000,000 Cash $ 25,000 Accounts Payable $ 45,000
Cost of Goods $ 550,000 Accounts Receivable $ 110,000 Payroll Payable $ 20,000
Gross Profit $ 450,000 Inventory $ 125,000 Taxes Payable $ 4,500
Total Current Assets $ 260,000 Total Current Liabilities $ 69,500
Less: Bank & Other LTD $ 75,000
Selling $ 100,000 Gross Fixed Assets $ 250,000 Total Liabilities $144,500
General Expense $ 250,000 Less: Accum Deprec $ (150,000)
Deprec Expense $ 35,000 Net Fixed Assets $ 100,000 Equity (Inside Owners)
Total Expense $ 385,000 Cap Investment $125,000
Profit before Tax $ 65,000 Deps & Other Assets $ 25,000 Retned Earn $ 76,500
Income Tax $ 26,000 Total Assets $ 385,000 Current Period Earnings $ 39,000
Profit after Tax $ 39,000 Total Equity $240,500
Total Liabilities and Equity $385,000
It is one thing to know how to do the arithmetic and another to know how to use the results. In the following Table, I will illustrate
common measurements used in business. I want you to write in the blank cells on the right hand side of the page how you think the results of the
calculation could be used to confirm performance or to compare performance between time periods or between companies. Do you think the
number values generated are “good” or “bad”? As a manager, what could you do to make them “better”? How could you use the information to
make business decisions?
If you look on the Internet you can find sites that show these same business measures. Some will even have explanations of how they are
used. Almost universally these sites merely show only definitions. If they show how to use the results it is almost always from the securities
analyst point of view, and not how a business manager would apply the information to improve the business You learn nothing by copying these
internet definitions into the blank cells. If this is what you choose to do, merely enter the URL and don’t bother copying the text from the site.
©William G. Donohoo 7/28/2014
, 2
This is the Rosie Ruiz approach (look her up on Google). My desire is that you work out the meaning of each of these sets of calculations on your
own. Think it through. I am less worried about the correctness of the answer you derive than I am that you have to stretch your mind.
I encourage you to work through these calculations on your own. Note that values have been rounded so you will find trivial variations in
calculations as you check my work. This slight loss of precision is fine for our type of work. Generally, we are attempting to get close to the
“right” answer. All the values we work with are constantly moving so any calculation is only a close approximation.
Calculation Results How do you think this can be used in business? Are each of the
values generated “good” or “bad”? How can they be improved?
Income Statement . .
(1.) Return on or % of X where X is any line entry on Used to determine the percentage of the sales that is a profit to
the Income statement. the company. 3.9% is a bad value. It ca be made better by
E.g. Profit Return on Sales = Net Profit/Sales = % 39000/1000000 decreasing the expenses and increasing the sales. It can be used
[You could use Pretax or Profit After Tax. Just use it = 3.9% to find the sales or the profit of the company from the income
consistently from one period to another and from one statement.
company to another]
This calculation can be done for every line item on the
Income Statement [I.E. line item/Sales = %]
If Sales and Return % are known, then Profit = Sales X 1000000 X 3.9% =
Return % 39000
If Profit and Return % are known then Sales = Profit/ 39000/3.9% =
Return % 1000000
Balance Sheet . .
(2.) Allocation of Assets by Asset Title to Total Assets 25000/385000 = 6.5% Used to determine the profitability of the assets owned by a
E.g. Cash/Total Assets = % company. The value is quite good and can be improved by
maximizing the potential of the company’s assets.
(3.) Allocation of (an account or account group in Total This shows a company’s ability to service its debts. If this
Liabilities and Equity) to (Total Liabilities and Equity) value is high, then the company is able to pay off its debts. In
by Account Title = % this case, the value is good, meaning that the company can pay
off the debtors. However, it can be improved by borrowing
E.G. Current Liabilities/(Total Liabilities and Equity) = 69500/385000 = 18% less. These values can be used to determine the company’s
% liabilities, debts or equity.
Equity/(Total Liabilities and Equity) = % 240500/385000 = 63%
Long Term Debt/(Total Liabilities and Equity) = % 75000/385000 =
19.5%
©William G. Donohoo 7/28/2014
Business Arithmetic
In business, we use many different measurements to confirm our performance and to do comparisons. What follows are a series of
arithmetic calculations that are commonly used. I will be using the following Income Statement and Balance Sheet to illustrate the calculations.
Income Statement Balance Sheet
Assets (Tools) Liabilities (Outside Owners)
Sales $ 1,000,000 Cash $ 25,000 Accounts Payable $ 45,000
Cost of Goods $ 550,000 Accounts Receivable $ 110,000 Payroll Payable $ 20,000
Gross Profit $ 450,000 Inventory $ 125,000 Taxes Payable $ 4,500
Total Current Assets $ 260,000 Total Current Liabilities $ 69,500
Less: Bank & Other LTD $ 75,000
Selling $ 100,000 Gross Fixed Assets $ 250,000 Total Liabilities $144,500
General Expense $ 250,000 Less: Accum Deprec $ (150,000)
Deprec Expense $ 35,000 Net Fixed Assets $ 100,000 Equity (Inside Owners)
Total Expense $ 385,000 Cap Investment $125,000
Profit before Tax $ 65,000 Deps & Other Assets $ 25,000 Retned Earn $ 76,500
Income Tax $ 26,000 Total Assets $ 385,000 Current Period Earnings $ 39,000
Profit after Tax $ 39,000 Total Equity $240,500
Total Liabilities and Equity $385,000
It is one thing to know how to do the arithmetic and another to know how to use the results. In the following Table, I will illustrate
common measurements used in business. I want you to write in the blank cells on the right hand side of the page how you think the results of the
calculation could be used to confirm performance or to compare performance between time periods or between companies. Do you think the
number values generated are “good” or “bad”? As a manager, what could you do to make them “better”? How could you use the information to
make business decisions?
If you look on the Internet you can find sites that show these same business measures. Some will even have explanations of how they are
used. Almost universally these sites merely show only definitions. If they show how to use the results it is almost always from the securities
analyst point of view, and not how a business manager would apply the information to improve the business You learn nothing by copying these
internet definitions into the blank cells. If this is what you choose to do, merely enter the URL and don’t bother copying the text from the site.
©William G. Donohoo 7/28/2014
, 2
This is the Rosie Ruiz approach (look her up on Google). My desire is that you work out the meaning of each of these sets of calculations on your
own. Think it through. I am less worried about the correctness of the answer you derive than I am that you have to stretch your mind.
I encourage you to work through these calculations on your own. Note that values have been rounded so you will find trivial variations in
calculations as you check my work. This slight loss of precision is fine for our type of work. Generally, we are attempting to get close to the
“right” answer. All the values we work with are constantly moving so any calculation is only a close approximation.
Calculation Results How do you think this can be used in business? Are each of the
values generated “good” or “bad”? How can they be improved?
Income Statement . .
(1.) Return on or % of X where X is any line entry on Used to determine the percentage of the sales that is a profit to
the Income statement. the company. 3.9% is a bad value. It ca be made better by
E.g. Profit Return on Sales = Net Profit/Sales = % 39000/1000000 decreasing the expenses and increasing the sales. It can be used
[You could use Pretax or Profit After Tax. Just use it = 3.9% to find the sales or the profit of the company from the income
consistently from one period to another and from one statement.
company to another]
This calculation can be done for every line item on the
Income Statement [I.E. line item/Sales = %]
If Sales and Return % are known, then Profit = Sales X 1000000 X 3.9% =
Return % 39000
If Profit and Return % are known then Sales = Profit/ 39000/3.9% =
Return % 1000000
Balance Sheet . .
(2.) Allocation of Assets by Asset Title to Total Assets 25000/385000 = 6.5% Used to determine the profitability of the assets owned by a
E.g. Cash/Total Assets = % company. The value is quite good and can be improved by
maximizing the potential of the company’s assets.
(3.) Allocation of (an account or account group in Total This shows a company’s ability to service its debts. If this
Liabilities and Equity) to (Total Liabilities and Equity) value is high, then the company is able to pay off its debts. In
by Account Title = % this case, the value is good, meaning that the company can pay
off the debtors. However, it can be improved by borrowing
E.G. Current Liabilities/(Total Liabilities and Equity) = 69500/385000 = 18% less. These values can be used to determine the company’s
% liabilities, debts or equity.
Equity/(Total Liabilities and Equity) = % 240500/385000 = 63%
Long Term Debt/(Total Liabilities and Equity) = % 75000/385000 =
19.5%
©William G. Donohoo 7/28/2014
