Reply Discussion 4 Accounting pc

 Every ratio we have discussed in our lectures this week are very important to the success every company in their own way. But there are four ratios that stood out to me. One of the four ratios that I stood out was the ratio of fixed assets to long-term liabilities. This is “a measure of how much fixed assets a company has to support its long-term debt.” It measures a company’s ability to repay the face amount of debt at maturity. It is computed as ratio of fixed assets to long-term liabilities equals fixed assets (net) divided by Long-term liabilities. (Warren, Jones & Tayler, 2019) This ratio is important because it is important for a company to know if they have the assets to repay their debts at maturity. The second ratio is the times interest earned ratio. This ratio “measures the risk that interest payments will not be made if earnings decrease. The higher the ratio, the more likely interest payments will be paid if earnings decrease.” This is computed as times interest earned equals income before income tax expense plus interest expense divided by interest expense. (Warren, Jones & Tayler, 2019) I think this ratio is important because as a company you must think in the future and cannot always predict it. You never know when you may have a bad month or quarter and may not meet your sales goals. Knowing this number will ensure that you are aware of the percentage that you do not want to fall under to pay off debt on time. The Third ratio is return on total assets. This ratio “measures the profitability of total assets without considering how the assets are financed.” It is computed as Net income plus interest expense divided by average total assets. (Warren, Jones & Tayler, 2019) It is important to know what your return on your assets are. Any smart company would want to turn profit from its assets and this ratio will tell you if you are. The last ratio is the price-earnings ratio. This ratio “measures a company’s future earnings prospect.” It is computed as price-earnings ratio equals market price per share of common stock divided by earnings per share on common stock. (Warren, Jones & Tayler, 2019) It is very important to know your future earnings prospects and this ratio will show you just that. It allows the company to gauge how much they can possibly earn in the future and help control other important aspects of the company’s operation like their inventory or labor costs. For many years, companies have been buying back shares of their own common stock. There are many reasons a company may do this and some of them are “to consolidate ownership, preserve stock prices, return stock prices to real value, boost financial ratios, or to reduce cost of capital. Stock buybacks take the place of dividends and returns capital to investors.” (Segal, 2022) This buyback program would have an effect on the financial analysis decision because it would “reduce the company’s cash holding and subsequently its total asset base by the amount expended in the buyback. It would then lower the shareholders’ equity on the liability side by the same amount.” (Picardo, 2021) In other words, this buyback program would benefit the company as well as the shareholders. It allows the company to pay back the investors/shareholders through the shares bought back instead of dividends. References: Warren, C., Jones, J. P., Tayler, W. B. (2019). Financial and Managerial Accounting (15th ed.). Boston: Cengage. ISBN: 978-1337902663 Segal, T. (2022). Stock Buybacks: Why Do Companies Buy Back Shares? Stock Buybacks: Why Do Companies Buy Back Shares? ( Picardo, E. (2021). The Impact of Share Repurchase on Financial Accounting. The Impact of Share Repurchases on Financial Accounting (

)class, are long-term creditors interested in different ratios than short-term creditors? Why or why not?

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