Ratios are another amazing way to notice variances in assets, liabilities, income and expenses. There are tons of different ratios we could look at but let's take a couple and examine them for Simply Yoga. Take a look at their balance sheet.

 

Current Assets:

Cash 9550

Accounts Receivable 900

Prepaid Expenses 1100

Total Current Assets 11550  

Property and Equipment: 

Yoga Props (less accum depr)1500

Total property and Equip.1500

Total Assets 13050  

Current Liabilities: 

Accounts Payable 710

Payroll Taxes Payable 672

Payroll Taxes Payable 1382

Total Current Liabilities 

Long Term Liabilities

Loan Payable 6500 

Stockholder's Equity 

Common Stock 1000

Retained Earnings 4186

Total Equity 5168

Total Liabilities 13050

 

Let's talk first about the working capital ratio. The formula is:

Working capital= current assets−current liabilities $10,168=$11,550−$1382



So, this shows that Simply Yoga has plenty of funds to pay current liabilities, which is a good thing! But, it also shows that they are holding more funds in a very liquid account, which may be better used to pay off any higher interest debt, such as their loan payable. This is an area for review, right?

The current ratio is another way to look at the ability of a company to cover short term debt.

Current Ratio = Current assets/Current Liabilities

8.36=$11,550/$1,382

What this tells us is that Simply Yoga has enough current assets to cover their current liabilities 8.36 times. Again, this is a good thing, unless they are paying a crazy amount of interest somewhere else. Might that cash be better used to pay off that loan they have sitting on the books?