9. Interest cost $10,000.
10. Plant and equipment $25,000. (It will be noted from the comparative balance sheet that there has been a net increase of only $7,500 in plant and equipment. While $25,000 was added to the plant and equipment asset during the year, there was a decrease in value due to depreciation, amounting to $17,500, as shown by the profit and loss statement. This depreciation expense is reflected as a decrease in the value of the asset Plant and Equipment and does not therefore decrease the asset Cash.)
11. Notes payable $5,000—the decrease being shown by the comparative balance sheet.
12. Mortgage payable $50,000—also shown on the comparative balance sheet.
If from the total cash available for use there is deducted the cash expended, as indicated above, the difference should indicate the amount of cash on hand at the close of the period. This balance of $10,000, as indicated by the tabulated statement below, is the amount shown by the comparative balance sheet as being on hand.
| Cash Receipts: | ||
| Balance on Hand December 31, 1921 | $ 15,000.00 | |
| From Customers, as above | 462,000.00 | |
| Interest Income | 250.00 | |
| Total Cash available for use | $477,250.00 | |
| Cash Expenditures: | ||
| For Purchases as above | $ 287,000.00 | |
| Inward Freight and Cartage | 15,000.00 | |
| Sales Salaries | 19,000.00 | |
| Advertising | 30,000.00 | |
| Sundry Selling Expense | 10,000.00 | |
| Office Salaries | 10,500.00 | |
| Insurance | 3,750.00 | |
| Sundry Office Expense | 2,000.00 | |
| Interest Cost | 10,000.00 | |
| Plant and Equipment | 25,000.00 | |
| Notes Payable | 5,000.00 | |
| Mortgage Payable | 50,000.00 | 467,250.00 |
| Balance of Cash on Hand December 31, 1922, per Balance Sheet. | $ 10,000.00 | |
By a careful study of the interrelations between various items as explained above, the student will see that the interactions between all of the transactions for the year as set forth in the comparative balance sheet and the profit and loss statement, have been indicated and proved. The proof is secured in the tie-up between the figure of cash as shown by the cash statement, and that shown in the comparative balance sheet statement as cash on hand at the end of the period.
Inter-Ratios and Their Uses.—Before leaving the study of the balance sheet and profit and loss statement and their interrelations, it is desirable to explain certain ratios between items found on both statements. These are ratios which are watched very carefully in judging the financial condition of a business. Their significance is apparent.
1. Merchandise Turnover. By merchandise turnover is meant the rate at which the merchandise stock is moved or turned over by sale during the fiscal period. The ratio expressing the rate of turnover is found by dividing the cost of goods sold, as shown in the profit and loss statement, by the average inventory carried for the year. Where there are available only the figures of opening and closing inventory, the amount of the average inventory is taken as one-half of the sum of these two inventories. The rate of turnover varies in different businesses, ranging as high as 15 or 20 in some and as low as 1 or 2 in others. The value of a rapid turnover is apparent. One dollar invested in merchandise where the rate of turnover is 10 is equivalent to $10 invested where the rate is only 1. The more work a dollar does, the greater the profit possibilities.
2. Working Capital Turnover. The amount of sales as indicated by the profit and loss statement, divided by the working capital—the excess of current assets over current liabilities—as determined from the balance sheet, is called the “working capital turnover.” This indicates the rate at which the working capital is used in securing sales. Where the amount of working capital on hand varies markedly at different periods of the year, the average should be used as the basis for estimating the rate of turnover.