Learning objectives
After completing this unit, you will be able to:
- Assess liquidity and working capital with ratio and CCC (cash conversion cycle) tools
- Analyze profitability and margins with ROA (return on assets) and ROE (return on equity)
- Measure efficiency through turnover ratios and operational drivers
- Evaluate leverage, coverage, and covenant headroom
- Judge earnings quality and spot common red flags
Why this matters
Constructing statements (Unit 5) is table stakes. Managers, lenders, and investors win or lose on interpretation: whether profit converts to cash, whether growth is financed safely, and whether numbers repeat or games hide behind one-time items.
Unit overview
| # | Lesson | Core idea |
|---|---|---|
| 1 | Liquidity and Working Capital | Current, quick, cash ratios; CCC |
| 2 | Profitability and Margin Analysis | Margin stack, DuPont preview, peer cautions |
| 3 | Efficiency and Asset Utilization | Turnover, DSO, DIO, asset use |
| 4 | Leverage and Solvency | Debt ratios, coverage, lease-adjusted leverage |
| 5 | Earnings Quality and Red Flags | Accruals versus cash; integrated analyst checklist |
Connection to applied work
Write a two-page financial health memo on one public company using at least eight ratios from this unit, one footnote read, and a clear lend/invest/avoid recommendation. This caps your Financial Accounting case analysis.
Practice
- Compute current and quick ratios; explain when they disagree.
- Decompose ROE into margin, turnover, and leverage (DuPont).
- List three red flags where profit rises but operating cash falls.
Knowledge check
- What is the difference between liquidity and solvency?
- Why compare margins to peers in the same industry?
- What does interest coverage below 1.5x signal?
- What is earnings quality in one sentence?
Key takeaways
- Ratios are diagnostics, not conclusions; read numerators and denominators.
- Cash conversion and coverage ratios protect against "paper profit."
- Earnings quality integrates all prior units into one judgment.
- ACC 101 ends here; ACC 102 (Managerial Accounting) shifts to internal cost and control decisions.
Unit assessment
Complete each section below. Score 80%+ on the quiz to finish this unit's assessment.
Exercises
Apply what you learned in this unit with structured practice.
Deliverable
300–500 word analysis document saved to your portfolio under ACC 101.
Rubric
- • Framework applied correctly (not just named)
- • Specific evidence from a real example
- • Clear recommendation with tradeoffs acknowledged
- • Professional writing with source citation
Deliverable
Problem solutions + 150-word reflection in your ACC 101 workbook.
Rubric
- • Attempted all practice items before checking answers
- • Honest reflection on errors
- • Identifies a specific review action
Model / spreadsheet
Build or extend a spreadsheet model tied to this unit.
Deliverable
Spreadsheet file with Inputs / Model / Outputs tabs · One-paragraph summary of key insight from the model · Screenshot or export saved to portfolio
Rubric
- • Assumptions stated explicitly
- • Logic is auditable (formulas or steps visible)
- • Output answers a specific business question
- • Sensitivity or scenario considered
Knowledge quiz
Check your understanding before marking the unit complete.
1. Current assets are $600,000 and current liabilities are $400,000. The current ratio is:
2. The quick ratio excludes which asset from the numerator?
3. Gross margin equals:
4. Days sales outstanding (DSO) measures:
5. Return on assets (ROA) is calculated as:
6. Debt-to-equity of 2.0 means:
7. Interest coverage ratio equals EBIT divided by:
8. Which pattern may signal earnings quality concerns?