Lesson 2: Analyzing Profitability & Liquidity: Introduction to Financial Ratios
Duration of Days: 4
Lesson Objective
Students will calculate and interpret key financial ratios to evaluate a company’s profitability and liquidity. Students will analyze how accounting decisions influence ratio outcomes and financial strength.
• What is the purpose of financial ratios?
• How do profitability and liquidity differ?
• What does the gross profit ratio reveal about a company?
• How does the current ratio measure financial stability?
• How can accounting assumptions influence financial ratios?
• Financial ratio
• Gross profit ratio
• Profit margin
• Current ratio
• Liquidity
• Profitability
• Working capital
• Accounts receivable turnover
• Inventory turnover
• Financial strength
B. Accounting Principles: Identify and describe GAAP principles and explain how application impacts financial reporting.
C. Accounting Process: Analyze how transactions and estimates impact financial statements
Students strengthen mathematical reasoning and analytical comparison skills by evaluating structural differences in business models and financial statement impact.
Description:
Students calculate and interpret:
• Gross Profit Ratio
• Profit Margin
• Current Ratio
• Working Capital
Purpose:
This lesson introduces students to financial ratio analysis as a tool for evaluating company performance
DOK 1: Define and calculate financial ratios.
DOK 2: Interpret ratio results.
DOK 3: Analyze how accounting decisions influence ratio outcomes.
Investors, banks, and analysts use financial ratios to assess company performance before making decisions.
High revenue automatically equals high profitability.
• Ratio formula reference sheet
• Step-by-step modeling in Excel
• Small group ratio interpretation discussions
• Comparison chart of two companies
• Guided note template
• Scaffolded analysis questions
• Spanish vocabulary support for ELL students
• Ratio calculation worksheet
• Excel-based ratio assignment
• Short written interpretation of ratio results
• Exit ticket explaining difference between liquidity and profitability
• Mini-case comparing two companies’ financial strength
• Century 21, Accounting, General Journal, 11th edition
• Online working papers (MindTap)
• Microsoft Excel software
• Sample financial statements
• Ratio formula sheet
• Comparison worksheet
• Class notes, Do Now, Exit Tickets
• Projector for modeling and analysis