Expressed in percentage terms this same farm business has a net income that is 25 percent of the value of farm production. The data for some financial ratios come from the balance sheet of the business. Data for other ratios come from the income statement. Some ratios use data from both the balance sheet and the income statement. The balance sheet is a listing of the assets and liabilities of the business and the resulting equity on a given date.
Equity is the difference between the assets and the liabilities.
A Financial Management Tool. Allowance is made for changes in inventories. Net income is equal to receipts minus expenses plus or minus the change in inventories. Financial ratios can be put to many uses. It must provide information that will aid in evaluating the effectiveness of the business, and in decision making.