# Basic Financial Accounting Formulas You Should Know

Accounting is the systematic process of analysing, interpreting, communicating financial information to enable users make decisions.

As an accountant or Accounting students, there are certain accounting formulas and ratios you should know. The following are some of them:

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**Duties Of An Accountant****Accounting Rate of Return**

Net Income / Initial Investment

**Accounts Payable Turnover**

Cost of Goods Sold / Average Accounts Payable

**Accounts receivable turnover**

credit sales / average gross accounts receivables

**Accounts Receivable Turnover Ratio**

Net Credit Sales/Avg Net Accounts Receivable

**Accounts receivable collection period**

Investment in Accounts Receivable / Daily Sales

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**Types Of Accounting****Accumulated Depreciation**

Cost- Salvage Value/Years

**Activity Ratios (list 10)**

1.Accounts receivable turnover

2.Accounts payable turnover

3.Inventory turnover

4.Days sales in receivables

5.Days sales in inventory

6.Days purchases in payables

7.Operating cycle

8.Cash cycle

9.Total asset turnover

10.Fixed asset turnover

**Asset Turnover**

Total Revenue / Average Total Assets

**Average Collection Period**

365 / Receivables Turnover

**Average costs per sale**

Total Cost/Sales

**Average Days to Sell Inventory**

365 / Inventory Turnover

**Average Issuance Price**

A balance of common shares account/acquisition

**Balance Sheet**

Assets = Liabilities + Stockholders’ Equity

**Basic Earnings Per Share (EPS)**

Net Income – Preferred Dividends/Weighted-Average Common Shares Outstanding

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**3 Golden Rules of Accounting****Book Value Per Common Share**

Stockholder’s Equity Applicable to Common Shares/Number of Common Shares Outstanding

**Book Value Per Preferred Share**

Stockholder’s Equity Applicable to Preferred Shares/Number of Preferred Shares Outstanding

**Book value per share**

(total stockholders’ equity – preferred equity) /

number of common shares outstanding

**Break – even point**

Break Even = Fixed Cost/Contribution Margin

**Breakeven point in dollars**

fixed costs / (unit contribution margin/selling price)

**Breakeven Sales**

Fixed Costs / Contribution Margin Ratio

**Breakeven Units**

Fixed Costs / CMPU

**Capital Acquisitions Ratio**

Cash Flow from Operating Activities / Cash Paid for Property, Plant, and Equipment

**Cash coverage ratio**

EBIT + depreciation / interest

**Cash cycle**

Operating cycle – days purchases in payables

**Cash ratio**

(cash + marketable securities) / current liabilities

**Cash to expense ratio**

Cash-To-Expense Ratio = (Investment in Cash + Investment in Marketable Securities) / (Annual Operating Expense/365 days)

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**Difference Between Accounting And Finance****COGM Formula**

BWIP

DM used:

Beg RM

(+) Purchases

(=) Available

(-) End RM

(=) DM used in production

(+) DL

(+) MOH

(=) Total Manufacturing Costs

(+) BWIP

(-) EWIP

(=) COGM

**COGS Formula**

Beg FG Inventory

(+) COGM

(-) End FG Inventory

(=) COGS

**Computing Interest**

Principal of the Note x Annual Interest Rate x Time Expressed In Fraction of Year = Interest

**Contribution Margin**

Sales Revenue – Variable Costs

Contribution Margin Ratio

Contribution Margin / Sales Revenue

Conversion Costs

DL + MOH

**Cost/volume/profit analysis (list 4)**

1.Breakeven point in units

2.Breakeven point in dollars

3.Margin of safety

4.Margin of safety ratio

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**Risks Of An Accounting Career****Current Ratio**

Current Assets / Current Liabilities

**Days In Inventory**

365/Inventory Turnover

**Days purchases in payables**

average payables / (purchase / 365)

**Days’ sales in inventory**

365 days / inventory turnover or

Investment in Inventory / Cost of Daily Sales

**Days sales in receivables**

365 days/receivables turnovers or

average accounts receivable / (credit sales / 365)

**Days’ Sales Uncollected**

Accounts Receivable/Net Sales x 365

**Debt coverage ratio**

Earnings BEfore Interest and Taxes for a Given Period /(Interest Expense for a Given Period + Principal Payments on Debt for a Given Period)

**Debt to Asset Ratio**

Total Liabilities/Total Assets

**Debt-to-Equity**

Total Liabilities/ Total Equity

**Degree of financial leverage**

% change in net income / % change in EBIT,

or

= EBIT / EBT

**Degree of operating leverage**

= % change in EBIT / % change in sales

or

= contribution margin / EBIT

**Depletion Cost**

Unit Depletion Rate X Number of Units Extracted

**Depletion Expense**

Depletion Per Unit x Units Extracted and Sold In Period

**Depletion Per Unit**

Cost – Salvage Value/ Total Units of Capacity

**Depreciation**

(Initial Investment + Salvage Value) / Useful life

**Depreciation Cost**

Cost – Salvage Value

**Diluted EPS**

(net income – preferred dividends) / diluted weighted average common shares outstanding

**Direct Labor Efficiency Variance**

SR * (SH-AH)

**Direct Labor Rate Variance**

AH x (SR-AR)

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**Importance Of Mathematics In Accounting****Direct Materials Price Variance**

AQ x (SP-AP)

**Direct Materials Quantity Variance**

SP x (SQ – AQ)

**Dividend payout ratio**

cash dividends / net income

**Dividend yield**

Annual dividends per share / market price per share

**Double Declining Depreciation Expense Method**

( 2/useful life) X Book Value Start

**Earnings Per Share**

Net Income – Preferred Dividends/ Average number of common shares outstanding

**Earnings yield**

EPS / current market price per common share

**EBITDA margin**

EBITDA / sales

**EBITDA ratio**

enterprise value / EBITDA

**Price elasticity of demand**

E = [change in quantity / (average of quantities)] / [change in price / (average of prices)]

**Enterprise value**

total market value of the stock + book value of all liabilities – cash

**Equity multiplier**

total assets / total equity

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= assets / equity

**Fixed asset turnover**

= sales / average net plant, property and equipment

**Fixed charge coverage**

= earnings before fixed charges and taxes / fixed charges fixed charges include interest, required principal repayment, and leases

fixed charges include

include interest, required principal repayment, and leases

Interest coverage (times interest earned)

= EBIT / interest expense k(3) Cash flow to fixed charges = (cash from operations + fixed charges + tax payments) /

fixed charges. Note: cash from operations is after-tax.

**Fixed-asset turnover**

Fixed-Asset Turnover = Annual Sales / Investment in Property, Plant, and Equipment

**Good Will**

Purchase Cost – Fair Value of Identifiable Assets

**Gross profit margin percentage**

gross profit / sales

**Gross Profit Percentage**

(Net Sales Revenue – COGS) / Net Sales Revenue

**Income Statement**

Revenues – Expenses

**Inventory Turnover**

COGS / Average Inventory

**Invest coverage ratio**

Invest Coverage Ratio = Earnings BEfore Interest and Taxes for a Given Period / Interest Expense for a Given Period

**Investment Turnover**

Sales Revenue / Average Invested Assets

**Leverage**

Avg Totals Assets/ Avg shareholders equity

**Leverage ratios (list 8)**

1.Degree of financial leverage

2.Financial leverage ratio

3.Total debt to total capital ratio

4.Debt to equity ratio

5.Long-term debt to equity

6.Debt to total assets ratio

7.Fixed charge coverage

8. Interest coverage (times interest earned)

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**5 Signs You Have A Bad Accountant****Liquidity ratios (list 5)**

Net working capital

Current ratio

Cash ratio

Cash flow ratio

Net working capital ratio

**Long-term debt to equity ratio**

= (total debt – current liabilities) / equity

**Margin of safety**

= planned sales – breakeven sales

**Margin of safety ratio**

= margin of safety / planned sales

**Market Ratios (list 10)**

1.Market-to-book ratio

2.Price earnings ratio

3.Price to EBITDA ratio

4.Book value per share

5.Basic EPS

6.Diluted EPS

7.Earnings yield

8.Dividend yield

9.Dividend payout ratio

10.Shareholder return

**Market-to-book ratio**

= current stock price / book value per share

**Measuring Value of A company**

= Number Of Shares Issued X Share Price at Date

**Minimum Acceptable Profit**

Hurdle Rate * Average Invested Assets

**Net Book Value**

= Acquisition Cost – Accumulated Depreciation

**Net Cash Flow**

Net Income + Depreciation

**Net Present Value**

(Annual cash flows * PV of $1) – Initial Investment

**Net Profit Margin**

Net Income / Net Sales (Operating Revenues)

**Net profit margin x total asset turnover x equity multiplier (DuPont model)**

**return on common equity**

or

=(net income / sales) x (sales / average total assets) x

(average total assets) / average equity

**Net working capital**

current assets – current liabilities

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**Meaning Of Sales In Accounting****Net working capital ratio**

net working capital / total assets

**Operating profit margin percentage**

operating income / sales

**P / E Ratio**

Market Price Per Share /Earnings per share

**Partial Income Statement**

Sales

less: COGS

(=) Gross Margin

less: Operating Expenses

(=) Net Operating Income

**Payback Period**

Initial Investment / Annual Cash Flow

**Payout Ratio/ Cash Dividends Declares/ Free Cash Flow**

= Net Cash From Operating Activities –

Capital Expenditures – Cash Dividends

**PE ratio**

market price per share of common stock/earnings per share

**Performance measures (list 2)**

ROI

RI

**Price Earnings Ratio**

market price per share / EPS

**Price to EBITDA ratio**

market price per share / EBITDA per share

**Price-sales ratio**

price per share / sales per share

**Prime Costs**

DM + DL

**Profit Margin**

net income / sales

**Profitability Analysis Ratios (list 7)**

1.ROA

2.ROE

3.Net profit margin x total asset turnover x equity multiplier (DuPont model)

4.Gross profit margin percentage

5.Operating profit margin percentage

6.Net profit margin percentage

7.Sustainable growth rate

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**Important Accounting Trends in 2019****Profitability Index**

PV of Future Cash Flows / Initial Investment

**Profitability Ratios -(List 6)**

(1) Gross profit margin percentage

(2) Operating profit margin percentage

(3) Net profit margin percentage

(4) EBITDA margin

(5)ROA

(6) ROE

**Quality of Income Ratio**

Cash Flow from Operating Activities / Net Income

**Quick Ratio (Acid-Test Ratio)**

(cash + marketable securities + accounts receivable) /

current liabilities

**Rate of Return on Assets**

Net Income / Average Total Assets

**Receivables Turnover**

sales / accounts receivable

**Residual Income**

Income of business unit – (Assets of business unit x required rate of return)

Note: “Income” means operating income unless otherwise noted

**Retention ratio**

additions to retained earnings / net income = 1 – payout ratio

**Return on Assets (ROA)**

= Net profit margin x total asset turnover

or

= (net income / sales) x (sales / average total assets)

or

= net income / average total assets

**Return on equity (ROE)**

= Profit Margin X Asset turnover X Leverage

= Current Ratio

=ROA x financial leverage

or

= (net income / average total assets) x (average total assets / average equity )

or

= net income / average equity

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**Difference Between Cost And Price****ROI (Division)**

Net Operating Income / Average Invested Assets

**ROI (Multiplication)**

Profit Margin * Investment Turnover

**ROI**

Income of business unit / Assets of business unit

**Shareholder return**

(ending stock price – beginning stock price + annual dividends per share) / beginning stock price

**Special Order Formula**

Special Order Price

(-) Variable Manufacturing Costs

(-) Variable Selling and Administrative

(-) Additional Fixed Costs

(=) Net Extra Income per unit

**Statement of Cash Flows**

+/- Cash Flows from Operating Activities

+/- Cash Flows from Investing Activities

+/- Cash Flows from Financing Activities

= Net Change in Cash

+/- Cash Flows from Operating Activities

+/- Cash Flows from Investing Activities

+/- Cash Flows from Financing Activities

= Net Change in Cash

**Statement of Retained Earnings**

Retained Earnings (beginning) + Net Income – Dividends

**Straight Line Depreciation Expense Method**

Depreciation Cost / Useful Life

**Straight-Line Depreciation**

Cost – Salvage Value/ Useful Life in Periods

**Sustainable growth rate**

= (1- dividend payout ratio) x ROE

**Target Operating Income Sales (TIS)**

(FC + Target Operating Income) / CMR

**Target Operating Income Units (TIU)**

(FC + Target Operating Income) / CMPU

**The required rate of return for equity**

Re = Rf + Risk Premium

**The required rate of reurn for debt**

Rd = Rf + Risk Premium

**Times Interest Earned Ratio**

EBIT / interest or

(Net Income + Interest Expense + Income Tax Expense) / (Interest Expense)

**Total asset turnover**

sales / average total assets

**Total debt ratio**

total assets – total equity / total assets

**Total debt to total capital ratio**

(current liabilities + long term liabilities) / (total debt + total equity)

**Total Manufacturing Costs**

DM + DL + MOH

**Transfer Price**

Variable Costs + Opportunity Cost

**Unit Depletion Rate**

= (Total Cost – Salvage Value )/units in resource

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**How Accounting Was Done Before Spreadsheet****Units Of Activity Depreciation Expense Method**

= (Depreciation Cost / Total Units Of activity)

X

Units of Activity used in year

**Working Capital**

= Current Assets – Current Liabilities.

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