Basic Financial Accounting Formulas You Should Know

Basic Financial Accounting Formulas And Ratios 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:

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

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

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)

COGM Formula
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

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

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

Total Liabilities/ Total Equity

Degree of financial leverage
% change in net income / % change in EBIT,

Degree of operating leverage
= % change in EBIT / % change in sales
= 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

(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)

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

Financial leverage ratio
= 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

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)

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

Net working capital
current assets – current liabilities

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
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)

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

Profit Margin
net income / sales

Profitability Analysis Ratios (list 7)
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

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

Return on equity (ROE)
= Profit Margin X Asset turnover X Leverage
= Current Ratio
=ROA x financial leverage
= (net income / average total assets) x (average total assets / average equity )
= net income / average equity

ROI (Division)
Net Operating Income / Average Invested Assets

ROI (Multiplication)
Profit Margin * Investment Turnover

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

Transfer Price
Variable Costs + Opportunity Cost

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

Units Of Activity Depreciation Expense Method
= (Depreciation Cost / Total Units Of activity)
Units of Activity used in year

Working Capital
= Current Assets – Current Liabilities.

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