FORMULAS Flashcards
Accounting Equation
A = L + E
Expanded Accounting Equation
Assets = Liabilities + Equity + (Income - Expenses)
Net Profit
All income - All expenses
Gross Profit
Income Generated from Selling Goods - Cost of Goods Sold
Carrying Value
Original Cost - Accumulated Depreciation
Net Assets
Total Assets - Total Liabilities
Total Equity
Total Assets - Total Liabilities
Net Assets
= Total Equity
EBIT
EBIT = Revenue – COGS – Operating Expenses
Return on Equity (ROE)
= EBIT / Total Equity
Weighted Average Cost of Capital (WACC)
= [Debt / (Debt + Equity)](Required Rate of Return % Debt) + [Equity/Debt + Equity](Required Rate of Return% Equity)
Comprehensive Income
= Profit + Other Comprehensive Income (OCI)
Contribution margin
total sales revenue - total variable costs
Contribution margin per unit
= Selling price per unit - variable cost per unit
Contribution margin ratio
= Contribution margin per unit/selling price per unit
*it the the portion of revenue that will go towards covering fixed costs
Break-even point of sales revenue
Level of revenue needed to be earned to meet fixed costs
= fixed costs / contribution margin ratio
Sales volume (units) to earn desired profit
The extra profit that the business needs to earn in order to satisfy shareholder returns
= (Fixed costs + desired profit)/(contribution margin per unit)
Sales mix ratio
= Volume of sales for each product / total volume
WACM and WACM per unit
WACM is calculated by multiplying the CMU for a product by the sales mix ratio and the WACM per unit is the addition of all these seperate WACM’s.
Break even volume of units
= fixed costs / WACM per unit
Volume per item
= break even volume of units x sales mix ratio
Margin of safety
Level that the expected sales could fall and still allow the business to cover its costs - measure of operational risk (percentage)
= (expected sales volume - break even volume) / expected volume of sales
Absolute change
Amount in current period - amount in previous period
Relative change
[(Amount in current period - amount in previous)/amount in previous] x100
Horizontal analysis
- Absolute change year to year
- Relative change (%) year to year
Vertical analysis
Compare to a base within the same statement
=next line item/base item
the base item is usually the larges line item
Trend analysis
Index the base year (earliest year) as 100 and then then do next year/indexed year value x100 to get the next indexed value
Ratio analysis
[One line item/other line item]*100
Return on equity (ROE)
Tells how well the entity is generating profits relative to the amount of equity invested by shareholders.
[Profit available for distribution/average ordinary equity]*100
Return on assets (ROA)
Ability of a business to use its assets to generate a return
= EBIT/Average Total Assets
EBIT profit margin
The rate at which sales revenue is converted into profit
= EBIT/sales revenue*100
Expense ratio
The extent to which sales revenue is consumed by one particular expense or one cost centre
= ()expense/sales revenue*100 - can be conducted for any expense occuring in the statement
Gross profit margin
= gross profit/sales revenue*100
Cash flow to sales ratio
The rate at which sales revenue generates operating cash flow
= Net operating cash flows/sales revenue
Asset turnover
Indicates how well a business can generate sales revenue from assets
= Sales revenue/average total assets
Inventory turnover/days inventory
Average number of days inventory is held
= average inventory/cost of sales *365
Days sales outstanding
= Average trade receivables / sales revenue
Days purchases outstanding
= average trade payables / (cost of sales + net increase in inventory)
Current ratio or working capital ratio
number of times over current assets could meet current liabilities
= CA/CL
Quick ration or acid test ratio test
Number of times quick assets could service CL
= (cash + receivables)/(CL - overdrafts)
Cash flow ratio
The amount of cash flow available in a period to service CL
= Net operating cash flows / CL
Debt ratio
The extent to which the entity has used debt to finance their investment in assets (60% is considered high)
= total liabilities/total assets
Debt to equity ratio
= Debt ratio/equity ratio
Equity ratio
= 100% - debt ratio
Interest coverage ratio
=EBIT/finance costs
finance costs = interest expense - interest revenue
Average interest rate
= finance costs x average interest bearing liabilites
Debt coverage ratio
= Non-current liabilities/net operating cash flows
(cash flows generated from operations)
Net tangible asset backing per share (NTAB)
Earnings per share (EPS) / Diluted EPS
Profit avail to ordinary shareholder / WAVE no. of ordinary shares on issue **OR **
Dividend payout ratio
Price Earnings Ratio (P/E Ratio or PER)
