Essential Financial Accounting Formulas and Ratios

Essential Financial Statement Formulas

• Stockholder Equity: Total Assets – Total Liabilities
• Retained Earnings: Net Income – Dividends Declared
• Net Income: Sales Revenue – Expenses
• Gross Profit: Sales Revenue – Cost of Goods Sold (COGS)
• Cost of Goods Sold (COGS) based on Rate: (1 – Gross Profit Rate) × Net Sales

Inventory Accounting Adjustments (LIFO and FIFO)

• Calculating LIFO Reserve: FIFO Ending Inventory Cost – LIFO Ending Inventory Cost
• Adjusting Balance Sheet from LIFO to FIFO Inventory: LIFO Reserve + LIFO Inventory

Accounting Estimates and Depreciation

Changing Accounting Estimates

• Book Value at Date of Change: Costs – Accumulated Depreciation
• New Remaining Useful Life: Original Life – Years Depreciated + Additional Years
• Depreciation Expense (New Estimate): (Book Value – Salvage Value) / Remaining Estimated Life

Fundamental Accounting Concepts

• Sources and Uses Equation: Assets (Uses) = Liabilities + Equity (Sources)
• Calculating Interest Expense: Principal × Annual Rate × Portion of Year Outstanding

Key Financial Performance Ratios

Profitability Ratios

• Return on Equity (ROE): Net Income / Average Total Equity
• Return on Assets (ROA): Net Income / Average Total Assets
• Gross Profit Margin: (Sales Revenue – COGS) / Net Sales
• EBITDA Margin: EBITDA / Sales Revenue
• Profit Margin Ratio: Net Income / Sales Revenue

Efficiency and Turnover Ratios

• Asset Turnover: Sales / Average Total Assets
• Inventory Turnover: COGS / Average Inventory
• Accounts Receivable Turnover: Sales / Average Accounts Receivable
• Property, Plant & Equipment (PPE) Turnover: Sales Revenue / Average PPE

Liquidity Ratios

• Current Ratio: Current Assets / Current Liabilities
• Quick Ratio (Acid-Test): (Cash + Receivables) / Current Liabilities
• Cash Rotation: Cash / Current Liabilities

Solvency Ratios

• Debt-to-Equity Ratio: Total Liabilities / Total Equity
• Long-Term Debt-to-Equity Ratio: Long-Term Debt / Total Equity
• Equity Multiplier: Total Assets / Total Equity

Working Capital and Cycle Metrics

• Average Payment Period (DPO): Average Accounts Payable / Average Daily Purchases
• Average Collection Period (DSO): Average Accounts Receivable / Average Daily Sales
• Average Inventory Period (DIO): Average Inventory / Average Daily COGS
• Cash Conversion Cycle (CCC): DIO + DSO – DPO

Valuation and Shareholder Metrics

• Pay-out Ratio: Dividends Per Share / Earnings Per Share
• Price to Book Value: Market Price Per Share / Book Value Per Share
• Enterprise Value Multiple: Enterprise Value / EBITDA
• Earnings Per Share (EPS): Net Income / Weighted Average Number of Shares Outstanding
• Basic Earnings Per Share (BEPS): (Net Income – Preferred Dividends) / Weighted Average Number of Shares Outstanding

Depreciation Metrics

• Percent Depreciated: Accumulated Depreciation / Cost of Depreciable Asset