Accounting and finance formulas
Each formula is given with its inputs and an explanation of what the output means. Ratios are only meaningful in context — against prior periods, budget, or industry peers.
36 terms defined
- Accounting equation
- The identity underpinning double-entry bookkeeping. It must hold after every transaction.
- Gross profit
- Profit before operating expenses, showing how much each sales dollar contributes after direct production costs.
- Gross profit margin
- The proportion of revenue remaining after direct costs. Indicates pricing power and production efficiency.
- Operating margin
- The proportion of revenue remaining after operating expenses, before interest and tax.
- Net profit margin
- The proportion of revenue converted to profit after all expenses, interest and tax.
- Current ratio
- Short-term liquidity. A ratio below 1 indicates current liabilities exceed current assets.
- Quick ratio
- Liquidity excluding inventory, which may not convert to cash quickly. Also called the acid-test ratio.
- Working capital
- The absolute buffer of short-term resources funding day-to-day operations.
- Debt-to-equity ratio
- Financial leverage. Higher values mean greater reliance on borrowing relative to owners' capital.
- Interest coverage ratio
- How many times operating profit covers interest obligations. Lower values signal greater default risk.
- Return on assets
- How efficiently the asset base generates profit, independent of financing structure.
- Return on equity
- The return generated on owners' capital. Can be inflated by leverage rather than operating performance.
- Return on investment
- The proportional return on an outlay. Ignores timing, so it is not directly comparable across different horizons.
- Inventory turnover
- How many times inventory is sold and replaced in a period. Low turnover may indicate obsolete stock.
- Days inventory outstanding
- The average number of days inventory is held before sale.
- Receivables turnover
- How many times receivables are collected in a period. Measures credit control effectiveness.
- Days sales outstanding
- The average number of days taken to collect payment after a sale.
- Asset turnover
- Revenue generated per unit of assets. Measures how intensively the asset base is used.
- Price-to-earnings ratio
- What the market pays per unit of current earnings. Reflects growth expectations as well as risk.
- Contribution margin
- The amount available to cover fixed costs and then contribute to profit.
- Contribution margin ratio
- The proportion of each sales dollar available to cover fixed costs and profit.
- Break-even point in units
- The sales volume at which total revenue equals total costs and operating profit is zero.
- Break-even point in sales
- The sales revenue at which operating profit is zero.
- Margin of safety
- How far sales can fall before the business reaches break-even.
- Degree of operating leverage
- How sensitive operating profit is to a change in sales. Higher leverage magnifies both gains and losses.
- Straight-line depreciation
- An equal depreciation charge in each period of an asset's useful life.
- Double-declining balance depreciation
- An accelerated method charging more depreciation in early years, applied to book value rather than depreciable base.
- Units of production depreciation
- Depreciation charged in proportion to actual output rather than time elapsed.
- Net present value
- Present value of future cash flows less the outlay. A positive NPV indicates the project adds value at the chosen discount rate.
- Weighted average cost of capital
- The blended after-tax cost of an entity's debt and equity funding, weighted by their proportions of total capital.
- Economic value added
- Profit remaining after charging for the capital used. Positive EVA means value has been created.
- Materials price variance
- The portion of the materials variance caused by paying more or less than standard per unit.
- Materials quantity variance
- The portion of the materials variance caused by using more or less material than standard.
- Labour rate variance
- The portion of the labour variance caused by paying a different wage rate than standard.
- Labour efficiency variance
- The portion of the labour variance caused by using more or fewer hours than standard.
Assets = Liabilities + Equity
Revenue − Cost of goods sold
Gross profit ÷ Revenue
Operating income ÷ Revenue
Net income ÷ Revenue
Current assets ÷ Current liabilities
(Current assets − Inventory) ÷ Current liabilities
Current assets − Current liabilities
Total liabilities ÷ Shareholders' equity
EBIT ÷ Interest expense
Net income ÷ Average total assets
Net income ÷ Average shareholders' equity
(Gain from investment − Cost of investment) ÷ Cost of investment
Cost of goods sold ÷ Average inventory
365 ÷ Inventory turnover
Net credit sales ÷ Average accounts receivable
365 ÷ Receivables turnover
Revenue ÷ Average total assets
Market price per share ÷ Earnings per share
Sales revenue − Variable costs
Contribution margin ÷ Sales revenue
Fixed costs ÷ Contribution margin per unit
Fixed costs ÷ Contribution margin ratio
Actual sales − Break-even sales
Contribution margin ÷ Operating income
(Cost − Salvage value) ÷ Useful life
2 × (1 ÷ Useful life) × Beginning book value
(Cost − Salvage value) × (Units produced ÷ Total estimated units)
Σ (Cash flow ÷ (1 + r)^t) − Initial investment
(E÷V × Re) + (D÷V × Rd × (1 − Tax rate))
Net operating profit after tax − (Capital employed × WACC)
(Actual price − Standard price) × Actual quantity purchased
(Actual quantity used − Standard quantity allowed) × Standard price
(Actual rate − Standard rate) × Actual hours worked
(Actual hours − Standard hours allowed) × Standard rate