Accounting Equation:
This formula is the root of accounting.
Worth = Assets – Liabilities
Current Assets:
Sum of assets that will convert into cash in less than 12 months.
Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses
Net Fixed Assets:
Book value of fixed assets.
Net Fixed Assets = Fixed Assets at cost – Accumulated Depreciation
Total Assets
The sum of all assets.
Total Assets = Current Assets + Other Assets + Net Fixed Assets
Current Liabilities
Bills due within 12 months of the Balance Sheet date.
Current Liabilities = Accounts Payable + Accrued Expenses + Current Portion of Debt + Income Taxes Payable
Shareholder’s Equity
The value of the company to its owners. Also called net worth.
Shareholder’s Equity = Capital Stock + Retained Earnings
Total Liabilities and Equity
The total obligation plus worth of the entity.
Total Liabilities and Equity = Current Liabilities + Long-Term Debt + Shareholders’ Equity
Gross Margin
The left over amount after cost of goods sold are taken away from net sales.
Gross Margin = Net Sales – Cost of Goods Sold Formula
Operating Expenses
The sum of expenses paid for developing and selling the product or service.
Operating Expenses = Sales & Marketing + Research & Development + General & Administrative
Income From Operations
Net profit from the product or services sold.
Income From Operations = Gross Margin – Operating Expenses
Net Income
Net income is all income minus total expenses and costs.
Net Income = Income From Operations + Interest Income – Income Taxes
Current Ratio
A liquidity ratio that asks can the current assets pay the current liabilities? If the current ratio is greater than or equal to 1.0, then the answer is yes.
| Current Ratio = | Current Assets |
| | Current Liabilities |
Cash Ratio
Shows how much cash you currently have on hand. It also demonstrates how well your business can pay off its current liabilities. The higher the number, the healthier your company.
| Cash Ratio = | Cash |
| | Current Liabilities |
Quick Ratio
A liquidity ratio showing if there is enough cash and receivables to pay the bills due in 12 months
| Quick Ratio = | (Cash + Accounts Receivable) |
| | Current Liabilities |
Asset Turn Ratio
How well a unit is using its assets to make sales.
| Asset Turn Ratio = | Net Sales |
| | Total Assets |
Receivable Days
How long does it take on average to get paid for a product sold?
| Receivable Days = | 365(Accounts Receivable) |
| | Net Sales |
Inventory Turn
Measures how fast one is using the inventory
| Inventory Turn = | Cost of Goods |
| | Inventory |
Return on Assets (ROA)
How well management is doing at using the assets to make a profit.
| Return on Assets (ROA) = | Net Income |
| | Total Assets |
Return on Investment (ROI)
How well management is using money invested by shareholders.
| Return on Investment (ROI) = | Net Income |
| | Shareholders Equity |
Return on Sales (ROS)
Determines the profit margin of a company.
| Return on Sales (ROS) = | Net Income |
| | Net Sales |
Gross Margin
Percentage of profit over the cost of goods.
| Gross Margin = | (Net Sales - Cost of Goods) |
| | Net Sales |
Debt-to-Equity Ratio (DTE)
Measures if a company has more debt than equity. Checks if a company will be able to repay a loan out of their equity
| Debt-to-Equity Ratio (DTE) = | (Current Debt + Long-Term Debt) |
| | Shareholders Equity |
Debt Ratio
Compares debt to assets
| Debt Ratio = | (Current Debt + Long-Term Debt) |
| | Total Assets |
Break Even Point
Tells you how much you need to sell to cover all of your costs and generate a profit of $0
Break-even point = sales – fixed costs – variable costs
