Current Assets = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Supplies +
Prepaid Expenses + Other Liquid Assets
Current liabilities = notes payable + accounts payable + short-term loans + accrued expenses + unearned revenue +
current portion of long-term debts + other short-term debts
Net income= gross income (the total amount of money earned- expenses (such as taxes and interest payments)
Formulas
Liquidity ratios measure the short-term ability of the company to pay its obligations (loans and AP) and unexpected
needs for cash. Short-term creditors such as bankers and suppliers are interested in the following ratios:
o Working capital = Current assets – Current liabilities (can be converted to cash in a year or less, cl are short
term financial obligations)
o Current ratio = Current assets ÷ Current liabilities
o Inventory turnover = Cost of goods sold ÷ Average inventory (beginning + ending inventory/2- usually b/w 2
years)
o Days in inventory = 365 days ÷ Inventory turnover
o Accounts receivable turnover = Net credit sales ÷ Average net accounts receivable (like above compared b/w 2
yrs)
o Average collection period = 365 days ÷ Accounts receivable turnover
Solvency ratios measure the ability of the company to survive over a longer period. Long-term creditors and stockholders
are interested in the following ratios:
o Debt to assets ratio = Total liabilities ÷ Total assets
o Times interest earned = (Net income + Interest expense + Tax expense) ÷ Interest expense
o Free cash flow = Net cash provided by operating activities – Capital expenditures – Cash dividends
Profitability ratios measure the income or operating success of a company. Creditors and investors are interested in the
following ratios:
o Earnings per share = (Net income – Preferred dividends) ÷ Average common shares outstanding
o Price-earnings ratio = Stock price per share ÷ Earnings per share
o Gross profit rate = Gross profit ÷ Net sales
o Profit margin = Net income ÷ Net sales
o Return on assets = Net income ÷ average total assets (beginning + end assets/ 2)
o Asset turnover = Net sales ÷ Average total assets (refer above)
o Payout ratio = Cash dividends declared on common stock ÷ Net income
o Return on common stockholders’ equity ÷ Average common stockholders’ equity
Return on assets: Indicates the amount of net income generated by each dollar of assets.
Net income/average total assets
Asset Turnover: Indicates how efficiently a company uses its assets to generate sales
Net sales/average total assets
Profit margin: How effectively sales are turned into income
Profit Margin
×
Asset Turnover
=
Return on Assets
Net Income/Net Sales
Net Sales/ Average Total Assets
Net Income/ Average Total Assets
Unit contribution margin= unit selling price – unit variable cost (variable cost of one!)
Contribution margin= unit contribution margin/unit selling price (in %)
Break even (units)= fixed costs/unit contribution margin
Break even (dollar)= fixed costs/ contribution margin (%)
Target net income= sales- variable costs- fixed costs (for sales x units by cost of one)
*In a hypothetical question where they want an x percent increase in sales, and you need to find # units that need to be
sold:
1.Target net income calc. 2. Calculate increase (target net income x percent increase and then add amount to original
target income) 3. (fixed costs + target net income)/ unit margin contribution is new total of units 4. Subtract new total from
old to get how many units you need
Margin of safety
In dollar= actual sales (expected)-break even sales (dollars) *if you are given units sold x by price per unit to get
actual sales
In Ratio= margin of safety /actual sales (calc. from above)
Cashback= cost of capital invest/ net annual cash flow
Annual rate of return = annual income (annual revenues- annual expenses)/ average investment (initial cost+salvage/2)
Depreciation: Process of allocating to expense the cost of a plant assets over its useful life in a rational and systematic
manner (cost allocation not asset)
Cost- salvage value= DC then DC / useful life in yrs = depreciation expense (accumulated for that year)
In truck example, you multiply: DC x depreciation rate x (months/12) to find out specific depreciation
SPECIFIC!! Depreciation Expense using the straight-line method:
1. Find the Depreciatiable Cost = Cost of [PPE] – Salvage Value
2. Depreciation Rate % = (Depreciation Expense / Depreciation cost) x 100
3. Depreciation Cost x Depreciation Rate% = Annual depreciation expense
4. Annual Depreciation Expense = DC / Useful life
Tabular summary to record merchandise transactions
Assets
=
Accounts
Cash
+
Receivable
Liabilities
+
Accounts
+
Inventory
=
Payable
Stockholders' Equity
Common
+
Stock
Horizontal vs Vertical Analysis (example in that order)
example
Retained Earnings
+
Rev.
-
Exp.
-
Div.
Budgeted balance sheet
Inventory:
Perpetual- Accuracy and inventory, determine losses, Periodic- Determine inventory on hand, and cost of goods sold for
period (usually, a mixed system used)
Freight costs:
FOB shipping point- Buyer pays freight cost (ownership when loaded), FOB destination- Ownership passed upon delivery
FIFIO (cash flow):
First in, first out, cost of oldest inventory recognized
Receivables:
Accounts receivable: Amounts customers owe on an account, Notes: Written promise for amounts to be received
Plant assets:
Not meant to be sold with physical substance meant to provide service to the company for a number of years (ex. land).
Cost is measured by the cash paid in transaction of cash equivalent; you basically add up everything that it cost to
purchase it. Machinery input in financial statement: after you determine the amount, that amount is written in negative in
cash and positive in equipment under assets
Comparison:
Intracompany, intercompany, industry averages
Direct Materials: These are the costs of the production that physically relate to the production of the finished product (aka
raw materials).
Direct Labour: These are costs that are physically related to the production of the finished product.
Manufacturing Overhead: These are for the costs that you can’t directly trace back from just the finished product.
Typically, these are called factory costs. They are intangible and made of indirect costs, such as indirect materials and
indirect labour costs. (ex. Utilities)
Period Costs: Finally, these are costs that relate to the product, but don’t directly relate with the production of the finished
result. An example of this would be commission, salaries, marketing. These include Sales and Administration Expenses.
Note: Period costs are usually matched with the revenue generated in the same (time) period (think like a balance sheet,
if someone was paid $500 in Quarter 1, that incurs a $500 period cost for Q1)