$$A\ =L\ +\ OE$$ Assets = Liabilities + Owners’ Equity. Foundation for accounting and represents the relationship between assets, liabilities, and owners’ equity.

$$\frac{FC}{SP_{u\ }-\ VC\ _u}$$ $$\frac{\text{FC}}{\text{SP_u - VC_u}}$$ Fixed Costs / (Selling Price per Unit – Variable Cost per Unit). Indicates the minimum number of products necessary to cover all expenses before the business can make a profit.

$$\frac{CA}{CL}$$ Current Assets / Current Liabilities. Measures the business’s ability to pay current debt. A ratio less than one may indicate liquidity problems.

$$\frac{Total\ Liabilities}{Shareholders$$ Total Liabilities / Shareholders’ Equity. Tells what percentage of the company is indebted. A 40-50% range is good.

Future Value of Money

$$FV\ =\ PV\ \left(1+i\right)^{n\cdot t}$$ Discount rate is % expressed as a decimal. N is # of times interest is paid, typically 1. T is time in years. Future value of an investment that accrues interest over a specified length of time.

Sales – Cost of Goods Sold. A company’s revenue after subtracting the costs of the products it has sold.

Gross Profit / Total Revenue. Indicates the business’s efficiency in producing its products. Shows how well management is controlling cost. High gross profit margin is preferred.

Interest Coverage Ratio

Earnings Before Interest and Taxes / Interest Expense. Shows the number of times a company could make its interest payments with its earnings before interest and taxes. Low interest coverage ratio indicates a large debt burden.

Inventory Turnover Ratio

Cost of Goods Sold / Inventory. Measures how quickly a business sells its inventory and the number of times inventory turns over during the year. Low inventory turnover ratio may indicate that inventory is not selling quickly.

Change in Total Cost / Change in Quantity Sold. Indicates the change in total cost when there is a change in output.

Change in Total Revenue / Change in Quantity Sold. Indicates the change in total revenue when one more unit of output is sold. Helps determine if increased output is worth the additional revenue.

Net Profit Margin Formula

$$\frac{Net\ Income}{Revenue}$$

Operating Income Formula

Gross Profit - Operating Expenses

Operating Profit Margin Formula

$$\frac{Operating\ \Pr ofit}{Total\ Revenue}$$

Present Value of Money Formula

$$\frac{FutureValue}{(1+DiscountRate)^{n\cdot t}}$$ Present value of an investment, given its future value including interest, invested for a specified length of time.

Price-to-Cash Flow Ratio Formula

$$\frac{Current\ Stock\ \Pr ice}{Cash\ Flow\ Per\ Share}$$ Used to compare a business’s market value to its cash flow. Low price-to-cash flow ratio usually indicates that the stock is a good value.

$$\frac{(Current\ Assets-Inventory)}{Current\ Liabilities}$$ Also known as the acid-test ratio. Indicates how much money the business can convert into cash immediately. 1:1 to 2:1 is usually acceptable.

Return on Equity (ROE)

$$\frac{Net\ Income}{Shareholders’\ Equity}$$ Shows how much profit results from each dollar of shareholders’ investments.

Current Assets – Current Liabilities Enables investors to anticipate financial difficulties. Can vary based on industry. Low or negative working capital indicates poor managerial efficiency; can also be an indication of possible bankruptcy.

Expenses that stay the same regardless of the units sold or produced

Accounting Concepts and Ratios Flashcards

Student preview

23 questions

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1.

FLASHCARD QUESTION

Front

Accounting Equation

Back

2.

FLASHCARD QUESTION

Front

Breakeven Point

Back

3.

FLASHCARD QUESTION

Front

Contribution Margin (CM)

Back

4.

FLASHCARD QUESTION

Front

Current Ratio

Back

5.

FLASHCARD QUESTION

Front

Debt to Equity Ratio

Back

6.

FLASHCARD QUESTION

Front

Earnings Per Share (EPS)

Back

Net Earnings / # of Outstanding Shares of Common Stock.

Indicates how much profit goes to each share of common stock.

7.

FLASHCARD QUESTION

Front

Free Cash Flow (FCF)

Back

Cash Flow from Operations – Capital Expenditures. Measures the cash a business can generate after maintaining or expanding its asset base. Allows investment in projects that increase shareholder value.

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