# Financials Weight on the exam = 20% Number of formulas = 64   ## Formulas

• Fundamental accounting equation
• Expanded accounting equation
• Income statement equation
• Basic EPS
• Diluted EPS
• Dilution test
• Treasury stock method
• Receivables turnover
• Days of sales outstanding
• Inventory turnover
• Days of inventories on hand
• Payables turnover
• Number of days of payables
• Total assets turnover
• Fixed assets turnover
• Working capital turnover
• Current ratio
• Quick ratio
• Cash ratio
• Defensive interval
• Cash convertion cycle
• Debt-to-equity
• Debt-to-capital
• Debt-to-assets
• Financial leverage
• Interest coverage
• Fixed charge coverage
• Net profit margin
• Gross profit margin
• Operating profit margin
• Pretax margin
• Return on assets
• Operating return on assets
• Return on total capital
• Return on equity
• Return on common equity
• Cash flow-to-revenue
• Cash return-on-assets
• Cash return-on-equity
• Cash flow per share
• Debt coverage
• Interest coverage
• Reinvestment
• Debt payment
• Dividend payment
• Investing and financing
• Free cash flow to the firm
• Free cash flow to equity
• DuPont equition
• Extended DuPont equition
• CV of sales
• CV of operating income
• CV of net income
• Ending inventory
• Current cost of inventory (FIFO)
• Cost of goods sold (FIFO)
• Straight-line depreciation
• Double-declining balance depreciation
• Average age in years
• Average age as a percentage
• Average depreciable life
• Remaining useful life
• Income tax expense
• Interest expense
•

#### Fundamental accounting equation

Fundamental accounting equation is a main equation of the balance sheet A - assets

Liab - liabilities

Eq - equity

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#### Expanded accounting equation

Fundamental accounting equation is a main equation of the balance sheet. Expanded equation shows the components of equity. A - assets

Liab - liabilities

CC - contributed capital

REb - retained earnings at the beginning of the period

Rev - revenue for the period

Exp - expenses for the period

Div - dividends for the period

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#### Income statement equation

Income statement equation is a main equation of the income statement NI - net income

Rev - revenue

Exp - expenditures

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#### Basic EPS

Basic EPS (earnings per share) show investor how much of the company's profit belongs to each share of stock. It is widely used for P/E valuation ratio calculation. Basic EPS does not take into account the effect of dilutive securities. EPSb - Basic EPS (earnings per share)

NI - net income

Divp - preferred stocks dividends

ComShwa - weighted average number of common shares outstanding

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#### Diluted EPS

Diluted EPS considers the effect of all potentially dilutive securities. Therefore we add all expenses associated with delutive securities in numeriator and add all potential common shares created from conversion of delutive securities in denominator. EPSd - Duiluted EPS (earnings per share)

NI - net income

Divp - preferred stocks dividends

Divcp - convertible preferred stocks' dividends

Icd - interest expense on convertible debt

t - profit tax rate

ComShwa - weighted average number of common shares outstanding

Shconv pref - number of shares created after the convertion of convertible preferred stocks

Shconv debt - number of shares created after the convertion of convertible debt

Shopt - number of shares issuable from stock options

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#### Dilution test

Delution test is used to determine whether the security is potentially dilutive. If calculated test result is less than basic EPS that the security is dilutive. Test - the value of the test which should be compared with Basic EPS

Expdil sec - expenses associated with dilutive security (for example: interest on convertible debt, preferred stocks dividends on convertible preferred stocks

ComShconv - number of common shares created from the convertion of potentially dilutive security

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#### Treasury stock method

Treasury stock method assumes that the proceeds that a company receives from an option exercise are used to repurchase common shares in the market at the average price over the reporting period. Shn - new shares

Pav - average market price

Pex - exercise price

Shopt - number of shares covered by options or warrants

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#### Receivables turnover RecTurn - receivables turnover

Sales - annual sales

Recav - average receivables

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#### Days of sales outstanding

Days of sales outstanding or number of days of receivables Dayssal - days of sales outstanding

365 - number of days in a year

RecTurn - receivables turnover

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#### Inventories turnover InvTurn - inventories turnover

COGS - cost of goods sold

Invav - average inventory

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#### Days of inventory on hand

Days of inventory on hand or number of days of inventory Daysinv - days of inventory on hand

365 - number of days in a year

InvTurn - inventory turnover

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#### Payables turnover PayTurn - payables turnover

Purch - purchases

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#### Number of days of payables Dayspay - number of days of payables

365 - number of days in a year

PayTurn - payables turnover

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#### Total assets turnover TATurn - total assets turnover

Rev - revenue

TAav - average total assets

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#### Fixed assets turnover FATurn - fixed assets turnover

Rev - revenue

NetFAav - average net fixed assets

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#### Working capital turnover WCTurn - working capital turnover

Rev - revenue

WCav - average working capital

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#### Current ratio

Current ratio - a measure of a company's ability to satisfy its current liabilities with its current assets. CR - current ratio

CA - current assets

CL - current liabilities

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#### Quick ratio

Quick ratio - a measure of a company's ability to satisfy current liabilities with its most liquid assets QR - quick ratio

CA - current assets

Inv - inventories

CL - current liabilities

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#### Cash ratio

Cash ratio - a measure of a company's ability to satisfy current liabilities with the cash and cash equivalents Cash - cash on the balance

CashEq - cash equivalents

InvFunds - invested funds

CL - current liabilities

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#### Defensive interval

Defensive interval - a liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets. Cash - cash on the balance

MktSec - marketable securities

Rec - receivables

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#### Cash conversion cycle

Cash conversion cycle - a financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations. CCC - cash conversion cycle

Dayssaldays sales outstanding

Daysinvdays of inventory on hand

Dayspaynumber of days of payable

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#### Debt-to-equity

Debt-to-equity ratio compares the proportions of a company's assets that are financed through the use of debt relative to equity. DtoE - debt-to-equity

TotDebt - total debt

TotEq - total equity

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#### Debt-to-capital

Debt-to-capital ratio is a measurement of a company's financial leverage. The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. DtoC - debt-to-capital

TotDebt - total debt

TotEq - total equity

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#### Debt-to-assets

Debt-to-assets ratio measures the proportion of assets that is financed with debt DtoAs - debt-to-assets

TotDebt - total debt

TotAs - total assets

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#### Financial leverage

Financial leverage ratio measures the extent to which assets are financed with debt relative to equity TotAsav - average total assets

TotEqav - average total equity

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#### Interest coverage

Interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. EBIT - earnings before interest and taxes

IntPay - interest payments

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#### Fixed charge coverage

Fixed charge coverage ratio measures the number of times interest and lease payments are covered by operating income. FCC - fixed charge coverage

EBIT - earnings before interest and taxes

LP - lease payments

IntPay - interest payments

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#### Net profit margin

Net profit margin indicates how much of each dollar of revenues is left after all costs and expenses. NI - net income

Rev - revenue

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#### Gross profit margin

Gross profit margin indicates how much of every dollar of revenues is left after the cost of goods sold GP - gross profit

Rev - revenue

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#### Operating profit margin

Operating profit margin indicates how much of each dollar of revenues is left after both cost of goods sold and operating expenses are considered. EBIT - earnings before interest and tax (operating income)

Rev - revenue

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#### Pretax margin

Pretax margin indicates how much of each dollar of revenues is left after cost of goods sold, operating expenses and non-operating expenses are considered. EBT - earnings before tax

Rev - revenue

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#### Return on assets

Return on assets indicates the company's net profit generated per dollar invested in total assets. ROA - return on assets

NI - net income

TotAsav - average total assets

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#### Operating return on assets

Operating return on assets indicates the company's operating income generated per dollar invested in total assets. OROA - operating return on assets

EBIT - earnings before interest and tax (operating income)

TotAsav - average total assets

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#### Return on total capital ROTC - return on total capital

EBIT - earnings before interest and tax (operating income)

TotCapav - average total capital (average interest bearing debt + average total equity)

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#### Return on equity

Return on equity indicates the return generated per dollar of shareholders' investment in the company. ROE - return on equity

NI - net income

TotEqav - average total equity

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#### Return on common equity

Return on common equity is equal to the return on equity ratio when no preferred equity is outstanding. ROEcom - return on common equity

NI - net income

Divpref - preferred dividends

ComEqav - average common equity

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#### Cash flow-to-revenue

Cash flow-to-revenue ratio measures the amount of cash generated from operations per one dollar of net revenue. CFtoRev - cash flow-to-revenue

CFO - cash flow from operations

Revnet - net revenue is a revenue after adjustments (e.g., for estimated returns of for amounts unlikely to be collected)

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#### Cash return-on-assets

Cash return on assets indicates the company's operating cash flow generated per dollar invested in total assets. CashROA - cash return-on-assets

CFO - cash flow from operations

TotAsav - average total assets

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#### Cash return-on-equity

Cash return-on-equity indicates operating cash flow generated per dollar of shareholders' investment in the company. CashROE - cash return-on-equity

CFO - cash flow from operations

TotEqav - average total equity

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#### Cash flow per share

Cash flow per share is a measure of a firm's financial strength. CFO - cash flow from operations

Divpref - preferred dividends

ComShwa - weighted average number of common shares

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#### Debt coverage

Debt coverage ratio refers to the amount of cash flow available to meet interest and principle payments on debt DebtCov - debt coverage

CFO - cash flow from operations

TotDebt - total debt

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#### Interest coverage

Interest coverage ratio determines how easily a company can pay interest on outstanding debt. IntCov - interest coverage

CFO - cash flow from operations

Intpaid - interest paid

Taxespaid - taxes paid

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#### Reinvestment

Reinvestment measures how easily a company can finance the purchase of long-term assets with its operating cash flow CFO - cash flow from operations

CashPaidLTA - cash paid for long-term assets

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#### Debt payment

Debt payment ratio measures how easily a company can finance the repayment of long-term debt with its operating cash flow DebtPay - debt payment

CFO - cash flow from operations

CashRepLTD - cash long-term debt repayment

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#### Dividend payment

Dividend payment ratio measures how easily a company can pay dividends with its operating cash flow DivPay - dividend payment

CFO - cash flow from operations

Divpaid - dividends paid

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#### Investing and financing

Investing and financing ratio measures how easily a company can finance its investing and financing activities with its operating cash flow Inv and Fin - investing and financing

CFO - cash flow from operations

CashOutinv and fin - cash outflows from investing and financing activities

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#### Free cash flow to the firm

Free cash flow to the firm (FCFF) is the cash flow available to the company's suppliers of capital after all operating expenses (including taxes) have been paid and necessary investments in working capital and fixed capital have been made. or FCFF - free cash flow to the firm

NCC - noncash charges

CFO - cash flow from operations

IntExp - interest expense

t - tax rate

CapInvfix - fixed capital investment

WCInv - working capital investment

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#### Free cash flow to equity

Free cash flow to equity (FCFE) is the cash flow available to holders of the company's common equity after all operating expenses, interest and principal payments have been paid and necessary investments in working capital and fixed capital have been made. FCFE - free cash flow to equity

CFO - cash flow from operations

CapInvfix - fixed capital investment

Borrownet - net borrowing

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#### DuPont equation

DuPont equation analyses return on equity (ROE) via decomposion of other financial ratios. ROE - return on equity

NI - net income

Rev - revenue or sales

TotAs - total assets

TotEq - total equity

Net income/Revenue = net profit margin

Revenue/Total assets = Assets turnover

Total assets/Total equity = leverage ratio

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#### Extended DuPont equation

DuPont equation analyses return on equity (ROE) via decomposion of other financial ratios. ROE - return on equity

NI - net income

EBT - earnings before tax

EBIT - earnings before interest and tax

Rev - revenue or sales

TotAs - total assets

TotEq - total equity

Net income/EBT = Tax burden

EBT/EBIT = Interest burden

EBIT/Revenue = Operating profit margin

Revenue/Total assets = Assets turnover

Total assets/Total equity = leverage ratio

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#### CV of sales CVsales - coefficient of variation of sales

σsales - standard deviation of sales

Salesmean - mean sales

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#### CV of operating income CVOpInc - coefficient of variation of operating income

σOpInc - standard deviation of operating income

OpIncmean - mean operating income

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#### CV of net income CVNI - coefficient of variation of net income

σNI - standard deviation of net income

NImean - mean net income

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#### Ending inventory Invend - ending inventory

Invbeg - beginning inventory

Purch - purchases

COGS - cost of goods sold

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#### Current cost of inventory (FIFO) CCI(FIFO) - current cost of inventory (FIFO)

LIFOinv - LIFO inventory

LIFOres - LIFO reserve

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#### Current cost of inventory (FIFO) COGSFIFO - cost of goods sold (FIFO)

COGSLIFO - cost of goods sold (LIFO)

endLIFOres - ending LIFO reserve

begLIFOres - beginning LIFO reserve

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#### Straight-line depreciation

Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. SLD - straight-line depreciation

Cost - cost of fixed asset

SV - salvage value (or residual value)

Useful life - useful life of asset in years

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#### Double-declining balance depreciation

Double-declining balance depreciation is a method of accelerated depreciation permitting twice the rate of annual depreciation as the straight-line method. DDB - Double-declining balance depreciation

Cost - cost of fixed asset

AccDepr - accumulated depreciation

Useful life - useful life of asset in years

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#### Average age in years

Average age of an asset in years is determined by dividing accumulated depreciation on annual depreciation expense. Ageav - average age in years

AccDepr - accumulated depreciation

DeprExpan - annual depreciation expense

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#### Average age as a persentage

Average age as a percentage means as a persentage of total estimated useful life of an asset. Ageav - average age as a percentage

AccDepr - accumulated depreciation

EndInvgross - ending gross investment

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#### Average depreciable life

Average depreciable life is an average useful life of an asset. DeprLifeav - average depreciable life

EndInvgross - ending gross investment

DeprExpan - annual depreciation expense

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#### Remaining useful life

Useful life is a period during which an asset or property is expected to be usable for the purpose it was acquired. RUL - remaining useful life

EndInvnet - ending net investment

DeprExpan - annual depreciation expense

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#### Income tax expense IncTaxExp - income tax expense

Taxpay - taxes payable

ΔDTL - change in deferred tax liabilities

ΔDTA - change in deferred tax assets

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#### Interest expense IntExp - interest expense

rm - market rate at issue

LiabValbeg - balance sheet value of the liability at the beginning of the period

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