ACCOUNTING AND FINANCE FOR BUSINESS KEY FORMULAS

STATEMENT OF
FINANCIAL
POSITION
Balance Sheet
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐸𝑞𝑢𝑖𝑡𝑦
Equation

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

Quick Ratio 𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
Leverage Ratio 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦

Net Debt to 𝐷𝑒𝑏𝑡 − 𝐶𝑎𝑠ℎ & 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠

𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
Equity Ratio 𝐸𝑞𝑢𝑖𝑡𝑦
STATEMENT OF
FINANCIAL
PERFORMANCE
Income
Statement 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Equation

Income 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 + 𝐺𝑎𝑖𝑛𝑠

Gross Profit 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

Margin 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥

EBIT Margin 𝐸𝐵𝐼𝑇 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Net Profit 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡

Margin 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Return on 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 =
Equity 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦

𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Efficiency Ratio 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡𝑠

DuPont Formula 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 × 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒

EQUITY
FUNDING
Market
𝑀𝑘𝑡 𝐶𝑎𝑝 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝐿𝑎𝑠𝑡 𝑃𝑟𝑖𝑐𝑒
Capitalisation
ACCOUNTING AND FINANCE FOR BUSINESS KEY FORMULAS

Price Earnings 𝐿𝑎𝑠𝑡 𝑃𝑟𝑖𝑐𝑒

𝑃𝐸𝑅 =
Ratio 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Dividend Yield 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝐿𝑎𝑠𝑡 𝑃𝑟𝑖𝑐𝑒

Holding Period 𝑃𝑒𝑟𝑖𝑜𝑑 𝐸𝑛𝑑 𝑃𝑟𝑖𝑐𝑒 + 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 − 𝑃𝑒𝑟𝑖𝑜𝑑 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒

𝐻𝑃𝑅 =
Return 𝑃𝑒𝑟𝑖𝑜𝑑 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
DEBT FUNDING
𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠𝑡
2 𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒
Bond Valuation 𝑉𝑎𝑙𝑢𝑒 = ∑ ( 𝑛×𝑚 ) +
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 𝑛×𝑚
𝑡=1 (1 + ) (1 + )
𝑚 𝑚
RISK AND
RETURN
∑𝑛𝑖=1 𝑉𝑎𝑙𝑢𝑒𝑖
Mean 𝑀𝑒𝑎𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒𝑠𝑖

Standard ∑𝑛 (𝑆𝑎𝑚𝑝𝑙𝑒 𝑉𝑎𝑙𝑢𝑒𝑖 − 𝑀𝑒𝑎𝑛 𝑉𝑎𝑙𝑢𝑒 )2

Deviation 𝑆𝐷 = √ 𝑖=1
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒𝑠𝑖 𝑖𝑛 𝑠𝑎𝑚𝑝𝑙𝑒 − 1
Expected ∑𝑛𝑖=1 𝐻𝑃𝑅𝑖
Return 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐻𝑃𝑅𝑖 𝑖𝑛 𝑠𝑎𝑚𝑝𝑙𝑒
(historical)
Expected 𝑛

Return 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = ∑ 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛𝑖 × 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑖

(probabilistic) 𝑖=1

Expected
𝐶𝐴𝑃𝑀 = 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒 + (𝐵𝑒𝑡𝑎 × 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚)
Return (CAPM)

𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑅,𝑀
Beta 𝐵𝑒𝑡𝑎 =
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑀
TIME VALUE OF
MONEY
Future Value
(simple 𝐹𝑉 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 + (𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 × 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 × 𝑃𝑒𝑟𝑖𝑜𝑑𝑠)
interest)
Future Value
(compound 𝐹𝑉 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 × (1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒)𝑃𝑒𝑟𝑖𝑜𝑑𝑠
interest)
Future Value 𝑛

(Cash Flow 𝐹𝑉 = ∑ 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡 × (1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒)𝑛−𝑡

Series) 𝑡=1
Present Value 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒
(compound 𝑃𝑉 =
(1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒)𝑃𝑒𝑟𝑖𝑜𝑑𝑠
interest)
Present Value 𝑛
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡
(Cash Flow 𝑃𝑉 = ∑
(1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒)𝑡
Series) 𝑡=1
ACCOUNTING AND FINANCE FOR BUSINESS KEY FORMULAS

Effective Annual 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝐴𝑛𝑛𝑢𝑚

Rate 𝐸𝐴𝑅 = (1 + ) −1
𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝐴𝑛𝑛𝑢𝑚
INVESTMENT
DECISION
𝐹𝑟𝑒𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
Free Cash Flow = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
+ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒
𝐷𝑒𝑏𝑡
Weighted 𝑊𝐴𝐶𝐶 = (𝐶𝑜𝑠𝑡𝐷𝑒𝑏𝑡 × (1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) × )
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦
Average Cost of 𝐸𝑞𝑢𝑖𝑡𝑦
Capital + (𝐶𝑜𝑠𝑡𝐸𝑞𝑢𝑖𝑡𝑦 × )
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦
𝑛
Net Present 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡
𝑁𝑃𝑉 = ∑ ( ) − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Value (1 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)𝑡
𝑡=1
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡
Profitability ∑𝑛𝑡=1 ( )
(1 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)𝑡
Index 𝑃𝐼 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
MANAGEMENT
DECISION
Contribution
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
Margin

Net Income 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = (𝑉𝑜𝑙𝑢𝑚𝑒 × 𝑈𝑛𝑖𝑡 𝑃𝑟𝑖𝑐𝑒) − (𝑉𝑜𝑙𝑢𝑚𝑒 × 𝑈𝑛𝑖𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡)
(Pre Tax) − 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

Break Even 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑉𝑜𝑙𝑢𝑚𝑒 =
Sales Volume 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡