 |
Accounting
Formulas
The
most basic of accounting formulas is:
- Assets = Liabilities + Owners Equity
Using
algebra, we can make the following equations:
- Liabilities = Assets - Owners Equity
- Owners equity = Assets - Liabilities
Ratios
are used for quick analysis of financial reports. There are three main
categories that ratios cover:
- Liquidity
- Profitability
- Debt Management
Liquidity
ratios try to determine if a company has enough cash to pay bills and
remain solvent:
- The current
ratio is:
- Current assets / current liabilities
- The rule of thumb is around a 2 to 1 ratio
- The quick
ratio is:
- (cash + marketable securities + receivables)
/ current liabilities
- The rule of thumb is a ratio of 1 to 1
- The receivable
turnover is:
- Sales / average accounts receivable
- Each industry has their own rule of thumb
- Inventory
turnover:
- Cost of goods sold / average inventory
- Each industry has their own rule of thumb
Profitability
ratios try to determine if the business is earning enough to stay in
business, or if the money invested could earn more elsewhere:
- Profit
margin on sales ratio:
- Net income / sales
- Rule of thumb is 2% to 5%
- Asset
turnover:
- Sales / average total assets
- Measures sales produced compared to asset
investment
- Return
on equity:
- Net income / average owners equity
- Ratio is the percent return on equity invested
Debt
management ratios:
- Debt
to equity ratio:
- Total liabilities / owners equity
- Rule of thumb is 1 to 1
- Total
debt to assets:
- Total debt / total assets
- Lenders like to see low debt ratios
- To have a high debt ratio means the company
is leverage
Basic
Accounting Information:
What is Accounting
Accounting
History
Basic
Accounting Principles
Accrual
Accounting
Accounting
Terms
Accounting
Internal Control
Return to TOP of Page
Return from Accounting Formulas to
Accounting Basics
Visit our Accounting Store
|
|
