Financial Accounting and Statement Analysis Formulas

Posted on Apr 21, 2026 in Financial and Accounting Management

Liquidity

Current Ratio = Current Assets ÷ Current Liabilities
Quick Ratio = (Cash + A/R + Short-term Investments) ÷ Current Liabilities
Working Capital = Current Assets − Current Liabilities

• High Working Capital: Strong ability to pay short-term debts
• Low Working Capital: Higher liquidity risk
• Impacts operating cash flows on the Statement of Cash Flows

Contingent Liabilities (Warranties)

Record liability and expense if both criteria are met:

1. Probable future loss
2. Amount can be reasonably estimated

Bonds Payable

A bond is a promise to repay principal plus periodic interest.

Advantages

• Stockholders maintain control
• Interest is tax deductible
• Can increase earnings (leverage)
• Flexible financing terms

Disadvantages

• Bankruptcy risk
• Cash flow burden

Shareholders’ Equity

• Common Stock = Par Value × Shares Issued
• APIC = Amount above par value
• Retained Earnings = Beginning RE + Net Income − Dividends
• Treasury Stock = Cumulative repurchases (contra equity)
• Outstanding Shares = Issued Shares − Treasury Shares

Price-to-Book Ratio

Book Value per Share = (Equity − Preferred Equity) ÷ Common Shares
Price-to-Book = Market Price ÷ Book Value per Share

Interpretation

• Low P/B: Undervalued or potential problems
• High P/B: Overvalued or strong growth expectations

Earnings Per Share (EPS)

EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares

Retained Earnings

Ending RE = Beginning RE + Net Income − Dividends

Stock Transactions Table

Stock Split, Dividend, and Repurchase

Stock Split

• Increases shares
• No equity change
• Reduces price per share

Stock Dividend

• Decreases Retained Earnings
• Increases Common Stock + APIC
• No total equity change

Share Repurchase

• Decreases equity
• Decreases shares outstanding
• Increases EPS

Statement of Cash Flows

• Operating Activities
• Investing Activities
• Financing Activities

Indirect Method (Cash from Operations)

Net Income

• + Depreciation / Amortization
• − Gains / + Losses
• − Increase in Current Assets
• + Decrease in Current Assets
• + Increase in Current Liabilities
• − Decrease in Current Liabilities

Working Capital Rules

Cash Flow Structure

Cash Flow Ratios

Operating Cash Flow ÷ Current Liabilities = Liquidity strength
Operating Cash Flow ÷ CAPEX = Ability to reinvest
Free Cash Flow = CFO − CAPEX

Forecasting the Income Statement

Revenue_t = Revenue_t−1 × (1 + growth rate)

Expenses = % of Sales × Revenue

EBT = Revenue − Expenses
Tax = EBT × Tax Rate
Net Income = EBT − Tax

Forecasting the Balance Sheet

• Accounts (A/R, Inventory, etc.) = % of Sales
• Retained Earnings = Beg RE + Net Income − Dividends
• Plug: Cash adjusts to balance the equation

Accounting Equation

Assets = Liabilities + Equity

Cash Flow Identity

Ending Cash − Beginning Cash = Net Change in Cash
Net Change = Operating + Investing + Financing

Key Cash Flow Examples

Operating Example Adjustments

• A/R increase → subtract
• Inventory increase → subtract
• A/P increase → add
• Wages payable increase → add

Investing

• Purchase PPE → negative cash
• Sale PPE → positive cash

Financing

• Issue stock → positive cash
• Debt repayment → negative cash
• Dividends → negative cash

Net Cash Flow from Operating Activities

Indirect Method Adjustment Rules

Statement of Cash Flows Structure

Full Cash Flow Template

Net Cash Flow Summary Formula

Working Capital and Liquidity Ratios

Cash Flow Ratios

Interpretation

Forecasted Income Statement Rules

Forecasting Balance Sheet Rules

Capital Transactions

Shareholder Equity

Price to Book

Stock Effects

Base Inputs (Given)

Net Sales = 33,002
Net Income = 4,927
Dividends = 2,853
CAPEX % = 3.7% of sales
Depreciation = 950 (given)
Amortization = 1,914 (given)

Current Asset Formulas

Accounts Receivable

Formula: 20.4% × Net Sales
= 0.204 × 33,002
= 6,732.41

Note: 20.4% comes from problem assumption; 33,002 comes from forecasted net sales.

Inventory

Formula: 12.3% × Net Sales
= 0.123 × 33,002
= 4,059.25

Note: 12.3% = assumption; 33,002 = net sales.

Other Current Assets

Formula: 7% × Net Sales
= 0.07 × 33,002
= 2,310.14

Tax Assets

Formula: 5% × Net Sales
= 0.05 × 33,002
= 1,650.10

Non-Current Assets

Goodwill

Formula: NO CHANGE
= prior balance = 39,959

Note: Comes directly from prior balance sheet (FY2019).

Other Assets

Formula: 3.3% × Net Sales
= 0.033 × 33,002
= 1,089.07

CAPEX (PP&E Adjustment)

Formula: 3.7% × Net Sales
= 0.037 × 33,002
= 1,221.07

Ending PP&E Logic

Formula: Beginning PP&E + CAPEX − Depreciation
= 4,675 + 1,221.07 − 950
= 4,946.07

Note: 4,675 = prior balance sheet; 950 = given depreciation; CAPEX = calculated above.

Intangibles

Formula: Beginning + CAPEX − Amortization
= 20,560 + 1,221.07 − 1,914
= 19,867.07

Note: 20,560 = prior balance sheet; 1,914 = given amortization.

Current Liabilities

Accounts Payable

Formula: 6.4% × Sales
= 0.064 × 33,002
= 2,112.13

Accrued Compensation (Current)

Formula: 7.2% × Sales
= 0.072 × 33,002
= 2,376.14

Accrued Income Taxes (Current)

Formula: 1.9% × Sales
= 0.019 × 33,002
= 627.04

Other Accrued Expenses

Formula: 9.6% × Sales
= 0.096 × 33,002
= 3,168.19

Non-Current Liabilities

Accrued Compensation & Retirement

Formula: NO CHANGE
= prior balance = 1,651

Accrued Income Taxes (Non-Current)

Formula: 9.3% × Sales
= 0.093 × 33,002
= 3,069.19

Deferred Tax Liabilities

Formula: 4.2% × Sales
= 0.042 × 33,002
= 1,386.08

Other Liabilities

Formula: 2.5% × Sales
= 0.025 × 33,002
= 825.05

Returns and Equity

Retained Earnings

Formula: Beginning RE + Net Income − Dividends − Noncontrolling Interest
= 26,270 + 4,927 − 2,853 − 19
= 28,325

Note: 26,270 = prior RE; 4,927 = NI; 2,853 = dividends; 19 = given noncontrolling interest.

• % of sales ALWAYS uses 33,002
• Any “NO CHANGE” = prior balance sheet number
• CAPEX ALWAYS = % × sales (3.7%)
• Depreciation/amortization ALWAYS GIVEN (not %)
• Retained earnings ALWAYS: NI − dividends ± adjustments
• Plug cash LAST if needed

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