Accounting formulas Unit 3/4

Retern on Assets

(Net profit / avg total assets)*100%

• earns … profit from every dollar of assets controlled by the entity

• a profitability indicator that indicates how effectively a business has used its assets to earn profit

Return on Owner’s Investment

(Net profit / avg capital)*100%

• earns … for every dollar of capital invested

• a profitability indicator that indicates how effectively a business has used the owner’s capital to earn profit

Asset Turnover

Net Sales / Avg total assets (times)

• firm has earned … times the value of its assets as revenue

• an efficiency indicator that indicates how productively a business has used its assets to earn revenue

Debt Ratio

(total liabilities / Total assets) * 100%

• …% of firms assets are financed by liabilities

• a stability indicator that measures the percentage of a firm’s assets that are financed by liabilities

Working capital ratio

current assets / current liabilities :1

• $… of current assets for every $1 of current liabilities.

• a liquidity indicator that measures the ratio of current assets to current liabilities, to assess the firm’s ability to meet its short-term debts

Net Profit Margin

(Net profit / Net sales) * 100%

• …% of net sales is retained as Net profit

• a profitability indicator that indicates expense control by calculating the percentage of Net Sales revenue that is retained as Net Profit

Gross Profit Margin

(Gross profit / Net sales) * 100%

• …% of net sales is retained as Gross profit

• a profitability indicator that measures the average mark-up by calculating the percentage of Net Sales revenue that is retained as Gross Profit

Inventory Turnover

(Avg Inventory / COGS) * 365 days

• on average it takes … days to convert inventory into sales

• 
  

Accounts receivable turnover

(Average AR / net credit sales (incl GST)) * 365 days

• on average, it takes … days for firm to collect cash payments from accounts receivable

Accounts Payable turnover

(Average AP / net credit Purchases (incl GST)) * 365 days

• on average, it takes … days for firm to pay its accounts payable

Quick Asset Ratio

(Current assets (excl inventory and prepaid expenses) / Current Liabilities) :1

• For every $1 of liabilties, the firm has $… of QUICK assets to meet it

• a liquidity indicator that measures the ratio of quick assets to quick liabilities, to assess the firm’s ability to meet its immediate debts

Cash Flow Cover

Net cash flow from operating activities / Avg CL (times)

• Net cash flows from operating activities is able to pay average current liabilties … times

• a liquidity indicator that measures the number of times Net Cash Flows from Operating Activities is able to cover average current liabilities