Formula Sheet for Chapter 2

Expert-Level Formula Sheet for Chapter 2: Financial Statements, Taxes, and Cash Flow

(Wharton & Harvard-Level, Yet Simple & Effective for A+ Mastery)

🔹 1. The Balance Sheet (Snapshot of Financial Position)

📌 Key Formula (Fundamental Accounting Equation):

Total Assets=Total Liabilities+Shareholders’ Equity\text{Total Assets} = \text{Total Liabilities} + \text{Shareholders’ Equity}Total Assets=Total Liabilities+Shareholders’ Equity

📊 Assets (What the Company Owns)

• Current Assets Formula: Current Assets=Cash+Marketable Securities+Accounts Receivable+Inventory+Other Current Assets\text{Current Assets} = \text{Cash} + \text{Marketable Securities} + \text{Accounts Receivable} + \text{Inventory} + \text{Other Current Assets}Current Assets=Cash+Marketable Securities+Accounts Receivable+Inventory+Other Current Assets

• Net Fixed Assets Formula: Net Fixed Assets=Gross Fixed Assets−Accumulated Depreciation\text{Net Fixed Assets} = \text{Gross Fixed Assets} - \text{Accumulated Depreciation}Net Fixed Assets=Gross Fixed Assets−Accumulated Depreciation

• Total Assets Formula: Total Assets=Current Assets+Net Fixed Assets+Intangible Assets\text{Total Assets} = \text{Current Assets} + \text{Net Fixed Assets} + \text{Intangible Assets}Total Assets=Current Assets+Net Fixed Assets+Intangible Assets

📊 Liabilities (What the Company Owes)

• Total Current Liabilities: Total Current Liabilities=Accounts Payable+Notes Payable+Accrued Expenses\text{Total Current Liabilities} = \text{Accounts Payable} + \text{Notes Payable} + \text{Accrued Expenses}Total Current Liabilities=Accounts Payable+Notes Payable+Accrued Expenses

• Total Long-Term Liabilities: Total Long-Term Liabilities=Deferred Taxes+Long-Term Debt\text{Total Long-Term Liabilities} = \text{Deferred Taxes} + \text{Long-Term Debt}Total Long-Term Liabilities=Deferred Taxes+Long-Term Debt

• Total Liabilities Formula: Total Liabilities=Total Current Liabilities+Total Long-Term Liabilities\text{Total Liabilities} = \text{Total Current Liabilities} + \text{Total Long-Term Liabilities}Total Liabilities=Total Current Liabilities+Total Long-Term Liabilities

📊 Shareholders’ Equity (Owners' Claim on Assets)

• Book Value of Equity: Book Value of Equity=Common Stock+Capital Surplus+Retained Earnings−Treasury Stock\text{Book Value of Equity} = \text{Common Stock} + \text{Capital Surplus} + \text{Retained Earnings} - \text{Treasury Stock}Book Value of Equity=Common Stock+Capital Surplus+Retained Earnings−Treasury Stock

• Market Value of Equity (Market Capitalization): Market Value of Equity=Stock Price×Number of Shares Outstanding\text{Market Value of Equity} = \text{Stock Price} \times \text{Number of Shares Outstanding}Market Value of Equity=Stock Price×Number of Shares Outstanding

🔹 2. The Income Statement (Profitability Over Time)

📌 Key Formula:

Net Income=Total Revenue−Total Expenses\text{Net Income} = \text{Total Revenue} - \text{Total Expenses}Net Income=Total Revenue−Total Expenses

📊 Revenue & Expenses Breakdown

• Gross Profit: Gross Profit=Total Revenue−Cost of Goods Sold (COGS)\text{Gross Profit} = \text{Total Revenue} - \text{Cost of Goods Sold (COGS)}Gross Profit=Total Revenue−Cost of Goods Sold (COGS)

• Operating Income (EBIT - Earnings Before Interest & Taxes): EBIT=Gross Profit−Operating Expenses−Depreciation\text{EBIT} = \text{Gross Profit} - \text{Operating Expenses} - \text{Depreciation}EBIT=Gross Profit−Operating Expenses−Depreciation

• Net Income Formula: Net Income=EBIT−Interest Expense−Taxes\text{Net Income} = \text{EBIT} - \text{Interest Expense} - \text{Taxes}Net Income=EBIT−Interest Expense−Taxes

• Earnings Per Share (EPS): EPS=Net IncomeTotal Shares Outstanding\text{EPS} = \frac{\text{Net Income}}{\text{Total Shares Outstanding}}EPS=Total Shares OutstandingNet Income​

🔹 3. The Cash Flow Statement (Real Cash Movement)

📌 Key Formula:

Change in Cash=Cash Flow from Operations+Cash Flow from Investing+Cash Flow from Financing\text{Change in Cash} = \text{Cash Flow from Operations} + \text{Cash Flow from Investing} + \text{Cash Flow from Financing}Change in Cash=Cash Flow from Operations+Cash Flow from Investing+Cash Flow from Financing

📊 Breakdown of Cash Flow Components

• Cash Flow from Operating Activities (CFO): CFO=Net Income+Depreciation+Deferred Taxes−Change in Working Capital\text{CFO} = \text{Net Income} + \text{Depreciation} + \text{Deferred Taxes} - \text{Change in Working Capital}CFO=Net Income+Depreciation+Deferred Taxes−Change in Working Capital

• Change in Working Capital (WC): Change in WC=Change in Current Assets−Change in Current Liabilities\text{Change in WC} = \text{Change in Current Assets} - \text{Change in Current Liabilities}Change in WC=Change in Current Assets−Change in Current Liabilities

• Cash Flow from Investing Activities (CFI): CFI=−Capital Expenditures+Sales of Fixed Assets\text{CFI} = -\text{Capital Expenditures} + \text{Sales of Fixed Assets}CFI=−Capital Expenditures+Sales of Fixed Assets

• Cash Flow from Financing Activities (CFF): CFF=New Debt Issued−Debt Repayment+New Stock Issued−Stock Buybacks−Dividends Paid\text{CFF} = \text{New Debt Issued} - \text{Debt Repayment} + \text{New Stock Issued} - \text{Stock Buybacks} - \text{Dividends Paid}CFF=New Debt Issued−Debt Repayment+New Stock Issued−Stock Buybacks−Dividends Paid

🔹 4. Corporate Taxes (How Much Companies Pay in Taxes)

📌 Key Formula:

Tax Expense=Taxable Income×Tax Rate\text{Tax Expense} = \text{Taxable Income} \times \text{Tax Rate}Tax Expense=Taxable Income×Tax Rate

📊 Tax Breakdown

• Marginal Tax Rate (Tax Rate on the Next Dollar Earned): Marginal Tax Rate=Tax Paid on Last Dollar EarnedLast Dollar Earned\text{Marginal Tax Rate} = \frac{\text{Tax Paid on Last Dollar Earned}}{\text{Last Dollar Earned}}Marginal Tax Rate=Last Dollar EarnedTax Paid on Last Dollar Earned​

• Average (Effective) Tax Rate: Effective Tax Rate=Total Tax PaidTotal Income\text{Effective Tax Rate} = \frac{\text{Total Tax Paid}}{\text{Total Income}}Effective Tax Rate=Total IncomeTotal Tax Paid​

• Corporate Tax Example:

  • Taxable Income = $90,000

  • Tax Brackets Applied:

    • First $50,000 taxed at 15% → $7,500

    • Next $25,000 taxed at 25% → $6,250

    • Last $15,000 taxed at 34% → $5,100

  Total Taxes=7,500+6,250+5,100=18,850\text{Total Taxes} = 7,500 + 6,250 + 5,100 = 18,850Total Taxes=7,500+6,250+5,100=18,850 Effective Tax Rate=18,85090,000=20.94%\text{Effective Tax Rate} = \frac{18,850}{90,000} = 20.94\%Effective Tax Rate=90,00018,850​=20.94%

🔹 5. Market vs. Book Value (Stock Valuation)

📌 Key Concept:

Market Value of Equity=Stock Price×Shares Outstanding\text{Market Value of Equity} = \text{Stock Price} \times \text{Shares Outstanding}Market Value of Equity=Stock Price×Shares OutstandingBook Value of Equity=Assets−Liabilities\text{Book Value of Equity} = \text{Assets} - \text{Liabilities}Book Value of Equity=Assets−Liabilities

💡 Important: Market Value is Forward-Looking, while Book Value is Historical.

📍 Example:

• Company A:

  • Stock Price = $50

  • Shares Outstanding = 1,000,000

  • Market Value of Equity = $50M

  • Book Value of Equity = $30M
    Conclusion: Investors expect future growth because the market value is much higher than book value!

🎯 Summary – What You Must Know for A+

📌 Balance Sheet Key Formula:

Total Assets=Total Liabilities+Shareholders’ Equity\text{Total Assets} = \text{Total Liabilities} + \text{Shareholders’ Equity}Total Assets=Total Liabilities+Shareholders’ Equity

📌 Income Statement Key Formulas:

• Net Income = Revenue - Expenses

• EPS = Net Income ÷ Shares Outstanding

📌 Cash Flow Statement Key Formula:

Change in Cash=CFO+CFI+CFF\text{Change in Cash} = \text{CFO} + \text{CFI} + \text{CFF}Change in Cash=CFO+CFI+CFF

📌 Corporate Tax Key Formulas:

• Effective Tax Rate = Total Taxes ÷ Total Income

• Marginal Tax Rate = Tax on Last Dollar Earned ÷ Last Dollar Earned

📌 Market vs. Book Value Formula:

Market Cap=Stock Price×Shares Outstanding\text{Market Cap} = \text{Stock Price} \times \text{Shares Outstanding}Market Cap=Stock Price×Shares OutstandingBook Value=Total Assets−Total Liabilities\text{Book Value} = \text{Total Assets} - \text{Total Liabilities}Book Value=Total Assets−Total Liabilities