Accounting Formulas by Kalyan

Accounting Basic Formula

Assets = Liabilities + Owners' equity i.e. A = L + OE

Weighted Average

Calculate the average cost of the items in beginning inventory plus purchases made during the year

Weighted Average continued ....

Cost of Goods Available for Sale During the Year / Units Available for Sale During the Year

Current Assets

Current Assets include Cash, Short-term securities, Accounts and Notes receivable, Inventories, Prepaid expenses and Deferred Tax Assets

Current Ratio

Current Ratio = Current Assets / Current Liabilities. Also known as "working capital ratio", "liquidity ratio", "cash asset ratio" and "cash ratio"

Current & Acid-test Ratio difference

Current Ratio includes Merchandise Inventory whereas Acid-test ratio does not include

Units-of-Production Method Example Part 2

Depreciation Expense Per Unit Produced = ($50,000 - $5,000) / 100,000 = $0.45 per unit

Profit Margin

A ratio of profitability calculated as net income divided by revenues (Net Income / Revenues), or net profits divided by sales (Profits / Sales). It measures how much out of every dollar of sales a company actually keeps in earnings.

Bonds Issuance at a Discount or a Premium

Above the market rate is "Premium " Equal to the market rate is "Face amount (at par)" Below the market rate is "Discount"

Acid-test Ratio

Acid-test ratio = Cash(including temporary cash investment) / Current Liabilities It is also called as Quick Ratio

Double Declining-Balance Method

Annual Depreciation Expense = Double the Straight-line Depreciation Rate * Book Value at Beginning of Year

Straight-Line Depreciation Method Example Part 3

Annual Depreciation Expense = $9000

Straight-Line Depreciation Method Example Part 2

Annual Depreciation Expense = ($50000 - $5000) / 5 years

Straight-Line Depreciation Method

Annual Depreciation Expense = (Cost - Estimated Salvage Value) / Estimated Useful Life

Units-of-Production Method Example Part 3

Annual Depreciation Expense = 0.45 * 22,000 = $9,900

Units-of-Production Method Part 1

Annual Depreciation Expense = Depreciation Expense Per Unit Produced * Number of Units Produced during the Year

Cash Equivalents

Cash Equivalents include Commercial paper, U.S. Treasury securities, Bank certificates of deposit and Money market mutual funds

Cash

Cash includes Paper money, Petty cash funds, Undeposited receipts, Checking accounts and Money orders

Units-of-Production Method Part 2

Depreciation Expense Per Unit Produced = (Cost - Estimated Salvage Value) / Estimated Total Units to be Made

Double Declining-Balance Method Example Part 3

Depreciation Expense for 2008 = 40% × $50,000 = $20,000. Depreciation Expense for 2009 = 40% × ($50,000 - $20,000) = $12,000. (($50,000 - $20,000) is the Net Book Value at the beginning of the year

Depreciation

Depreciation is the allocation of the cost of an asset to the years in which the benefits of the asset are expected to be received. It is an application of the matching concept. It is a Contra-asset account. Depreciation expense is recorded in each fiscal period

Straight-Line Depreciation Method continued

Depreciation stops when Net Book Value = Salvage Value

Salvage Value

Disposable (Sell-able) value of the good after the depreciation period

Double Declining-Balance Method Example Part 2

Double the Straight-line Depreciation Rate = 2 × 20% = 40%. 20% is the depreciation percentage in straight-line method

Ending Inventory

Ending Inventory = Beginning Inventory + Merchandise Purchases - Sales

Bonds Payable - Terminology

Face Value is the amount an investor will receive at maturity. Bond Date is the date the bond was issued. Stated Interest Rate is typically an annual rate. Interest Payment Dates are dates when investor is paid interest. Maturity Date is date when face value of bond is repaid to investor.

Return on Investment (DuPont Model)

Margin * Turnover = (Net income / Sales) * (Sales / Average total assets)

Net Book Value

Net Book Value = Cost - Accumulated Depreciation

Units-of-Production Method Part 3

No depreciation expense is recorded if the equipment is idle.

First In First Out (FIFO)

Oldest Costs --> Costs of Goods Sold & Recent Costs --> Ending Inventory

Straight-Line Depreciation Method Example Part 1

On December 31, 2007, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000.

Units-of-Production Method Example Part 1

On December 31, 2007, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000.If 22,000 units were produced in 2008, what is the amount of depreciation expense?

Double Declining-Balance Method Example Part 1

On December 31, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. Calculate the depreciation expense for 2008 and 2009.

Return on Investment (ROI)

ROI = Net Income / Average Total Assets

Last In First Out (LIFO)

Recent Costs --> Costs of Goods Sold & Oldest Costs --> Ending Inventory

Retained Earnings

Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

Return on Equity (ROE)

Return on Equity = Net Income / Average Owner's equity

Inventory Valuation Methods

Specific Identification, Weighted-average, FIFO and LIFO

Depreciation Methods

Straight-line, Units of Production and Double Declining Method (Accelerated Method)

Double Declining-Balance Method Example Part 4

The above table shows the depreciation schedule for Double Declining Method

Specific Identification

When a unit is sold, the specific cost of the unit sold is added to cost of goods sold

Working Capital

Working Capital = Current Assets - Current Liabilities