Accounting Fundamentals

Cards · 52

Accounting Equation

The foundational principle balancing company resources with claims against them. Formula: Assets = Liabilities + Owner Equity.

Net Income

The total earnings or profit of a business after deducting all expenses from revenue. Formula: Net Income = Total Revenue - Total Expenses.

Gross Profit

The profit an enterprise makes after deducting production costs. Formula: Gross Profit = Net Sales - Cost of Goods Sold (COGS).

Cost of Goods Sold (COGS)

Direct costs attributable to the production of sold goods. Formula: COGS = Beginning Inventory + Purchases - Ending Inventory.

Operating Income (EBIT)

Profit realized from core operations before interest and tax deductions. Formula: Operating Income = Gross Profit - Operating Expenses.

Current Ratio

Liquidity metric measuring the ability to cover short-term obligations. Formula: Current Ratio = Current Assets / Current Liabilities.

Quick Ratio (Acid-Test)

Measures short-term liquidity using only the most liquid assets. Formula: Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

Debt-to-Equity Ratio

Measures the proportion of company financing coming from debt versus equity. Formula: Debt-to-Equity = Total Liabilities / Total Shareholders Equity.

Return on Assets (ROA)

Measures how efficiently a company uses its assets to generate earnings. Formula: ROA = Net Income / Total Assets.

Return on Equity (ROE)

Measures profitability relative to shareholder investments. Formula: ROE = Net Income / Total Shareholders Equity.

Working Capital

Operational liquidity available to a business for day-to-day trading. Formula: Working Capital = Current Assets - Current Liabilities.

Straight-Line Depreciation

Method distributing asset expense evenly over its useful life. Formula: Annual Depreciation = (Cost - Salvage Value) / Useful Life.

Inventory Turnover

Measures how many times inventory is sold and replaced over a period. Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory.

Days Sales of Inventory (DSI)

Average number of days required to turn inventory into sales. Formula: DSI = (Average Inventory / COGS) * 365.

Accounts Receivable Turnover

Measures efficiency in collecting outstanding balances from clients. Formula: AR Turnover = Net Credit Sales / Average Accounts Receivable.

Days Sales Outstanding (DSO)

The average number of days taken to collect payment after a sale. Formula: DSO = (Average Accounts Receivable / Total Credit Sales) * 365.

Gross Profit Margin

Percentage of revenue retained after paying the direct costs of goods. Formula: Gross Margin = (Gross Profit / Total Revenue) * 100.

Operating Margin

The proportion of revenue left over after paying variable operating costs. Formula: Operating Margin = (Operating Income / Revenue) * 100.

Net Profit Margin

Percentage of revenue remaining after all expenses and taxes are settled. Formula: Net Margin = (Net Income / Revenue) * 100.

Earnings Per Share (EPS)

Monetary value of earnings allocated to each outstanding common share. Formula: EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares.

Price-to-Earnings Ratio (P/E)

Valuation ratio comparing current share price to per-share earnings. Formula: P/E Ratio = Market Price per Share / Earnings Per Share.

Times Interest Earned (Interest Coverage)

Indicates how easily a firm can pay interest on its outstanding debt. Formula: Interest Coverage = Operating Income (EBIT) / Interest Expense.

Asset Turnover Ratio

Measures the efficiency of a firm's assets in generating revenue. Formula: Asset Turnover = Total Sales / Average Total Assets.

Retained Earnings

Cumulative net income retained rather than distributed as dividends. Formula: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.

Book Value per Share

Equity available to common shareholders divided by total shares. Formula: BVPS = (Total Stockholders Equity - Preferred Stock) / Total Common Shares.

Free Cash Flow (FCF)

Cash produced by operations after subtracting capital expenditures. Formula: FCF = Cash Flow from Operations - Capital Expenditures.

Accrual Basis Accounting

Accounting method where revenues and expenses are recorded when earned or incurred, regardless of when cash is exchanged.

Cash Basis Accounting

Accounting method recognizing transactions solely when cash is received or disbursed.

Accounts Payable Turnover

Quantifies the rate at which a company pays off its trade suppliers. Formula: AP Turnover = Total Supplier Purchases / Average Accounts Payable.

Days Payable Outstanding (DPO)

Average number of days taken to pay trade bills and invoices. Formula: DPO = (Average Accounts Payable / COGS) * 365.

Cash Conversion Cycle (CCC)

Time taken to convert operational investments into cash flows. Formula: CCC = Days Sales of Inventory + Days Sales Outstanding - Days Payable Outstanding.

Break-Even Point (Units)

Sales volume where revenues equal total costs, resulting in zero profit. Formula: Break-Even = Fixed Costs / (Unit Sales Price - Variable Cost per Unit).

Contribution Margin

Portion of sales revenue that exceeds total variable costs. Formula: Contribution Margin = Total Revenue - Total Variable Costs.

Contribution Margin Ratio

Percentage of each sales dollar available to cover fixed expenses. Formula: CM Ratio = Contribution Margin / Total Sales Revenue.

Double-Declining Balance Depreciation

Accelerated write-off method doubling the straight-line rate. Formula: Annual Depreciation = 2 * (Straight-Line Depreciation Rate) * Book Value at Beginning of Year.

Units-of-Production Depreciation

Depreciation method based on asset usage rather than time elapsed. Formula: Depreciation = [(Cost - Salvage Value) / Total Estimated Units] * Units Produced.

Operating Cash Flow Ratio

Measures coverage of short-term liabilities by operational cash flow. Formula: Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities.

Cash Ratio

Ultra-conservative liquidity metric assessing total cash reserves against debts. Formula: Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities.

Debt Ratio

Proportion of total assets financed through debt obligations. Formula: Debt Ratio = Total Liabilities / Total Assets.

Equity Multiplier

Financial leverage measure reflecting total assets per dollar of equity. Formula: Equity Multiplier = Total Assets / Total Stockholders Equity.

Dividend Payout Ratio

Percentage of net earnings distributed to shareholders via dividends. Formula: Payout Ratio = Total Dividends Paid / Net Income.

Dividend Yield

Dividend income generated per dollar of current share value. Formula: Dividend Yield = Annual Dividend per Share / Current Share Price.

Economic Order Quantity (EOQ)

Ideal order volume minimizing holding and ordering costs. Formula: EOQ = Square Root of [(2 * Demand * Order Cost) / Holding Cost per Unit].

Return on Invested Capital (ROIC)

Assesses profitability allocated over total capital invested. Formula: ROIC = NOPAT / Invested Capital.

Net Operating Profit After Tax (NOPAT)

Potential operating cash earnings excluding debt financing leverage. Formula: NOPAT = Operating Income * (1 - Effective Tax Rate).

Goodwill

Intangible asset arising from acquiring an entity above net fair value. Formula: Goodwill = Purchase Price - Fair Market Value of Net Identifiable Assets.

Allowance for Doubtful Accounts

Contra-asset estimating receivables expected to become uncollectible. Formula: Net Receivables = Gross Accounts Receivable - Allowance for Doubtful Accounts.

Amortization

Systematic allocation of the cost of an intangible asset over its useful lifespan.

Unearned Revenue

Liability recorded when cash is collected prior to delivering the promised goods or services.

Trial Balance

Internal bookkeeping report listing ending debit and credit balances to verify equality in the ledger.

General Ledger

Master record storing all verified accounts and transactions through debits and credits.

Weighted Average Cost of Capital (WACC)

Overall blended cost of enterprise financing across debt and equity. Formula: WACC = (E/V * Re) + (D/V * Rd * (1 - Tax Rate)).