The Accounting Formula Cheat Sheet

Everything a company owns equals what it owes plus what owners invested. This is the backbone of all accounting.

Equity breaks down into contributions, withdrawals, and profit/loss. This shows how daily operations affect the balance sheet.

The actual revenue after customers return stuff or get discounts.

✓ This is your real revenue — gross sales minus everything customers returned or didn't pay full price for.

What you paid for the stuff you actually sold.

✓ Lower COGS relative to sales = stronger gross margin. Watch for shrinkage or vendor price changes here.

For manufacturers: the cost of products that left the warehouse.

✓ Tracks what it cost to produce the goods that actually left the building — not what you made, what you sold.

Your markup on products before paying for operations.

✓ Your pricing power score. If this is shrinking, either prices are too low or product costs are rising.

Profit from core business operations, before interest and taxes.

✓ Profit from the actual business, before financing decisions. Removes interest and taxes for a cleaner picture.

The bottom line. What's left after everything.

✓ The bottom line. Positive = profit. Negative = loss. This is what flows into retained earnings.

Can you pay your bills this year? Positive = yes. Negative = trouble.

✓ Positive number means you can cover short-term obligations

What an asset is 'worth' on your books after accounting for wear and tear.

✓ Lower than cost = the asset has been partially expensed. When book value hits salvage value, stop depreciating.

The owners' total claim on company assets.

✓ What the owners would theoretically walk away with if all assets were sold and all debts paid.

Cash left over after maintaining and growing the business. This is real money you can use.

✓ This is the real money. Positive FCF means the business generates cash even after investing in itself.

How long your cash is tied up in operations. Shorter = better cash flow.

✓ Shorter = healthier. A negative cycle (like Amazon's) means you collect cash before you pay suppliers.

How much profit you keep from each dollar of sales.

✓ Higher % = more profit per dollar of sales

Your markup percentage before operating costs.

✓ Higher % = stronger pricing power or lower production costs. Compare to industry benchmarks.

How efficiently you use assets to generate profit.

✓ Higher % = assets generate more profit

Return earned on shareholders' investment.

✓ Higher % = better return for shareholders

Profit allocated to each share of common stock.

✓ Higher EPS = more profit per share. Investors watch the trend more than the absolute number.

How much investors pay per $1 of earnings. Higher = growth expectations.

✓ A high P/E signals growth expectations. A low P/E may mean undervalued — or stagnant. Context matters.

Can you pay short-term debts with short-term assets?

✓ 1.5 or higher is generally healthy

Can you pay bills without selling inventory? Stricter test.

✓ 1.0 or higher is generally healthy

The strictest liquidity test—cash only.

✓ The strictest liquidity test. Most healthy companies have a cash ratio below 1 — too high means idle cash.

What percentage of assets are financed by debt?

✓ Lower % = less financial risk (industry-dependent)

For every $1 of equity, how much debt do you have?

✓ Higher ratio = more creditor financing relative to owner financing. More risk, but also more leverage.

How many times over can you cover interest payments?

✓ Higher = easier to cover interest payments

How much are assets leveraged relative to equity? Used in DuPont Analysis.

✓ Used in DuPont. Higher = more assets funded by debt. Amplifies returns — and losses.

How many times you sell through your inventory per year.

✓ Higher = inventory sells faster

Average days inventory sits before selling.

How quickly you collect from customers.

✓ Higher = you collect faster. A falling ratio may signal customers struggling to pay.

Average days to collect payment from customers.

✓ Lower = better. Compare to your credit terms — if DSO > net 30, collections need attention.

How efficiently assets generate sales.

✓ Higher = more productive assets. Capital-intensive industries (utilities, airlines) naturally have lower ratios.

How quickly you pay suppliers.

✓ Lower turnover = you're taking longer to pay. May be smart cash management or a sign of strain.

Average days to pay your suppliers.

✓ Longer = you keep cash longer before paying. Balance this against supplier relationship health.

Same expense every year. Simple and predictable.

✓ Best for: Assets with equal wear over time

More expense early, less later. Accelerated method.

✓ Best for: Tech, vehicles—assets that lose value quickly

Based on actual usage, not time.

✓ Best for: Machinery, vehicles (mileage-based)

Sell old stuff first. When prices rise: Lowest COGS, Highest Net Income.

✓ Better for balance sheet quality — ending inventory reflects current costs. Not always best for taxes.

Sell new stuff first. When prices rise: Highest COGS, Lowest Net Income, Tax advantage.

✓ Can reduce taxable income in inflationary periods. Not allowed under IFRS — US GAAP only.

Average all costs together. Falls between FIFO and LIFO.

✓ Smooths out price fluctuations. Results land between FIFO and LIFO — a middle-ground approach.

How much each unit contributes to covering fixed costs and profit.

Percentage of each sales dollar available for fixed costs and profit.

How many units you must sell to cover all costs (profit = $0).

Revenue needed to cover all costs.

How many units to reach a specific profit goal.

Your cushion—how much sales can drop before you lose money.

Cushion as a percentage of current sales.

✓ Higher % = more cushion before losses begin. Below 20% starts to feel uncomfortable.

How sensitive profit is to sales changes. High leverage = big swings.

✓ A DOL of 3 means a 10% increase in sales = 30% increase in profit. Powerful — and risky in downturns.

The primary costs that go directly into products.

✓ The directly traceable costs. If prime costs are rising, look at supplier pricing and labor contracts.

Costs to convert raw materials into finished products.

✓ Everything it takes to transform raw materials into something sellable, minus the materials themselves.

Everything spent in the factory.

✓ All three cost buckets combined. Compare to revenue to assess manufacturing efficiency.

The total cost of products completed this period.

Used to apply overhead to products before knowing actual costs.

✓ Set before the period using estimates. Allows overhead to be applied during production, not just at year-end.

Overhead charged to products based on actual production.

✓ The overhead assigned to products. Will differ from actual overhead — reconcile at period end.

Did you apply too much or too little overhead?

✓ Favorable means you over-applied (applied more than actual). Typically closed to COGS at year-end.

Did you pay more or less than expected per unit?

✓ Favorable (F): Actual < Standard | Unfavorable (U): Actual > Standard

Did you use more or less than expected?

Difference due to material prices.

Difference due to material usage.

Difference due to labor rates.

Difference due to labor efficiency.

How long to recover your investment.

Average return on investment as a percentage.

✓ Quick and simple, but ignores time value of money. Use alongside NPV for complete capital budgeting picture.

The value of future cash flows in today's dollars.

✓ Accept if NPV > 0

Used to discount future cash flows. r = rate, n = periods.

✓ Multiply any future cash flow by this factor to find its value today. The core tool of discounted cash flow.

How much profit the company has kept over time.

What percentage of profit goes to shareholders.

✓ High ratio = generous dividends but less reinvestment. Growth companies often have a ratio near 0%.

Breaks down ROE into three drivers: profitability, efficiency, and leverage.

✓ Diagnoses why ROE is what it is — is it margins, efficiency, or leverage? Each driver points to different fixes.

Same as above, just showing the component ratios explicitly.

What today's money will be worth in the future.

What future money is worth today.

Basic interest calculation (no compounding).

Calculate the periodic payment on a loan. PV = loan amount, r = periodic interest rate, n = number of payments.

✓ Use this to calculate any fixed-payment loan: mortgage, car loan, equipment financing.