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Quick Reference To Managerial Accounting

This document provides formulas for 11 common accounting ratios used to analyze the financial health of a business. The ratios are divided into 4 categories: 1) Liquidity ratios measure a business's ability to pay short-term debts, such as the current and quick ratios. 2) Asset management ratios evaluate efficiency in using assets, like asset turnover and inventory turnover. 3) Profitability ratios assess management's ability to generate profits, including return on assets, equity, and sales. 4) Leverage ratios indicate whether too much debt is being used, like debt-to-equity and debt ratios. Accounting ratios are calculated from the income statement and balance sheet to evaluate performance.

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Amilius San Gregorio
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2K views

Quick Reference To Managerial Accounting

This document provides formulas for 11 common accounting ratios used to analyze the financial health of a business. The ratios are divided into 4 categories: 1) Liquidity ratios measure a business's ability to pay short-term debts, such as the current and quick ratios. 2) Asset management ratios evaluate efficiency in using assets, like asset turnover and inventory turnover. 3) Profitability ratios assess management's ability to generate profits, including return on assets, equity, and sales. 4) Leverage ratios indicate whether too much debt is being used, like debt-to-equity and debt ratios. Accounting ratios are calculated from the income statement and balance sheet to evaluate performance.

Uploaded by

Amilius San Gregorio
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Quick Reference to Managerial Accounting Formulas

Basic Income Statement


Sales
- Variable Cost
Contribution Margin
- Fixed Cost
Profit

Sales Revenue = Variable Costs + Fixed Costs + Profit


 S = VC + FC + P
 To breakeven (P = 0): S = VC + FC
Contribution Margin
 CM = S - VC
 CM - FC = P
 CM ratio = CM per unit / Sales Price per unit
Breakeven and Profit Planning
 Breakeven in units = FC / CM per unit
 Breakeven in dollars = FC / CM ratio
 Breakeven in dollars = Breakeven in units * Sales Price per unit
 Target Profit point in units = (FC + P) / CM per unit
 Target Profit point in dollars = (FC + P) / CM ratio
 Target Profit point in dollars = Target Profit point in units * Sales Price per unit
Gross Margin Pricing
 Markup % = (P + S, G & A expenses) / Total Production Costs
 Gross Margin-based Price = Total Production Cost per unit (1 + markup %)
Profit Margin Pricing
 Markup % = P / Total Costs & Expenses
 Profit Margin-based Price = Total Costs & Expenses per unit (1 + markup %)
Return on Assets Pricing
 ROA price = Total Costs & Expenses per unit + X
 X = (Total Costs of Assets Employed / Units to be Produced) * Desired Rate of Return
Target Costing
 Target Cost = Price Quote / (1 + Desired Profit %)
 If Actual Cost > Target Cost = FORGET IT
Make or Buy
 If Relevant Cost of Making < Purchase Price = MAKE IT
 Relevant Cost = Cost that will change as a result of decision
 Relevant Cost = Variable Cost + Fixed Cost that changed
Special Orders
 Selling Price > Relevant Cost = ACCEPT ORDER
 Accept Special Order as long as there is production capacity.
Sales Mix
 Scarce resource and contribution margin determine the most profitable product
 Concentrate on production of highest contribution margin per unit of resource

Unprofitable Segment Decision Analysis


 Contribution Margin > Avoidable Costs = KEEP DEVISION
 Eliminate segment: decrease in contribution margin & avoidable costs; unavoidable costs are not eliminated
Sell Now or Process Further
 Selling Price at split off > (Selling Price after processing - Additional Processing Costs) = SELL NOW
 Selling Price after processing - Selling Price at split off > Additional Processing Costs = PROCESS
Marginal Analysis / Incremental Analysis
 Marginal Revenue > Marginal Cost = PRODUCE MORE
Capital Expenditure Decision
 Accounting Rate of Return = Annual After-Tax NI / Ave. Investment Cost
 Average Investment Cost = (Total Investment + Salvage Value) / 2
 Payback Period = Investment / Annual Net Cash Inflow
 Net Present Value = Present Value of Future Cash Flow - Cost of Investment

Accounting ratios tell the story of financial health


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Accounting ratios are used to analyze your personal or business financial health. It evaluates the three financial statements (Balance Sheet, Profit & Loss (Income)
Statement, and Cash Flow Statement).
There are four groups of accounting ratios.
1. Liquidity Ratios – answer the question, “Can a unit pay its bills?”
2. Asset Management Ratios – answer, “Are our assets being used efficiently?”
3. Profitability Ratios – answer, “How good is management at making a profit?”
4. Leverage Ratios – answer, “Do we have too much debt?”
From the Balance Sheet and Income Statement several ratios are calculated.

Liquidity Ratios
There are two accounting ratios that measure a unit’s liquidity. These equations use the values reported in the Balance Sheet.
The first ratio is called Current Ratio. This ratio answers the question, “Can the current assets pay the current liabilities. “Yes” is the answer if the current ratio is greater
than or equal to 1.0. A value of 2.0 should be the target. This provides some cushion.
Current Ratio = Current Assets / Current Liabilities
Equation 1: Current Ratio
Another liquidity ratio used is called the Quick Ratio. It is a conservative ratio reporting if there is enough cash and receivables to pay the bills due in 12 months.
Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
Equation 2: Quick Ratio
Asset Management Ratios
There are three accounting ratios that measure a unit’s ability to effectively use their assets to produce income. These equations use the values reported in the Income
Statement and Balance Sheet.
The first ratio is Asset Turn Ratio. A measure of how well a unit is using its assets to make sales.
Asset Turn = Net Sales / Total Assets
Equation 3: Asset Turn Ratio
At times one may want to know how long does it take on average to get paid for a product sold? The ratio used to answer that question is called Receivable Days.
Receivable Days = 365(Accounts Receivable) / Net Sales
Equation 4: Receivable Days
The last ratio measures how fast one is using the inventory.
Inventory Turn = Cost of Goods / Inventory
Equation 5: Inventory Turn
Profitability Ratios
How well is management doing at making profits for its owners. There are four accounting ratios that answer this question. The ratios use the values reported in the
Income Statement and Balance Sheet.
The first ratio measures how well management is doing at using the assets to make a profit. This measurement is called Return on Assets (ROA).
ROA = Net Income / Total Assets
Equation 6: Return on Assets
Now lets look at another ratio to determine how well management is using money invested by shareholders. This is ratio is called Return on Equity (ROE) or Return on
Investment (ROI).
ROI = Net Income / Shareholder's Equity
Equation 7: Return on Equity or Return on Investment
Next lets determine the profit margin of a company. Also called Return on Sales (ROS).
ROS = Net Income / Net Sales
Equation 8: Return on Sales "Profit Margin"
The last profitability ratio is Gross Margin, the percentage of profit over the cost of goods.
Gross Margin = (Net Sales - Cost of Goods) / Net Sales
Equation 9: Gross Margin "Gross Profit"
Leverage Ratios
Does a unit operate with too much debt? There are two accounting ratios that answer this question. From the Balance sheet these ratios are calculated.
Does a unity have more debt than equity? Will a company be able to repay a loan out of their equity? This is answered with the Debt-to-Equity Ratio (DTE).
DTE = (Current Debt + Long-Term Debt) / Shareholder's Equity
Equation 10: Debt-To-Equity Ratio
The second ratio compares debt to assets.
Debt Ratio = (Current Debt + Long-Term Debt) / Total Assets
Equation 11: Debt Ratio

In summary, you now know the 11 basic accounting ratios that compares a unit’s performance. Measuring how well they produce more with less. Liquidity and
leverage ratios report the future survival of a company. Investors determine future success with profitability ratios. With this knowledge you can now determine the
financial health of a person or business.

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