Financial Reporting

Useful Formulas and Equations

A) The conceptual and regulatory framework for financial reporting

Equity = Assets – Liabilities

Net Profit = Revenue – Cost of sales – Other expenses

Closing net assets = Opening net assets + Profits + Capital introduced – Drawings

B) Accounting for transactions in financial statements

Cost of sales = Opening inventory + Purchases – Closing inventory

Annual depreciation (Straight line method) = (Cost – Scrap value) / Useful life

Net book value = Cost – Accumulated depreciation

Gain / (Loss) on disposal = Disposal proceeds – Net book value

Depreciation of a re-valued asset = (Re-valued amount – Scrap value) / Remaining useful life

Tax exclusive price = (Tax inclusive price x 100) / (100 + Tax rate)

Stage of completion (construction contracts) = Contract costs incurred to date / Total estimated
costs

Earnings per share = Net profit (or loss) attributable to equity holders / Weighted average equity
shares outstanding during the period

The rights fraction = Actual cum-rights price / Theoretical ex-rights price

The bonus fraction = Number of shares after bonus issue / Number of shares before bonus issue
C) Analysing and interpreting financial statements

Gross profit margin = (Gross profit / Revenue) x 100

Operating profit margin = (Operating profit / Revenue) x 100

Net profit margin = (Net profit / Revenue) x 100

Return on capital employed = Profit before interest & tax / (Equity + Liabilities) x 100

Return on equity = (Profit after tax / Equity) x 100

Interest cover = Profit before interest & tax / Interest charge

Asset turnover = (Revenue / Total assets) x 100

Return on capital employed = Asset turnover x Operating profit margin

Current ratio = Current assets / Current liabilities

Quick ratio (Acid test) = (Current assets – Inventory) / Current liabilities

Receivable days = (Trade receivables / Revenue) x 365 days

Inventory days = (Inventory / Cost of sales) x 365 days

Payable days = (Trade payables / Purchases) x 365 days

Cash operating cycle = Inventory days + Receivable days – Payable days

Gearing = Debt / Equity x 100

Gearing = Debt / (Debt + Equity) x 100

Working capital = Current assets – Current liabilities

Dividend yield = (Dividend per share / Market price) x 100

Dividend cover = Earnings per share / Dividend per share

Price earnings (PE) ratio = Market price / Earnings per share

Earnings yield = Earnings per share / Market price per share x 100
D) Preparation of financial statements

Increase / decrease in cash flow = Cash from operating activities +/- Cash from investing
activities +/- Cash from financing activities

Goodwill = Cost of acquisition – (Fair value of net assets x Percentage acquired)

Fair value formula for goodwill = Cost of acquisition + Fair value of NCI at acquisition – Total
net assets

Carrying value of associate = Initial cost +/- Share of post-acquisition profits / losses –
Impairment