Accounting Formulae.docx

ACCOUNTING FORMULAE Reducing Balance Depreciation - The annual charge is based on the formula: Gearing (Leverage) – Relationship between shareholder funding (owner’s equity) and loans Or Return On Equity In years of healthy profits, shareholders receive a better return on their money in a highly geared company In years when profits dip, the heavy burden of debt causes highly geared company’s shareholders to suffer more Liquidity Ratios – are designed to measure the companies’ ability to meet its maturing short-term obligations and ensuring the short run survival of the company. Current Ratio (2 times current ratio indicates a sound financial position) The Quick Ratio (Acid Test) removes inventory from the calculation (1 times quick ratio indicates a sound financial position) Profitability Ratios – designed to measure management’s overall effectiveness: does the company control expenses and earn a reasonable return on funds committed? Gross Profit Margin Profit Margin Return On Total Assets Return On Specific Assets Return On Capital Employed (Total Assets – Current Liabilities) Return on Owners Equity Capital Structure Ratios A – Those that examine the asset structure of the company B – Those that analyse the financing arrangements of the company’s total assets, in particular the extent to which the company relies on debt. Fixed To Current Asset Ratio Debt Ratio Debt/Equity Ratio Time Interest Earned Efficiency Ratios – give an indication of how effectively a company has been managing its assets. Inventory Turnover Average Collection Period Fixed Assets Turnover Stock Market Ratios Earnings Per Share Price/Earnings Ratio (PE) Dividend Yield Dividend Cover Break Even Analysis Pre-Determined Overhead Rate Material Efficiency Variance = [Standard Quantity – Actual Quantity] x [Standard Price Per Unit] = (SQ-AQ)SP Material Price Variance = [Standard Price Per Unit – Actual Price Per Unit] x [Actual Quantity Used] = (SP-AP)AQ Labour Efficiency Variance = [Standard Time Allowed – Actual Time Taken] x [Standard Rate Per Hour] = (ST-AT)SR Labour Rate Variance = [Standard Rate Per Hour – Actual Rate Per Hour] x [Actual Time Taken] = (SR-AR)AT Variable Overhead Variance Standard Cost of Variable Overheads Less Actual Cost Of Variable Overhead i.e. Units Produced x Standard Time Allowed x Standard Cost Per Hour Less Actual Costs Of Variable Overheads Variable Overhead Efficiency Variance = Number of Units x Standard Time Allowed x Standard Cost Per Hour (Standard cost of flexible budget time allowance for units produced) Less Actual Time Taken x Standard Cost Per Hour (Standard cost of actual time taken for units produced) = (6000 × 2 × £1.50) ? (11 100 × £1.50) = £18 000 ? £16 650 = £1350 favourable Variable Overhead Spending Variance = Actual Time Taken x Standard Cost Per Hour (Standard cost of actual time taken for units produced ) Less Actual costs incurred = 11 100 × £1.50 = £16 650 ? £17 200 = £550 adverse Fixed Overhead Spending Variance Budgeted Amount Less Actual Amount Fixed Overhead Denominator Variance Budgeted Amount Less Amount Applied To Units Produced (i.e. Units Produced x Standard Time Allowed x Standard Cost) Sales Contribution Variance Contrib Variance = difference in contribution margin per unit x Actual Sales in Units Sales Volume Variance Volume Variance = (Actual Sales Less Budgeted Sales) x Budgeted Contrib Margin Per Unit Sales Quantity Variance Quantity Variance = (Actual Sales Less Budgeted Sales) x Budgeted Weighted Average Contrib Margin Per Unit Sales Mix Variance Sales Mix Variance = (Actual Sales Less Budgeted Sales) x (Budgeted Contrib Margin Per Unit Less Budgeted Weighted Average Contrib Margin Per Unit) Throughput Ratios A ratio of less than 1 indicates that a product is losing money Method 2: Reducing Balance Depreciation Method 3: Consumption Method Task Two: Determining the Value of Closing Work-in-Progress and Inventories Financing Net Assets Current Ratio Quick Ratio (sometimes called the Acid Test) Gross Profit Margin Profit Margin Return on Total Assets Return on Specific Assets Return on Capital Employed Return on Owner's Equity Fixed to Current Asset Ratio Debt Ratio Times Interest Earned Inventory Turnover Average Collection Period Fixed Assets Turnover Putting it all Together: The Dupon Chart Return Total Assets Defined as Profit/Sales x 100 Sales/Investment in total assets Multiply one by the other Profit/Total assets x 100 = ROTA Earnings per Share (EPS) Price/Earnings Ratio (PE) Dividend Yield Dividend Cover Profit from Different Cost Structures The Equation Method The Contribution Margin Method The Contribution Margin Ratio Method (or Profit/Volume Ratio) Overheads: Manufacturing and Non-Manufacturing The Anatomy of Variances: Material and Labour Variable and Fixed Overhead Analysis Sales Variances Concept of Present Value Appendix 15.2: The Calculation of the Internal Rate of Return Throughput Accounting