“20 Basic Financial

Accounting Formulas”

Abdelsalam Elshourbagy,
CMA®
 Formula No. 1 : The Accounting Equation (or
Balance Sheet equation)

Calculation:
Assets = Liabilities + Owner’s equity (or Stockholders’ equity)

Description:
The fundamental accounting equation, also called
the balance sheet equation, is the foundation for the double-
entry bookkeeping system and the cornerstone of the entire
accounting science. Like any equation each side will always
be equal. In the accounting equation every transaction will
have a debit and credit entry, and the total debits (left side)
will equal the total credits (right side).

Abdelsalam Elshourbagy,
CMA®
 Formula No.2 : Current Assets

Calculation:
Current Assets = Cash & Cash equivalents + Accounts Receivable +
Inventory + Prepaid Expenses

Description:
In accounting, a current asset is any asset which can
reasonably be expected to be sold, consumed, or exhausted
through the normal operations of a business within the
current fiscal year or operating cycle or financial year
(whichever period is longer). Typical current assets
include cash, cash equivalents, short-term investments which
in the ordinary activity are mainly related to non-strategic
companies in the process of being sold (usually as a result of
private negotiations), accounts receivable, stock inventory,
supplies, and the portion of prepaid liabilities (sometimes
referred to as prepaid expenses) which will be paid within a
year.

Abdelsalam Elshourbagy,
CMA®
 Formula 3: Net Fixed Assets

Calculation:
Net Fixed Assets = Fixed Assets at historical cost - Accumulated
Depreciation

Description:
Net fixed assets is a valuation metric that measures the net
book value of all fixed assets on the balance sheet at a given
point in time. It is calculated by subtracting the accumulated
depreciation from the historical cost of the assets. The net
fixed asset is the asset’s residual value of the fixed asset. It is
calculated using the total price paid for all fixed assets at the
time of purchase minus the total depreciation amount already
taken since the time assets were purchased.

Abdelsalam Elshourbagy,
CMA®
 Formula 4: Total Assets

Calculation:
Total Assets = Current Assets + Other Assets + Net Fixed Assets

Description:
The concept of total asset falls under the category of financial
statement and reporting. It is the value of all the resources
that the company owns. They are clearly recorded in the
financial statements so that the stakeholders of the company
gets an idea about the actual value of assets in possession of
the business.
Assets are also classified on the balance sheet as either
current assets or long-term assets. A current asset is an asset
that can be liquidated within a year, whereas long-term assets
are those assets that are liquidated in more than a year.

Abdelsalam Elshourbagy,
CMA®
 Formula 5: current Liabilities

Calculation:
Current Liabilities = Accounts Payable + Accrued Expenses +
Current Portion of Debt + Income
Taxes Payable

Description:
Current liabilities are the obligations of the company expected
to get paid within one year and are calculated by adding the
value of trade payables, accrued expenses, notes payable,
short-term loans, prepaid revenues, and the current portion of
the long-term loans. These financial obligations are usually
compensated using the current assets of the company.
Investors and creditors keep a close eye on the net current
liabilities formula to ensure the management is using their
resources efficiently to manage their immediate financial
obligations.

Abdelsalam Elshourbagy,
CMA®
 Formula 6: Shareholder’s Equity

Calculation:
Stockholder’s Equity = Paid-in share capital + Retained earnings +
Accumulated other comprehensive income - Treasury stock

Description:
The stockholder’s equity can be calculated by deducting the
total liabilities from the company’s total assets. In other
words, the Shareholder’s equity formula finds the net value of
a business or the amount that the shareholders can claim if
the company’s assets are liquidated, and its debts are repaid.
As per another method, a company’s stockholder’s equity
formula can be derived by summing up paid-in share capital,
retained earnings, and accumulated other comprehensive
income
and then deducting treasury stock
from the summation.

Abdelsalam Elshourbagy,
CMA®
 Formula 7: Total Liabilities & Equity

Calculation:
Total Liabilities & Equity = Current Liabilities + Long- term Debt +
Stockholders’ Equity

Description:
This is the total obligation plus worth of the entity. In another
way it is how the company’s assets were financed either by
Debt or Equity.

Abdelsalam Elshourbagy,
CMA®
 Formula 8: Cost of Goods sold (COGS)

Calculation:
COGS= beginning inventory balance + purchases in the current
period - ending inventory balance

Description:
COGS represents the expenses directly tied to the production
of goods.
Costs include all costs of purchase, costs of conversion and
other costs that are incurred in bringing the inventories to
their present location and condition. Costs of goods made by
the businesses include material, labour, and allocated
overhead.
The costs of those goods which are not yet sold are deferred
as costs of inventory until the inventory is sold or written
down in value.

Abdelsalam Elshourbagy,
CMA®
 Formula 9: Gross Profit

Calculation:
Gross Profit = Net Sales - Cost of Goods Sold

Description:
Gross profit is the revenue minus the cost of goods sold
(COGS). It measures the income the company makes after
deducting the costs directly linked to making and delivering its
products and services.
Gross profit appears on the company's income statement.

Abdelsalam Elshourbagy,
CMA®
 Formula 10: Operating Expenses (Opex)

Calculation:
Operating Expenses = Sales & Marketing + Research &
Development + General & Administration

Description:
An operating expense is an ongoing cost for running a
product, business, or system. Its counterpart, a capital
expenditure (capex), is the cost of developing or providing
non-consumable parts for the product or system. For
example, the purchase of a photocopier involves capex, and
the annual paper, toner, power and maintenance costs
represents opex.

Abdelsalam Elshourbagy,
CMA®
 Formula 11: Income From Operations

Calculation:
Income From Operations = Gross Profit - Operating Expenses

Description:
Income from operations, also known as operating income, is
the amount of profit a company has after paying for all
expenses related to its core operations. There are different
formulas to calculate income from operations

• Operating income = net income + Interest expense +Taxes

• Operating Income = Total Revenue – Direct costs – Indirect
Costs

Abdelsalam Elshourbagy,
CMA®
 Formula 12: Net Income

Calculation:
Net Income = Income From Operations (EBIT) - Interest Expense -
Income Taxes

Description:
In business and accounting, net income (also total
comprehensive income, net earnings, net profit, bottom line
or sales profit) is an entity's income minus cost of goods sold,
expenses, depreciation and amortization, interest, and taxes
for an accounting period.
It is computed as the residual of all revenues and gains less
all expenses and losses for the period, and has also been
defined as the net increase in shareholders' equity that
results from a company's operations. It is different from gross
income, which only deducts the cost of goods sold from
revenue.

Abdelsalam Elshourbagy,
CMA®
 Formula 13: Retained Earnings

Calculation:
Retained Earnings = Beginning Retained Earnings + Net Income
(Loss) during period – dividend Paid during Period

Description:
The retained earnings (also known as Earned Surplus,
Retained Capital, accumulated Earnings) of a corporation is
the accumulated net income of the corporation that is
retained by the corporation at a particular point of time, such
as at the end of the reporting period. At the end of that period,
the net income (or net loss) at that point is transferred from
the Profit and Loss Account to the retained earnings account.
If the balance of the retained earnings account is negative it
may be called accumulated losses, retained losses or
accumulated deficit.

Abdelsalam Elshourbagy,
CMA®
 Formula 14: Net Cash Flow

Calculation:
Net Cash Flow = Beginning Cash Balance +(-) Operating cashflow
+(-) Investing Cashflow +(-) Financing Cashflow

Description:
Net cash flow is a measure of the difference between the
cash inflow and the cash outflow of a business. It indicates
the amount of cash generated, whether it’s positive or
negative. Net cash flow can be calculated by subtracting cash
payments from cash receipts, or by adding cash from
operating, investing, and financing activities. The basic net
cash flow formula is:
Net cash flow = cash inflows - cash outflows.

Abdelsalam Elshourbagy,
CMA®
 Formula 15: Depreciable Base

Calculation:
Depreciable Base = Acquisition Cost of Asset – Salvage value of
Asset

Description:
Depreciation basis is the amount of a fixed asset's cost that
can be depreciated over time. This amount is the acquisition
cost of an asset, minus its estimated salvage value at the end
of its useful life. Acquisition cost is the purchase price of an
asset, plus the cost incurred to put the asset into service.
Many organizations plan to use an asset and then scrap it. If
so, they assume that there will be no salvage value, in which
case the depreciation basis of an asset is the same as its
cost. The use of no salvage value in the derivation of
depreciation basis is the standard approach, since it reduces
the complexity of the depreciation calculation.

Abdelsalam Elshourbagy,
CMA®
 Formula 16: Operation Cash flow

Calculation:
The Direct method is as follows:
Operating Cash Flow = Cash Receipts from Sales,
Interest & Dividends – Cash Payments to Suppliers,
expenses, Interests & Taxes

The Indirect method is as follows:

Operating Cash Flow = Net Income (+/-) Working
Capital + Non-Cash Expenses

Description:
It is also known as cash flow from operations.
The Operating Cash Flow Formula signifies the cash flow
generated from the core operating activities of the business
after deducting the operating expenses. It helps in analysing
how strong and sustainable is the business model of the
company.

Abdelsalam Elshourbagy,
CMA®
 Formula 17: Investing Cash flow

Calculation:
Cash Flow from Investing Activities = Purchase/Sale
of Long-Term Assets (Capex) + Purchase/Sales of other
businesses (M&A) + Purchase/Sale of Marketable
Securities.

Description:
Cash flow from investing activities refers to cash inflow and
outflow of cash from investing in assets (including
intangibles), purchasing of assets like property, plant and
equipment, shares, debt, and from sale proceeds of assets or
disposal of shares/debt or redemption of investments like a
collection from loans advanced or debt issued.

Abdelsalam Elshourbagy,
CMA®
 Formula 18: Financing Cash flow

Calculation:
Cash Flow from Financing Activities =
Issue/Repurchase of Equity +
Issue/ Repurchase of Debt +
Dividend Payments & other items.

Description:
Cash Flow from Financing Activities is the net amount of
funding a company generates in a given time period. Finance
activities include the issuance and repayment of equity,
payment of dividends, issuance and repayment of debt, and
capital lease obligations. Companies that require capital will
raise money by issuing debt or equity, and this will be
reflected in the cash flow statement.

Abdelsalam Elshourbagy,
CMA®
 Formula 19: Net Working Capital

Calculation:
Net Working Capital = Current Assets – Current
Liabilities

Description:
The working capital formula tells us the short-term liquid
assets available after short-term liabilities have been paid off.
It is a measure of a company’s short-term liquidity and is
important for performing financial analysis, financial modeling,
and managing cash flow.

Abdelsalam Elshourbagy,
CMA®
 Formula 20: Straight Line Depreciation

Calculation:
Annual Depreciation = (Cost of Asset – Salvage Value) /
useful Life of the Asset

Description:
Straight line depreciation is a method of calculating the
depreciation expense of an asset over its useful life. The
formula for straight line depreciation is:(Cost of the asset -
salvage value) / useful life of the asset = annual depreciation.
The formula subtracts the estimated salvage value of the
asset from its cost, and then divides the result by the
estimated useful life of the asset. This gives the same amount
of depreciation each year.

Abdelsalam Elshourbagy,
CMA®
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