CORPORATE ACCOUNTING & FINANCIAL MANAGEMENT

FORMULA SHEET
CS EXECUTIVE NEW SYLLABUS
FINANCIAL STATEMENT ANALYSIS (RATIO ANALYSIS)
LIQUIDITY RATIOS
CURRENT Current Assets
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐑𝐚𝐭𝐢𝐨:
RATIO Current liabilities

Current assets include cash, current investments, Trade

Receivables, inventories (stocks), Short Term loans and
advances, and prepaid expenses.

Current Liabilities include Trade Payables, Outstanding

Expenses, Bank Overdraft, Short Term Loans & Advances.

ACID TEST Current Assets − Inventories

RATIO/ Current liabilities
QUICK
RATIO/
LIQUID
RATIO
CASH RATIO Cash and bank balances + Current investments
Current liabilities

LEVERAGE / SOLVENCY RATIOS

DEBT Debt-Equity Ratio = Long Term Debts / Shareholders’
EQUITY Funds
RATIO
where:
Shareholders’ Funds (Equity) = Share capital + Reserves
and Surplus + Money received against share warrants +
Share application money pending allotment

Share Capital = Equity share capital + Preference share

capital

or
Working Capital = Current Assets – Current Liabilities
 DEBT TO Debt to Capital Employed Ratio = Long-term Debt/Capital
CAPITAL Employed (or Net Assets)
EMPLOYED
RATIO Capital employed is equal to the long-term debt +
shareholders’ funds.

INTEREST Profit before interest and taxes

COVERAGE Interest on Long term debts
RATIO
FIXED Profit before interest and taxes + Depreciation
CHARGES Repayment of loan Interest + (1 – Tax rate)
COVERAGE
RATIO
DEBT Profit after tax + Depreciation + Other non − Interest on term loan + L
SERVICE Interest + Lease rentals + Repayment of term loan
COVERAGE
RATIO
TURNOVER RATIOS
INVENTORY Cost of goods sold
TURNOVER Average inventory

COGS = Opening Stock + Net Purchases – Closing Stock

Average Inventory = (Opening Stock + Closing Stock) / 2

DEBTORS Net credit sales

TURNOVER Average sundry debtors

Net Credit Sales = Total Sales – Cash Sales

Average Sundry Debtors = (Opening + Closing) /2

FIXED ASSET Net sales

TURNOVER Average net fixed assets

TOTAL Net sales

ASSET Average total assets
TURNOVER
 PROFITABILITY RAITOS (%)
GROSS Gross profit
PROFIT × 100
Net sales
MARGIN
Gross Profit = Net Sales – COGS
Net Sales = Gross Sales – Sales return

EBITDA Earnings before interest, taxes, depreciation,and amortisation

MARGIN Net sales
× 100

NET PROFIT Net profit x 100

MARGIN Net sales

EARNING Earning power =

Profit before interest and tax
× 100
POWER Average total assets

RETURN ON Profit before interest and tax

CAPITAL
ROCE = × 100
Average total assets
EMPLOYED
RETURN ON Equity earnings
× 100
Average equity
EQUITY

TIME VALUE OF MONEY

PRESENT VALUE OF PV = Future Value
SINGLE CASH (1+i)t
FLOW
FUTURE VALUE OF FVt = PV * (1+i)t
SINGLE CASH
FLOW
FUTURE VALUE OF FVA = R (1+ i)t – 1
ANNUITY i

PRESENT VALUE OF PVA = R (1 + i)t – 1

ANNUITY i ( 1+i)t

PRESENT VALUE OF R
PERPETUITY i

WITH GROWTH:
R
 i-g

CAPITAL BUDGETING
PACKBACK PERIOD UNIFORM CASH FLOW:
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝑎𝑦 𝐵𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠

AVERAGE RATE OF 𝐴𝑅𝑅 =

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
×100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
RETURN
NET PRESENT VALUE NPV = Sum of Discounted Cash Inflows –
Discounted Cash Outflows

PROFITABILITY 𝑃𝑉 𝑜𝑓 𝐹𝑢𝑡𝑢𝑟𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠

𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 =
INDEX 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

CAPITAL STRUCTURE
CAPITAL EBIT
Value of Firm = Ko
STRUCTURE
THEORIES Total Value of Firm = Value of Debt + Market
( NI & NOI ) Value of Equity
EBIT−Interest
Value of Equity = Ke

OVERALL COST OF D E
Ko = K d × + Ke ×
CAPITAL (WACC) (D + E) (D + E)

MM APPROACH EBIT EBIT

Vl = Vu = =
K ol K ou

OPERATING Contribution
Operating Leverage =
LEVERAGE Operating Profit (EBIT)
% change in EBIT
Degree of OL = % Change in Sales

FINANCIAL Operating Profit (EBIT)

Financial Leverage =
LEVERAGE Profit Before Tax
 % change in EPS
Degree of FL =
% Change in EBIT

COMBINED Contribution EBIT Contribution

DCL = DOL × DFL = × =
LEVERAGE EBIT PBT PBT
% change in EPS
Degree of CL = % Change in Sales

WOKRING CAPITAL CA
Working Capital Leverage =
LEVERAGE TA + ∆ CA

FINANCIAL BREAK- 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐹𝐵𝑃 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 +
EVEN POINT 1−𝑡

INDIFFERENCE (𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡)(1 − 𝑡) − 𝑃𝐷(1 + 𝑡)

POINT 𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑃𝑙𝑎𝑛 𝐴

(𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡)(1 − 𝑡) − 𝑃𝐷(1 + 𝑡)

=
𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑃𝑙𝑎𝑛 𝐵

COST OF CAPITAL
IRREDEEMABLE DEBT Kd after taxes = Kd (1 – tax rate)

REDEEMABLE DEBT 𝐼 (1 − 𝑡) + (𝑅𝑉 − 𝑁𝑃)/𝑛

𝐾𝑑 = × 100
𝑅𝑉 + 𝑁𝑃
( )
2

IRREDEEMABLE Kp (cost of pref. share)

PREFERENCE SHARES Annual dividend of preference shares
=
Market price of the preference stock

REDEEMABLE 𝑅𝑉 − 𝑁𝑃
𝑃𝐷 + ( 𝑛 )
PREFERENCE SHARES 𝐾𝑝 = × 100
𝑅𝑉 + 𝑁𝑃
( 2 )

COST OF EQUITY CAPM:

Ke = Rf + β (Rm − Rf )
 DIVIDEND YIELD:
𝑫𝑷𝑺
𝑪𝒆 (𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙) = × 𝟏𝟎𝟎
𝑴𝑷

EARNINGS YIELD:
𝑫𝑷𝑺
𝑪𝒆 (𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙) = × 𝟏𝟎𝟎
𝑴𝑷

DIVIDEND GROWTH:
𝑫𝑷𝑺
𝑪𝒆 (𝑨𝒇𝒕𝒆𝒓 𝒕𝒂𝒙) = ( × 𝟏𝟎𝟎) + 𝑮
𝑴𝑷(𝒐𝒓 𝑵𝑷)

COST OF NEWLY 𝑪𝒆 (𝑨𝒇𝒕𝒆𝒓 − 𝒕𝒂𝒙)

ISSUED EQUITY 𝑬𝑷𝑺
=
SHARES 𝑵𝑷
𝑫𝑷𝑺 𝑫𝑷𝑺
× 𝟏𝟎𝟎 𝒐𝒓 ( × 𝟏𝟎𝟎) 𝒐𝒓 ( × 𝟏𝟎𝟎) + 𝑮
𝑴𝑷 𝑵𝑷

DIVIDEND POLICY
WALTER FORMULA 𝑟
𝐷 + 𝑘 (𝐸 − 𝐷)
𝑃=
𝑘

GORDON FORMULA 𝐸(1 − 𝑏)

𝑃=
𝑘𝑒 − 𝑏𝑟
1
MM MODEL Po = (𝐷1 + 𝑃1)
1+𝑟
DIVIDEND PAYOUT 𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 = ( ) × 100
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

DIVIDEND PAYOUT = 1 - RETENTION

RETENTION RATIO 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑖𝑜 =

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 −𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
× 100
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

RETENTION RATIO = 1 – DIVIDEND PAYOUT

WORKING CAPITAL MANAGEMENT

OPERATING R+W+F+D–C
CYCLE
 R (RAW r
MATERIAL 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑎𝑛𝑑 𝑠𝑡𝑜𝑟𝑒𝑠
=
HOLDING 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑎𝑛𝑑 𝑠𝑡𝑜𝑟𝑒𝑠
PERIOD)
C (CREDITORS 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
c=
PERIOD) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

W (WIP 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘 − 𝑖𝑛 − 𝑝𝑟𝑜𝑔𝑟𝑒𝑠𝑠

w=
PERIOD) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

F (FINISHED 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠

f=
GOODS 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
HOLDING)
D (DEBTORS 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑏𝑜𝑜𝑘 𝑑𝑒𝑏𝑡𝑠
D=
COLLECTION) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦

BAUMOL’S
𝟐𝑨 × 𝑭
CASH 𝑪=√
MANAGEMENT 𝑶
MODEL
where, C = Optimum cash balance
A = Annual (or monthly) cash disbursements
F = Fixed cost per transaction
O = Opportunity cost of holding cash

MILLER ORR 𝟑 𝟑𝒃𝝈 𝟐

MODEL CASH 𝒛 = √
MANAGEMENT 𝟒𝒊

Where, b = fixed cost associated with a security

transaction
𝜎 2 = variance of daily net cash flows
i = interest rate per day on marketable securities.

The optimal value of h is simply 3z.

Upper Limit = Lower Limit + 3z
Return Point = Lower Limit + z
or = Upper Limit – 2z
Average Cash Balance = Lower Limit + z
VARIOUS LEVEL Minimum Stock Level = Re-order Level - (Normal
OF INVENTORY Consumption x Normal re-order Period)
MANAGEMENT
Re-ordering Level = Maximum Consumption x
Maximum Re-order period

Maximum stock level = Re-ordering Level + Re-

ordering Quantity-(Minimum Consumption x
Minimum Re-ordering period)

Average Stock Level = Minimum Stock Level + 1/2 of

re-ordering quantity

OR

Average Stock Level = Minimum Stock Level +

Maximum Stock Level

Danger Level = Average Consumption x Maximum re-

ordering period for emergency purchases

ECONOMIC 𝟐 × 𝑹 × 𝑪𝑷
ORDER 𝑬𝑶𝑸 = √
𝑪𝑯
QUANTITY

Where R = Annual quantity used (in units)

CP = Cost of placing an order / ordering cost per order
CH = Cost of holding one unit/Inventory carrying cost
of one unit / carrying cost of one unit per year

SECURITY ANALYSIS
PRICE EARNING P/E = Stock Price Per Share / Earnings Per Share
RATIO (or)
P/E = Market Capitalization / Total Net Earnings
(or)
Justified P/E = Dividend Payout Ratio / R – G

PRICE TO BOOK 𝑴𝒂𝒓𝒌𝒆𝒕 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑺𝒉𝒂𝒓𝒆

𝑷/𝑩 𝑹𝒂𝒕𝒊𝒐 =
VALUE RATIO 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝑺𝒉𝒂𝒓𝒆
 PRICE TO SALES 𝑴𝑽𝑺
𝑷/𝑺 𝑹𝒂𝒕𝒊𝒐 =
RATIO 𝑺𝑷𝑺

Where:
MVS = Market Value per Share
SPS = Sales per Share

PRICE TO CASH 𝑃𝑟𝑖𝑐𝑒 − 𝑡𝑜 − 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑅𝑎𝑡𝑖𝑜

FLOW RATIO 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
=
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

PRICE TO EARNINGS 𝑃𝑟𝑖𝑐𝑒/𝐸𝑃𝑆

𝑃𝐸𝐺 𝑅𝑎𝑡𝑖𝑜 =
GROWTH RATIO 𝐸𝑃𝑆 𝐺𝑟𝑜𝑤𝑡ℎ

HOLDING PERIOD Holding Period Return = Income + (End of Period

RETURN Value – Initial Value) / Initial Value

Annualized HPR = (HPR + 1)1/n – 1

OPERATIONAL APPROACH TO FINANCIAL DECISION

BASIC Contribution = Sales – Variable Cost
Contribution = Fixed Cost + Profit
Fixed Cost = Contribution – Profit

Selling Price * Selling Quantity = Sales Value

Selling Price = Sales Value / Sales Quantity
Sales Quantity = Sales Value/ Selling price

BREAK EVEN POINT 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡

𝐵𝑟𝑒𝑎𝑘 − 𝐸𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 (𝑢𝑛𝑖𝑡 ) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Fixed cost
Break-Even point(`)=
P/V ratio

or = Break – even units × Selling price p.u.

P/V RATIO 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

𝑃/𝑉 𝑟𝑎𝑡𝑖𝑜 = × 100
𝑆𝑎𝑙𝑒𝑠
 DESIRED SALES 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 (𝑅𝑠. ) =
𝑝/𝑣 𝑟𝑎𝑡𝑖𝑜

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 (𝑈𝑛𝑖𝑡𝑠) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

MARGIN OF SAFETY Margin of Safety = Actual Sales – Break- Even Sales

Or = Proft/ PV ratio

Or = Profit * Selling price p.u / Contribution p.u

Margin of Safety as % of Total Sales = Margin of

Safety / Total Sales *100

CHANGE FORMULA PV Ratio = Change in Profit / Change in sales * 100

VC Ratio = Change in Total Cost / Change in Sales

*100

OTHERS Break Even Sales(% ) + Margin of Safety (% ) = 100%

BES(% ) = 100% - MOS(% )
MOS(% ) = 100% - BES (% )

VC% + PV% = 100%

VC% = 100% - PV%
PV% = 100% - VC%