Financial Statement Analysis formula sheet.

Where Costs incurred to date $\div$ estimated total costs = percentage of completion; contract price = total transaction price.

Used when control passes to the customer over time, so revenue follows progress rather than delivery. IFRS and US GAAP share the same five-step model here. Revenue for the year is cumulative revenue to date minus revenue already recognised in earlier years.

Exam tip Exam questions ask for one year's revenue: compute the cumulative figure, then subtract what earlier years already booked, using the latest estimate of total costs.

Lesson: Revenue recognition in practice and what it means for analysis →All Analyzing Income Statements formulas

Where Preferred dividends = dividends on preferred shares for the period; weighted average shares = each block of shares $\times$ months outstanding $\div 12$.

Earnings available to ordinary shareholders per average share in issue. Shares issued or bought back during the year count only for the months they were outstanding, while stock splits and stock dividends are treated as if they happened at the start of the year.

Exam tip Never deduct ordinary (common) dividends, and restate every earlier share block for a split or stock dividend before you weight by time.

Lesson: Basic EPS and the weighted average number of shares →All Analyzing Income Statements formulas

Where $\text{NI}$ = net income, $\text{Pref. div.}$ = preferred dividends, $t$ = tax rate, $\text{WASO}$ = weighted average shares outstanding.

The if-converted method assumes the bonds became shares, so the after-tax interest saved goes back into earnings and the new shares join the denominator. Convertible preferred works the same way: add back its dividends instead of interest. A security is included only if it lowers EPS.

Exam tip Check dilution quickly: if after-tax interest divided by the new shares is above basic EPS, the bond is antidilutive and is left out.

Lesson: Diluted EPS: if-converted, treasury stock and antidilution →All Analyzing Income Statements formulas

Where $N$ = shares under option or warrant, $X$ = exercise price, $\bar{P}$ = average market price for the period, $\text{WASO}$ = weighted average shares outstanding.

Exercise proceeds are assumed to buy back shares at the average market price, so only the net new shares dilute. The numerator does not change. Options dilute only when they are in the money, that is when the average price is above the exercise price.

Exam tip Use the average market price for the period, not the year-end price; options with an exercise price at or above it add no shares.

Lesson: Diluted EPS: if-converted, treasury stock and antidilution →All Analyzing Income Statements formulas

Where $\text{FV}$ = fair value at the acquisition date of the target's identifiable assets (including identifiable intangibles) and of the liabilities assumed.

Goodwill is the premium paid over the fair value of the net assets acquired. It is not amortised under IFRS or US GAAP but is tested for impairment at least annually. A negative result is a bargain purchase, recognised as a gain in profit or loss.

Exam tip Use the target's fair values, never its book values, and remember that internally generated goodwill is never recognised as an asset.

Lesson: Goodwill: recognition, impairment and analysis →All Analyzing Balance Sheets formulas

Where $\Delta\text{AR}$ = change in accounts receivable, $\Delta\text{Deferred revenue}$ = change in unearned revenue (closing minus opening).

The first line of a direct-method cash flow statement and the usual starting point when converting from the indirect method. Rising receivables mean sales were made on credit and not yet collected; rising deferred revenue means cash arrived before the revenue was earned.

Exam tip If receivables went up, cash collected is below revenue; if deferred revenue went up, cash collected is above revenue.

Lesson: Operating cash flow: the direct method →All Analyzing Statements of Cash Flows I formulas

Where $\text{COGS}$ = cost of goods sold, $\Delta\text{Inventory}$ and $\Delta\text{AP}$ = change in inventory and accounts payable (closing minus opening).

Works in two steps: cost of sales plus the inventory build gives purchases, and purchases minus the rise in payables gives cash paid. A typical exam item gives an income statement and two balance sheets and asks for this single line.

Exam tip Get the signs from the logic: building inventory costs cash, while letting payables rise delays cash, so it reduces the amount paid.

Lesson: Operating cash flow: the direct method →All Analyzing Statements of Cash Flows I formulas

Where $\text{NI}$ = net income; non-cash charges = depreciation, amortisation and similar; $\Delta$ = closing minus opening balance of working capital accounts.

Reconciles accrual profit to operating cash. Gains and losses on asset sales are removed because the whole sale proceeds belong in investing cash flow. IFRS and US GAAP allow both methods; US GAAP preparers using the direct method must still show the indirect reconciliation.

Exam tip An increase in an operating asset (receivables, inventory) is a use of cash and is subtracted; an increase in an operating liability (payables) is added.

Lesson: Operating cash flow: the indirect method →All Analyzing Statements of Cash Flows I formulas

Where $\text{CFO}$ = cash flow from operations, $\text{Int}$ = interest expense, $t$ = tax rate, $\text{FCInv}$ = capital expenditure minus proceeds from fixed asset sales.

Cash left for all providers of capital, debt and equity, after operating needs and fixed investment. After-tax interest is added back because interest goes to lenders, who are among the capital providers. US GAAP always puts interest paid in CFO; IFRS lets companies put it in CFO or financing.

Exam tip Add back $\text{Int}(1-t)$ only when interest paid was deducted in CFO; for an IFRS company that classifies interest paid as financing, skip it.

Lesson: Free cash flow to the firm and to equity →All Analyzing Statements of Cash Flows II formulas

Where $\text{FCInv}$ = fixed capital investment net of asset sale proceeds; net borrowing = new debt issued minus debt repaid.

Cash available to ordinary shareholders after operating needs, fixed investment and payments to lenders. It caps what the company can sustainably pay out as dividends and buybacks without new financing.

Exam tip Net borrowing is added when positive and subtracted when the company repaid more debt than it raised.

Lesson: Free cash flow to the firm and to equity →All Analyzing Statements of Cash Flows II formulas

Where LIFO reserve = FIFO inventory minus LIFO inventory, disclosed by US GAAP companies that use LIFO.

LIFO is allowed under US GAAP but banned under IFRS, so analysts restate a LIFO company's inventory to FIFO to compare it with FIFO or IFRS peers. With rising costs LIFO leaves older, cheaper costs on the balance sheet and understates inventory, current assets and equity.

Exam tip For a full restatement, equity rises by LIFO reserve $\times (1-t)$ and deferred tax liabilities by LIFO reserve $\times t$.

Lesson: The LIFO reserve, LIFO-to-FIFO conversion and LIFO liquidation →All Analysis of Inventories formulas

Where $\text{LR}_{\text{end}}$, $\text{LR}_{\text{begin}}$ = LIFO reserve at the end and start of the year.

Only the change in the reserve during the year affects cost of sales. In a period of rising costs the reserve grows, so FIFO cost of sales is lower and profit higher than under LIFO. A falling reserve can signal a LIFO liquidation, where old cheap layers flow through and temporarily inflate LIFO margins.

Exam tip Subtract an increase in the reserve and add back a decrease; pre-tax profit under FIFO changes by the same amount with the opposite sign.

Lesson: The LIFO reserve, LIFO-to-FIFO conversion and LIFO liquidation →All Analysis of Inventories formulas

Where Estimated selling price in the ordinary course of business, less the costs still needed to finish the goods and to make the sale.

Inventory is carried at the lower of cost and NRV under IFRS and under US GAAP for methods other than LIFO and retail (which use lower of cost or market). A write-down reduces inventory and usually raises cost of sales. IFRS allows a later reversal up to the original write-down; US GAAP never does.

Exam tip A write-down lowers inventory and equity, so it raises inventory turnover and lowers the current ratio in later analysis.

Lesson: Measuring inventory: lower of cost and net realisable value →All Analysis of Inventories formulas

Where $\text{FV}$ = fair value of the asset; value in use = present value of the future cash flows the asset is expected to generate.

IFRS uses a one-step test: if carrying amount exceeds recoverable amount, the asset is written down to recoverable amount and the difference is the loss. IFRS allows the loss to be reversed later for PPE and intangibles other than goodwill, but not above the carrying amount the asset would have had without the impairment.

Exam tip Recoverable amount is the higher of the two measures, not the lower.

Lesson: Impairment of PPE and intangibles →All Analysis of Long-Term Assets formulas

Where $\text{CA}$ = carrying amount; undiscounted CF = sum of expected future cash flows from the asset without discounting.

Step one checks recoverability with undiscounted cash flows; only if it fails is the loss measured, against fair value. Because undiscounted flows are large, US GAAP tends to trigger impairments later than IFRS. Impairment losses on assets held for use cannot be reversed under US GAAP.

Exam tip Undiscounted cash flows decide whether there is a loss; fair value decides how big it is. Mixing the two is the classic trap.

Lesson: Impairment of PPE and intangibles →All Analysis of Long-Term Assets formulas

Where Proceeds = cash received; cost minus accumulated depreciation = carrying amount at the date of sale.

The gain or loss is reported in profit or loss, but the full proceeds are an investing cash inflow, which is why the gain is subtracted in the indirect CFO. Rearranged, proceeds equal carrying amount plus the gain (or minus the loss), a common cash flow question.

Exam tip If the asset was impaired or revalued, use its adjusted carrying amount, not original cost less depreciation.

Lesson: Derecognition: sale, abandonment, exchange and spin-off →All Analysis of Long-Term Assets formulas

Where $L_0$ = lease liability, $\text{ROU}_0$ = right-of-use asset, $PMT$ = lease payment at the end of each period, $r$ = rate implicit in the lease or the lessee's incremental borrowing rate, $n$ = number of payments.

Lessees put almost every lease on the balance sheet at the present value of the payments. IFRS uses one finance-type model for all leases; US GAAP classifies leases as finance or operating, but both start with the same asset and liability. Short-term leases (and low-value assets under IFRS) can stay off balance sheet.

Exam tip If payments are made at the start of each period, value them as an annuity due (BGN mode), which gives a higher liability.

Lesson: Lessee accounting: the IFRS model and US GAAP finance leases →All Topics in Long-Term Liabilities and Equity formulas

Where $L_{t-1}$ = lease liability at the start of the period, $r$ = discount rate, $PMT$ = lease payment.

Under IFRS and US GAAP finance leases, expense is interest on the liability plus straight-line amortisation of the ROU asset, so total expense is front-loaded. Interest sits below operating profit. The principal part of the payment is a financing outflow; interest is operating under US GAAP and operating or financing under IFRS.

Exam tip Interest always uses the opening liability; the rest of the payment reduces the liability.

Lesson: Lessee accounting: the IFRS model and US GAAP finance leases →All Topics in Long-Term Liabilities and Equity formulas

Where $PMT$ = level periodic lease payment; amortisation of the ROU asset is the plug that makes the expense equal the payment.

For a US GAAP operating lease the lessee reports one straight-line lease cost within operating expenses, and the whole payment is an operating cash outflow. Compared with a finance lease, this gives lower operating profit and lower CFO, but higher CFF.

Exam tip Operating lease: whole payment in CFO. Finance lease: only interest can be in CFO, principal goes to CFF, so finance-lease CFO is higher.

Lesson: US GAAP operating leases and the effect on ratios →All Topics in Long-Term Liabilities and Equity formulas

Where $\text{DBO}$ = defined benefit obligation (present value of benefits earned to date); $\text{FV}$ = fair value of plan assets.

Both IFRS and US GAAP report this net amount on the balance sheet. A positive result is a deficit and a net liability; a negative result is a surplus and a net asset. Only defined benefit plans have one, because in a defined contribution plan the employee bears the investment risk.

Exam tip A lower discount rate raises the DBO and so widens a deficit; a higher rate shrinks it.

Lesson: Defined contribution and defined benefit pension plans →All Topics in Long-Term Liabilities and Equity formulas

Where Service cost = current and past service cost, $r$ = discount rate, net pension liability = DBO minus plan assets at the start of the year.

Under IFRS, profit or loss carries service cost and net interest on the net liability; remeasurements (actuarial gains and losses, actual return minus interest income on assets) go to OCI and are never recycled. US GAAP instead uses an expected return on assets and amortises items from OCI into profit or loss.

Exam tip Past service cost hits profit or loss at once under IFRS, but under US GAAP it goes to OCI and is amortised over time.

Lesson: Defined contribution and defined benefit pension plans →All Topics in Long-Term Liabilities and Equity formulas

Where Taxes payable = taxable income $\times$ tax rate (current tax); $\Delta\text{DTL}$, $\Delta\text{DTA}$ = change in deferred tax liabilities and assets, ending minus beginning.

Reported tax expense is current tax plus deferred tax. A growing DTL means tax has been deferred to later years, so expense exceeds cash tax; a growing DTA means tax was paid ahead of the expense.

Exam tip Watch the signs: an increase in DTL adds to expense, an increase in DTA reduces it.

Lesson: Deferred tax balances and income tax expense →All Analysis of Income Taxes formulas

Where Carrying amount = balance sheet value of the asset, tax base = its value for tax purposes, $t$ = tax rate expected to apply when the difference reverses.

Arises when an asset's carrying amount exceeds its tax base, for example when tax depreciation is faster than book depreciation. If the asset's carrying amount is below its tax base, the result is a DTA. For liabilities the logic flips: a warranty provision with a zero tax base creates a DTA.

Exam tip Only temporary differences create deferred taxes; permanent differences such as tax-exempt income never do.

Lesson: Deferred tax balances and income tax expense →All Analysis of Income Taxes formulas

Where $\text{ETR}$ = effective tax rate; income tax expense = current plus deferred tax; pretax income = accounting profit before tax.

Temporary differences alone leave the effective rate equal to the statutory rate. Permanent differences, foreign rates and tax rate changes are what open a gap, and the tax note's reconciliation explains it. Compare with the cash tax rate to see how much tax is being deferred.

Exam tip The denominator is accounting pretax income, not taxable income from the tax return.

Lesson: Effective, statutory and cash tax rates →All Analysis of Income Taxes formulas

Where Life = useful life in years, $\text{Carrying amount}_{t-1}$ = cost minus accumulated depreciation at the start of year $t$.

An accelerated method: higher expense and lower profit and assets early, the reverse later. The method choice and estimates of life and salvage value are classic levers for managing earnings; a longer life or higher salvage value lowers expense and flatters profit. Straight-line is (cost minus salvage) divided by life.

Exam tip Apply the rate to the full carrying amount without deducting salvage first, and stop once the carrying amount reaches salvage value.

Lesson: Integrated cases: what accounting choices do to the numbers →All Financial Reporting Quality formulas

Where $\text{CA}$ = current assets, $\text{CL}$ = current liabilities, $\text{STI}$ = short-term marketable investments.

Three liquidity tests from loosest to strictest. The quick ratio drops inventory and prepaid expenses because they are hard to turn into cash quickly; the cash ratio also drops receivables. All use ending balance sheet figures.

Exam tip With a current ratio above 1, paying off current liabilities with cash raises the ratio; with a ratio below 1, the same payment lowers it.

Lesson: Liquidity ratios and the cash conversion cycle →All Financial Analysis Techniques formulas

Where $\text{DOH}$ = days of inventory on hand, $\text{DSO}$ = days sales outstanding, days of payables = number of days taken to pay suppliers; each is 365 divided by the matching turnover.

How long cash is tied up between paying for inventory and collecting from customers. A shorter cycle means less working capital to finance and usually better liquidity; a lengthening cycle can signal slow collections or obsolete stock.

Exam tip Inventory and payables turnover use cost of sales (or purchases); receivables turnover uses revenue. Payables days are subtracted, not added.

Lesson: Liquidity ratios and the cash conversion cycle →All Financial Analysis Techniques formulas

Where Tax burden $\text{NI}/\text{EBT}$, interest burden $\text{EBT}/\text{EBIT}$, EBIT margin, total asset turnover and financial leverage; Avg TA = average total assets.

Splits ROE into taxes, interest, operating profitability, efficiency and leverage to show what drove a change. The first three factors multiply to the net profit margin, which gives the three-step version. More debt raises leverage but lowers the interest burden ratio, so ROE rises only if the extra return beats the cost of borrowing.

Exam tip Tax burden equals 1 minus the average tax rate, so a higher tax burden ratio means lower taxes; a lower interest burden ratio means more interest expense.

Lesson: Integrated ratio analysis and DuPont →All Financial Analysis Techniques formulas