Glossary of Formulas used in Accounting

Equity = Assets – Liabilities

Assets = Equity + Liabilities

Assets = Equity + (Revenue – Expenses) + Liabilities

Or (if we ‘add’ Expenses to each side)

Assets + Expenses = Equity + Revenue + Liabilities

Dividends (d) = Operating cash flow (C) – Capital outlays (I) + Net cash flow from debt owners (F) that is, d = C – I + F

Economic profit = (RNOA – cost of capital) × NOA Where, RNOA = OI/NOA

RNOA = PM x ATO
Where, PM = OI/Sales and ATO = Sales/NOA

Profit margin (PM) as:
PM = OI/Sales
Where OI = operating income after tax

Asset turnover (ATO)
ATO = Sales/NOA Where NOA = net operating assets

Overhead absorption rate would be calculated as:

Total overheads of a production department / Level of activity
Cost-volume-profit analysis
y = f(x)
Where y = the cost of the venue
x = the number of tickets sold

Production + Opening inventory = Sales + Closing inventory

Contribution margin (CM) is the difference between sales revenue (S) and variable costs (VC):

Contribution Margin = Sales – Variable Costs
CM = S – VC

The accounting rate of return (ARR) can be calculated as follows:

ARR (%) = (Average net profit /Initial investment) x 100

Where an investment is expected to provide constant cash flow each year, the payback period can be calculated as follows:

Payback period = Initial investment / Cash flow