Follow a guided path through related formulas, examples, and explanations.
The annuity formula can solve for the equal periodic payment needed to repay a known loan or reach a future savings target. Use the present-value paym…
The cash conversion cycle (CCC) estimates how many days a company’s cash is tied up between paying for inventory and collecting cash from customers. C…
Double declining balance, or DDB, is an accelerated depreciation method that records more expense in an asset's early years and less later. Double the…
The effective annual rate formula converts a nominal annual rate with intra-year compounding into the actual percentage change over one year. Divide t…
The FIFO method assumes the first inventory costs acquired are the first costs assigned to cost of goods sold. To calculate FIFO, take units sold from…
FIFO assigns the oldest inventory costs to cost of goods sold first; LIFO assigns the newest costs first. When unit costs are rising, FIFO usually pro…
The future value formula calculates how much one amount today will become after earning a periodic rate for a set number of periods. Multiply present…
The IRR formula finds the discount rate that makes a project’s net present value equal to zero. In other words, internal rate of return is the break-e…
The LIFO method assigns the newest inventory costs to cost of goods sold first, leaving older costs in ending inventory. Work backward through the cos…
The NPV formula adds the present values of all project cash flows, including the initial investment. Discount each future cash flow by its timing; a p…
The payback period formula measures how long cumulative project cash inflows take to recover the initial investment. For equal annual inflows, divide…
The perpetuity formula values a stream of payments that continues forever. Divide the next constant payment by the periodic discount rate, or divide t…
The present value formula tells you what one future cash flow is worth at an earlier date. Divide the future amount by one plus the periodic discount…
The present value of an annuity is what a fixed series of future payments is worth today. For an ordinary annuity, discount the payments with the peri…
Straight line depreciation allocates an asset's depreciable amount evenly over its useful life. Subtract estimated residual value from cost, divide by…
The time value of money (TVM) means a dollar available today is normally worth more than the same dollar received later because today’s dollar can ear…
The weighted average cost method pools the costs of similar inventory and assigns one average cost per unit. Divide total cost of goods available for…
A balance sheet is a snapshot of what a business owns (assets), what it owes (liabilities), and the owners' claim on whatever is left (equity), all me…
Absorption costing treats fixed manufacturing overhead as a product cost: it attaches to each unit made, and GAAP requires it for external financial s…
The allowance for doubtful accounts is a contra-asset account that estimates how much of your accounts receivable you will never collect. You create i…
A bond's value is the present value of everything it will pay you: each coupon payment, plus the face value at maturity, all discounted at the current…
Break-even analysis finds the sales level where total revenue equals total costs — the point where a business earns nothing and loses nothing. To get…
Contribution margin is what remains from revenue after subtracting all variable costs — the costs that rise and fall with each unit you sell. That rem…
Cost of goods sold (COGS) equals beginning inventory plus purchases minus ending inventory. It is the cost of the goods you actually sold during the p…
The current ratio is current assets divided by current liabilities, with both numbers taken from the balance sheet on the same date. It answers one qu…
The debt to equity ratio equals total liabilities divided by shareholders' equity, both taken straight from the balance sheet. It tells you how many d…
DuPont analysis splits return on equity into three parts — net profit margin, asset turnover, and the equity multiplier — that multiply back to ROE ex…
EBITDA is earnings before interest, taxes, depreciation, and amortization — a company's operating profitability with financing costs, taxes, and non-c…
Free cash flow is operating cash flow minus capital expenditures. It measures the cash a company has left after paying to run the business and maintai…
Job order costing accumulates costs for each individual job rather than averaging them across all production. Direct materials and direct labor are tr…
Net working capital (NWC) is current assets minus current liabilities — the dollar cushion a company has for paying its bills over the next twelve mon…
Operating leverage is how heavily a company's cost structure leans on fixed costs. The more of its costs that stay put when sales move, the more a cha…
The predetermined overhead rate (POHR) is estimated total manufacturing overhead for the year divided by the estimated total amount of an activity dri…
Process costing assigns production costs by averaging them over masses of identical units as they flow through departments. Each department divides it…
The quick ratio is current assets minus inventory, divided by current liabilities — or, in its stricter build-up form, cash plus marketable securities…
Ending retained earnings equals beginning retained earnings plus net income minus dividends. Retained earnings is the running total of profit a compan…
Yield to maturity (YTM) is the single discount rate that makes a bond's market price equal the present value of everything the bond still pays — every…
The accounting equation is Assets = Liabilities + Equity. It states that everything a business owns was financed by one of two sources: money the busi…
An accrued expenses journal entry debits an expense account and credits a liability account — usually a specific payable such as Utilities Payable, Wa…
Every adjusting entry is one of five types: accrued revenue, accrued expense, unearned (deferred) revenue, prepaid expense, or depreciation. Below is…
Adjusting entries are journal entries made at the end of an accounting period to record revenues that have been earned and expenses that have been inc…
A bank reconciliation matches the cash balance in a company's ledger to the balance on its bank statement by adjusting each side for timing difference…
The CAPM formula gives a stock's expected return: E(R) = Rf + β(Rm − Rf), the risk-free rate plus beta times the market risk premium. In plain words,…
Closing entries are the journal entries made at the end of an accounting period to zero out the temporary accounts — revenues, expenses, and dividends…
Cost of equity is the annual return a company's shareholders require for holding its stock — the minimum the firm must earn on equity-funded projects…
A debit is an entry on the left side of an account and a credit is an entry on the right side — they are directions, not plus and minus. Whether that…
When a customer pays you before you deliver the good or service, debit Cash and credit Deferred Revenue — also called unearned revenue — which is a li…
The depreciation journal entry debits Depreciation Expense and credits Accumulated Depreciation. The debit puts one period's share of the asset's cost…
The dividend discount model (DDM) says a share of stock is worth the present value of every dividend it will ever pay, discounted at the return you re…
The Gordon growth model says a share of stock is worth next year's expected dividend divided by the gap between your required rate of return and the d…
A prepaid expense is a payment made before you receive the benefit — six months of rent paid on move-in day, or a full year of insurance or software p…
A T-account is a T-shaped sketch of a single ledger account: the account name sits on the top bar, debits go on the left of the vertical line, and cre…
Terminal value is the value of every cash flow a business generates after the explicit forecast period of a DCF, collapsed into a single number dated…
Unearned revenue is cash a business collects before it delivers the product or service the customer paid for. It is a liability — not revenue — becaus…
The WACC formula calculates a company's weighted average cost of capital — the blended after-tax rate it pays for the money that finances it. It weigh…
Cost-volume-profit (CVP) analysis models how profit responds when price, sales volume, or costs change. It rests on one number — the contribution marg…
A journal entry records one business transaction as equal debits and credits, with a date and a short description of what happened. Because total debi…
A flexible budget restates the original budget at the activity level you actually reached: variable costs are recomputed at actual volume, fixed costs…
A trial balance is a two-column list of every general ledger account and its ending balance — debits in the left column, credits in the right — prepar…
The indirect method builds the operating section of the statement of cash flows by starting with net income, adding back non-cash expenses such as dep…
An income statement reports a company's revenues minus its expenses, ending in net income, for a period of time — a month, a quarter, or a year. It te…