Need an all-in-one list with the **Financial Reporting and Analysis** formulas included in the CFA® Level 1 Exam? We have compiled them for you here. The relevant formulas have been organized and presented by chapter. In this section, we will cover the following topics —** Basics of Accounting, Income Statements, Balance Sheets, Cash Flow Statements, Financial Analysis Techniques, Inventories, Income Taxes, Current and Non-current Liabilities and Assets**.

**1. Basics of Accounting**

*Basic Accounting Equation*

Assets = Liabilities + Equity

*Net income*

Net~Income = Revenue-Expenses

*Gross profit (income*)

Gross~profit~(income) = Revenue-Cost~of~goods~sold

*Operating profit (income*)

Operating~profit~(income) = Profit~before~interest~and~tax~(PBIT) = Gross~profit-Operating~expenses

*Profit Before Tax (PBT)*

Profit~before~tax~(PBT) = PBIT-Interest~expense

*Net profit (income*)

Net~profit~(income) = PBT-Tax~expense= Operating~profit-Interest~Expense-Tax~expense

**2. Understanding Income Statements**

*Basic Earnings per Share (EPS)*

Basic~EPS= \frac {Net~Income - Preferred~Dividends}{Weighted~average~number~of~common~shares~outstanding}

*Diluted Earnings per Share (DEPS)*

Diluted~EPS= \frac {Adjusted~income~available~for~common~shares}{Weighted~average~common~ and~potential~common~shares~outstanding}

Diluted~EPS = \frac {\big[Net~Income-Preferred~dividends\big]+ \big[Convertible~preferred~dividends\big]+ \big[Convertible~debt~interest\big]\big(1-t\big)}{\big(Weighted~average~shares\big)+\big(Shares~from~conv.~pfd.~shares\big)+\big(Shares~from~conversion~of.~conv.~debt\big)+\big(Shares~issuable~from~stock~options\big)}

*Gross profit margin*

Gross~profit~margin = \frac {Gross~profit}{Revenue}

*Net profit margin*

Net~profit~margin = \frac {Net~profit}{Revenue}

**3. Understanding Balance Sheets**

## Liquidity Ratios

*Current ratio*

Current~ratio=\frac {Current~assets}{Current~liabilities}

*Quick ratio*

Quick~ratio=\frac {Cash + Short–term~marketable~securities + Receivables}{Current~liabilities}

*Cash ratio*

Cash~ratio=\frac {Cash + Short–term~marketable~securities}{Current~liabilities}

## Solvency Ratios

*Long-term debt-to-equity*

Long–term~debt–to–equity = \frac {Long–term~debt}{Total~equity}

*Total debt-to-equity*

Total~debt–to–equity = \frac {Total~debt}{Total~equity}

*Debt ratio*

Debt~ratio= \frac {Total~debt}{Total~assets}

*Financial leverage*

Financial~leverage = \frac {Total~assets}{Total~equity}

## Free Cash Flow Measures

FCFF = CFO + [Int × (1 - tax~rate)] - FCInv

CFO = Cash flow from operations

Int = Cash interest paid

FCInv = Fixed capital investment (net capital expenditures)

FCFF = NI + NCC + [Int × (1 – tax~rate)] - FCInv - WCInv

NI = Net income

NCC = Non-cash charges (depreciation and amortization)

Int = Cash interest paid

FCInv = Fixed capital investment (net capital expenditures)

WCInv = Working capital investment

FCFE = CFO - FCInv + Net~borrowing

CFO = Cash flow from operations

FCInv = Fixed capital investment (net capital expenditures)

Net~borrowing = Debt issued – debt repaid

## Cash Flow Ratios

### Performance Ratios

**Cash flow-to-revenue**

Cash~flow–to–revenue = \frac {Cash~flow~from~operations}{Revenue}

**Cash-to-income**

Cash–to–income = \frac {Cash~flow~from~operations}{Operating~income}

**Cash return-on-assets**

Cash~return–on–assets = \frac {Cash~flow~from~operations}{Average~total~assets}

**Cash return-on-equity**

Cash~return–on–equity= \frac {Cash~flow~from~operations}{Average~total~equity}

*Cash flow per share*

Cash~flow~per~share = \frac {CFO - Preferred~dividends}{Weighted~average~number~of~common~shares}

**4. Understanding Cash Flow Statements**

## Cash Flow Ratios

### Coverage Ratios

*Debt Coverage*

Debt~coverage = \frac {Cash~flow~from~operations}{Total~debt}

*Interest Coverage*

Interest~coverage = \frac {CFO + Interest~paid + Taxes~paid}{Interest~paid}

*Reinvestment ratio*

Reinvestment~ratio = \frac {Cash~flow~from~operations}{Cash~paid~to~acquire~long–term~assets}

*Debt payment*

Debt~payment = \frac {Cash~flow~from~operations}{Cash~paid~to~repay~long–term~debt}

*Dividend payment*

Dividend~payment = \frac {Cash~flow~from~operations}{Dividends~paid}

*Investing and financing ratio*

Investing~and~financing~ratio = \frac {Cash~flow~from~operations}{Cash~outflows~from~investing~and~financing~activities}

**5. Financial Analysis Techniques**

## Activity Ratios

Receivables~turnover = \frac {Annual~sales}{Average~receivables}

**Meaning**: The efficiency of a company in collecting its trade receivables

Days~of~sales~outstanding = \frac {365}{Receivables~turnover}

**Meaning**: The average number of days a company takes to collect its receivables from clients

Inventory~turnover = \frac {Cost~of~goods~sold}{Average~inventory}

**Meaning**: The efficiency of a company in terms of inventory management

Days~of~inventory~on~hand = \frac {365}{Inventory~turnover}

**Meaning**: The average inventory processing period

Payables~turnover = \frac {Purchases}{Average~trade~payables}

**Meaning**: The efficiency of a company in allowing trade credit to suppliers

Number~of~days~of~payables = \frac {365}{Payables~turnover~ratio}

**Meaning**: The average number of days a company takes to pay its suppliers

Fixed~assets~turnover = \frac {Revenue}{Average~net~fixed~assets}

**Meaning**: The efficiency of a firm in utilizing its fixed assets

Working~capital~turnover = \frac {Revenue}{Average~working~capital}

**Meaning**: The efficiency of a firm in managing its working capital (current assets – current liabilities)

Total~assets~turnover = \frac {Revenue}{Average~total~assets}

**Meaning**: The efficiency of a firm in using its total assets to create revenue

Cash~conversion~cycle = Days~of~sales~outstanding + Days~of~inventory~on~hand - Number~of~days~of~payables

**Meaning**: The number of days a company takes to convert its investments in inventory and other resources into cash flows from sales

Equity~turnover = \frac {Revenue}{Average~total~equity}

**Meaning**: The efficiency of a firm in utilizing equity to create revenue

## Liquidity Ratios

Current~ratio = \frac {Current~assets}{Current~liabilities}

**Meaning**: Ability to meet current liabilities (with total current assets)

Quick~ratio = \frac {Cash + Marketable~securities + Receivables}{Current~liabilities}

**Meaning**: Ability to meet current liabilities (with total current assets, excluding inventory)

Cash~ratio = \frac {Cash + Marketable~securities}{Current~liabilities}

**Meaning**: Ability to meet current liabilities (with cash and marketable securities only)

Defensive~interval = \frac {Cash + Marketable~securities + Receivables}{Average~daily~expenditure}

**Meaning**: The number of days a company can cover its average daily expenses with the use of current liquid assets only

## Solvency Ratios

Debt–to–equity = \frac {Total~debt}{Total~shareholder’s~equity}

**Meaning**: Debt as a percentage of total equity

Debt–to–capital= \frac {Total~debt}{Total~debt + Total~shareholder’s~equity}

**Meaning**: Debt as a percentage of total capital

Debt–to–assets= \frac {Total~debt}{Total~assets}

**Meaning**: Debt as a percentage of total assets

Financial~leverage = \frac {Average~total~assets}{Average~total~equity}

**Meaning**: An indicator of a company’s debt financing usage

Interest~coverage = \frac {Earnings~before~interest~and~taxes}{Interest~payments}

**Meaning**: The ability to cover interest expenses

Fixed~charge~coverage = \frac {Earnings~before~interest~and~taxes + Lease~payments}{Interest~payments + Lease~payments}

**Meaning**: The ability to cover interest and lease expenses

## Profitability Ratios

Gross~profit~margin = \frac {Gross~profit}{Revenue}

**Meaning**: Gross profitability as a percentage of total revenue

Operating~profit~margin = \frac {Operating~income~(EBIT)}{Revenue}

**Meaning**: Operating profitability (before interest and tax) as a percentage of total revenue

Pre–tax~margin = \frac {EBT}{Revenue}

**Meaning**: Operating profitability (before tax) as a percentage of total revenue

Net~profit~margin = \frac {Net~income}{Revenue}

**Meaning**: Net profitability as a percentage of total revenue

Return~on~assets~(ROA) = \frac {Net~income}{Average~total~assets}

**Meaning**: Net profitability (excluding interest and taxes) as a percentage of total invested funds

Operating~return~on~assets~(ROA) = \frac {Operating~profit~(EBIT)}{Average~total~assets}

**Meaning**: Net profitability (including interest and taxes) as a percentage of total invested funds

Return~on~total~capital = \frac {Operating~profit~(EBIT)}{Average~total~capital}

**Meaning**: Operating profitability as a percentage of total capital

Return~on~equity~(RoE) = \frac {Net~income}{Average~equity}

**Meaning**: Net profitability as a percentage of total equity

## Valuation Ratios

Earnings~per~Share~(EPS) = \frac {Net~Income - Preferred~dividends}{Outstanding~number~of~common~shares}

**Meaning**: Income earned per 1 common share outstanding

Price~earnings~(P/E)~ratio = \frac {Share~price}{Earnings~per~share~(EPS)}

**Meaning**: The price that investors are willing to pay per $1 of earnings

P/E~ratio~(company~wide) = \frac {Market~capitalization}{Net~income}

**Meaning**: Total price that investors are willing to pay for a company’s Net income

Dividend~yield = \frac {Dividend~per~share}{Current~share~price}

**Meaning**: The “portion “of a share price that is distributed as dividends

Retention~rate~(RR) = \frac {Net~income - Dividends~declared}{Net~income}

**Meaning**: The “portion” of Net income that is reinvested in the company

Dividend~payout = \frac {Dividends~declared}{Net~income}

**Meaning**: The “portion” of Net income that is distributed as dividends

Sustainable~growth~rate~(g) =RR \times ROE

**Meaning**: Equity growth rate

## DuPont Analysis

## Inventories

Where:**FIFO** = First-in, First-out method**LIFO** = Last-in, First-out method

Ending~inventory = Beginning~inventory + Purchases - Cost~of~goods~sold~(COGS)

Cost~of~goods~sold~(COGS) = Beginning~inventory + Purchases - Ending~inventory

FIFO~inventory = LIFO~inventory + LIFO~reserve

Delta~Cash = LIFO~reserve \times Tax~rate

Delta~Cash = Excess cash saved on the valuation method

FIFO~retained~earnings = LIFO~retained~earnings + LIFO~Reserve \times (1 - Tax~rate)

FIFO~COGS = LIFO~COGS - (Ending~LIFO~reserve - Beginning~LIFO~reserve)

## Long-lived Assets

Straight–line~depreciation~expense = \frac {Cost-Salvage~(residual)~value}{Useful~life}

Double–declining~balance (DDB)~depreciation~expense=\frac {2 \times (Cost - Accumulated~depreciation)}{Useful~life}

**Double-declining balance (DDB) depreciation expense** = Double the straight-line depreciation rate

Units~of~production~depreciation~expense= \frac {Cost - Salvage~value}{Life~in~output~units} \times Output~units~in~the~period

Ending~PPE~net~book~value = (Original)~Cost - Accumulated~depreciation

Average~age = \frac {Accumulated~depreciation}{Annual~depreciation~expense}

Total~useful~life = \frac {Historical~cost}{Annual~depreciation~expense}

Remaining~useful~life = \frac {Ending~PPE~net~book~value}{Annual~depreciation~expense}

## Income Taxes

Income~tax~expense = Taxes~Payable + Δ~Deferred~Tax~Liabilities~(DTL) - Δ~Deferred~Tax~Assets~(DTA)

Effective~tax~rate = \frac {Income~tax~expense}{Pre–tax~income}

## Non-Current Liabilities

Interest~expense = Market~rate~at~Issuance \times Balance~sheet~value~of~the~liability~at~the~beginning~of~the~period

Coupon~interest~payment = Coupon~rate~(as~per~contract) \times Par~Value

**Follow the links to find more formulas on Quantitative Methods, Economics, Corporate Finance, Alternative Investments, Portfolio Management, Equity Investments, Fixed-Income Investments, and Derivatives, included in the CFA® Level 1 Exam.**