Formulae in

Cost Accounting
&
Financial Management

CA IPCC
Part I

FINANCIAL
MANAGEMENT

Chapter 1 : TIME VALUE OF MONEY

FV = PV(1+r)n

Meaning of Terms
FV

= Future Value,

PV

= Present Value,

= % rate of interest,

= The time gap.

Chapter 2 : CAPITAL BUDGETING

ARR = Average PAT p.a/ Net investment.

Profitability index (PI)/ Desirability factor = Total of Discounted Cash Inflows/
Total Discounted Cash Outflows.
EAC = Cash Outflows per annum+ EAI

EAI = Initial Investment / Relevant Annuity Factor.

Meaning of Terms
EAC = Equivalent Annual Costs
PI

EAI =

Profitability Index
Equivalent Annual Investment

Chapter 6 :

CAPITAL STRUCTURE

k =
d

Annual Interest Charge

Market Value of debt

ke =

Equity Earnings
Market Value ov Equity

ko = kd

ko = kd

D
E
+ ke
V
V

ke = ko +

D
(k o k d
E

V=D+E=

Expected Operating Income

Discount rate applicable to the risk class to which the firm belongs

ke = ko +

D
E
+ ke
V
V

D
(k o k d )
E

Meaning of Terms
Kd = Cost of debt
Ke = Cost of equity
V = Market Value of the firm (V)
D = Market value of debt (D)
E

= Market value of Equity

ko = Overall capitalization rate for the firm

Chapter 7 : Ratio Analysis

Current Assets
Current Liabilities
Quick Assets
Quick Ratio =
Quick Liabilties
Cash + Marketable Securities
Cash Ratio =
Current Liabilitie s
Owner' s Equity
Equity
Owners Equity to Total Equity Ratio =
or
Total Equity
Total Assets
Debt
Debt Equity Ratio =
Equity
Earnings available for debt service
Debt Service Coverage Ratio =
Interest + Instalments ( principal component )
Earnings Before Interest and Tax [ EBIT ]
Interest Coverage Ratio =
Interest
Pr ofit After Tax[ PAT ]
Preference Dividend Coverage Ratio =
Pr eference Dividends
Pr ofit After Tax [ PAT ] Pr eference Dividend
Equity Dividend Coverage Ratio =
Equity Dividend
Capital Gearing Ratio =
Pr eference Share Capital + Debentures + Long term loans
Equity Share Capital + Re serves and Surplus Losses
Current Ratio =

Or

Fixed income bearing sec urities

Non Fixed income bearing sec urities
Fixed Assets
Fixed Assets to Long term fund Ratio =
Long Term Funds
Pr oprietary Funds or Capital Employed or Owners' Equity
Proprietary Ratio =
Total Assets
Proprietary funds = Share Capital + Reserves and Surplus Fictitious Assets

Total Assets = Total Assets as per Balance Sheet except fictitious assets and losses.

Capital Turnover Ratio =

Fixed Assets Turnover Ratio =

Sales
Capital Employed
Sales
Fixed Assets

Sales
Working Capital

Working Capital Turnover Ratio =

Inventory Turnover Ratio = Average Stock = X [Opening Stock + Closing Stock]

Raw Material Turnover Ratio =

Debtors Turnover Ratio =

Average Collection Period =

Average Accounts Re ceivable
365
or
Average Daily credit sales
Debtors Turnover Ratio

Creditors Turnover Ratio =

Average Payment Period

Average Accounts Payable
365
=
or
Average Daily Credit Purchase
Creditors Turnover Ratio

Return on Equity =
PAT Pr eference Dividend
Equity Share Capital + Re serves and Surplus Fictitious Assets

Earnings per share =

Pr ofit After Taxes Pr eference Dividend

Number of equity shares

Dividend per share =

Total dividends distributed to the equity shareholders

Number of equity shares

Price Earnings Ratio =

Return on Capital Employed =

Return on Investment =

Raw Materials Consumed

Average Raw Materials Stock

Credit Sales
Average Accounts Re ceivable

Credit Purchases
Average Accounts Payable

Market Pr ice per Share

Earning per share
Re turn
100%
Capital Employed

Pr ofit Before Interest and Tax

100%
Capital Employed

Gross Pr ofit
100%
Sales

Gross Profit Ratio =

Operating Profit Ratio =

Net Profit Ratio =

Dividend Yield =

ROE = Net Profit = Net Profit Sales Assets

Equity
Assets Equity
Sales

Operating Pr ofit
100%
Sales

Net Pr ofit
100%
Sales

Dividend per share

100%
Market price per share

Meaning of Terms
Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances + Loans and
Advances + Marketable non-trade securities at market value.

Current Liabilities = Trade creditors + Bills payable + Outstanding expenses + Provision

for taxation + Proposed Dividend + Other Provision + Cash Credit +
Bank Overdraft + Unclaimed Dividend
Quick Assets

Current Assets Inventories Prepaid Expenses

Quick Liabilities = Current Liabilities Bank Overdraft Cash Credit

Owners Equity =
Total Equity

Share Capital (both equity and preference) + Reserves and Surplus ()

Fictitious Assets
Owners Equity + External Equity [i.e., outside liabilities inclusive of
current liabilities and provisions]
Or
Balance Sheet Total Miscellaneous Expenditure

Equity

Owners Equity

Debt

Long term loan fund.

Proprietary funds = Share Capital + Reserves and Surplus Fictitious Assets

Total Assets = Total Assets as per Balance Sheet except fictitious assets and losses.
Average Stock =

X [Opening Stock + Closing Stock]

Chapter 9 : COST OF CAPITAL

P0 = 1. (1-t). PVIFA (kd, n) + F.PVIF (kd,n)

F P0
I(1 t ) +
n
kd
F + P0
2

Cost of term loans = Interest rate (1- tax rate)

P0 = D.PVIFA(kp,n) + F.PVIF(kp,n)

F P0
D+
n
kp =
F + P0
2

D
ke 1 + g
P0

ke = Rf + B (Rm Rf)

Wt =

Dt Pt
Pt 1

Ke =

E1
P

WACC =

W k
r =1

EPS =

EBIT(1 t )
N1

EPS =

(EBIT Int .)(1 t )

N2

Meaning of Terms
P0(Cost of debentures)
=
I
=
t
=
F
=
kd
=
n
=
P0(Cost of preference capital)
D
=
F
=
kp
=
D1
=
D0
=
P0
=
g
=
b
=
r
=
Rf
=
B
=
Rm
=
Wt
=
E1
=
Wr
=
Kr
=
Int
=
N1
=
N2
=
t
=

Present value of the debenture (net of floatation cost)

Annual interest payable on the debenture
Tax rate
Principal amount repayable at the maturity time
Cost of debenture
Maturity period
= Net amount realized per share (net of floatation cost)
Preference dividend per share
Redemption price
Cost of preference capital
Expected dividend per share next year = D0 (1 + g)
Last paid dividend per share
Current market price per share
Growth rate
Retention Ratio
Return on Equity
Risk free rate
Beta
Return on market
Wealth Ratio
Expected EPS for the next year
Weight of rth source of capital
Cost of rth Source of capital
Total interest charge on debt financing.
Total No. of Equity Shares under financial Plan 1
Total No. of equity Shares under Financial plan 2
Tax Rate

Chapter 10 : Leverage Analysis

Equity Earnings = Sales Variable Costs Fixed costs Interest Tax Preference
Dividend

Equity Earnings = [Q (P-V)-F-I] (1-t)-DP

Earnings Per Share

[Q (P - V) - F - I] (1 - t) - DP
Equity Earnings
=
Number of Equity Shares
n

EBIT
Percentage Change in EBIT
Q( P V )
Contribution
DOL =
= EBIT =
=
Q
Percentage Change in Sales
Q( P V ) F
EBIT
Q

EPS
Percentage Change in EPS
EBIT
= EPS =

EBIT
D
Percentage Change in EBIT
EBIT I P
EBIT
1 t

DFL =

DCL =

EPS
Percentage Change in EBIT
Q( P V )
= EPS =
Q
D
Percentage Change in Sales
Q( P V ) F I P
Q
1 t

Meaning of Terms
Q

Number of units sold

Price per unit

Variable Cost per unit

Total fixed cost

Total Interest

Tax rate

DP

Preference Dividend

Number of equity shares