Audit and Assurance

Useful Formulas and Equations

Since AA is predominantly a theoretical exam, candidates are unlikely to be asked to carry out
complex calculations. However, basic calculations may still be required as part of assessing and
analysing the financial statements. The following formulas can be quite useful;

Cost of sales = Opening inventory + Purchases – Closing inventory

Annual depreciation (Straight line method) = (Cost – Scrap value) / Useful life

Net book value = Cost – Accumulated depreciation

Gross profit margin = (Gross profit / Revenue) x 100

Operating profit margin = (Operating profit / Revenue) x 100

Net profit margin = (Net profit / Revenue) x 100

Return on capital employed = Profit before interest & tax / (Equity + Liabilities)

Return on equity = (Profit after tax / Equity) x 100

Interest cover = Profit before interest & tax / Interest charge

Asset turnover = (Revenue / Total assets) x 100

Current ratio = Current assets / Current liabilities

Quick ratio (Acid test) = (Current assets – Inventory) / Current liabilities

Receivable days = (Trade receivables / Revenue) x 365 days

Inventory days = (Inventory / Cost of sales) x 365 days

Payable days = (Trade payables / Purchases) x 365 days

Cash operating cycle = Inventory days + Receivable days – Payable days

Gearing = Debt / Equity

Gearing = Debt / (Debt + Equity)

Working capital = Current assets – Current liabilities

Earnings per share = Net profit (or loss) attributable to equity holders / Weighted average equity
shares outstanding during the period

Price earnings (PE) ratio = Market price / Earnings per share

Earnings yield = Earnings per share / Market price