FORMULAS OF BREAK EVEN ANALYSIS, RATIO ANALYSIS, CAPITAL BUDGETING , ACCOUNT CLASSIFICATION

1. FORMULAS :
1. Break Even Analysis
2. Account Classification
3. Ratio Analysis
4. Methods of Capital Budgeting
BY A. Raja

2. BREAK EVEN ANALYSIS
1. Variable Cost (V.C) = (1 – P/V Ratio) * Sales
2. P/V Ratio = (Changes in Profit / Changes in Sales ) * 100
3. Total Contribution = Sales * P/V Ratio
4. Desired Sales = (Fixed Cost + Desired Profit) / Contribution
5. B.E.P (Units) = Fixed Cost / Contribution per Unit
(or)
B.E.P (Units) = B.E.P (Rs.) / Sales Price

3. Classification of Accounts:
1. Personal Account:
Rule: i) Debit the Receiver
ii) Credit the Giver
2. Real Account:
Rule: i) Debit what comes in
ii) Credit what goes out
3. Nominal Account:
Rule: i) Debit all Expenses and Losses
ii) Credit all Gains and Incomes

4. Ratio Analysis
1. Leverage Ratio:
Debt Equity Ratio (DER) =Long-term Liabilities / Shareholder funds
Proprietory Ratio (PR) = Networth / Total Assets
Fixed Assets Ratio (FAR) = Fixed Assets / Capital Employed
2. Liquidity Ratio:
Current Ratio (CR) = Current Assets / Current Liabilities
Quick Ratio (Q.R) = Quick Assets / Current Liabilities
Note: Quick Ration is also called Liquid Ratio

5. Ratio Analysis Cont…
3. Profitability Ratio:
Gross Profit Ratio (GPR) = (Gross Profit / Net Sales ) * 100
Net Profit Ratio (NPR) = (Net Profit after Tax / Net Sales) *100
4. Turnover Ratio:
Gross Working Capital (GWC) = Total of Current Assets
Net Working Capital (NWC) = [Current Assets – Current Liabilities]
Gross Profit = Sales – Cost of Goods Sold (COGS)
Cost of Goods Sold = Net Sales – Gross Profit

6. Methods of Capital Budgeting
1. Payback Period Method(PBP)
2. Average Rate of Return Method(ARR)
3. Net Present Value Method (NPV)
4. Profitability Index Method (PI)
5. Internal Rate of Return Method (IRR)

7. Methods of Capital Budgeting cont…
1. Payback period (PBP) Method =
[ Initial Investment / Average Cash Inflows ]
2. ARR = [Average Profit After Tax / Average Investment] *100
Where Average Profit After Tax = Cash inflow – Depreciation
where Depreciation = [Cost of the Asset + Installation Charges –
Scrap value] / Life of the Asset (in years)
Average Investment = [ Cost of the Asset – Scrap] /2

8. Methods of Capital Budgeting cont…
3. Net Present Value (NPV) = Total present value of Cash Inflows – Total
Present value of Cash Outflows
4. Profitability Index (PI) = Present value of Cash Inflow / Present Value
of Cash Outflow