FAR review support for recurring formulas, financial ratios, and common journal entry patterns.
Use this page as a final FAR reference for formulas, ratios, and journal-entry patterns. It is not a substitute for learning the underlying rules, but it helps you recall recurring calculations and account effects during late-stage review.
These references are designed to be supplemented by more detailed discussions found in relevant chapters of this book, such as:
Below are some of the most common formulas tested on the FAR exam, organized by topic. While each formula is simple on its own, practicing complete examples is crucial to fully internalize the context in which these formulas apply.
Basic EPS
Basic EPS measures net income allocated to each share of common stock outstanding.
Formula:
$$ \text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}} $$
Key Points:
Diluted EPS
Diluted EPS adjusts the denominator (and sometimes the numerator) for potential common shares (e.g., stock options, convertible bonds).
$$ \text{Diluted EPS} = \frac{\text{Net Income} - \text{Preferred Dividends} + \text{After-Tax Interest Savings on Convertible Debt}}{\text{Weighted Average Number of Common Shares + Dilutive Potential Shares}} $$
Key Points:
Depreciation is one of the most common accounting calculations. FAR relentlessly tests knowledge of different depreciation methods, each with unique formulas.
$$ \text{Annual Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}} $$
Straight-line is uniform over the asset’s life.
$$ \text{Annual Depreciation Expense in Year } i = \left( \frac{2}{\text{Useful Life}} \right) \times \text{Book Value at Beginning of Year } i $$
Key Points:
$$ \text{Annual Depreciation Expense} = \left( \frac{\text{Remaining Life in Years}}{\frac{\text{Useful Life} \times (\text{Useful Life} + 1)}{2}} \right) \times (\text{Cost} - \text{Salvage Value}) $$
The denominator is the sum of the digits from 1 to n (the “sum of years”). This method is front-loaded.
$$ \text{Depreciation Expense (Per Unit)} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Total Units or Hours of Production Over Life}} $$
The expense for a period = Depreciation Expense (Per Unit) × Actual Units (or hours) produced in that period.
Accounting for bonds is a staple in FAR. Two core methods exist: (1) the Effective Interest Method (preferred under GAAP) and (2) the Straight-Line Method (an acceptable alternative only if not significantly different from the effective method, although widely used in practice for simplicity).
Effective Interest Method
Example Formula:
$$ \text{Interest Expense} = \text{Carrying Amount of the Bond} \times \text{Yield Rate per Period} $$
$$ \text{Amortization of Discount/Premium} = \text{Interest Expense} - \text{Cash Interest Paid} $$
Straight-Line Method
Analyzing financial statements requires familiarity with standardized metrics. Ratios help measure profitability, liquidity, solvency, and more. While each ratio has variants, these summary formulas are commonly tested.
$$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$
Measures short-term debt-paying ability; >1 is typically desired.
$$ \text{Quick Ratio} = \frac{\text{Cash + Marketable Securities + Receivables}}{\text{Current Liabilities}} $$
Excludes inventory and prepaid expenses to isolate highly liquid assets.
$$ \text{Cash Ratio} = \frac{\text{Cash + Cash Equivalents + Marketable Securities}}{\text{Current Liabilities}} $$
Even stricter measure of short-term liquidity.
$$ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} $$
High turnover indicates more frequent inventory turnover, but too high may indicate stockouts.
$$ \text{AR Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Net Receivables}} $$
Reflects how quickly a company collects cash from customers.
$$ \text{AP Turnover} = \frac{\text{COGS or Credit Purchases}}{\text{Average Accounts Payable}} $$
Measures how quickly a firm pays its suppliers.
$$ \text{Gross Margin Percentage} = \frac{\text{Net Sales} - \text{Cost of Goods Sold}}{\text{Net Sales}} $$
$$ \text{ROE} = \frac{\text{Net Income}}{\text{Average Shareholders’ Equity}} $$
$$ \text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}} $$
$$ \text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} $$
$$ \text{Debt-to-Equity} = \frac{\text{Total Liabilities}}{\text{Total Shareholders’ Equity}} $$
Gauges the proportion of financing from creditors versus equity holders.
$$ \text{Times Interest Earned} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}} $$
Measures ability to service debt.
Journal entries provide the backbone of financial accounting. Mastering standard entries and variations is essential for FAR success. Below is a curated list of high-frequency entries. For thorough explanations of these and more, see Chapters 9 (Cash and Cash Equivalents), 10 (Trade Receivables), 11 (Inventory), 12 (PP&E), 16 (Debt), 17 (Equity), 20 (Revenue), and so on.
Recording a Cash Sale:
Debit: Cash Credit: Sales Revenue
Collecting Accounts Receivable:
Debit: Cash Credit: Accounts Receivable
Recognizing Uncollectible Accounts (Allowance Method):
Estimate/uncollectible:
Debit: Bad Debt Expense Credit: Allowance for Doubtful Accounts
Write-off specific account:
Debit: Allowance for Doubtful Accounts Credit: Accounts Receivable
Purchases (Periodic System):
Debit: Purchases Credit: Accounts Payable
Purchases (Perpetual System):
Debit: Inventory Credit: Accounts Payable
Sale of Inventory (Perpetual System):
Debit: Accounts Receivable (or Cash) Credit: Sales Revenue Debit: Cost of Goods Sold Credit: Inventory
Acquisition of Fixed Assets:
Debit: PP&E (e.g., Machinery) Credit: Cash (or Accounts Payable)
Recording Depreciation:
Debit: Depreciation Expense Credit: Accumulated Depreciation
Disposal of Fixed Assets (Gain):
Debit: Cash (proceeds) Debit: Accumulated Depreciation Credit: Equipment (historical cost) Credit: Gain on Disposal of Equipment
Issuing Bonds at Discount:
Debit: Cash (issue price) Debit: Discount on Bonds Payable Credit: Bonds Payable (face value)
Amortizing Discount (Effective Interest Method Example):
Debit: Interest Expense Credit: Discount on Bonds Payable Credit: Cash (interest payment)
Issuing Bonds at Premium:
Debit: Cash (issue price) Credit: Premium on Bonds Payable Credit: Bonds Payable (face value)
Amortizing Premium (Effective Interest Method Example):
Debit: Interest Expense Debit: Premium on Bonds Payable Credit: Cash (interest payment)
Issuing Common Stock at Par:
Debit: Cash Credit: Common Stock (at par value) Credit: Additional Paid-In Capital (APIC) (excess)
Repurchasing Stock (Treasury Stock, Cost Method):
Debit: Treasury Stock Credit: Cash
Reissuing Treasury Stock Above Cost:
Debit: Cash Credit: Treasury Stock Credit: APIC – Treasury Stock
Under the new 5-step revenue recognition model (ASC 606):
Recording Revenue (when performance obligations are satisfied):
Debit: Accounts Receivable (or Cash) Credit: Sales/Service Revenue
If contract liabilities or unearned revenue exist:
Debit: Unearned Revenue Credit: Revenue
Accruing an Expense:
Debit: Expense Credit: Accrued Liability (e.g., Wages Payable, Interest Payable)
Paying an Accrued Expense:
Debit: Accrued Liability Credit: Cash
Operating Lease (ASC 842):
Initial Recognition of Right-of-Use Asset and Lease Liability:
Debit: Right-of-Use Asset (Operating) Credit: Lease Liability
Periodic Lease Payment:
Debit: Lease Expense Credit: Cash
(Right-of-use asset and lease liability are amortized in the background with slightly different presentation.)
Finance Lease (Lessee):
Debit: Right-of-Use Asset (Finance) Credit: Lease Liability
Periodic Lease Payment:
Debit: Interest Expense Debit: Lease Liability Credit: Cash
Record amortization of ROU asset each period:
Debit: Amortization Expense Credit: Accumulated Amortization – ROU Asset
Recognizing a Probable and Reasonably Estimable Loss:
Debit: Loss (Lawsuit, Warranties, etc.) Credit: Liability (Lawsuit Payable, Warranty Liability, etc.)
Below is a simplified diagram that illustrates the general flow of a transaction from the point of journal entry through final financial statement presentation:
flowchart LR
A["Transaction Occurs"] --> B["Journal Entry"]
B --> C["General Ledger Posting"]
C --> D["Trial Balance"]
D --> E["Financial Statements"]
Let’s illustrate bond amortization for a single period using the Effective Interest Method. Suppose a $100,000 bond is 5 years until maturity, with a 10% stated interest rate (paid annually), sold at a discount to yield an effective rate of 12%. The discounted price was $96,535.80, which becomes the bond’s initial carrying value.
Journal Entry:
Debit: Interest Expense …………….. $11,584.30 Credit: Discount on Bonds Payable …… $1,584.30 Credit: Cash (Interest Paid) ……….. $10,000
Resulting new carrying value of the bond = $96,535.80 + $1,584.30 = $98,120.10.