Finance Formulas / May 3, 2018 / Luz Tyson
An accounting ratio compares two line items in a company’s financial statements, namely made up of its income statement, balance sheet and cash flow statement. These ratios can be used to evaluate a company’s fundamentals and provide information about the performance of the company over the last quarter or fiscal year.
The accounting equation, also known as the balance sheet equation, is written as Assets = Liabilities + Equity and underpins the balance sheet's foundation. The accounting equation is the foundation of double entry accounting, and displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders.
The accounting equation is sometimes referred to as the "basic accounting equation" or balance sheet equation could also be written as Shareholders' Equity = Assets – Liabilities, where the statement is rearranged to reflect the residual claim of equity owners. Alternatively, one can rearrange the accounting statement and the results of the equation will still hold if done properly.
Contribution margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit. The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations. If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. It is also useful for determining the profits that will arise from various sales levels.
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