The Ultimate CPA Guide to Ratio Analysis
The Ultimate CPA Guide to Ratio Analysis
All Five Categories — Liquidity, Turnover, Profitability, Debt, and Investment — tested across the CPA exam
Ratios are one of the few CPA exam topics that follow you across multiple sections. On FAR, you calculate ratios and determine how transactions shift the current ratio or debt-to-equity. On AUD, you use ratios during analytical procedures to spot unusual fluctuations and design testing. On BAR, ratios show up in financial statement analysis and valuation work.
Whether you are learning from zero or reviewing before exam day, this guide covers the five ratio categories, the core formulas, the reading tricks that help you reconstruct formulas under pressure, the cash conversion cycle, worked examples, and short videos to lock in the concepts.
Who this guide is for:
- FAR students who need ratio formulas, transaction effects, and quick review material
- AUD students who want to get faster at analytical procedure simulations
- BAR students who need valuation multiples and financial analysis logic
- Anyone looking for a final formula sheet style review before exam day
Jump to:
Video: Every Ratio I Needed to Score a 95 on FAR
Want a complete CPA study roadmap?
I scored 90+ on all four CPA exams. My free course breaks down exactly how — including how to handle ratio questions on every section.
Get My Free CPA 101 CourseHow Ratios Are Tested on the CPA Exam FAR • AUD • BAR
Ratios are not just a FAR topic. Understanding where they appear changes how you study and helps you reuse one topic across multiple sections.
| Section | How Ratios Appear | Common Formats |
|---|---|---|
| FAR | Direct calculation questions, “what happens to the ratio if...” scenario analysis, and transaction impact questions | MCQ, TBS |
| AUD | Analytical procedures, unusual fluctuation analysis, and substantive analytical procedure simulations | TBS |
| BAR | Financial statement analysis, business performance interpretation, and valuation multiples | MCQ, TBS, written communication |
| REG | Return metrics and planning context questions in certain business scenarios | MCQ |
| TCP | After-tax return metrics and investment planning contexts | MCQ, TBS |
| ISC | KPI interpretation and financial-health indicators in systems and risk contexts | MCQ, TBS |
Kyle’s 90+ Score Insight: AUD candidates consistently underestimate how ratio-heavy analytical procedure TBS can be. If you know the ratios cold, you identify anomalies quickly. If you do not, you burn time doing arithmetic instead of interpreting the results.
Three Tricks for Reading Any Ratio High-Yield
Read the denominator as “for every $1 of ___”
The denominator is the baseline. The current ratio is current assets / current liabilities, so read it as: for every $1 of current liabilities, we have $X of current assets. This simple framing helps prevent formula inversion.
The second word in an “X-to-Y” ratio goes in the denominator
Debt-to-equity means equity is the denominator. Return on assets means assets is the denominator. The name often tells you the structure if you slow down and read it literally.
For turnover ratios, the named asset usually sits in the denominator
Inventory turnover uses inventory in the denominator. Accounts receivable turnover uses average AR in the denominator. The ratio measures how many times you cycle through that resource.
All Five Categories at a Glance
| Category | Core Question | Key Ratios |
|---|---|---|
| Liquidity | Can we pay short-term debts? | Current ratio, Quick ratio, Operating cash flow ratio |
| Turnover | How efficiently do we use assets? | AR turnover, Inventory turnover, AP turnover, Asset turnover, Working capital turnover, Cash conversion cycle |
| Profitability | How much profit do we keep from sales? | Profit margin, Gross profit margin |
| Debt | How much debt do we carry? | Total debt ratio, Debt-to-equity, Times interest earned |
| Investment | How effectively is capital being deployed, and is the stock attractive? | ROA, ROE, Equity multiplier, EPS, P/E, PEG, Price-to-sales, Price-to-book, Dividend payout |
Liquidity Ratios FAR • AUD
Video: Master Liquidity Ratios in 5 Minutes
It is not enough to ask whether a company has enough assets. The real question is whether it has enough liquid assets. Cash is fully liquid. Accounts receivable is fairly liquid because the sale has already occurred. Inventory is less liquid because it still has to be sold and collected. Prepaid expenses are not convertible to cash at all.
Current assets from most liquid to least liquid: Cash → Marketable securities → Accounts receivable → Prepaid expenses → Inventory
Working Capital
Not a ratio — a dollar amount. It answers: after current liabilities are paid, what short-term resources remain? If current assets are $22,000 and current liabilities are $10,000, working capital is $12,000.
Current Ratio High-Yield
Includes all current assets. If current assets are $22,000 and current liabilities are $10,000, the ratio is 2.2. For every $1 of current liabilities, we have $2.20 of current assets.
Quick Ratio (Acid-Test Ratio) High-Yield
Excludes inventory and prepaid expenses. It is a stricter short-term solvency test because it uses more liquid assets.
Operating Cash Flow Ratio
Uses actual cash generated by operations rather than accrual-based balances. This is one of the most conservative liquidity measures.
Common Trap: Students often include inventory in the quick ratio. Do not. The quick ratio excludes inventory and prepaid expenses.
Study Tip: The quick ratio and acid-test ratio are the same thing. Prepaids are excluded because they do not convert into cash. Inventory is excluded because it still has to be sold and collected.
Turnover Ratios FAR • AUD • BAR
Most turnover ratios can be converted into a days measure by dividing 365 by the turnover rate. That conversion is especially useful for the cash conversion cycle.
Working Capital Turnover
With net sales of $102,000 and working capital of $12,000, turnover is 8.5.
Asset Turnover
With net sales of $102,000 and total assets of $52,000, asset turnover is about 2.0.
Accounts Receivable Turnover High-Yield
With $102,000 in credit sales and average AR of $10,000, turnover is 10.2.
Inventory Turnover High-Yield
With COGS of $30,600 and average inventory of $7,000, turnover is about 4.4.
Accounts Payable Turnover High-Yield
With COGS of $30,600 and AP of $6,000, turnover is about 5.1.
Higher days in AP generally helps cash flow because the company holds onto cash longer before paying vendors.
The Cash Conversion Cycle High-Yield
Using the example above: 83 + 36 − 72 = 47 days.
A shorter cash conversion cycle is generally better because less working capital is tied up in operations. Days in AP is subtracted because delaying payment lets the company keep cash longer.
| Component | Days | Effect on CCC |
|---|---|---|
| Days in Inventory | 83 | Added — longer to sell means more cash tied up |
| Days in AR | 36 | Added — longer to collect means more cash tied up |
| Days in AP | 72 | Subtracted — longer to pay means more cash retained |
| Cash Conversion Cycle | 47 days | 83 + 36 − 72 = 47 |
Common Trap: Students often forget that days in AP is subtracted in the cash conversion cycle. It reduces the time cash is tied up.
Kyle’s 90+ Score Insight: The cash conversion cycle is a favorite because it combines three separate turnover relationships into one operational story. Know it forward and backward.
Profitability Ratios FAR • AUD • BAR
Video: Master Profitability Ratios in Minutes
Profit Margin High-Yield
If net income is $5,100 and sales are $102,000, profit margin is 5%. Five cents of every dollar of sales becomes net income.
Gross Profit Margin High-Yield
If gross profit is $71,400 and sales are $102,000, gross profit margin is 70%.
Study Tip: The spread between gross profit margin and profit margin tells you how much revenue is being consumed by period costs like G&A and selling expenses.
Debt Ratios FAR • BAR
Total Debt Ratio
With liabilities of $37,000 and assets of $52,000, the ratio is 71%.
Debt-to-Equity High-Yield
If liabilities are $37,000 and equity is $15,000, debt-to-equity is about 2.5.
Times Interest Earned High-Yield
If EBIT is $7,000 and interest expense is $1,000, times interest earned is 7.
Common Trap: Students sometimes forget to add interest and taxes back to net income when deriving EBIT.
Study Tip: EBIT means earnings before interest and taxes. Start with net income and add both back.
Investment ratios are often where BAR students get tripped up — especially PEG and price-to-book.
My Free CPA 101 Course covers financial statement analysis from the ground up, including how these ratios show up in valuation and advisory scenarios. Start it here for free.
Investment Ratios BAR
Company Efficiency Ratios
Return on Assets (ROA) High-Yield
With net income of $5,100 and assets of $52,000, ROA is about 10%.
Return on Equity (ROE) High-Yield
With net income of $5,100 and equity of $15,000, ROE is about 34%.
Equity Multiplier
With assets of $52,000 and equity of $15,000, the equity multiplier is about 3.5.
Investor Ratios
Dividend Payout Ratio
With $510 of dividends paid and $5,100 of net income, the payout ratio is 10%.
Earnings Per Share (EPS) High-Yield
With $5,100 of net income, no preferred dividends, and 1,000 common shares, EPS is $5.10.
Study Tip: EPS falls when the same earnings are spread across more shares. That is why dilution matters.
P/E Ratio High-Yield
With a $25 share price and EPS of $5.10, the P/E ratio is about 4.9.
Common Trap: P/E is only usable when earnings are positive. If earnings are negative, shift to other valuation multiples like price-to-sales.
Business Valuation Multiples
These are especially relevant in BAR valuation and advisory scenarios.
PEG Ratio High-Yield
PEG adjusts P/E for expected growth. Lower generally indicates better value relative to growth.
Price-to-Sales
This is useful when the company is not profitable and P/E cannot be used.
Price-to-Book
This compares market value to book value and is especially useful in asset-heavy industries and financial company analysis.
| Valuation Multiple | Best Used When | Lower Is Better? |
|---|---|---|
| P/E Ratio | The company is profitable and earnings are stable | Generally yes |
| PEG Ratio | Comparing companies with different growth rates | Generally yes |
| Price-to-Sales | The company has negative earnings | Generally yes |
| Price-to-Book | Asset-heavy industries and financial institutions | Generally yes |
Complete Ratio Formula Reference
Use this section for final review before exam day.
| Ratio | Formula | Core Question |
|---|---|---|
| Liquidity Ratios | ||
| Working Capital | Current Assets − Current Liabilities | What remains after paying current debts? |
| Current Ratio | Current Assets / Current Liabilities | All current assets vs. current debts |
| Quick Ratio | (Cash + Marketable Securities + AR) / Current Liabilities | Highly liquid assets vs. current debts |
| Operating Cash Flow Ratio | Cash Flow from Operations / Current Liabilities | Actual cash generated vs. current debts |
| Turnover Ratios | ||
| Working Capital Turnover | Net Sales / Working Capital | Times working capital is used and replaced |
| Asset Turnover | Net Sales / Total Assets | Sales generated per dollar of assets |
| AR Turnover | Net Credit Sales / Average AR | Times AR is collected |
| Days in AR | 365 / AR Turnover | Average collection time |
| Inventory Turnover | COGS / Average Inventory | Times inventory is sold and replaced |
| Days in Inventory | 365 / Inventory Turnover | Average sell-through time |
| AP Turnover | COGS / Average Accounts Payable | Times AP is paid |
| Days in AP | 365 / AP Turnover | Average payment time |
| Cash Conversion Cycle | Days in Inventory + Days in AR − Days in AP | Total days from cash out to cash in |
| Profitability Ratios | ||
| Profit Margin | Net Income / Net Sales | Net income per dollar of sales |
| Gross Profit Margin | Gross Profit / Net Sales | Gross profit per dollar of sales |
| Debt Ratios | ||
| Total Debt Ratio | Total Liabilities / Total Assets | Debt per dollar of assets |
| Debt-to-Equity | Total Debt / Total Equity | Debt raised per dollar of equity |
| Times Interest Earned | EBIT / Interest Expense | Times interest payments are covered |
| Investment Ratios | ||
| ROA | Net Income / Total Assets | Net income per dollar of assets |
| ROE | Net Income / Total Equity | Net income per dollar of equity |
| Equity Multiplier | Total Assets / Total Equity | Assets per dollar of equity |
| Dividend Payout Ratio | Dividends Paid / Net Income | Portion of earnings distributed |
| EPS | (Net Income − Preferred Dividends) / Avg. Common Shares | Per-share earnings |
| P/E Ratio | Price Per Share / EPS | Price relative to earnings |
| PEG Ratio | P/E Ratio / Growth Rate | P/E adjusted for growth |
| Price-to-Sales | Market Capitalization / Annual Sales | Value relative to revenue |
| Price-to-Book | Market Capitalization / Total Equity | Value relative to book value |
FAQ
What ratio formulas matter most for FAR?
The highest-yield ratio formulas for FAR usually include current ratio, quick ratio, AR turnover, inventory turnover, debt-to-equity, times interest earned, ROA, ROE, and the cash conversion cycle.
Is the quick ratio the same as the acid-test ratio?
Yes. The quick ratio and acid-test ratio are the same formula. Both exclude inventory and prepaid expenses.
How is the cash conversion cycle tested on the CPA exam?
It may be tested directly as a formula, indirectly through days components, or as part of broader operational analysis in FAR or BAR questions.
What is the difference between ROA and ROE?
ROA measures profit generated from total assets. ROE measures profit generated from shareholder equity. ROE is usually higher when the company uses leverage.
Do I need to memorize every ratio for the CPA exam?
No. You should prioritize the most frequently tested ratios first and then learn the patterns that help you reconstruct formulas from their names.
Ready to master every topic across the CPA exam?
Ratios are just the start. My Free CPA 101 Course gives you a complete study system for FAR, AUD, BAR, REG, TCP, and ISC — including the exact strategies I used to score 90+ on every section.
Kyle Ashcraft is a CPA who scored a 90+ on all four CPA exams. Kyle founded Maxwell CPA Review, which is an exam-prep company that offers a comprehensive CPA exam review course and private tutoring.