The CPA Exam Guide to Ratio Analysis: All 25 Formulas, Worked Through
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Ratios are one of the few CPA topics that follow you from section to section. On FAR you calculate them and work out how a transaction moves the current ratio. On AUD you use them in analytical procedures to find the fluctuation worth investigating. On BAR they turn up again in financial statement analysis and valuation.
Learn them once and you get paid three times. This guide covers the five categories, the formulas, a way to rebuild a formula from its name when your memory goes blank, the cash conversion cycle, and worked examples that all run off one consistent set of financial statements.
In this guide
The figures used throughout. Every worked example below comes from the same company: net sales $102,000, COGS $30,600, gross profit $71,400, net income $5,100, total assets $52,000, total liabilities $37,000, equity $15,000, current assets $22,000, current liabilities $10,000, average AR $10,000, average inventory $7,000, average AP $6,000, EBIT $7,000, interest expense $1,000, 1,000 common shares at $25.
Where are ratios tested on the CPA exam?
Ratios show up in three sections, and they are asked in a different way in each one.
| Section | How they appear | Format |
|---|---|---|
| FAR | Direct calculation, and transaction-effect questions asking which way a ratio moves | MCQ, TBS |
| AUD | Analytical procedures, spotting the unusual fluctuation, designing substantive tests | Mostly TBS |
| BAR | Financial statement analysis, performance interpretation, valuation multiples | MCQ, TBS |
AUD candidates underestimate how ratio-heavy an analytical procedures simulation can be. If the formulas are automatic, you spend your time interpreting the numbers. If they are not, you spend it doing arithmetic, and the interpretation is what earns the points.
How do you rebuild a ratio formula from its name?
Before you memorize anything, learn these three rules. A large share of ratio formulas can be reconstructed from the name alone, which is what you want on a morning when your memory has gone blank.
- Read the denominator as "for every $1 of." The denominator is the baseline you are measuring against. Current ratio is current assets over current liabilities, so read it as: for every $1 of current liabilities, we hold $X of current assets. This is the single best guard against flipping a formula upside down.
- In an X-to-Y ratio, Y is the denominator. Debt-to-equity puts equity underneath. Return on assets puts assets underneath. The name tells you the structure if you read it literally.
- In a turnover ratio, the named item is the denominator. Inventory turnover puts inventory underneath. Receivables turnover puts average AR underneath. You are measuring how many times you cycle through that item, so it has to be the base.
What are the five categories of ratios?
| Category | The question it answers | Main ratios |
|---|---|---|
| Liquidity | Can we pay what is due soon? | Current, quick, operating cash flow |
| Turnover | How efficiently do we use what we have? | AR, inventory, AP, asset, working capital, cash conversion cycle |
| Profitability | How much of each sales dollar do we keep? | Profit margin, gross profit margin |
| Debt | How much leverage are we carrying? | Total debt, debt-to-equity, times interest earned |
| Investment | How well is capital deployed, and is the stock priced well? | ROA, ROE, equity multiplier, EPS, P/E, PEG, price-to-sales, price-to-book, payout |
What are the liquidity ratios?
Liquidity ratios ask whether a company can cover its short-term obligations using assets that can actually become cash in time to be useful.
The word doing the work is liquid. Cash already is cash. Marketable securities are close. Accounts receivable is reasonably liquid because the sale has happened and you are waiting on collection. Inventory is further out, because it still has to be sold and then collected. Prepaid expenses sit at the end, because they never convert to cash at all. You consumed the benefit rather than receiving money back.
Working capital
Not a ratio at all, a dollar amount. It answers what is left over after the current liabilities are settled. Here, $22,000 less $10,000 gives $12,000.
Current ratio
Every current asset counts. $22,000 over $10,000 gives 2.2. For every $1 of current liabilities the company holds $2.20 of current assets.
Quick ratio, also called the acid-test ratio
Inventory and prepaid expenses come out. It is the stricter test, because it only counts assets that can realistically be turned into cash quickly.
Operating cash flow ratio
This one uses cash the business actually generated rather than accrual balances, which makes it the most conservative of the three.
The trap. Leaving inventory in the quick ratio. It comes out, and so do prepaid expenses. Quick ratio and acid-test ratio are two names for the same formula, and an exam question will use either one without warning.
What are the turnover ratios, and how does the cash conversion cycle work?
Turnover ratios measure efficiency: how many times in a year the company cycles through a given balance. Almost any turnover ratio converts into a days figure by dividing 365 by the turnover, and those days figures are what feed the cash conversion cycle.
Working capital turnover
$102,000 over $12,000 gives 8.5.
Asset turnover
$102,000 over $52,000 gives 2.0, or 1.96 before rounding.
Accounts receivable turnover
Days in AR = 365 / AR Turnover
$102,000 over $10,000 gives 10.2, and 365 divided by 10.2 gives about 36 days to collect.
Inventory turnover
Days in Inventory = 365 / Inventory Turnover
$30,600 over $7,000 gives 4.4, and 365 divided by 4.4 gives about 83 days to sell.
Accounts payable turnover
Days in AP = 365 / AP Turnover
$30,600 over $6,000 gives 5.1, and 365 divided by 5.1 gives about 72 days to pay. More days here helps cash flow, because the company is holding its money longer before handing it to vendors.
The cash conversion cycle
This is the one worth knowing cold. It measures how long cash is tied up between paying for inventory and collecting from the customer.
| Component | Days | Why it moves that way |
|---|---|---|
| Days in inventory | 83 | Added. Longer to sell means cash is tied up longer. |
| Days in AR | 36 | Added. Longer to collect means cash is tied up longer. |
| Days in AP | 72 | Subtracted. Longer to pay means you keep the cash longer. |
| Cash conversion cycle | 47 | 83 + 36 − 72 |
Shorter is generally better, because less working capital is trapped in the operating cycle.
The trap. Adding days in AP instead of subtracting it. Ask yourself what the number is doing: taking longer to pay your suppliers means your cash stays in your account, so it shortens the cycle. If you can reason it out you will never need to remember the sign.
Two notes on AP turnover. Some texts use purchases rather than COGS in the numerator, which is more precise but rarer on the exam. And this is the ratio where the cycle really gets tested, because it folds three separate turnover relationships into one story about the business.
What are the profitability ratios?
These measure how much of each sales dollar survives to the bottom line.
Profit margin
$5,100 over $102,000 gives 5%. Five cents of every sales dollar ends up as net income.
Gross profit margin
$71,400 over $102,000 gives 70%.
Read the two together. The gap between 70% and 5% is everything consumed between gross profit and net income: selling costs, general and administrative expenses, interest and tax. When a question gives you both margins, that spread is usually the point of the question.
What are the debt ratios?
Debt ratios ask a different question from liquidity ratios. Liquidity asks whether the near-term bills can be paid. Debt ratios ask how much leverage sits on the balance sheet overall, and whether the interest on it can be serviced.
Total debt ratio
$37,000 over $52,000 gives about 71%. Roughly 71 cents of every dollar of assets is financed by creditors.
Debt-to-equity
$37,000 over $15,000 gives about 2.5.
Times interest earned
$7,000 over $1,000 gives 7. Earnings cover the interest bill seven times over.
The trap. Forgetting to build EBIT. Questions hand you net income, not EBIT. Earnings before interest and taxes means you start at net income and add back both the interest expense and the tax expense. Miss either one and every downstream answer is wrong.
What are the investment ratios?
These serve two different readers. The company uses some of them to judge how well it is deploying capital. An investor uses the rest to judge whether the shares are attractively priced.
Return on assets
$5,100 over $52,000 gives about 10%.
Return on equity
$5,100 over $15,000 gives about 34%.
Equity multiplier
$52,000 over $15,000 gives about 3.5.
Why ROE is so much higher than ROA here. Leverage. The same $5,100 of net income is being measured against $52,000 of assets in one case and only $15,000 of equity in the other, and the equity multiplier of 3.5 is exactly the size of that gap. A high ROE next to a modest ROA is a leverage story, not a profitability story, and exam questions like testing whether you know the difference.
Dividend payout ratio
$510 over $5,100 gives 10%.
Earnings per share
$5,100 with no preferred dividends over 1,000 shares gives $5.10. Preferred dividends come out first because that income belongs to preferred holders, not common ones. Spread the same earnings over more shares and EPS falls, which is what dilution means.
Price-to-earnings
A $25 share price over $5.10 of EPS gives about 4.9.
PEG ratio
PEG adjusts P/E for how fast earnings are growing, so a high P/E on a fast-growing company can still look reasonable.
Price-to-sales
Price-to-book
| Multiple | Use it when |
|---|---|
| P/E | The company is profitable and earnings are reasonably stable |
| PEG | You are comparing companies growing at different rates |
| Price-to-sales | Earnings are negative, so P/E cannot be used at all |
| Price-to-book | Asset-heavy industries and financial institutions |
The trap. Using P/E when earnings are negative. A negative P/E is not a cheap stock, it is a meaningless number. That is the whole reason price-to-sales exists, and a question that hands you a loss-making company is usually testing exactly this.
Start free with CPA 101
Ratios are one topic. CPA 101 is free and includes all 25 of the 2026 AICPA released MCQs plus a study outline, so you can see how the rest of the material gets taught. No credit card required.
Full formula reference
For final review. Every formula on this page in one place.
| Ratio | Formula | What it answers |
|---|---|---|
| Liquidity | ||
| Working capital | Current assets − current liabilities | What is left after current debts |
| Current ratio | Current assets / current liabilities | All current assets against current debts |
| Quick ratio | (Cash + marketable securities + AR) / current liabilities | Liquid assets only against current debts |
| Operating cash flow ratio | Cash flow from operations / current liabilities | Real cash against current debts |
| Turnover | ||
| Working capital turnover | Net sales / working capital | Times working capital cycles |
| Asset turnover | Net sales / total assets | Sales per dollar of assets |
| AR turnover | Net credit sales / average AR | Times receivables are collected |
| Days in AR | 365 / AR turnover | Average days to collect |
| Inventory turnover | COGS / average inventory | Times inventory is sold |
| Days in inventory | 365 / inventory turnover | Average days to sell |
| AP turnover | COGS / average AP | Times payables are paid |
| Days in AP | 365 / AP turnover | Average days to pay |
| Cash conversion cycle | Days in inventory + days in AR − days in AP | Days cash is tied up |
| Profitability | ||
| Profit margin | Net income / net sales | Net income per sales dollar |
| Gross profit margin | Gross profit / net sales | Gross profit per sales dollar |
| Debt | ||
| Total debt ratio | Total liabilities / total assets | Debt per dollar of assets |
| Debt-to-equity | Total liabilities / total equity | Debt per dollar of equity |
| Times interest earned | EBIT / interest expense | Times interest is covered |
| Investment | ||
| ROA | Net income / total assets | Income per dollar of assets |
| ROE | Net income / total equity | Income per dollar of equity |
| Equity multiplier | Total assets / total equity | Assets per dollar of equity |
| Dividend payout ratio | Dividends paid / net income | Share of earnings distributed |
| EPS | (Net income − preferred dividends) / average common shares | Earnings per share |
| P/E | Price per share / EPS | Price against earnings |
| PEG | P/E / growth rate | P/E adjusted for growth |
| Price-to-sales | Market capitalization / annual sales | Value against revenue |
| Price-to-book | Market capitalization / total equity | Value against book value |
Frequently asked questions
Which ratio formulas matter most for FAR?
The current ratio, quick ratio, AR turnover, inventory turnover, debt-to-equity, times interest earned, ROA, ROE and the cash conversion cycle. If you know those nine cold, you can reason through most of the rest.
Is the quick ratio the same as the acid-test ratio?
Yes. Two names, one formula. Both exclude inventory and prepaid expenses, and an exam question may use either name.
How is the cash conversion cycle tested?
Three ways. Directly as a formula, indirectly by giving you the turnover ratios and making you convert them to days first, or as part of a broader question about how an operational change affects working capital.
What is the difference between ROA and ROE?
ROA measures income against every dollar of assets, however they were financed. ROE measures income against the owners' money only. ROE is higher whenever a company uses debt, and the gap between them is the leverage.
Why is inventory excluded from the quick ratio?
Because it is two steps away from cash rather than one. Inventory has to be sold before it becomes a receivable, and the receivable has to be collected before it becomes cash. The quick ratio only counts what can realistically be converted in time to pay a current liability.
Do I need to memorize every ratio for the CPA exam?
No. Learn the most frequently tested ones properly, then use the naming patterns to rebuild the rest. Reading the denominator as "for every $1 of" will get you further under pressure than a memorized list will.
See how the rest of the material gets taught
CPA 101 is free and covers the 2026 AICPA released questions plus a study outline. No credit card, and you will know within an evening whether the explanations work for you.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
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