Calculate Internal Rate of Return

The internal rate of return (IRR) is defined as the rate of return an investment project creates over its entire life. It is computed by finding that discount rate that results in a zero net present value for the project.


Additional Accounting Links:
Calculate Accounting Average


Useful External Links:

Online NPV Calculator
Calculate IRR using Excel

Purchase Raw Materials Journal Entry

Use the following information to record the purchase raw materials in the accounting ledger.
When you receive the ship, you are obligated to pay cash or a agree on paying at a later date

Both transactions require these accounting entries to keep the ledger in check.

1. Increase raw materials inventory with credit
   
2. Decrease cash account with debit
   
3. Increase accounts payable with credit
   

Prepaid Expenses and Unearned Revenues

In accounting, prepaid expenses and unearned revenues are considered prepayments by accountants. That is defined as money has exchanged hands but the expense or revenue is not recorded due to the expense has not been incurred yet or the revenue has not been earned yet by the company.

Examples of prepaid expenses and unearned revenues

• Prepaid Expense - A year long insurance contract a company paid $12,000 for at the beginning of the year. Since the insurance company owes the company service, the expense prepayment is recorded as an asset (Journal Entries: debit Prepaid Insurance and credit Cash).

• Unearned Revenue - A year long subscription of $12,000 is received in advance by a magazine company. Because the company owes something, the unearned revenue is recorded as a liability (Journal Entries: debit Cash and credit Unearned Revenue).

Advantages and Disadvantages of Globalization

What is globalization and what are some of its advantages and disadvantages?

In recent decades, globalization has been defined as an economic force driving worldwide economic integration and the expanding of businesses beyond their domestic borders. The worldwide trend of diminishing trade barriers, increased technology, and reduced shipping costs have promoted a prosperous era of world trade. Companies are no longer limited to their domestic boundaries and may conduct business anywhere in the world. Some benefits of globalization include lower prices and job creation.

Manufacturing activities can be performed where labor and supplies are cheapest leading to reduced consumer costs. Jobs can be created in poorer economies that eventually lead to prosperous economic growth. Yet the effects of job creation and globalization are like a double edged sword. Jobs often are eliminated in countries with higher costs and out-sourced to countries with lower cost structures.

This has been viewed as one of the main disadvantages of globalization and a point of contention between employees of multinational companies. However, many of these benefits continue to outweigh its disadvantages therefore the world will continue to see globalization rise as a powerful global economic force.

What is Working Capital Management

Working capital management relates to the short-term management of a firm's short term assets and liabilities. For example, inventory is considered a short-term asset and accounts payable is categorized as a short-term liability that shows what the firm owes to other entities.

Computer Accounting System Modules

Modern computer accounting systems contain different modules in order to function correctly. Each module handles a different task. For example data collection, processing, and reporting for each type of business activity that the company is involved in. Some examples include:

• Sales Moduless
• Purchasing Modules
• Inventory Management Modules
• Human resources module
• Production Module

Accounting Regulations External Decision Makers

How external decision makers benefit from accounting regulations and laws?

Enforced accounting regulations help protect the interests of external decision makers such as stockholders and banks by ensuring that information for evaluating the performance and financial condition of a company is available to necessary users and that the information presented is prepared by certified professionals according to specific guidelines that are enforceable by law.

Accounting guidelines provide assurance that the information presented is:

1. Accurate
2. Reliable
3. Comparable over time and across companies.

Calculate Pretax Margin

What is the Pretax Margin?

In accounting, the pretax margin is a number that measures the operating efficiency of a company by using its accounting records. The pretax margin is expressed as a percentage of revenues earned. Since pretax margin illustrates the relationship between operating income and revenues, it is a measure of the profitability of the company.

Calculate Pre-tax Margin

Pretax margin = (Operating income + other income − interest)/ Sales

What are Capital Structure Decisions?

Management makes a capital structure decision when it decided the appropriate mix of debt and equity capital that its company uses to finance its assets and operations.

An example of a capital structure decision would be for a firm to issue new debt to finance a new factory instead of common stock.

Additional Accounting Examples and Tutorials:

Definition of Treasury Stock
Reasons Companies Issue Preferred Stock

What is Capital Budgeting?

In accounting, capital budgeting is about how a firm will utilize its fixed assets, such as a factory, to make use and make returns off of long-term investments.


A good example of this is a decision made by management to construct a new factory with machinery in order to meet demand for a new product. This is a capital budgeting decision


More Accounting Links:
Average Accounting Return

What causes a Liability?

Liabilities can result from certain types of contractual relationships with lenders, suppliers, customers, employees, governments, and other companies.

Outsourcing Manufacturing to China

What has led to an increase in outsourcing manufacturing to China?

Many reasons have led to the current interest in outsourcing manufacturing activities to China in recent years. Strong economic growth and the easing of government regulations have made companies consider China for manufacturing. MNCs can take advantage of cheap labor in the interior provinces but must watch out for more expensive labor near the coast.

Firms interested in doing business in China must also respect local officials and regulations if they desire to be successful.

Revenue Recognition Definition

Revenue recognition is an accounting term used to refer to the recording of a sale or service with a journal entry into a company's accounting records. Revenue will be recognized only when certain criter has been met. This criteria for revenue recongnition includes:

1. The work has been substantially completed by the company for a customer.

2. Cash or a secured future payment (credit note) has been received by the company

Operating Expense to Sales Ratio

The Operating Expense to Sales Ratio displays in a ratio format a company's operating expenses as a percent of its total net revenues, most often per quarter.

Formula for the  Operating Expense to Sales Ratio 

Total Overhead Cash Expense / Net Revenues

This ratio is  considered a measure of the total overhead used in the manufacturing firm per net sales revenue dollar

The most important information revealed by this formula is the efficiency of a company's overall cost structure and it also indicates the ability of its business operations to convert income to profit.

For example, a company experiencing larger and more stable cash flows can sustain a higher operating expense to sales ratio than a smaller company with much less stable operations. 

Management can use the information gained from this ratio in order to manage cost and ensure the long term profitabilty of a company. 

Other Financial Ratios:

Ratio Analysis Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio

Revenue Recongnition Principle Defintion

What is the Revenue Recongnition Principle in Accounting?

It is one of the most important accounting principles along with the matching principle. It is used to determine the correct accounting period to record when revennues are earned and expenses paid. One important aspect of this principle is that revenues are recognized when  realized or realizable and that they are recongnizable when earned.

This is quite different than cost accounting. In cost accounting revenues incurred by a company are reccorded when cash is received no matter when the product or service is actually given to the customer.

 

   

What are Trade Discounts?

What are Trade Discounts?

Often when dealing with customers, companies will offer trade discounts in order to entice larger sales. Trade discounts are deductions from list prices offered, to special customers, for quantities purchased or for the purpose of establishing different price levels for different classes of customers, such as wholesalers and retailers.

Trade discounts are also used so that vendors can change the effective prices of prodcuts included in catalogs by issuing a revised discount sheet.

Revenues should be recorded after deduction of such discounts.

What is a Deffered Expenditure

As deffered expenditure is a type of  expenditure when payment has been made or a liabilityhas been incurred by a company but which is carried forward on the assumption that it will benefitthe company over a subsequent periods in the future.  In accounting it is also commonly referred to as deferred revenue expenditure.

Characteristics of Accounting Assets

The following is by defintion the characteristics of accounting assets

•          Probable future economics benefits
  
•          Obtained or controlled by an entity
  
•          Result of past transactions or events.
  

Assets are controlled by the company with the intent to gain future economic benefit.

Nonoperating Revenues and Gains

The following are some examples of Non- Operating Revenues and Gains:

• Interest revenue (or interest income
  
• Gain on sale of securities
• Gain on sale of equipment
  
• Gain on sale of buildings           
  
• Gain on sale of machinery

Four Significant Dividend Dates

The four following dates are important terms to understand in the distribution of a dividend by a corporation.

1. Date of Declaration is the day that the dividend is declared by the board of directors of a corporation. At this time, a liability is created on the balance sheet to make the payment come into existence.
2. Ex- Dividend Date is a date that indicates who is able to receive the dividend. An investor who buys the stock before the ex-dividend date is entitled to receive a dividend from the corporation. On the other hand, an investor who sells their stock before the date will not receive a dividend.
   
3. Date of record usually follows the date of declaration by three to four weeks. In order to receive payment of the dividend an investor must be listed as the owner of a stock on this date.
4. Date of payment is the date on which an investor will be paid a dividend. It usually comes two to three weeks after the date of record
   

What are Dead Assets?

In accounting, dead assets are a type of asset that do not have any life beyond their immeadiate use.

Multi-Domestic Strategy and Transnational Strategy

What is the difference between at multi-domestic strategy and transnational strategy?

A multi-domestic strategy gives a top priority to quick local responsiveness and commitment. It can be considered a differentiation strategy because the firm attempts to deliver different products and services to different local customers.

On the other hand, a transnational strategy looks at the bigger worldwide picture and tries to take advantage of overall global factors. For example, they will seek location advantage and search to gain economic operating efficiencies worldwide.

What is Residual Income?

In accounting and finance, residual income is defined as the net operating income an investment center generates above a company’s minimum required rate of return on its operating assets.

Additional Accounting Links:
Calculate Average Accounting Return

Calculate Basic Earnings per Share

Earnings per share calculation (EPS) are required by the SEC to be included on the income statements of publicly owned companies. Basic earnings per share is based on the weighted-average number of common shares outstanding for the year.

The number used will ignore dilution caused by the convertible preferred stock.

What is Cost Center Manager?

A cost center manager is an employee who has control over cost, but not revenue or investment funds of a company. For example, a profit center manager will control cost and revenue. On the other hand, an investment center manager has control over cost, revenue, and investment funds of a company.

Calculate Average Tax Rate

The average tax rate for a company is the tax liability divided by taxable income.

Average Tax Rate Formula:

Average Tax Rate = Tax Liability/ Taxable Income

Calculate Inventory Turnover Ratio

In accounting, the inventory turnover ratio displays how many times inventory was sold or turned over by a company during a fiscal year. The equation for inventory turnover is listed below:

Inventory Turnover Formula:

Inventory Turnover= COGS/Inventory

The inventory turnover ratio is normally compared with firms operating in the same industry. A low turnover ratio typically poor sales performance and excessive amounts of unsold inventory. On the other hand, a high turnover ratio represents strong sales or under-purchasing by the company.


Useful External Links:
American Express Inventory Turnover Calculator

Related Accounting Tutorials:

FIFO Method and Weighted Average Inventory Method
Perpetual Inventory System
Basic Equation for Inventory Accounts
Inventory Cost Flow Assumptions
Accounting Inventory Shrinkage Example Problem
Merchandising Accounting Journal Entry

Definition of Treasury Stock

Treasury Stock is shares of a corporation's capital stock that have already been issued and are now being re-purchased by the same issuing corporation.

These treasury shares may be held onto by the company permanently or may be re-issued at a later time to the public. Shares of capital stock will not receive dividends, will not have the power to vote, and cannot share in the distribution of assets upon dissolution of the company.

It is also important to note that shares of a company's stock that are held in treasury are not regarded as shares outstanding and therefore will not be used in the calculation of earnings per share (EPS)

Additional Accounting Examples and Accounting Definitions:

Cost of Preferred Stock
Calculate Preferred Stock Value

Purpose of Subsidiary Ledgers Definition

A subsidiary ledger provides a company a detailed record of specific items that are included in the balance of a general ledger controlling accounting. In a merchandising company, subsidiary ledgers are used to track the amounts of receivables from customers, amounts of money owed to suppliers, and quantities of products in inventory.

The advantage of using a subsidiary ledger is that it provides more detailed information than available in the general ledger. Information is intended to be used by the company's mangers and employees. These records are not used in the preparation of financial statements.

Common Size Balance Sheet

A common size balance sheet is a type of standardized financial statement that completely lists all of a firms specific assets, liabilities, and equity claims as a percentage of a firms total assets.

The common size ratio for each line on the financial statement is calculated as follows:

Common Size Balance Sheet Ratio:
Common Size Ratio = Item of Interest/ Reference Item

Common Size Ratio for Bonds Outstanding = Amount of Bonds/ Total Assets

These ratios are useful when conducting a cross- sectional analysis between different companies in the same industry.

Additional Accounting Balance Sheet Example Problems:

Accounting Balance Sheet Example
Accumulated Depreciation Balance Sheet
Balance Sheet Questions
Financial Statements

Extraordinary Items on Income Statement

One category of irregular events that is required by law to disclosed on the income statement is extraordinary items. An extraordinary item is a gain or loss incurred by the company that is defined as being:

1. Unusual in nature
2. Not expected to recur in the foreseeable future

Events such as these are rare and often do not appear in the income statements of a company. Some examples of an extraordinary items include damage caused earthquakes, volcanoes, and hurricanes.

Events like this can also be called an extraordinary loss

Level of Sales Importance

In any retailing/ manufacturing company, the level of sales can have a significant impact on other areas of the firm’s activities. Level of sales volume can determine the production budgets, cash collections, cash payments, and selling and administrative budgets.

Eventually with changes in the level of sales, these factors determine the cash budget, budgeted income statement and ultimately the balance sheet of a firm.

Incremental Analysis Example

Incremental analysis, also referred to as marginal or differential cost analysis, is when an accountant focuses on the changes in revenues and costs that are a planned result of a specified action in the company


The following steps are commonly used in incremental analysis

1. Arrange all costs associated with each alternative action desired.
   
2. Remove the sunk costs and drop any costs shared between alternative decisions.
   
3. Choose the best alternative according to the cost data.

Incremental analysis provides a way to illustrate with numbers business decisions.

Related Accounting Tutorials
Recording Opportunity Costs
What is Opportunity Cost?

CFO to Capital Expenditures

This long term solvency ratio assesses a firm’s ability to generate cash flow from ongoing operations in excess of the capital expenditure required to maintain the facilities and build plant capacity.

The extra cash flow can be used to service debt or other unanticipated costs.

CFO to Capital Expenditures Ratio=
(Cash Flow Continuing Operations)/ (Capital Expenditures)

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