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
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:
- Accurate
- Reliable
- Comparable over time and across companies.
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
Liabilities can result from certain types of contractual relationships with lenders, suppliers, customers, employees, governments, and other companies.
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
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:
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?
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.
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.
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.
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
The four following dates are important terms to understand in the
distribution of a dividend by a corporation.
- 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.
- 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.
- 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.
- 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
In accounting,
dead assets are a type of asset that do not have any life beyond their immeadiate use.
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
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.
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.
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
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/InventoryThe 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 MethodPerpetual Inventory SystemBasic Equation for Inventory AccountsInventory Cost Flow AssumptionsAccounting Inventory Shrinkage Example ProblemMerchandising Accounting Journal Entry
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 StockCalculate Preferred Stock Value
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.
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 AssetsThese 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 ExampleAccumulated Depreciation Balance SheetBalance Sheet QuestionsFinancial Statements
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:
- Unusual in nature
- 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
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, 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
- Arrange all costs associated with each alternative action desired.
- Remove the sunk costs and drop any costs shared between alternative decisions.
- 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 CostsWhat is Opportunity Cost?
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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Which of the following organizations has legal authority to establish reporting requirements for publicly held corporations in the United States?
A. International Accounting Standards Board (IASB)
B. Financial Accounting Standards Board (FASB)
C. Internal Revenue Service (IRS)
D. American Institute of Certified Public Accountants (AICPA)
E. Securities and Exchange Commission (SEC)
Answer : E
Additional Accounting Information:
- Depreciation is an allocation of capital expenditures over the estimated revenue producing period of a long term asset. This is required due to the matching principle.
- Depreciation is a determined by acquisition cost, useful life, depreciation rate, and estimated salvage value.
- Depreciation does not involve the cash account Only the purchase and disposal of assets involve cash account
Additional Accounting Links:
Asset Historical Cost ExamplesStraight Link Depreciation ExampleDepreciation of an Asset and Book Value
Follow these steps to adjust net income for use in a Cash Flow Statement
Net Income Adjustments
- Adjust for Non-Cash Changes in Current Accounts
- Adjust for Non-Cash Changes in Non-Current Accounts
- Add Depreciation & Amortization
- Add Loss on Sale of Assets
- Subtract Gain on Sales of Assets
Which accounting method is better for manufacturing firms to use for cost control, FIFO or weighted-average method?Accountants often consider the
FIFO method superior to the weighted-average method for cost control in managerial accounting environments. The reason for this is current performance should be measured in relation to costs of the current period only.
The
weighted-average method mixes these costs in with costs of the prior period. Thus, under the weighted-average method, the department’s actual performance in the current reporting period is affected by what has happened previously in earlier periods.
Corporate Bonds inherently contain certain risks that investors most know and be cautious about when choosing to invest in bonds. The following table contains the most common risks that are
determinants on bond yields.- A taxability premium compensates for unfavorable tax status of certrain classes of bonds
- An Interest Rate Risk Premium compensates for holding securities for the long-term when their prices are more sensitive to interest rate changes
- An Inflation premium compensates investors for the known fact that prices rise in the future and decrease purchasing power
- A Liquidity Premium compensates for holding securities that are difficult to convert to cash at their true value
- The Default Risk Premium compensates for the possibility that the issuer is unable to meet the required interest or required principal payments.
A combination of all these premiums are
determinants of bond yields
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Accounting Definition of quantity schedule:A
quantity schedule summarizes and displays the physical flow of units produced through a department during an accounting period.
Its serves a company several mains purposes:
- Quantity Schedules provide information about manufacturing activity within the specific department and shows the current stage of completion of in-process units
- A Quantity Schedules provides the data required for calculating equivalent units and for preparing the other parts of the production report for a product and/or department
Definition of a Bank Statement A bank statement is a detailed statement issued by a bank showing a client's bank
account balances according to the bank record. Most banks send their customers statements by mail or email month.
Customer can then check their funds available in the bank and to update their own records of transactions that have occurred. It is important that the customer check their
bank statement for errors. A customer may have less money in their accounts than they think due to bank charges and fees or other errors.
When the
trial balance does not balance, the accountant must find the errors and correct them. the following steps are suggestions on how to correct errors in the
trial balance.- Double check the trial balance columns to see if they are added together correctly
- Check if debit accounts or credit accounts are placed on the trial balance by error
- Recompute each account balance in the accounting ledger.
- Ensure that account balances are correctly entered from the accounting ledger.
- Verify that each journal entry is posted in the trial balance.
- Double Check that each original journal entry has equal debits and credits on the ledger.
Additional Accounting Information:
Information on the Accounting CycleWhat is a Trial Balance?
There are many features of
Debt Securities such as bonds that make them unique:
- Bonds have a superior liquidation claim in bankrupty than equity securities (stocks)
- Interest on debt is tax deductible
- Debt Securities represent funds borrowed by a firm
These securities represent funds borrowed by the firm instead of equity securities such as stocks that represent ownership in the firm. Owning bonds do not allow voting rights in a firm like equity securities. One advantage of
debt securities is that interest paid on the debt is tax deductible by the company. Lastly, debt holders have more priority over equity holders if the firm is liquidated due to bankruptcy. These
characteristics of debt securities make them attractive to investors.
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A Rental Company reported these two different balances in their
Unearned Rent account at the beginning and end of 2007:
Jan. 1, 2007 =$2,600
Dec. 31, 2007 = $3,200
If
rent revenue for 2007 was $26,300, how much
cash was received by the company as advance payments for rent due in 2007?
Answer: $26, 900
