Wednesday, May 28, 2008

Calculate Break Even Analysis

Break-Even Analysis shows the point at which all costs are covered by revenue.

Can be used to determine:
  1. What volume must be sold to cover all costs at a given sales price.
  2. What price must be set to cover all costs given an estimated demand for the product

Assume the following costs:

Fixed costs (FC): $ 1,000,000
Variable cost/unit (VC): $ 10.00

BE = FC / (P-VC)

Calculate the break-even unit volume at selling prices of $15.00 and $20.00 per unit.

At $15.00, BE = 1,000,000 / (15 – 10) = 200,000 units

At $20.00, BE = 1,000,000 / (20 – 10) =
100,000 units

Lower volume needed at higher price

Tuesday, May 27, 2008

Accounting Cost Principle Information

GAAP Cost Principle = Accounting information is based on actual cost.

The value of accounts on accounting financial statements must be the actual cost incurred rather than their current market value. GAAP Cost Principle requires that accountants show amounts less than cost incurred due to the conservatism principle when unsure, yet accountants are prohibited from showing market values on the balance sheet that are greater than cost.

Accounting Example:

An airplane is an asset purchased for $1,000,000. It cannot be reported as being worth $1,200,000 on the balance sheet. It can be reported being worth $800,000.

Monday, May 26, 2008

Purchasing on Credit Partial Payments

A Shipping Company purchases a machine for $28,000 on credit, and a month later makes a partial payment of $23,000 for the machine. The overall result of the 2 transactions combined will cause:

A. Total Liabilities to increase by $5,000
B. Total Assets to decrease by $23,000
C. Total Assets to decrease by $5,000
D. Total Liabilities to decrease by $5,000
E. Total Assets to remain unchanged

Answer: A

Explanation to Solution:

28000 on credit implies a Liability

23000 of 28000 is paid , yet the company still has an outstanding liabilities balance of 28000-23000 = 5000.

This is because the partial payment of 23000 decreases the asset (cash) by 23000, remember the question asked for the 'overall result' of the 2 transactions. You must remember that cash is not the only form of Asset. For example, if you buy office equipment with cash, you are trading one asset for another type of asset.

Sunday, May 25, 2008

Definition of Plant Assets

The following are four main characteristics of Plant Assets:
  1. Tangible in Nature
  2. Actively Used in Operations
  3. Expected to Benefit Future Periods
  4. Called Property, Plant, & Equipment

Calculate Cost of Goods Sold

In order to Calculate Cost of Goods Sold Use the Following Chart:

Schedule of Cost of Goods Sold

Beginning Inventory

Plus: Purchases

Plus: Transportation-in

Less: Purchase Returns and Purchase Allowances

Less: Purchase Discounts

Cost of Goods Available for Sale

Less: Ending Inventory

Cost of Goods Sold

Saturday, May 24, 2008

Aging of Accounts Receivable Method

To use the aging of accounting receivable method, follow these three steps.
  1. Year-end Accounts Receivable is broken down into age classifications.
  2. Each age grouping has a different likelihood of being rated uncollectible.
  3. Compute a separate allowance for each age grouping.

Monday, May 19, 2008

Interest Revenue on Note Receivable.

On October 1, 2006, Company A loaned $300,000 to Company B in exchange for a nine month, 11 percent note receivable. Company A's accounting period ends on January 1, 2007. What amount would be reported in Company A’s 2007 income statement as Interest Revenue?

Answer: $16,500

Sunday, May 18, 2008

Calculate Wages Expense Problem

A small business reported these balances on their Wages Payable account at the beginning of 2005 and end of 2005:

Jan. 1, 2005 Dec. 31, 2005
$1,100 $1,400

If wages of $18,500 were paid in cash during the year, what amount would be reported for Wages expense in 2005?

Answer: $18,800

Friday, May 16, 2008

Inventory Cost Flow Assumptions

The following are examples of inventory costing methods:

First-In, First-Out (FIFO)
Assumes costs flow in the order incurred.

Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred.

Weighted Average Inventory method assumes costs flow at an average of the costs available.

Thursday, May 15, 2008

Accounting Inventory Shrinkage Example Problem

Accounting Inventory Shrinkage is defined as a loss of inventory computed by comparing physical count of inventory with recorded amounts.

Reasons for Inventory Shrinkage
  1. Theft
  2. Obsolescence
  3. Spoilage
  4. Damage
  5. Customer Grazing
  6. Display Items
Journal Entry for Inventory Shrinkage

Debit COGS
Credit Merchandise Inventory

Additional Inventory Accounting Examples:
Perpetual Inventory System
Basic Equation for Inventory Accounts
Inventory Cost Flow Assumptions

Wednesday, May 14, 2008

Variable Cost Ratio Example

There is a company that manufactures toilet and sells its product for $20 per vase. The companies variable cost ratio is 60% and it has fixed costs that total $32,000. If fixed costs increase by 40% this year, how many more units is the company required to sell in order to generate the same operating income as under the current operating conditions?

Variable Cost Percent = Variable Cost/Sales Revenue

60% = VC/20
Variable Costs (VC) = 12

Contribution Margin= Sales Revenue- Variable Cost
CM = SR – VC

CM = 20 – 12
Contribution Margin (CM) = 8

Increase in Fixed Costs (FC) = $32,000 x .4 = 12,800

12,800/8 = 1,600 more toilets are needed to be produced

Additional Accounting Examples:

Difference between Fixed Cost and Variable Cost
Relationship between Variable and Absorption Costing
Applying Manufacturing Overhead

Fixed Costs and Variable Costs Examples

Tuesday, May 13, 2008

Calculate Fixed Asset Turnover Ratio

FAT Ratio Definition

The fixed asset turnover ratio measures how a firm manages its plant and equipment (net fixed assets) to produce sales. When a companies fixed asset turnover ratio is below the industry average, it means the firm has too many fixed assets relative to the sales revenue it generates.

How to Calculate Fixed Asset Turnover Ratio Equation:

Fixed Asset Turnover Ratio = Sales / Net Fixed Assets

Links Accounting and Financial Ratios:

Ratio Analysis and Financial Control
Degree of Financial Leverage
How to Calculate Current and Quick Ratios

Purchase Texas Instruments BA II Plus Professional Financial Calculator
Purchase HP 10bII Financial Calculator
Purchase Texas Instruments BA II Plus Financial Calculator

Monday, May 12, 2008

Accounting Bank Reconciliation Example

A bank reconciliation is created by accountants periodically to display the differences between cash reported on a companies bank statement and the cash balance on company’s books.

Bank Statement Balance Reconciling Items:

Deduct: Outstanding checks.
Add: Deposits in transit.
Add or Deduct: Bank accounting errors.

Book Balance Reconciling Items:
Deduct: Bank service charge.
Deduct: Nonsufficient funds check (NSF).
Add: Interest earned on checking accounts.
Add: Collections made by the bank.
Add or Deduct: Accounting Book errors.

Following these two steps to reconcile bank statements:
  1. Reconcile bank statement balance to the adjusted bank balance.
  2. Reconcile book balance to the adjusted book balance.

After a bank reconciliation the adjusted balances should be equal to each other. Accounting Software will often reconcile bank balances for accountants.

Additional Links:
Definition of a Bank Statement
Canceled Checks and Bank Reconciliation Journal Entry

External Links:
Accounting Bank Reconciliation Tutorial

Employee Payroll Journal Entries

When debiting employee payroll expense, accountants muse debit the appropriate accounts with correct journal entries.

Example Accounting Journal Entry for Employee Payroll Deductions:

Jan. 31 Salaries Expense 4,200
FICA - Social Security Tax Payable 248
FICA - Medicare Tax Payable 58
Employee Federal Income Tax Payable 420
Employee Medical Insurance Payable 148
Employee Union Dues Payable 200
Accrued Salaries Payable 3,126

External Links:
Accounting Payroll Tutorial
Payroll 101

Thursday, May 1, 2008

Weighted Average Capital Cost WACC

The cost of capital is used to determine the appropriate discount rate in NPV Analysis. It is the opportunity cost of funds employed.

Formula for Weighted Average Capital Cost (WACC):

To Calculate WACC Equation

WACC= (E/E+D)*Rs + (D/E+D)*Rd*(1-Tc)

What is Cost of Capital?

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.