## 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

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?

## 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?

## 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

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
VC% = VC/SR

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

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

## 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 and the cash balance on company’s books.

Bank Statement Balance Reconciling Items:

Deduct: Outstanding checks.
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 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.

Definition of a Bank Statement
Canceled Checks and Bank Reconciliation Journal Entry

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

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.