Monday, November 24, 2008

Sources of GAAP Accounting Principles

There are three main sources of GAAP Accounting Principles:

Committee on Accounting Procedure CAP

Committee on Accounting Procedure CAP 1939-1959

  • First private body interested in writing accounting rules
  • Creation Encouraged by SEC
  • Issued 51 Accounting Research Bulletins to accounting professionals
  • Consisted of members who were practice certified public accountants (CPAs)
  • Acted upon accounting problems when they began to occur

What is Cost of Capital?

The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs.

For a levered firm, the financing costs can be represented by the weighted average cost of capital:

More information about the weighted average cost of capital

Sunday, November 23, 2008

What is Amortization

Amortization is depreciation of the cost of intangible assets to expense in a controlled and timely manner over the useful life of the asset. It is very similar to depreciation.

What is a Cost Driver?

Cost driver is any expense that causes change of costs over a defined period of time in a company. The activities that cause these expense are called are also called activity bases or activity drivers.

Total Annual Overhead
Units of Cost Driver
= one $ per unit of cost driver

Saturday, November 22, 2008

Difference Fixed Cost Variable Cost

What is the difference between a fixed cost and a variable cost?

  • A fixed cost is defined as a cost that remains constant throughout the manufacturing process, in total, regardless of changes in the levels of activity within a company.
  • A variable cost is defined as a cost that changes, in total, in direct proportion to changes level of activity within a company.

Friday, November 21, 2008

Recording Opportunity Cost

An Opportunity cost is a potential benefit that is given up when a company chooses one alternative over another. These costs are not usually entered into the accounting records of an organization, but are considered in financing decisions.

Revenue not earned and cannibalized revenue are examples of accounting opportunity costs

Wednesday, November 19, 2008

A product cost is any accounting cost related to purchasing or manufacturing goods in a company. With regards to manufacturing goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Monday, November 17, 2008

When Use Process Costing System?

There are many different situations when to use a process costing system of accounting . It is best to use a process costing system should in situations where a homogeneous product is produced on a continuous basis. For example, producers of one product such as chemicals or auto-parts can use a process costing system.

Additional Information:

Differences between Process Costing and Job Order Costing Methods

Friday, November 14, 2008

What is Book Value per Share?

The book value per share of stock is equal to a corporation’s total amount of stockholders’ equity divided by the number of common shares of stock outstanding. The book value per share will not be the same as the market value of a corporation's stock.

Saturday, November 8, 2008

What is Time Value of Money

The “time value of money” (TVM) illustrates that a dollar received today is more valuable than a dollar received in the future. A dollar received today can be invested to yield more than a dollar in the future under a risk free rate of return. The time value of money is very important in financing decisions and capital budgeting.

Calculate Average Accounting Return (AAR)

Wednesday, November 5, 2008

What is an Audit Risk?

Audit Risk is the risk that an auditor may fail to modify appropriately their opinion on financial statements presented by the company that are materially misstated by the company. This will not allow for a proper audit to be done.

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.