Wednesday, December 31, 2008

What are Indirect Materials?

Indirect materials are generally small items of material such as rivets, nails, and oil . They can be considered be an integral part of a finished product produced by the manufacturing company but their costs are difficult to trace and may be insignificant in the overall costs incurred to produce a product. Indirect materials are ordinarily classified as manufacturing overhead and can be applied to the product costs.

Links related to indirect materials and managerial accounting:

Calculate Manufacturing Overhead
Job Order Costing
Manufacturing Company Accounting

Tuesday, December 30, 2008

Perpetual Inventory System

When a merchandising company uses a Perpetual Inventory system, the inventory account balances are updated after each sale made by the company. This type of inventory system is much more complex and often employs the use of computer technology such as scanning cash registers, bar coded merchandise to update the inventory records after each sale.

The perpetual inventory system is more expensive and complex but it gives managers several main advantages:
  1. A higher degree of control over inventory in the company's possession
  2. Helps purchasing agents to order replacement merchandise in a more timely fashion
  3. Detects and deters employee theft
  4. Identifies other problems related to inventory quickly

Monday, December 29, 2008

Balance Sheet Assets Questions

Barnes Company had the following account balances at the end of their first year of operation on their balance sheet:

Revenues $ 43,000
Expenses 28,000
Dividends 2,000
Common stock 85,000
Total liabilities 54,000

What is the amount of their total assets?


Sunday, December 28, 2008

What Costs for Depreciation?

A manufacturing company incurred the following costs related to the purchase of an equipment on January 1, 2009:

Invoice cost, terms 1/10 n 30, fob shipping point $55,000

(Payment is made within discount period)

Shipping costs 1,000
Installation costs 1,500
First year utility costs 2,000

What cost should Bears use as a basis for depreciation?

Answer $57,000

Saturday, December 27, 2008

What is a Transfer Price?

An accounting transfer price is the accounting cost used for the transfer of goods or services between segments or subsidiaries of the same organization or family of companies.

Some examples include two departments or divisions selling to each other. Transfer prices are needed for performance evaluation purposes and accounting records. The selling unit gets credit for the transfer price and the buying unit/department must deduct the transfer price as an expense of doing business.

Transfer prices in international can be regulated and manipulated to save money with international subsidiaries.

Friday, December 26, 2008

What is an Operating Segment?

An operating segment of business is any division or activity of an organization which it is necessary that a manager seeks cost, revenue, or profit data in individual accounting records

Examples of operating segments include departments, operations, sales territories, divisions, product lines, and sales departments

Thursday, December 25, 2008

Activity Based Costing Method Differences

How is activity based costing different from traditional costing methods?

Activity-based costing differs from traditional costing systems in three main different ways:

  1. In activity-based costing (ABC), non-manufacturing and manufacturing costs may be assigned to products produced by a firm.
  2. Some manufacturing costs may be excluded from product costs using activity-based costing (ABC) that are included with traditional costing methods.
  3. An activity-based costing (ABC) system will usually include a number of activity cost pools determined by the company, each of these cost pools has a unique measure of activity. These measures of activity can differ from the allocation bases that are normally used in traditional costing systems.
  4. The activity rates are different from typical predetermined overhead rates because they should be based on activity at actual capacity rather than depending on a more inaccurate budgeted levels of activity.

Wednesday, December 24, 2008

Pledging Receivables as Loan Collateral

If a business decides to pledge its receivables as collateral for a loan and the loan remains outstanding at the end of the accounting period, the company is required to disclose this information in the notes accompanying its current financial statements.

It is required of the business because the company has pledged assets to cover a specific liability, therefore if the business dishonors its obligations to pay the loan, the creditor has legal rights to the amount of receivables identified in the assets pledged as collateral to cover the loan.

This type of financing must be disclosed to satisfy the full-disclosure principle which informs shareholders.

Tuesday, December 23, 2008

Variable Cost Examples

Here are some examples of variable costs and their cost drivers in different types of industry. It is important to note what the cost driver is and how it affects the expense.



Cost Driver


Direct Materials

Number of units produced

Law Firm


Number of hours



Number of miles flow


Housekeeping costs

Number of rooms occupied

Tire Factory


Number of rubber used

Country Club

Food cost

Number of members

Monday, December 22, 2008

Straight-Line Depreciation Expense Example

Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful. Use the following example to calculate depreciation expense.

Straight-Line Depreciation Expense Method:

Straight-Line depreciation Expense = (Asset Cost- Salvage Value)/ Useful Life

Additional Links:

Accumulated Depreciation Balance Sheet
Depreciation of an Asset and Book Value

Four Types of Adjusting Entries

There are four main types of adjusting entries to be used in an accounting system.

Four types of adjusting entries:

  1. converting liabilities to revenue
  2. converting assets to expenses
  3. accruing unpaid expenses
  4. accruing uncollected revenues

Saturday, December 20, 2008

Adjusting Journal Entry Note Receivable

If a company receives a 90-day, 6 percent note receivable from a client for the sale of a $10,000 computer. The sale occurred in the middle of September. If IBN’s accounting period ends on September 31, and they fail to make the appropriate adjusting entry related to the note receivable, then

A. Assets will be overstated and equity will be overstated.
B. Assets will be understated and equity will be unaffected.
C. Assets will be overstated and liabilities will be understated.
D. Assets will be understated and equity will be understated.

Answer D

Accounting Cycle

The series of accounting procedures in a specified period is known as the accounting cycle.

The following is a list of the steps to follow in the accounting cycle.

  1. Start Accounting Cycle
  2. Analyze Accounting Transactions
  3. Post Accounting Transactions
  4. Prepare unadjusted trial balance
  5. Adjust
  6. Prepare adjusted trial balance
  7. Prepare financial statements
  8. Close
  9. Prepare post-closing trial balance
  10. Repeat Accounting Cycle

The accounting cycle is the method accountants use to keep track of the financial situation of a company. The financial reports will be correct and accurate if the accounts have been analyzed correctly, events have been posted correctly and the accounting equation remains balanced.

Overall, the most important result of completing the accounting cycle is the production of financial statements.

Wednesday, December 10, 2008

Ratio Analysis Financial Control

Using Ratio Analysis for Financial Control

  • Liquidity ratios show financial managers how readily the firm’s assets can be converted to cash to pay liabilities.
  • Debt ratios show the firm’s ability to pay long-term financial obligations such as bonds.
  • Return ratios demonstrate how much return the firm is generating relative to the value of its book assets.
  • Coverage ratios estimate the ability of the firm to pay the interest expenses on money it has borrowed from creditors
  • Operating ratios demonstrate how efficient the operation of the firm is

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.