Monday, February 23, 2009

Calculate Average Tax Rate

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

Sunday, February 22, 2009

Calculate Inventory Turnover Ratio

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/Inventory

The 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:
Dealing with Seasonal Changes in Inventory
FIFO Method and Weighted Average Inventory Method
Perpetual Inventory System
Basic Equation for Inventory Accounts
Inventory Cost Flow Assumptions
Accounting Inventory Shrinkage Example Problem
Merchandising Accounting Journal Entry

Friday, February 20, 2009

Definition of Treasury Stock

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 Stock
Calculate Preferred Stock Value

Tuesday, February 17, 2009

Purpose of Subsidiary Ledgers Definition

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.

Sunday, February 15, 2009

Common Size Balance Sheet

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 Assets

These ratios are useful when conducting a cross- sectional analysis between different companies in the same industry. They can also give you a good idea of how the firm's financial condition has been changing over time. This type of analysis is called trend analysis and is often used by investors.

Additional Accounting Balance Sheet Example Problems:

Accounting Balance Sheet Example
Accumulated Depreciation Balance Sheet
Balance Sheet Questions
Financial Statements

Thursday, February 12, 2009

Cash Debt Coverage Ratio

What is the Cash Debt Coverage Ratio?

In accounting terms, the Cash Debt Coverage Ratio is the ratio of net cash provided by operating activities by the company to average total liabilities

This is called the cash debt coverage ratio because it is a cash-basis measure of solvency. This ratio indicates a company’s ability to repay its current liabilities from cash generated from operating activities. This ratio is of particular importance because the company can pay back its liabilities without having to liquidate the assets that it currently uses in its operations.

Wednesday, February 11, 2009

Extraordinary Items on Income Statement

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:
  1. Unusual in nature
  2. 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

Tuesday, February 10, 2009

Restricted vs. Unrestricted Funds

What is the different between Restricted and Unrestricted Funds?

Restricted Resources are unique to non-profit, or public entity accounting. The limitations on use of funds are external only; they cannot be restricted internally.  Examples of sources of these funds, and their restrictions, include donors, contracts and government agencies.

Unrestricted Resources have no external conditions placed on their use by the organization. Some examples include state appropriations or unconditional gifts. Designated Resources are not restricted by the fund source, but may have conditions placed by someone else giving money to the organization.

Level of Sales Importance

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 for the entire year.

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.

Additional Accounting Examples and Explanations:

Sunday, February 8, 2009

Incremental Analysis Example

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

  1. Arrange all costs associated with each alternative action desired.
  2. Remove the sunk costs and drop any costs shared between alternative decisions.
  3. Choose the best alternative according to the cost data.
Incremental analysis provides a way to illustrate with numbers business decisions. Decision-making involves choosing between different alternatives that will have different cost factors.. The main focus of incremental analysis is to examine what is most different between the alternatives in terms of three major accounting amounts:

  1. Revenue differences 
  2. Cost differences
  3. Cost savings differences 

Related Accounting Tutorials:
Recording Opportunity Costs
What is Opportunity Cost?

Friday, February 6, 2009

Disposing of Receivables

 What is Disposing of Receivables?

Companies can convert receivables to cash before they are from debtors to raise cash quickly if needed. This can be accomplished by two main ways:

  1. Selling (Factoring) Receivables- The company can sell its accounts receivables to a finance company to get the cash instantly. The finance company will generally charge the seller a factoring fee and take ownership of the receivables. In this case, the finance company assumes the risk of bad debts that it takes over from the company. 
  2. Pledging Receivables- The company can also borrow money from a finance company or bank and pledge its receivables as security for the loan. Unlike factoring, this does not transfer risk of bad debts to the 3rd party. If the loan is not paid back the lender can take title to the receivables pledged. 

Thursday, February 5, 2009

Inventory Purchase Journal Entry

Type of Journal Entry
Account titles
Purchase of Inventory or small items for credit
Accounts Payable


Fair Value Accounting Securities

What is fair value accounting and how is this topic related accounting systems for trading securities on a public market? 

In accounting, relevance and reliability, as outlined in the FASB are key to success. In a financial reporting context this means fair value (FMV) vs. historical costs of an asset. On many physical assets that a company owns, GAAP is recording on the balance sheet at historical costs. This is generally easy for the accountant because they can find records indicating exactly what the fair market value of an asset is to a company when it was purchased.

However, on trading securities and many other intangible assets, its irrelevant to record them at historical costs because these values change frequently. Companies follow a fair value hierarchy (FMV), when reporting  these costs on the balance sheet.

Furthermore, in the futures market, fair value (FMV) is equal to the equilibrium price for a futures contract. This price is equal to the spot price after taking into account compounded interest over a certain period of time (usually one year). If the futures are above fair value  FMV, then the Wall Street traders are betting the market index will go higher, the opposite is true if futures are below their FMV.

Wednesday, February 4, 2009

CFO to Capital Expenditures

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)

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

Monday, February 2, 2009

Establishing Reporting Requirements

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:

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.