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

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

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

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.

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

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

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

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:

Purpose of Budgets

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.

Related Accounting Tutorials
Recording Opportunity Costs
What is Opportunity Cost?

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)

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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:

• Committee on Accounting Procedures
• Accounting Principles Board
• Financial Accounting Principles Board