Outsourcing Manufacturing to China

What has led to an increase in outsourcing manufacturing to China?

Many reasons have led to the current interest in outsourcing manufacturing activities to China in recent years. Strong economic growth and the easing of government regulations have made companies consider China for manufacturing. MNCs can take advantage of cheap labor in the interior provinces but must watch out for more expensive labor near the coast.

Firms interested in doing business in China must also respect local officials and regulations if they desire to be successful.

Revenue Recognition Definition

Revenue recognition is an accounting term used to refer to the recording of a sale or service with a journal entry into a company's accounting records. Revenue will be recognized only when certain criter has been met. This criteria for revenue recongnition includes:

1. The work has been substantially completed by the company for a customer.

2. Cash or a secured future payment (credit note) has been received by the company

Calculation of Payback Period

The payback period of a machine purchase is calculated by estimating the number of years it will take to recover the cash invested in a capital budgeting project. 

The payback period can be calculated in the following manner. 

When the cash inflows are even and predictable it is easier to calculate the payback period. For example, if the annual cash inflow is standard or the cash flow is in the form of an annuity, the computation of the payback period is simple. 

Payback Period Equation: Initial Investment/ Annual Cash Inflow

Example of Payback Period Calculation:

If $20,000 is invested in a manufacturing machine, and the machine is invested to produce an annual cash inflow of $5,000 for 7 years, then

Payback Period = $20,000/$5,000 = 4

Operating Expense to Sales Ratio

The Operating Expense to Sales Ratio displays in a ratio format a company's operating expenses as a percent of its total net revenues, most often per quarter.

Formula for the  Operating Expense to Sales Ratio 

Total Overhead Cash Expense / Net Revenues

This ratio is  considered a measure of the total overhead used in the manufacturing firm per net sales revenue dollar

The most important information revealed by this formula is the efficiency of a company's overall cost structure and it also indicates the ability of its business operations to convert income to profit.

For example, a company experiencing larger and more stable cash flows can sustain a higher operating expense to sales ratio than a smaller company with much less stable operations. 

Management can use the information gained from this ratio in order to manage cost and ensure the long term profitabilty of a company. 

Other Financial Ratios:

Ratio Analysis Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio

Retained Earnings Practice Problem

Calculate retained earnings accounting practice problem: 

A brand new company started its operations on January 2, 2010, with an initial investment of $50,000 by each of its two primary stockholders who were also involved in the management of the company.

The company's net income for its first year of business was $240,000. The company also paid a total of $100,000 in dividends to its stockholders during the year.


What is the company's retained earnings that will be reported on the balance sheet at December 31, 2010?


Accounting Answer:

Retained earnings equation = Net Income - Dividends

Retained Earnings = 240,000 - 100,000 = 140,000

Revenue Recongnition Principle Defintion

What is the Revenue Recongnition Principle in Accounting?

It is one of the most important accounting principles along with the matching principle. It is used to determine the correct accounting period to record when revennues are earned and expenses paid. One important aspect of this principle is that revenues are recognized when  realized or realizable and that they are recongnizable when earned.

This is quite different than cost accounting. In cost accounting revenues incurred by a company are reccorded when cash is received no matter when the product or service is actually given to the customer.

 

   

Calculate Economic and Accounting Profit

How to calculate total accounting and economic profit from simple business example:

Example Accounting Problem:

An entrepreneur currently has an annual salary of $600,000 and wants to start a business on his own.  The persons estimates the total of operating the new business will be about $250,000 per year.The potential revenue is estimated as $800,000 per year.

1. Calculate total accounting profit.
2. calculate total economic profit.


Accounting Answers:

1. Calculate total accounting profit. 800,000 - 250,000 = 550,000
2. Calculate total economic profit. 550,000 - 600,000 = -50,000

After looking at the total economic profit, the entrepreneur would be better staying with his current job if money is all the he cares about.

What are Trade Discounts?

What are Trade Discounts?

Often when dealing with customers, companies will offer trade discounts in order to entice larger sales. Trade discounts are deductions from list prices offered, to special customers, for quantities purchased or for the purpose of establishing different price levels for different classes of customers, such as wholesalers and retailers.

Trade discounts are also used so that vendors can change the effective prices of prodcuts included in catalogs by issuing a revised discount sheet.

Revenues should be recorded after deduction of such discounts.

What is a Deffered Expenditure

As deffered expenditure is a type of  expenditure when payment has been made or a liabilityhas been incurred by a company but which is carried forward on the assumption that it will benefitthe company over a subsequent periods in the future.  In accounting it is also commonly referred to as deferred revenue expenditure.