Wednesday, June 30, 2010

Generally Accepted Auditing Standards (GAAS)

In accounting terms, what are Generally Accepted Auditing Standards (GAAS)?

Generally Accepted Auditing Standards (GAAS) in the United States of America , are broad rules and guidelines set down by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA).

These standards require, that while working for a client, a CPA would apply the generally accepted accounting principles (GAAP). If the CPA fails to do so, they can be held to be in violation of the AICPA's code of professional ethics and face punishment.

Sunday, June 27, 2010

LLC Management Law

The first and most important management issue regarding LLCs is whether they are to have centralized management (corporation) or decentralized management (partnership).

MEMBER MANAGEMENT IS DEFAULT RULE. Similar to partnership, all extraordinary matters and amendments to the operating agreement require the consent of all members. RULLCA 407(b)

Members in manager-managed LLCs have limited powers. The managers have exclusive management rights and decide all ordinary business matters by a majority of the managers. RULLCA 407(c)

  1. Ordinary business matters decided by a majority of members. 
  2. There are arguments over if unamity is good enough or the majority should suffice. Like Closely Held Corporation
Members who are not managers, like shareholders in a corporation, have no inherent right to bind the LLC. RULLCA 301(a) EXPAND WITH CONTRACTS

Managers have exclusive rights to bind the LLC but not liable for LLC. Broad Grant of Authority. RESTRICT WITH CONTRACTS

Saturday, June 26, 2010

What is Fair Value Accounting?

What is fair value accounting and how is it related to the accounting for trading securities?

In accounting we have to rationalize relevance and reliability, as outlined in the FASB's conceptual framework. In financial reporting this means fair value vs. historical costs. On many physical assets, GAAP is recording at historical costs. However, on trading securities and many intangible assets, its irrelevant to record them at historical costs.

Companies follow a fair value hierarchy, when reporting costs. There are three levels, based on reliability.

Friday, June 18, 2010

Cost Flows Manufacturing Company

What are the cost flows of a manufacturing company?

Direct material, direct labor, and manufacturing overhead are all considered types of production costs incurred by manufacturers when they are producing products for resale to the public or other businesses.

These types of costs are considered product costs by an accountant because they are stored in inventory until the manufacturer’s products are sold to a customer for money. Because of this type of inventory system, manufacturers of goods generally employ product-costing systems to keep track of the flow of these costs from the time production begins until finished products are finally sold.

Thursday, June 17, 2010

Fixed Cost Calculation Example Problem

Fixed Cost Calculation Example Problem

A company has variable cost of 80 million per year. These cost represent approsimately 75% of the total revenue. They will make 50,000 widgets estimated for next year.

A. What is the break-even point expressed in total revenue for the company?
B. What is the average daily revenue per widget produced necessary to break-even?

Accounting Answer:

The key to answering this accounting problem is that variable cost = total costs.


If we have 80,000,000 of variable cost which is equivalent to 75% of total revenues the next step will be finding out the break-even point in terms of each sale simply devide the 80M to 75% and we get the total revenue amounting to 106.67M.

Multiply the total revenue to 25% which is the resulting difference of 100% and 75% you get the Contribution Margin amounting to 26.67M.

 BES= CM - Fixed Cost where profit is equivalent to zero. So your BES = 26.67M

Break Even Sale Point is 26.67M


 Average daily sale per widget for the company to break-even is equal to 533

Friday, June 4, 2010

New Equipment Rate of Return

A company is considering the purchase of a new piece of equipment.

Relevant information concerning the equipment follows:  

Purchase cost of Equipment......................................$180,000
Cost Savings by the Equipment..................$37,500
Lifespan of the Equipment.............................12 years

1. Compute the payback period for the equipment the company wants to purchase. If the company rejects proposals with a payback period greater than four years, would the company buy this machine? 

2.  Using straight line depreciation, would the equipment be purchased if the company mandates a rate of return (ROR) at least 14%? Compute the simple rate of return on the equipment.

Accounting Answers:

1. No, the company would not buy that equipment because the payback period = 4.8 years which is greater than the 4 years required.

2. Again, the company would not purchase this because the Rate of Return = 13%

Wednesday, June 2, 2010

What is Negative Goodwill?

Negative Goodwill Example

Negative goodwill  occurs when the net assets acquired by a purchaser at the date of acquisition, at fair market value (FMV), exceed the cost of the acquisition. This purchase reflected on the balance sheet net of other intangible assets. Negative goodwill is recognized as accounting income in the following special situations:

  • To the extent that negative goodwill relates to expected future losses and expenses, it is recognized in the company's income statement when the future losses and expenses are recognized.
  • Amount of negative goodwill that is related to monetary assets is recognized as income immediately by an accountant. 
  • Amount of negative goodwill in excess of the FMV of the acquired identifiable non-monetary assets is recognized as income immediately as well.
  • Amount of negative goodwill relating to identifiable non-monetary assets is recognized as income on a systematic basis over the remaining useful lives of the identifiable acquired depreciable assets with a maximum period of 20 years.

Popular Accounting Problems

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