Dr. T 's Accounting Problems and Business Examples

Section 1245 Property- Depreciable Property Used In Business

2012-02-12T19:05:00.000-08:00

What is Section 1245 Property- Depreciable Property Used In Business?

A gain on the disposition of §1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. The gain treated as ordinary income is the lesser of:

The depreciation allowed or allowable on the property.
The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property taking into account depreciation.)

Extent gain results from artificial depreciation deductions, § 1245 applies. The extent the gain results because the taxpayer sells the property for more than he paid for it, § 1245 does not apply

This is all taxed at the Capital Gains Rate. Any gain recognized that is more than the part that is ordinary income from depreciation is §1231 gain.

Cost Recovery Schedules Depreciation

2012-02-07T09:11:00.000-08:00

§168 of the Internal Revenue Code provides various cost recovery schedules. Under the accelerated cost recovery system” ACRS, the cost recovery of an asset depends on three things:

The total amount of cost to be recovered
The number of years over which the cost is to be recovered
The rate at which the cost is to be recovered over those years

The total amount of cost to be recovered by the taxpayer is the total expected decline in value while the asset is used in the taxpayer’s business, as measured by the different between the original cost and the salvage value.

The Internal Revenue Service (IRS) allows that the depreciation of an asset is $0 under § 168(b)(4).

When is gain taxed by the IRS?

2012-02-01T12:13:00.000-08:00

What is a realization event?

There is no tax on the gain until the occurrence of a “realization event”, such as a cash dividend or other types of payouts considered by the IRS. Although the cash dividend does not make the owner any richer, it serves as the trigger for taxing the enrichment that the tax system had previously ignored.

This is mainly justified by the tax policy of Administrative ease for the Internal Revenue Service's enforcement of tax law.

Capital Loss Carrybacks and Carryover

2012-01-30T22:13:00.000-08:00

Rules for Capital Loss Carrybacks and Carryover

Under § 1212, corporate taxpayers may carry back those capital losses for up to the three preceding taxable years to offset any net capital gains that corporation might have enjoyed in those prior years. Immediate refund can be obtained for anything a taxpayer deserves from the IRS.

For non-corporate taxpayers, there is no carryback provision. However, losses that are nondeductible because of the § 1211 limitations may be carried over to future years indefinitely. You can offset the whole amount against ordinary income because of the small business exception.

Unrealized Gain in Charitable Deductions

2012-01-29T22:18:00.000-08:00

Unrealized gain in donated property is deductible only if:

The gain would have been long-term capital gain had the taxpayer sold the property;
In the case of a contribution of tangible personal property (not land):

Use of property by charity is related to its tax-exempt purpose, AND
Property is not given to a private foundation, which are a category of charities with special treatment in a number of respects including charitable property deductions.

You can’t get unrealized appreciation of personal property through deduction if giving this way to a private organization.

Netting of Long term and Short term Capital Gains and Losses

2012-01-26T10:11:00.000-08:00

Netting of Long term and Short term Capital Gains and Losses

These groups of capital gains are netted against one another according to the following rules in § 1221.

Long-term capital gains are netted against long-term loses.
Short-term capital gains are netted against short-term losses.
If the results of the first two netting procedures have the same sign (that is, both are losses or both are gains for the taxpayer), then the taxpayer has that amount of each type of net gain or loss, and each is treated accordingly by the Internal Revenue Code and the Internal Revenue Service.

However, if the results of the first two netting procedures have opposite signs (that is, if one is a net gain and the other a net loss), those two outcomes are netted against each other.
This final result of this netting has the character of whatever type of gain or loss “sticks out” after the netting procedures regarding capital gains are finished

What are Business Entertainment Deductions?

2012-01-25T18:04:00.000-08:00

The Definition of Business Entertainment Deductions in Tax Accounting

§ 274 of the Internal Revenue Code authorizes no deductions, it limits conditions or prohibits certain deductions that § 162 or 212 would otherwise permit.

BUSINESS ENTERTAINMENT DEDUCTIONS

§ 274(a) If an activity is “of a type generally considered to constitute entertainment, amusement, or recreation its expenses may be deducted if

Activity is directly related to the taxpayer’s business OR
Activity is associated with the conduct of the taxpayer’s business and it immediately precedes for follows a substantial business discussion

STANDARD: There must be a substantial and bona fide business deduction and a minimal nexus between business and the activity. This is required for a taxpayer claiming a business entertainment deduction.

What is Reasonable Compensation for the IRS?

2012-01-25T17:46:00.000-08:00

Definition of Reasonable Compensation

§ 162(a)(1) of the Internal Revenue Code allows for “a reasonable allowance for salaries or other compensation for personal services actually rendered."

The reasonable compensation section of the tax code often comes into play because the double taxation of corporations. If the officers and executives of a corporation are substantially identical with its major shareholders, a temptation may arise to distribute some of the earnings of the corporation under the label of additional compensation for services, rather than under the dividend label to save on taxes.

The reduction in dividend tax lessens that tax advantage of compensation over dividends, but in many situations a significant tax advantage for compensation remains. There are still many controversies between businesses and the IRS over what is considered reasonable compensation for a corporate officer.

What are Shareholders?

2011-11-30T13:37:00.001-08:00

Shareholders: They are the owners of the corporation.

The Shareholders possess the right to 1) Elect directors 2) Vote on fundamental transactions like mergers, sale of assets, dissolutions, and amendments of articles of incorporation.

They have residual claim on corporations assets if it is dissolved (“liquidation right”). Once creditors have been paid in a liquidation, the shareholders can get the remaining assets.
They have a right to receive a pro rata share of corporate profits (dividends) if authorized by board of directors. This is not absolute, they have to bargain for this right. Preferred Shares get dividends first.
Control rights are weighted by the size of your investment. This is different than a general partnership where all partners vote equally.
Other than electing the board, they have no management of conduct rights. Shareholder do not have rights to act on behalf of the corporation. They are passive investors.

What is a company's authorized stock?

2011-11-28T19:40:00.001-08:00

A company's authorized stock is the number of shares that it may legally issue. The amount of authorized stock will appear in the articles of incorporation that a company files with the secretary of state during the beginning of its existence.

A corporation cannot issue more stock, or stock of a different class, that the articles of incorporation authorize. This is why it is important for a company to anticipate its future financing needs when preparing its articles of incorporation.

However, with approval of the board of directors or shareholders, the articles of incorporation may be amended to increase the number of shares authorized, or to create an entirely new class of stock for selling to investors.

Preferred Shares –Bargain for Rights

2011-11-11T20:15:00.001-08:00

Preferred Shares –Bargain for Rights

Have preference or priority in payment over common shares Terms are set out in articles or in separate document called “certificate of designations.
They get dividends paid out first. The dividends could accumulate and then preferred shares must get paid out first before holders of other classes of stock outstanding.
Initially, they did not have voting rights
Liquidation Preference- Might get right to sell shares back to the company at a certain price
Preemptive rights – a right to buy shares ahead of other shareholders from the corporation This is an Anti-Dilution Device and normally something that preferred shareholders pay for and bargain to receive.

Capitalization and Depreciation

2011-11-11T20:10:00.001-08:00

Capitalization and Depreciation- Matching Expenses with the Income that those expenses help produce

§168 of the Internal Revenue Code provides various cost recovery schedules. Under the accelerated cost recovery system ACRS, the cost recovery of an asset depends on three things:

The total amount of cost to be recovered
The number of years over which the cost is to be recovered
The rate at which the cost is to be recovered over those year.

Differences between cash method and accrual method

2011-10-12T20:42:00.000-07:00

Taxpayers have two primary choices that they must stick to when completing accounting records for tax returns. What are the main differences between the cash method of accounting and the accrual method of accounting for tax purposes?

The Cash Method

The cash method of accounting has a focus on money our and money in. For example, a taxpayer has income when she receives a payment from a buyer. The taxpayer has a deduction when they make payment.

The Accrual Method

Oppositely, the accrual method of accounting focuses more on legal rights and obligations: An item is considered income when the right to receive it is earned. An item is deductible when the taxpayer becomes liable to pay the item.

It is important to note that individual taxpayers are generally required to use the cash method of accounting. Certain taxpayers must use the same method of accounting for tax purposes as they use to keep their books.

How are business ethics different in the US than other countries?

2011-09-30T09:25:00.000-07:00

How are business ethics different in the US than other countries?

U.S political and legal social institutions create much greater coercive and normative pressure for US companies to comply with ethical standards. There are many prescriptive rules that companies are required to follow. For example, in the United States Sarbanes-Oxley is a law that dictates ethical guidelines for US companies. In comparison, in England there is no law requiring British companies to follow prescribed ethical guidelines. Instead, companies voluntarily comply with the Cadbury Code of Best Practices. It is very important to consider U.S. Business Ethics when doing business in the United States.

Is Sarbanes-Oxley necessary?

The law imposes much stricter guidelines on companies and executives creating stronger shareholder rights. Yet Critics argue that the increased compliance costs hurt US companies and are unnecessary. For overall investment in the United States, the law creates a safer environment for foreign investors. Therefore, it has become a necessary part of doing business in the United States.

Section 197 Intangibles- Amortization

2011-07-25T18:11:00.000-07:00

What are IRS Section 197 Intangibles- Amortization?

Normally the goodwill of a business is a non-depreciable asset. However, congress made an exception.

§ 197 : Taxpayers are allowed to recover the cost of a wide range of purchased intangibles, including goodwill and other “customer based intangibles,” on a straight line basis over 15 years, without regard to the actual useful life of the asset.

§ 197 usually does not apply to intangibles created by the taxpayer itself.
Little practical significance because taxpayers can deduct the majority of costs used to create goodwill under § 162
§ 197 only comes into effect when goodwill is purchased

Work Clothing Tax Deduction

2011-05-25T18:07:00.000-07:00

What types of tax deductions are available for individual taxpayers regarding work clothing?

The generally accepted rule governing the deductibility of clothing expenses is that the cost of clothing is deductible as a business expense only if:

The clothing is of a type required as a condition of employment
It is not adaptable to general usage as ordinary clothing, and
It is not so worn as ordinary/daily clothing.

A taxpayer must satisfy all these requirements in order to pass an audit by the IRS concerning a work clothing tax deduction.

Fixed Costs and Variable Costs Examples

2010-08-14T10:01:00.000-07:00

The following are examples of fixed costs and variable costs:

Indirect labor- fixed costs could be variable under certain circumstances
Indirect materials- variable costs
Insurance on building- fixed costs
Depreciation on building (straight-line)- fixed costs
Overtime premium pay- variable costs
Property taxes- fixed costs
Polishing compounds- variable costs
Depreciation on machinary (based on machine hours used)- variable costs
Employer's payroll taxes- variable costs
Machine lubricants- variable costs
Employees' hospital insurance (paid by employer)- fixed costs
Labor for machine repairs- variable costs
Vacation pay- variable costs
Patent amortization- fixed costs
Janitor's wages- fixed costs
Rent- fixed costs
Factory electricity- fixed costs
Plant manager's salary- fixed costs

Additional Accounting Examples:

Variable Cost Ratio Example

Difference between Fixed Cost and Variable Cost

Relationship between Variable and Absorption Costing
Applying Manufacturing Overhead

Accounting Income Statement

2010-08-13T11:52:00.000-07:00

The main purpose of the accounting income statement is to report the net income earned by a company during a specified period. Most company's issue annual and quarterly income statements.

The income statement is generally considered the best representation of a company's financial health. A well prepared should answer the following questions:

What is the company's current financial status (profit/loss) ?
What were the company's operating results for the period?
What did the company use its cash for during the period.

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

What is default risk?

2010-08-11T12:10:00.000-07:00

In relation to financial and managerial accounting, default risk is the probability that a company or customer will not be able to make timely debt or interest payments when they are required.

When the amount of debt in a company's capital structure increases, the likelihood of default increases significantly because the principal and required interest payments become much larger.

Additional Accounting Examples:

Purpose of Higher Leverage

What is Financial Leverage?
Ratio Analysis for Financial Control
Operating Expense to Sales Ratio
Calculate Gross Financial Margin
Degree of Financial Leverage

Purpose of Higher Leverage

2010-07-28T13:26:00.000-07:00

What is the purpose of higher leverage?

There are many important reasons why a company might make use of high leverage in its borrowing practices. One reason is that higher leverage allows a company to expand without requiring additional stockholder investments but also will make repayment to creditors less certain.

It is important to check a company's financial statements with financial ratios to ensure that they will be able to meet future liabilities.

Additional Accounting Examples:

Ratio Analysis for Financial Control

Operating Expense to Sales Ratio

Calculate Gross Financial Margin

Degree of Financial Leverage

What is default risk?

Dividend Preferences

2010-07-27T16:35:00.000-07:00

It is important to consider Dividend Preferences in companies that have both common stock and preferred stock. The manner in which the dividends are divided is based on the rights of preffered stock holders.

Additional Accounting Examples and Explanations:

Four Significant Dividend Dates

Cost of Preferred Stock

Prepaid Rent and Unearned Rent

2010-07-27T12:49:00.000-07:00

What is the different between Prepaid Rent and Unearned Rent?

The following is an accounting example explaining the different between prepaid rent and unearned rent. Prepaid rent is a type of payment made by a tenant in advance of its due date and is an asset to the receiving company. For example, if the apartment's tenant had paid $240 in January for the entire year rent ($20 a month), it would show as of 1/31/xx $240 as prepaid rent. 240/12=20, 240-20=220.

The landlord in this situation would show $220 as unearned rent as of 1/31/xx a liability on the balance sheet, because they have received money for rent in which they have not provided service February through December, therefore the title unearned rent. This is the matching principle in accounting, primarily the major underlying principal of generally accepted accounting principles (GAAP).

Additional Accounting Examples:

Advance Payments and Unearned Rent

Credit Sales and Purchases

Accounting Cost Principle

Revenue Recognition Principle

Seasonal Change in Inventory

2010-07-26T12:28:00.000-07:00

Many firms have inventories that are highly seasonal and change greatly throughout their business year. Therefore, calculating the inventory turnover from end of year inventories will not produce the most accurate results for different firms. Companies with large seasonal changes in inventories are better to calculate the firm's average inventory over the past year and use that to calculate inventory turnover than other less accurate methods.

Additional Accounting Tutorials and Accounting Examples:

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

What is Fair Value Accounting?

2010-06-26T12:44:00.000-07:00

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.

Calculate Account Receivable Turnover

2010-04-09T08:51:00.000-07:00

A receivable turnover ratio measures how long it takes for a company to collect on credit sales. This turnover ration tells an accountant how many times receivables are turned over. The average collection period will indicate the average length of time that a firm must wait after making a sale before it receives cash.

Receivables Turnover = Sales/ Accounts Receivable

What drives “convergence” for international firms?

2010-04-07T13:54:00.000-07:00

Convergence is the increasing similarity of management practices in firms. It is more apparent in transnational firms than multinational firms.

Globalization is pushing convergence for multiple reasons including global customers, growing levels of economic development, and global competition. In order for firms to remain competitive, it is an advantage to be aware of what people are doing in other foreign countries.

Transnational firms must seek to take advantage of their foreign domestic situations by assimilating into their culture.

For further information about international business, check these links:

Advantages and Disadvantages of Globalization
Multi-Domestic Strategy and Transnational Strategy

Fiscal Year Definition and Explanation

2010-04-06T11:33:00.000-07:00

The following is the accounting definition and explanation of a fiscal year:

The year long accounting period used by a company is known as its fiscal year. The maximum length of this accounting period is generally twelve months which includes all transactions that have taken place in the accounting cycle or fiscal year

A year-long accounting period that ends when its business activities are at their lowest point in the annual operating cycle is called a natural business year. It is possible to see the long-term financial history of a company by reviewing balance sheets that are prepared every year. The history of operations for each fiscal year is shown in the income statement.

Additional Accounting Examples and Explanations:

Information on the Accounting Cycle
What is a Trial Balance?
Common Trial Balance Errors

No Inequality in Trial Balance

2010-04-01T08:48:00.000-07:00

The following four types of errors will not cause an inequality in the trial balance of an account.

Recording a transaction more than once
Posting part of a specific transaction correctly as a debit or credit yet doing it in the wrong account.
Failing to record a transaction or to post a transaction in the appropriate account
Accidentally recording the exact same erroneous amount for both debit and credit parts of a transaction.

Additional Accounting Examples and Explanations:

Information on the Accounting Cycle
What is a Trial Balance?
Common Trial Balance Errors

Normal Balances of Accounts

2010-03-31T11:44:00.000-07:00

What is a Normal Balance

The sum of increases to the account is equal to or greater than the decreases to the account. Hence, the account is considered to have a normal balance.

What is Accounting Business Transaction?

2010-03-30T12:44:00.000-07:00

There are two important criteria for an action to be considered an Accounting Business Transaction

The business transaction must be recorded
Transactions that are not related directly to outsiders are sometimes referred to as internal transactions.

Maturity Value Definition

2010-03-28T16:21:00.000-07:00

What is the accounting definition of Maturity Value?

Bond Maturity Value is the amount of an obligation to be collected or paid at maturity by the bond issuer that is equal to the principal plus any interest.

Plantwide Overhead Rate

2010-02-26T13:24:00.000-08:00

The Plant-wide overhead rate is used by companies as a single overhead rate that is used throughout all production departments in a specific plant. It is popular for companies to use multiple overhead rates rather than plantwide overhead rates to more accurately distribute overhead costs among produced products.

It is a good idea to use multiple overhead rates in manufacturing situations when one department is machine intensive and another department is more labor intensive in its production techniques.

What is an example of a globalization driver?

2010-01-19T14:01:00.000-08:00

Globalization drivers are conditions in an industry that favor transnational/international strategies over multi-local/regional strategies. These factors generally fall into four categories such as markets, costs, governments, and competition.

An example of a cost factor would include the search for cheaper local labor and procuring cheaper raw materials in foreign countries.

For further information about international business practices, check these links:

Advantages and Disadvantages of Globalization
Multi-Domestic Strategy and Transnational Strategy

What is Accounting Work Sheet?

2009-11-13T12:21:00.000-08:00

A work sheet is a preparation tool used by accountants to help them produce financial statements. They are normally only used within the company and will not be shown to outsiders. In todays computer economy, many are prepared on computer spreadsheet programs such as Excel.

What is Retained Earnings?

2009-09-06T12:00:00.000-07:00

Calculate Internal Rate of Return

2009-08-23T18:37:00.000-07:00

The internal rate of return (IRR) is defined as the rate of return an investment project creates over its entire life. It is computed by finding that discount rate that results in a zero net present value for the project.

Additional Accounting Links:
Calculate Accounting Average

Useful External Links:

Online NPV Calculator
Calculate IRR using Excel

Purchase Raw Materials Journal Entry

2009-08-09T14:39:00.000-07:00

Use the following information to record the purchase raw materials in the accounting ledger.
When you receive the ship, you are obligated to pay cash or a agree on paying at a later date

Both transactions require these accounting journal entries to keep the ledger in check.

Increase raw materials inventory with credit
Decrease cash account with debit
Increase accounts payable with credit

Additional Accounting Tutorials and Accounting Examples:

What are Direct Materials?
What are Indirect Materials?
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

Prepaid Expenses and Unearned Revenues

2009-08-07T14:16:00.000-07:00

In accounting, prepaid expenses and unearned revenues are considered prepayments by accountants. That is defined as money has exchanged hands but the expense or revenue is not recorded due to the expense has not been incurred yet or the revenue has not been earned yet by the company.

Examples of prepaid expenses and unearned revenues

Prepaid Expense - A year long insurance contract a company paid $12,000 for at the beginning of the year. Since the insurance company owes the company service, the expense prepayment is recorded as an asset (Journal Entries: debit Prepaid Insurance and credit Cash).

Unearned Revenue - A year long subscription of $12,000 is received in advance by a magazine company. Because the company owes something, the unearned revenue is recorded as a liability (Journal Entries: debit Cash and credit Unearned Revenue).

Advantages and Disadvantages of Globalization

2009-08-06T19:23:00.000-07:00

What is globalization and what are some of its advantages and disadvantages?

In recent decades, globalization has been defined as an economic force driving worldwide economic integration and the expanding of businesses beyond their domestic borders. The worldwide trend of diminishing trade barriers, increased technology, and reduced shipping costs have promoted a prosperous era of world trade. Companies are no longer limited to their domestic boundaries and may conduct business anywhere in the world. Some benefits of globalization include lower prices and job creation.

Manufacturing activities can be performed where labor and supplies are cheapest leading to reduced consumer costs. Jobs can be created in poorer economies that eventually lead to prosperous economic growth. Yet the effects of job creation and globalization are like a double edged sword. Jobs often are eliminated in countries with higher costs and out-sourced to countries with lower cost structures.

This has been viewed as one of the main disadvantages of globalization and a point of contention between employees of multinational companies. However, many of these benefits continue to outweigh its disadvantages therefore the world will continue to see globalization rise as a powerful global economic force.

2009-08-06T18:04:00.001-07:00

What is Working Capital Management

2009-08-06T17:32:00.000-07:00

Working capital management relates to the short-term management of a firm's short term assets and liabilities. For example, inventory is considered a short-term asset and accounts payable is categorized as a short-term liability that shows what the firm owes to other entities.

Computer Accounting System Modules

2009-07-03T16:50:00.000-07:00

Modern computer accounting systems contain different modules in order to function correctly. Each module handles a different task. For example data collection, processing, and reporting for each type of business activity that the company is involved in. Some examples include:

Sales Moduless
Purchasing Modules
Inventory Management Modules
Human resources module
Production Module

Accounting Regulations External Decision Makers

2009-07-02T16:41:00.000-07:00

How external decision makers benefit from accounting regulations and laws?

Enforced accounting regulations help protect the interests of external decision makers such as stockholders and banks by ensuring that information for evaluating the performance and financial condition of a company is available to necessary users and that the information presented is prepared by certified professionals according to specific guidelines that are enforceable by law.

Accounting guidelines provide assurance that the information presented is:

Accurate
Reliable
Comparable over time and across companies.

Calculate Pretax Margin

2009-06-08T18:17:00.000-07:00

What is the Pretax Margin?

In accounting, the pretax margin is a number that measures the operating efficiency of a company by using its accounting records. The pretax margin is expressed as a percentage of revenues earned. Since pretax margin illustrates the relationship between operating income and revenues, it is a measure of the profitability of the company.

Calculate Pre-tax Margin

Pretax margin = (Operating income + other income − interest)/ Sales

What are Capital Structure Decisions?

2009-05-19T18:13:00.000-07:00

Management makes a capital structure decision when it decided the appropriate mix of debt and equity capital that its company uses to finance its assets and operations.

An example of a capital structure decision would be for a firm to issue new debt to finance a new factory instead of common stock.

Additional Accounting Examples and Tutorials:

Definition of Treasury Stock
Reasons Companies Issue Preferred Stock

What is Capital Budgeting?

2009-05-06T18:04:00.000-07:00

In accounting, capital budgeting is about how a firm will utilize its fixed assets, such as a factory, to make use and make returns off of long-term investments.

A good example of this is a decision made by management to construct a new factory with machinery in order to meet demand for a new product. This is a capital budgeting decision

More Accounting Links:
Average Accounting Return

What causes a Liability?

2009-05-02T17:25:00.000-07:00

Liabilities can result from certain types of contractual relationships with lenders, suppliers, customers, employees, governments, and other companies.

Outsourcing Manufacturing to China

2009-04-28T14:40:00.000-07:00

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

2009-04-18T14:12:00.000-07:00

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

Operating Expense to Sales Ratio

2009-04-13T13:08:00.000-07:00

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

Revenue Recongnition Principle Defintion

2009-04-12T13:50:00.000-07:00

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.

What are Trade Discounts?

2009-04-05T18:31:00.000-07:00

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

2009-04-01T19:35:00.000-07:00

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.

Characteristics of Accounting Assets

2009-03-19T15:26:00.000-07:00

The following is by defintion the characteristics of accounting assets

Probable future economics benefits
Obtained or controlled by an entity
Result of past transactions or events.

Assets are controlled by the company with the intent to gain future economic benefit.

Nonoperating Revenues and Gains

2009-03-17T19:22:00.000-07:00

The following are some examples of Non- Operating Revenues and Gains:

Interest revenue (or interest income
Gain on sale of securities
Gain on sale of equipment
Gain on sale of buildings
Gain on sale of machinery

Four Significant Dividend Dates

2009-03-15T14:46:00.000-07:00

The four following dates are important terms to understand in the distribution of a dividend by a corporation.

Date of Declaration is the day that the dividend is declared by the board of directors of a corporation. At this time, a liability is created on the balance sheet to make the payment come into existence.
Ex- Dividend Date is a date that indicates who is able to receive the dividend. An investor who buys the stock before the ex-dividend date is entitled to receive a dividend from the corporation. On the other hand, an investor who sells their stock before the date will not receive a dividend.
Date of record usually follows the date of declaration by three to four weeks. In order to receive payment of the dividend an investor must be listed as the owner of a stock on this date.
Date of payment is the date on which an investor will be paid a dividend. It usually comes two to three weeks after the date of record

Additional Accounting Examples and Explanations:

Dividend Preferences

Cost of Preferred Stock

What are Dead Assets?

2009-03-11T16:29:00.000-07:00

In accounting, dead assets are a type of asset that do not have any life beyond their immeadiate use.

Multi-Domestic Strategy and Transnational Strategy

2009-03-10T16:44:00.000-07:00

What is the difference between at multi-domestic strategy and transnational strategy?

A multi-domestic strategy gives a top priority to quick local responsiveness and commitment. It can be considered a differentiation strategy because the firm attempts to deliver different products and services to different local customers.

On the other hand, a transnational strategy looks at the bigger worldwide picture and tries to take advantage of overall global factors. For example, they will seek location advantage and search to gain economic operating efficiencies worldwide.

What is Residual Income?

2009-03-03T17:25:00.000-08:00

In accounting and finance, residual income is defined as the net operating income an investment center generates above a company’s minimum required rate of return on its operating assets.

Additional Accounting Links:
Calculate Average Accounting Return

Calculate Basic Earnings per Share

2009-03-01T14:42:00.000-08:00

Earnings per share calculation (EPS) are required by the SEC to be included on the income statements of publicly owned companies. Basic earnings per share is based on the weighted-average number of common shares outstanding for the year.

The number used will ignore dilution caused by the convertible preferred stock.

What is Cost Center Manager?

2009-03-01T13:22:00.000-08:00

A cost center manager is an employee who has control over cost, but not revenue or investment funds of a company. For example, a profit center manager will control cost and revenue. On the other hand, an investment center manager has control over cost, revenue, and investment funds of a company.

Calculate Average Tax Rate

2009-02-23T17:07:00.000-08:00

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

2009-02-22T14:37:00.000-08:00

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

2009-02-20T14:14:00.000-08:00

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

2009-02-17T13:58:00.000-08:00

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.

Common Size Balance Sheet

2009-02-15T10:59:00.000-08:00

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

2009-02-11T13:26:00.000-08:00

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:

Unusual in nature
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

2009-02-10T13:09:00.000-08:00

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

2009-02-08T18:13:00.000-08:00

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

Arrange all costs associated with each alternative action desired.
Remove the sunk costs and drop any costs shared between alternative decisions.
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

2009-02-04T15:39:00.000-08:00

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

2009-02-02T15:06:00.000-08:00

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:

Definition of Depreciation Summary

2009-01-27T13:48:00.000-08:00

Depreciation is an allocation of capital expenditures over the estimated revenue producing period of a long term asset. This is required due to the matching principle.

Depreciation is a determined by acquisition cost, useful life, depreciation rate, and estimated salvage value.

Depreciation does not involve the cash account Only the purchase and disposal of assets involve cash account

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

Asset Historical Cost Examples
Straight Link Depreciation Example
Depreciation of an Asset and Book Value

Net Income Cash Flow Adjustment

2009-01-26T13:04:00.000-08:00

Follow these steps to adjust net income for use in a Cash Flow Statement

Net Income Adjustments

Adjust for Non-Cash Changes in Current Accounts
Adjust for Non-Cash Changes in Non-Current Accounts

Add Depreciation & Amortization
Add Loss on Sale of Assets
Subtract Gain on Sales of Assets

FIFO Method Weighted Average Method

2009-01-21T17:15:00.000-08:00

Which accounting method is better for manufacturing firms to use for cost control, FIFO or weighted-average method?

Accountants often consider the FIFO method superior to the weighted-average method for cost control in managerial accounting environments. The reason for this is current performance should be measured in relation to costs of the current period only.

The weighted-average method mixes these costs in with costs of the prior period. Thus, under the weighted-average method, the department’s actual performance in the current reporting period is affected by what has happened previously in earlier periods.

Determinants of Bond Yield

2009-01-13T12:39:00.000-08:00

Corporate Bonds inherently contain certain risks that investors most know and be cautious about when choosing to invest in bonds. The following table contains the most common risks that are determinants on bond yields.

A taxability premium compensates for unfavorable tax status of certrain classes of bonds
An Interest Rate Risk Premium compensates for holding securities for the long-term when their prices are more sensitive to interest rate changes
An Inflation premium compensates investors for the known fact that prices rise in the future and decrease purchasing power
A Liquidity Premium compensates for holding securities that are difficult to convert to cash at their true value
The Default Risk Premium compensates for the possibility that the issuer is unable to meet the required interest or required principal payments.

A combination of all these premiums are determinants of bond yields

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Definition of quantity schedule

2009-01-12T13:28:00.000-08:00

Accounting Definition of quantity schedule:

A quantity schedule summarizes and displays the physical flow of units produced through a department during an accounting period.

Its serves a company several mains purposes:

Quantity Schedules provide information about manufacturing activity within the specific department and shows the current stage of completion of in-process units
A Quantity Schedules provides the data required for calculating equivalent units and for preparing the other parts of the production report for a product and/or department

Definition of Bank Statement

2009-01-11T16:46:00.000-08:00

Definition of a Bank Statement

A bank statement is a detailed statement issued by a bank showing a client's bank account balances according to the bank record. Most banks send their customers statements by mail or email month.

Customer can then check their funds available in the bank and to update their own records of transactions that have occurred. It is important that the customer check their bank statement for errors. A customer may have less money in their accounts than they think due to bank charges and fees or other errors.

Common Trial Balance Errors

2009-01-05T11:04:00.000-08:00

When the trial balance does not balance, the accountant must find the errors and correct them. the following steps are suggestions on how to correct errors in the trial balance.

Double check the trial balance columns to see if they are added together correctly
Check if debit accounts or credit accounts are placed on the trial balance by error
Recompute each account balance in the accounting ledger.
Ensure that account balances are correctly entered from the accounting ledger.
Verify that each journal entry is posted in the trial balance.
Double Check that each original journal entry has equal debits and credits on the ledger.

Additional Accounting Information:

Information on the Accounting Cycle
What is a Trial Balance?

Characteristics of Debt Securities

2009-01-04T10:02:00.000-08:00

There are many features of Debt Securities such as bonds that make them unique:

Bonds have a superior liquidation claim in bankrupty than equity securities (stocks)
Interest on debt is tax deductible
Debt Securities represent funds borrowed by a firm

These securities represent funds borrowed by the firm instead of equity securities such as stocks that represent ownership in the firm. Owning bonds do not allow voting rights in a firm like equity securities. One advantage of debt securities is that interest paid on the debt is tax deductible by the company. Lastly, debt holders have more priority over equity holders if the firm is liquidated due to bankruptcy. These characteristics of debt securities make them attractive to investors.

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Advance Payments Unearned Rent

2009-01-03T15:42:00.000-08:00

A Rental Company reported these two different balances in their Unearned Rent account at the beginning and end of 2007:

Jan. 1, 2007 =$2,600
Dec. 31, 2007 = $3,200

If rent revenue for 2007 was $26,300, how much cash was received by the company as advance payments for rent due in 2007?

Answer: $26, 900

Net Income Practice Problem

2009-01-02T12:13:00.000-08:00

Use the following data below to calculate net income for this company:

Sales, $920,000
Cost of merchandise sold, $560,000
Administrative expenses, $30,000
Rent revenue $20,000
Interest expense, $10,000
Sales returns and allowances $65,000
Selling expenses, $110,000

Answer: Net Income= $165,000

How to Calculate Net Income

Asset Historical Cost Examples

2009-01-01T12:29:00.000-08:00

In financial accounting and managerial accounting, all assets are recorded on the balance sheet and depreciated at their historical cost.

In accounting, a historical cost is considered the purchase price plus any additional costs necessary to obtain the asset, prepare it for use, and transport. Additional costs related to an asset include costs besides the purchase price include transportation costs, insurance for asset delivery and others.

Below is a list of additional costs related to the purchase of an asset that may be included in the historical cost of an asset:

Purchase of equipment will include the purchase price. Plus additional costs will include delivery costs, installation, set-up costs, and the cost of modifications.

Purchase of a building will include the purchase price. Additional cost will include title search, title transfer documents, legal fees, inspections costs, and real estate commissions.

Purchase of land will include the purchase price. Additional costs will include demolition of old buildings, title search, government fees and real estate fees.

The historical cost must be used in asset depreciation.

Example depreciation problem with historical costs.

What are Indirect Materials?

2008-12-31T11:00:00.000-08:00

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

Perpetual Inventory System

2008-12-30T13:29:00.000-08:00

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:

A higher degree of control over inventory in the company's possession
Helps purchasing agents to order replacement merchandise in a more timely fashion
Detects and deters employee theft
Identifies other problems related to inventory quickly

Additional Accounting Tutorials and Accounting Examples:

Balance Sheet Assets Questions

2008-12-29T13:17:00.000-08:00

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?

$152,000

What Costs for Depreciation?

2008-12-28T19:51:00.000-08:00

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

Additional Links to Accounting Problems and Examples:

Accumulated Depreciation Balance Sheet
How to Calculate Net Income
Accounting Financial Statements
Credit Sales and Purchases Accounting Problems

What is a Transfer Price?

2008-12-27T19:42:00.000-08:00

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.

S0me 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.

What is an Operating Segment?

2008-12-26T10:35:00.000-08:00

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

Activity Based Costing Method Differences

2008-12-25T12:43:00.000-08:00

How is activity based costing different from traditional costing methods?

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

In activity-based costing (ABC), non-manufacturing and manufacturing costs may be assigned to products produced by a firm.
Some manufacturing costs may be excluded from product costs using activity-based costing (ABC) that are included with traditional costing methods.
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.
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.

Pledging Receivables as Loan Collateral

2008-12-24T13:35:00.000-08:00

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.

Variable Cost Examples

2008-12-23T10:04:00.000-08:00

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.

Industry	Cost	Cost Driver
Manufacturing	Direct Materials	Number of units produced
Law Firm	Payroll	Number of hours
Airline	Fuel	Number of miles flow
Hotel	Housekeeping costs	Number of rooms occupied
Tire Factory	Rubber	Number of rubber used
Country Club	Food cost	Number of members

Straight-Line Depreciation Expense Example

2008-12-22T14:52:00.000-08:00

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

2008-12-22T13:41:00.000-08:00

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

Four types of adjusting entries:

converting liabilities to revenue
converting assets to expenses
accruing unpaid expenses
accruing uncollected revenues

Adjusting Journal Entry Note Receivable

2008-12-20T21:10:00.000-08:00

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

2008-12-20T20:26:00.000-08:00

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.

Start Accounting Cycle
Analyze Accounting Transactions
Post Accounting Transactions
Prepare unadjusted trial balance
Adjust
Prepare adjusted trial balance
Prepare financial statements
Close
Prepare post-closing trial balance
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.

Additional Accounting Examples and Explanations:

Information on the Accounting Cycle
What is a Trial Balance?
Common Trial Balance Errors

Ratio Analysis Financial Control

2008-12-10T15:51:00.000-08:00

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

Additional Accounting Examples and Explanations:

Calculate Invested Capital
Ratio Analysis and Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio

Sources of GAAP Accounting Principles

2008-11-24T21:47:00.000-08:00

There are three main sources of GAAP Accounting Principles:

Committee on Accounting Procedure CAP

2008-11-24T21:46:00.000-08:00

Committee on Accounting Procedure CAP 1939-1959

First private body interested in writing accounting rules
Creation Encouraged by SEC
Issued 51 Accounting Research Bulletins to accounting professionals
Consisted of members who were practice certified public accountants (CPAs)
Acted upon accounting problems when they began to occur

What is Cost of Capital?

2008-11-24T17:37:00.000-08:00

The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs.

For a levered firm, the financing costs can be represented by the weighted average cost of capital:

More information about the weighted average cost of capital

What is Amortization

2008-11-23T12:25:00.000-08:00

Amortization is depreciation of the cost of intangible assets to expense in a controlled and timely manner over the useful life of the asset. It is very similar to depreciation.