An indicator of profitability that is measured by dividing the accounting net income by the amount invested.
An indicator of profitability that is measured by dividing the accounting net income by the amount invested.
computations: 1. Which of the following models for evaluating capital expenditures considers the time value of money by discounting the future cash flows? Accounting Rate Of Return Wrong. The accounting return uses...
Our Explanation of Evaluating Business Investments compares four of the techniques for reviewing potential capital expenditures. You will be introduced to accounting rate of return, payback, net present value, and...
it will take to recoup the cash spent on a project. There are two weaknesses with the payback method: 1) the time value of money is not considered, and 2) the cash flows occurring after the cash is paid back is ignored....
received after the payback period. Another example of a non-discount method in capital budgeting is the accounting rate of return method, which is similar to the return on investment (ROI). [To overcome the above...
The rate that will discount all cash flows to a net present value of zero.
A term used in evaluating business investments. It represents the targeted rate that a company needs to earn. It is also referred to as the discount rate, because this rate is used to discount the future cash flows to...
What is the internal rate of return? Author: Harold Averkamp, CPA, MBA Definition of Internal Rate of Return The internal rate of return is the interest rate that will discount an investment’s future cash amounts to be...
Our Explanation of Evaluating Business Investments compares four of the techniques for reviewing potential capital expenditures. You will be introduced to accounting rate of return, payback, net present value, and...
A reduction in the cost of goods purchased that is allowed by the supplier based on the authorized return of goods. Also a general ledger account in which the purchase returns are recorded under the periodic inventory...
The result of dividing a corporation’s net income by the average amount of common stockholders’ equity during the time interval when the net income was earned. To learn more about this ratio, see Explanation...
A measurement of financial performance of a company’s operating division that is not responsible for its financing and income taxes. The calculation is likely to be 1) the division’s operating income before...
A financial ratio that expresses the income statement effect from employing an asset as a percentage of the asset’s cost on the balance sheet.
in the Purchases account. Example of a Purchase Return Let’s assume that a company using the periodic inventory system, purchased merchandise having a cost of $1,000 with terms of net 30 days. This was recorded with:...
Our Explanation of Bonds Payable covers the recording of bonds, the accrual of interest expense, and the amortization of the discount and premium on bonds payable. You gain an understanding on why the market value of...
Our Explanation of Bonds Payable covers the recording of bonds, the accrual of interest expense, and the amortization of the discount and premium on bonds payable. You gain an understanding on why the market value of...
Why does the internal rate of return equate to a net present value of zero? Author: Harold Averkamp, CPA, MBA Internal rate of return and net present value are discounted cash flow techniques. To discount means to remove...
What is hurdle rate? Author: Harold Averkamp, CPA, MBA Definition of Hurdle Rate In capital budgeting, the term hurdle rate is the minimum rate that a company wants to earn when investing in a project. Therefore, the...
rate is expected to be 15.7% which may be a great return, but because it’s less than the required 16%, the investment will be rejected because of its negative net present value. [To find the exact rate that a project...
What is the return on assets ratio? Author: Harold Averkamp, CPA, MBA Definition of Return on Assets Ratio The return on assets ratio, or return on total assets ratio, relates a company’s net income during a specific...
What is the payback reciprocal? Author: Harold Averkamp, CPA, MBA The payback reciprocal is a crude estimate of the rate of return for a project or investment. The payback reciprocal is computed by dividing the digit...
Our Explanation of Present Value of an Ordinary Annuity uses the appropriate present value factors for discounting a stream of equal cash amounts occurring at equal time intervals. An important feature is the use of loan...
How do I calculate IRR and NPV? Author: Harold Averkamp, CPA, MBA Definition of IRR The internal rate of return (IRR) method or model determines the interest rate that discounts all cash inflows and cash outflows to a...
Market interest rate, current return, effective interest rate. Also see yield to maturity.
Our Explanation of Present Value of an Ordinary Annuity uses the appropriate present value factors for discounting a stream of equal cash amounts occurring at equal time intervals. An important feature is the use of loan...
Our Explanation of Present Value of an Ordinary Annuity uses the appropriate present value factors for discounting a stream of equal cash amounts occurring at equal time intervals. An important feature is the use of loan...
Rates based on a department’s direct and indirect overhead costs and some measure of the department’s activity, such as the department’s machine hours. Departmental rates are more accurate than...
See hurdle rate.
In accounting this is the rate used to discount future cash flows in order to determine their present value.
A percentage of an hourly wage rate (or salary) that represents the employer’s additional costs of employee benefits such as paid vacation days, paid sick days, insurance (health, dental, life, worker...
The interest rate stated on a bond. This is also referred to as the face interest rate, nominal interest rate, and coupon rate.
A loan in which the interest rate does not change over the life of the loan.
Also referred to as the current interest rate, the yield-to-maturity, and the effective interest rate. The market interest rate is always changing whereas the stated interest rate does not change.
The stated interest rate appearing on the face of the bond. Also referred to as the nominal rate or the stated interest rate.
The interest rate specified or stated in a note payable or in a bond payable. Often this rate is fixed and will not change during the life of the note or bond.
What is burn rate? Author: Harold Averkamp, CPA, MBA In business, burn rate is usually the monthly amount of cash spent in the early years of a start-up business. Burn rate is an important metric since the new business...
A factory or manufacturing overhead rate used to allocate, apply, assign, or spread indirect product costs to items manufactured. Under traditional cost accounting, the burden rate might be a percentage of direct labor...
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