How do I calculate IRR and NPV? 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 net present value of $0. In other...
How do I calculate IRR and NPV? 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 net present value of $0. In other...
In standard costing, how is the purchase price variance reclassified to arrive at actual cost? Definition of Purchase Price Variance In standard costing, the purchase price variance is the difference between the actual...
, if the manufacturer’s production and sales have declined and it fails to cut fixed costs, the manufacturer could be worse off by increasing selling prices. It could even lead to a death spiral. Examples of Elastic...
What is the payback reciprocal? 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 “1” by a project’s payback...
What is the average collection period? Definition of Average Collection Period The average collection period is the average number of days between 1) the dates that credit sales were made, and 2) the dates that the money...
What is disinvestment? In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. Disinvestment is sometimes described as the opposite of capital...
Should a company focus on cash flows or accounting profits when making a capital expenditure decision? Using the incremental cash flows and discounting them to reflect the time value of money is the preferred method. The...
What is benchmarking? Benchmarking is a process for improving some activity within an organization. We will illustrate benchmarking with the following example. Company Q has identified one of its activities that needs...
What are accounting ratios? Definition of Accounting Ratios Accounting ratios, which are also known as financial ratios, are one part of financial statement analysis. Accounting ratios will often relate one financial...
What is a learning curve? Definition of Learning Curve A common learning curve shows that the cumulative average time to complete a manual task (in which learning is involved) will decrease 20% whenever the cumulative...
What is a variable cost? Definition of Variable Cost A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume...
What is DCF? In accounting, DCF refers to discounted cash flows or to the discounted cash flow techniques such as net present value or internal rate of return. DCF is a preferred method for evaluating capital...
What is the dividend yield? The dividend yield is the annual cash dividend per share of common stock divided by the market price of a share of the common stock. Usually, fast growing corporations have a low dividend...
What is transfer pricing? Definition of Transfer Pricing Transfer pricing involves setting a price that will be used when one responsibility center of a company sells goods or services to another responsibility center of...
income of exactly zero. Examples Causing a Break-even Point to Increase The break-even point will increase by any of the following: An increase in the amount of the company’s fixed costs/expenses An increase in...
How do you calculate Return on Capital Employed (ROCE)? Return on capital employed is used as a measurement of the performance of a division of a company. It assumes that the division is not responsible for its financing...
What is the difference between correlation and cause and effect? Definition of Correlation Correlation refers to the association between two or more variables. The association is measured by a statistic known as the...
What is the normal balance of the direct materials variance accounts? I don’t believe there is a normal balance. If a company pays exactly the standard cost of its direct materials, there will be no balance in the...
What is the difference between a cost center and a profit center? Definition of Cost Center A cost center is a subunit of a company that is responsible only for its costs. A few examples of cost centers are: Production...
What is a responsibility center? Definition of Responsibility Center A responsibility center is a part or subunit of a company in which the manager has some degree of authority and responsibility. The company’s...
the amounts of a and bx. a is the estimated total amount of fixed electricity costs during the month. It is the value of y, when x is zero. If the total cost line intersects the y-axis at $1,000 then it is assumed that...
What are out-of-pocket costs? Out-of-pocket costs are those costs or expenses that require a cash payment in the current period or during a project. For example, the wages of the person setting up a machine for a new...
What is the tax advantage when bonds are issued instead of stock? Definition of Bonds and Stock In this context, bonds refers to bonds payable, a form of long-term debt that typically promises to pay interest every six...
What is capital budgeting? Definition of Capital Budgeting Capital budgeting is a process used by companies for evaluating and ranking potential capital expenditures or investments that are significant in amount. A few...
of a company’s break-even point, its expenses are sorted into fixed expenses, variable expenses, and semivariable or mixed expenses. Examples of Causes for an Increase in a Break-even Point Some of the reasons why a...
What is trend analysis? Definition of Trend Analysis In the analysis of financial information, trend analysis is the presentation of amounts from several years all expressed as a percentage of a base year. Trend analysis...
in Manufacturing At a manufacturing company, the salaries and wages of employees in the manufacturing operations are assigned to the products manufactured. When the products are sold, the costs assigned to those...
What does per annum mean? Definition of Per Annum Per annum means yearly or annually. It is a common phrase used to describe an interest rate. Often “per annum” is omitted, as in “I have a 4% mortgage loan.” or...
Are there two ABC methods in accounting? Some accountants use ABC to mean Activity Based Costing. Under this ABC a manufacturer will use many cost drivers to assign overhead costs to products. The objective of Activity...
What is the meaning of base year? In accounting, base year may refer to the year in which a U.S. business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the...
Should capital budgeting decisions be based on cash flows or revenues and expenses? Definition of Capital Budgeting Decisions Capital budgeting assists in the investment decisions regarding assets that will have an...
of earning the next dollar of taxable income. The marginal cost is important because a company’s fixed costs are unlikely to change when one more unit is produced or one additional unit of activity takes place....
What is the discounted value of expected net receipts? Let’s first define expected net receipts. These are future receipts after deducting any related payments. For example, if you are likely to receive $1,200 one year...
What is a rolling budget? Definition of Rolling Budget A rolling budget often refers to a company’s operating budget which presents the future monthly budgets for the next 12 months. A rolling budget is also known as a...
What is decentralization? Definition of Decentralization Decentralization refers to a company’s top management delegating authority to subunits or segments of the company such as a company consisting of a consumer...
What is the effective interest rate? Definition of Effective Interest Rate The effective interest rate is the true rate of interest earned. It can also mean the market interest rate, the yield to maturity, the discount...
of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity. Fixed costs. The total amount of a fixed...
What is hurdle rate? 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 hurdle rate is also referred to as...
What is the times interest earned ratio? Definition of Times Interest Earned Ratio The times interest earned ratio is an indicator of a corporation’s ability to meet the interest payments on its debt. The times...
What are some of the methods for evaluating capital expenditures? Definition of Evaluating Capital Expenditures Capital expenditures involve large amounts of money spent on assets that have a useful life of more than one...
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