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 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 is inventory change and how is it measured? Definition of Inventory Change Inventory change is the difference between the amount of last period’s ending inventory and the amount of the current period’s ending...
Is a loan payment an expense? Definition of Loan Payment Generally a loan payment consists of: An interest payment, which is an expense A principal payment, which reduces the loan’s principal balance If the interest...
What are common-size financial statements? Common-size financial statements present the financial statement amounts as a percentage of a base number. For example, the common-size income statement will report the revenue...
In accounting, what is meant by relevant costs? Definition of Relevant Costs Relevant costs are future costs that will differ between two or more alternative actions. Expressed another way, relevant costs are the costs...
Why and how do you adjust the inventory account in the periodic method? Definition of Inventory Account in Periodic Method Under the periodic method or periodic system, the account Inventory is dormant throughout the...
What is a toxic asset? I would define a toxic asset as an investment whose value has dropped significantly and there is no market in which to sell the asset. To illustrate, let’s assume that at the peak of the real...
What is the consistency principle? Definition of Consistency In accounting, consistency requires that a company’s financial statements follow the same accounting principles, methods, practices and procedures from one...
What is the difference between gross profit margin and gross margin? Definition of Gross Profit Gross profit is an amount that is computed as follows: A company’s net Sales minus its cost of goods sold A product’s...
What is an unpresented cheque or check and does it require an adjustment to the balance sheet? Definition of Unpresented Cheque or Check An unpresented cheque is a check that a company has written, but the check has not...
What is the difference between notes payable and notes receivable? Definition of Notes Payable and Notes Receivable Notes payable and notes receivable are both associated with a written note that promises to repay the...
What is an incremental cost? Definition of Incremental Cost An incremental cost is the difference in total costs as the result of a change in some activity. Incremental costs are also referred to as the differential...
What is solvency? Definition of Solvency I use the term solvency to mean a company is able to 1) pay its obligations when they come due, and 2) continue in business. Some people look to a company’s working capital to...
What is job order costing? Definition of Job Order Costing Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual unit of output. The job order costing system is...
What is an unfavorable variance? Definition of a Variance In accounting the term variance usually refers to the difference between an actual amount and a planned or budgeted amount. For example, if a company’s budget...
What is a current asset? Definition of Current Asset A current asset is a company’s cash and its other assets that are expected to be converted to cash within one year of the date appearing in the heading of the...
What is the net method? Definition of Net Method In accounting, the net method likely refers to the way a company records each vendor’s invoice that offers an early payment discount. Example of Net Method Assume that a...
What is the accounting entry when an order is received? There is no accounting entry recorded in a company’s general ledger accounts when an order is received. The reason is that a sale or sales revenues has not yet...
What is window dressing? Definition of Window Dressing Window dressing refers to actions taken or not taken prior to issuing financial statements in order to improve the appearance of the financial statements. Example...
Do variance accounts have an impact on financial statements? Or are they for performance evaluation only? Since the financial statements must reflect the cost principle, both the standard costs and the variances must be...
Why are accruals needed every month? Reasons for Monthly Accruals Accrual adjusting entries are needed monthly only if a company issues monthly financial statements. Two reasons for the monthly accrual adjusting entries...
Are fixed assets the same as plant assets? Definition of Fixed Assets and Plant Assets My experience indicates that people use the term fixed assets to mean the same as plant assets. As a result, I define both fixed...
If a mortgage payment is due on January 1, should the payment be accrued at December 31? The following answer assumes that the accrual basis of accounting (also known as the accrual method of accounting) is being used…...
What is the matching principle? Definition of Matching Principle The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on its income...
What is an indirect cost? Definition of Indirect Cost An indirect cost is a cost that is not directly traceable to a cost object (product, department, etc.). Rather, the indirect cost is sometimes referred to as a common...
What is a budget variance? A budget variance results when an actual amount is different from a planned or budgeted amount. A budget variance can occur for revenues and for expenses. Join PRO to Track Progress Mark the...
Why does our company's balance sheet report its land at cost when it is so much more valuable? Accountants are guided by the cost principle. This requires accountants to report assets at their cost when acquired—not...
What is a classified balance sheet? Definition of Classified Balance Sheet A classified balance sheet arranges the amounts from a company’s balance sheet accounts into a format that is useful for the readers. For...
What does the cost principle mean for a company's income statement? If a company has buildings, equipment and inventory, the cost principle will mean that the amount of depreciation expense and the cost of goods sold...
What is managerial accounting? Definition of Managerial Accounting Managerial accounting is also known as management accounting and it includes many of the topics that are included in cost accounting. Some of the...
What is IFRS? IFRS is the acronym for International Financial Reporting Standards. IFRS is used throughout the world except in the United States where U.S. GAAP (generally accepted accounting principles) is followed....
Would you please help me understand opportunity cost? You might think of opportunity cost as the profit you had to forego. Let’s illustrate this with a little story. Suppose that you are the sole owner of a company...
What are the accounting principles, assumptions, and concepts? Definition of Accounting Principles, Assumptions, and Concepts The basic underlying accounting principles, assumptions, and concepts include the following:...
What is elastic demand? Definition of Elastic Demand Elastic demand is the situation in which demand for a product or service is sensitive to price changes. Elastic demand is a major concern for a manufacturer that...
Why Does Inventory Get Reported on Some Income Statements? Reporting of Inventory on Financial Statements Inventory is an asset and its ending balance is reported in the current asset section of a company’s balance...
What is a deferred cost? Definition of Deferred Cost A deferred cost is a cost that is already recorded in a company’s accounts, but at least some of the cost should not be expensed until a future accounting period....
What is safety stock? Definition of Safety Stock Safety stock is an additional quantity of an item held by a company in inventory in order to reduce the risk that the item will be out of stock. Safety stock acts as a...
What is meant by nonoperating expenses and losses? Definition of Nonoperating Expenses and Losses Nonoperating expenses are business expenses that are outside of a company’s main or central operations. (Some describe...
What is a natural business year? Definition of Natural Business Year A natural business year is the period of 12 consecutive months (or 52-53 consecutive weeks) ending at a low point of the organization’s activities...
What are invoice payment terms? Definition of Invoice Payment Terms Invoice payment terms appear as part of the information shown on the invoice (or bill) prepared by a seller of goods or a provider of services....
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