Why not use Sales in the Inventory Turnover Ratio? The short answer is: Because Inventory is at cost. Inventory is not on the company’s books at selling prices. The Inventory Turnover Ratio is Cost of Goods Sold...
Why not use Sales in the Inventory Turnover Ratio? The short answer is: Because Inventory is at cost. Inventory is not on the company’s books at selling prices. The Inventory Turnover Ratio is Cost of Goods Sold...
or LIFO, but require the same cost flow assumption be used on both the company’s tax return and on the company’s financial statements. With inflation being the norm, profitable companies using LIFO are matching the...
principle, the cost flow assumption, consistency, and other accounting concepts and principles. When a company elects the LIFO cost flow assumption, it chooses to put its most recent costs in the cost of goods sold, and...
profit might have a variety of definitions. We will assume that net profit means a company’s net sales minus all expenses. The expenses include the cost of goods sold, the selling, general, and administrative...
What is the operating cycle? Operating cycle definition The operating cycle is the time required for a company’s cash to be put into its operations and then return to the company’s cash account. Operating cycle...
The balance sheet and income statement are connected. Definition of Balance Sheet and Income Statement The balance sheet reflects the accounting equation: Assets = Liabilities + Owner’s (Stockholders’) Equity When a...
in the accounting periods in which the asset is being used. More Information on the Depreciation Entry It is important to understand the following: The depreciation entry will cause a decrease in the company’s net...
What is the difference between the current ratio and the quick ratio? Definition of Current Ratio The current ratio is the proportion, quotient, or relationship between the amount of a company’s current assets and the...
in a year, each semimonthly pay period will have on average 2.16667 weeks per semimonthly payday. Example of Biweekly Payroll Let’s assume that a company pays its employees biweekly on every other Friday. If a new...
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...
What is the proper accounting for supplies? Definition of Supplies Office supplies are items used to carry out tasks in a company’s departments outside of manufacturing or shipping. Office supplies are likely to...
What is the difference between a budget and a standard? Definition of a Budget In business and other organizations, a budget often refers to a department’s or a company’s projected revenues, costs, or expenses....
will be recorded in the inventories and the cost of goods sold accounts. Since the company must pay its vendors and production workers the actual costs incurred, there are likely to be some differences. The differences...
a company’s assets, liabilities, and owner’s or stockholders’ equity. The balances in these accounts as of the final moment of an accounting year will be reported on the company’s end-of-year balance sheet....
relatively soon, accountants will usually skip recording the asset. Here are three examples of how the expense might be reported on the company’s income statement. Example 1. A service company purchases $900 of...
and utilities, and interest on loans are examples of expenses that are not assigned to the products. Instead, these costs are described as period costs since they are expensed immediately in the accounting period in...
an account receivable is actually removed from the company’s receivables. Under the direct write off method there is no contra asset account such as Allowance for Doubtful Accounts. This means that the balance sheet...
. Let’s begin by assuming that a company’s product has a cost of $75 and the company desires a 25% gross margin (or 25% of the selling price). Let’s use “SP” to indicate the product’s required selling price...
What is the aging method? Definition of Aging Method The aging method usually refers to the technique for estimating the amount of a company’s accounts receivable that will not be collected. The estimated amount that...
of these two balance sheet amounts in the denominator. Using the average of only two days can also be misleading if the company’s year ends at the low point of business activity. For example, when a company’s peak...
How do you calculate the payback period? Definition of Payback Period The payback period is the expected number of years it will take for a company to recoup the cash it invested in a project. Examples of Payback Periods...
at the end of each accounting period. As a result, Accumulated Depreciation is viewed as a permanent account. Example of Depreciation Accounts Assume a company has equipment which is used in its business. The...
will be closed at the end of each year. However, the account’s debit balance is closed directly to the owner’s capital account. (The owner’s draws are not reported as an expense on the company’s income...
Depreciation However, U.S. companies continue to use the term reserve in regards to the accounting for inventories using the LIFO cost flow method. For example, the company will use a contra inventory account entitled...
What is the days' sales in accounts receivable ratio? Definition of Days’ Sales in Accounts Receivable The days’ sales in accounts receivable ratio (also known as the average collection period) tells you the...
be sold without a sales effort. Until that effort is made and an item is actually sold, the company cannot report the $10 increase from $40 to $50. This is referred to as the revenue recognition principle. In other...
What are net incremental cash flows? Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could...
of $48,000 ($4,000 per month multiplied times 12 months in a year). A person with a semimonthly salary of $3,000 is earning an annualized salary of $72,000 ($3,000 multiplied times 24 semimonthly pay periods). A company...
on this in the Internal Revenue Service Publication 946. Examples of Mid-Month Convention Under the mid-month convention, if a company put a warehouse into service on October 6, it is assumed that the warehouse was put...
. These accountants do not include selling, administrative, or interest costs in their definition of the full cost of a product. Their view is consistent with the way that inventory and the cost of goods sold are...
, etc. The manufacturer has 40,000 production machine hours. Using the traditional method of cost accounting, the company will allocate or assign $50 of overhead of each machine used to produce the output. Applying $50...
in all of the capital accounts must be equal to the reported total of the company’s assets minus its liabilities. Because of the historical cost principle and other accounting principles, the total amount reported in...
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 a general ledger? Definition of General Ledger A general ledger is a grouping of perhaps hundreds of accounts that are used to sort and store information from a company’s business transactions. The general...
done by using a predetermined annual overhead rate. Example of Applied Overhead Let’s assume that a company expects to have $800,000 of overhead costs in the upcoming year. It also expects that it will have its normal...
of the accounting periods. (Hence, the number of years, partial years, passage of time, etc. are not relevant with the units-of-activity method of depreciation.) Example of Units-of-Activity Depreciation Assume that a...
spent to acquire or improve a company’s fixed assets. The capital expenditures increase the respective asset accounts which are reported in the noncurrent asset section of the balance sheet entitled property, plant...
Which assets are classified as current assets? Definition of Current Assets Current assets include cash and assets that are expected to turn to cash within one year of the balance sheet date. Current assets also include...
Our Explanation of Accounting Basics uses a simple story to introduce important accounting concepts and terminology. It illustrates how transactions will be included in a company's financial statements.
of Adjusting the Inventory Account When using the periodic method, balance in the inventory account can be changed to the ending inventory’s cost by recording an adjusting entry. To illustrate, let’s assume that the...
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