Treasury stock is usually the amount that a corporation has paid to repurchase some of its own shares of stock (and has not reissued or retired the shares). The corporation’s cost is debited to the general ledger...
Treasury stock is usually the amount that a corporation has paid to repurchase some of its own shares of stock (and has not reissued or retired the shares). The corporation’s cost is debited to the general ledger...
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...
Is a favorable variance always an indicator of efficiency in operation? In a standard costing system, some favorable variances are not indicators of efficiency in operations. For example, the materials price variance,...
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...
What is synergy? In business the term synergy is often associated with the merger or acquisition of companies. Synergy implies that the outcomes resulting from the merger of two companies will be greater than the sum...
How much of the contribution margin is profit on units sold in excess of the break-even point? After the break-even point is reached, the entire contribution margin on the next units sold will be profit…provided the...
What do negative variances indicate? Definition of Negative Variances on Accounting Reports Negative variances are the unfavorable differences between two amounts, such as: The amount by which actual revenues were less...
How do you reduce a company's break-even point? Definition of Break-even Point The break-even point is the level of sales where a company’s income statement will report exactly zero net income. The level of sales can...
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...
What is contribution margin? Definition of Contribution Margin In accounting, contribution margin is defined as: revenues minus variable expenses. The contribution margin can be expressed as an amount and/or as a ratio...
Where can I find financial ratios for my industry? One source for financial ratios by industry is the RMA Annual Statement Studies Financial Ratio Benchmarks. RMA is the acronym for Risk Management Association and...
What causes an increase in break-even point? Definition of Break-even Point The break-even point is the sales volume or sales revenue that is needed to cover the company’s expenses. In other words, it is the point...
What is the production volume variance? Definition of Production Volume Variance The production volume variance is associated with a standard costing system used by some manufacturers. This variance arises when there is...
What is the contribution margin ratio? Definition of Contribution Margin Ratio The contribution margin ratio is the percentage of sales revenues, service revenues, or selling price remaining after subtracting all of the...
Do I buy a new machine or use an old one? One technique for deciding whether to buy a new machine or to use an old machine is to look at the future cash flows if you buy a new machine and the future cash flows if you use...
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...
What are turnover ratios? Definition of Turnover Ratios In accounting, turnover ratios are the financial ratios in which an annual income statement amount is divided by an average asset amount for the same year....
What are pro forma financial statements? Definition of Pro Forma Financial Statement A pro forma financial statement is one based on certain assumptions and projections (as opposed to the typical financial statement...
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 an implicit interest rate? Definition of Implicit Interest Rate An implicit interest rate is one that is not stated explicitly. Example of Implicit Interest Rate Assume that I lend you $4,623 and you agree to...
What is responsibility accounting? Definition of Responsibility Accounting Responsibility accounting involves the internal accounting and budgeting for each responsibility center within a company. The objective of...
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...
What causes a variation in profit margin and turnover ratios between industries? Mega grocery stores, discount stores, and warehouse clubs often have small profit margins but have high turnover ratios. The small profit...
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 separation of duties? What is Separation of Duties The separation of duties is one of various internal control techniques for safeguarding a company’s assets. By separating employee’s duties, the likelihood...
How do you reduce the break-even point? Definition of Break-even Point The break-even point is the number of units or amount of revenues needed for the company’s income statement to report zero net income or zero net...
What is a static budget? Definition of Static Budget A static budget is a budget in which the amounts will not change even with significant changes in volume. In contrast to a static budget, a company’s sales...
What is ROI? Definition of ROI ROI is the acronym for return on investment. Traditionally, ROI related 1) the income statement profit to the 2) the balance sheet investment. A drawback of ROI is that the accounting...
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 the difference between Present Value (PV) and Net Present Value (NPV)? Definition of Present Value (PV) Present value or PV is the result of discounting one or more future amounts to the present. The greater the...
What is the internal rate of return? 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 equal to cash paid at the...
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...
What is the dividend payout ratio? The dividend payout ratio, or simply the payout ratio, is the percentage of a corporation’s earnings that is paid out in the form of cash dividends. The calculation of the dividend...
What is sales mix? Definition of Sales Mix Sales mix is the relative proportion or ratio of a business’s products that are sold. Sales mix is important because a company’s products usually have different degrees of...
What is the margin of safety? Definition of Margin of Safety In break-even analysis, the term margin of safety indicates the amount of sales that are above the break-even point. In other words, the margin of safety...
What causes an unfavorable fixed overhead budget variance? An unfavorable fixed overhead budget variance results when the actual amount spent on fixed manufacturing overhead costs exceeds the budgeted amount. The fixed...
What is NPV? Definition of NPV NPV is the acronym for net present value, which can be calculated as follows: The present value of the future cash inflows Minus the cash investment Example of NPV Assume that a company...
Why does the internal rate of return equate to a net present value of zero? Internal rate of return and net present value are discounted cash flow techniques. To discount means to remove the interest contained within the...
How do we deal with a negative contribution margin ratio when calculating our break-even point? Definition of Negative Contribution Margin A negative contribution margin ratio indicates that a company’s variable costs...
What is trading on equity? Definition of Trading on Equity Trading on equity, which is also referred to as financial leverage, occurs when a corporation uses bonds, other debt, and preferred stock to increase its...
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