with significant amounts of inventory and plant assets. For example, when inventory is measured by using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is...
with significant amounts of inventory and plant assets. For example, when inventory is measured by using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is...
Can a fully depreciated asset be revalued? A fully depreciated asset cannot be revalued because of accounting’s cost principle. Definition of a Fully Depreciated Asset A fully depreciated asset is one that has...
Under the accrual method of accounting, this account reports the amount of worker compensation insurance expense that pertains to the period indicated in the heading of the income statement, whether or not the company...
What is the meaning of pro rata? Pro rata is a Latin term that means in proportion. Pro rata is related to prorate, a term used in cost accounting. To illustrate the term pro rata, let’s assume that a company’s...
payment of $450,000 in order to acquire a building, the land on which the building sits, and also some equipment. The lump sum payment means that the total cost of $450,000 has to be allocated among three general ledger...
produced. In other words, the utility bill will be clinging to the units produced. Some of the utility cost will be clinging to the units in inventory and therefore will be part of the cost of the asset inventory. Some...
What is the purpose of depreciation? Purpose of Depreciation The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive...
consider a project, its internal rate of return must equal or exceed the hurdle rate. The hurdle rate is also used to discount a project’s future cash flows to its net present value. Example of Hurdle Rate The...
How are fully depreciated assets reported on the balance sheet? Definition of Fully Depreciated Asset A fully depreciated asset is a depreciable asset for which no additional depreciation expense will be recorded. In...
How do I record exterior cement work? Is it an asset or an expense? If the cement work was done to repair or maintain existing cement work, then the expenditure should be recorded as an expense. Even if the cost is very...
and finished goods. The notes to the financial statements will also described how the manufacturer’s inventory is valued. For example, the notes will disclose whether FIFO lower of cost or net realizable value, LIFO,...
Since our Explanation of Cash Flow Statement illustrates how the amounts are determined, you will get a better understanding of this very important financial statement. No longer will you look at only the income...
statement that is distributed to someone outside of the corporation must comply with generally accepted accounting principles (referred to as GAAP or US GAAP). US GAAP includes basic underlying concepts such as the cost...
This could be the difference between cost and the selling price. For example, a retailer may markup its cost by 50% to arrive at a selling price. In the retail method of costing inventory, markup is used to mean the...
The principle that requires a company to match expenses with related revenues in order to report a company’s profitability during a specified time interval. Ideally, the matching is based on a cause and effect...
A gain from holding an asset and the gain has not yet been reported in the financial statements. As an example, assume that a company purchased land many years ago and continues to hold the land. The land was purchased...
What does it mean to check the extensions and to foot an invoice? To check the extensions on a purchase invoice means to verify that the number of units of each item multiplied by its unit cost agrees with the total...
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...
in a general ledger intangible asset account. If a company designs and registers its trademark, the amount recorded is limited to its cost. Costs incurred to defend a trademark are also recorded in the trademark...
How can I determine the inventory methods used by other companies in my industry? Definition of Inventory Methods Inventory methods refers to the order or manner in which a company moves its actual costs out of the...
costs, burden, indirect manufacturing costs, and indirect product costs. Since manufacturing overhead is an indirect product cost, it needs to be allocated or assigned to the products manufactured and will cling to the...
What is the difference between gross profit and net profit? Definition of Gross Profit Gross profit is defined as net sales minus the cost of goods sold. Example of Gross Profit Assume that a retailer had gross sales of...
between the asset amounts reported on the balance sheet minus the liability amounts. Next, the accountant’s cost principle requires that only the cost of items purchased can be reported as an asset. This means that...
is $400,000 and is expected to process 50,000 identical units of product. Some companies will develop standard costs for controlling its operations. For example, the standard cost of processing all identical units in...
as the asset Propane Inventory. As the propane is sold, the dealer will reduce Propane Inventory for the cost of the propane sold and will increase the expense Cost of Goods Sold. Example 3. A manufacturer uses propane...
Is depreciation expense an administrative expense? Definition of Depreciation Expense Depreciation expense is the systematic allocation of a depreciable asset’s cost to the accounting periods in which the asset is...
What is the effect on financial ratios when using LIFO instead of FIFO? Definition of Effect of LIFO Instead of FIFO During periods of significantly increasing costs, the LIFO cost flow assumption instead of the FIFO...
What is a fully depreciated asset? Definition of Fully Depreciated Asset A fully depreciated asset is a plant asset or fixed asset where the asset’s book value is equal to its estimated salvage value. In other words,...
of inventory so that it can meet the fluctuating demand of its customers, avoid disruptions in production, and minimize holding costs. Since the costs of the items purchased or produced are likely to change (especially...
of the monetary unit assumption, accountants at a U.S. corporation do not hesitate to add the cost of a parcel of land purchased in 2024 to the cost of another parcel of land that had been purchased in 2004. (See...
What is the difference between gross margin and contribution margin? Definition of Gross Margin Some use the term gross margin to mean the same as gross profit, which is: net sales minus the cost of goods sold. Others...
the standard quantity of materials. The materials usage variance is favorable when the actual quantity of materials used was less than the standard quantity. In the U.S. the materials usage cost variance is expressed in...
Can absorption costing cause an increase in net income? Definition of Absorption Costing Absorption costing is a cost accounting method (required by US GAAP) in which a manufacturer must assign fixed manufacturing...
in the accounting period in which it expires or is used up. If the future benefit of a cost cannot be determined, it should be charged to expense immediately. Examples of the Matching Principle To illustrate the...
This is a long term asset account that accumulates the cost of a project that has not yet been placed into service. When the project is finished and placed into the service, the cost is removed from this account and is...
How do you account for the rebate on an automobile? The rebate on the purchase of an automobile should be recorded as a reduction of the automobile’s cost. The lower automobile cost will result in lower depreciation...
In standard costing the difference between the actual cost and the standard cost of direct materials or direct labor. The price variance of direct labor is usually referred to as the labor rate variance.
A weighted average cost used with the periodic inventory system. To learn more, see Explanation of Inventory and Cost of Goods Sold.
The multiplication of a quantity times its cost. For example, if 100 items are in inventory at a cost of $3.46 each, the inventory extension is $346.
Usually the difference between the cost of inventory at LIFO versus the cost of inventory at FIFO.
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