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...
Why are sales a credit? Definition of Sales In accounting, sales are revenues earned when a company transfers ownership of its goods to its customers. Under the accrual basis or method of accounting, the sale occurs when...
What is the difference between revenues and receipts? Definition of Revenues A company’s revenues are amounts it has earned as the result of business activities such as selling merchandise or performing services. Under...
What does amortization mean? Definition of Amortization In general, the word amortization means to systematically reduce a balance over time. In accounting, amortization is conceptually similar to the depreciation of a...
What are goods in transit? Definition of Goods in Transit Goods in transit refers to inventory items and other products that have been shipped by a seller, but have not yet reached the purchaser. When goods are in...
What is a multiple-step income statement? Multiple-Step Income Statement Definition A multiple-step income statement presents two important subtotals before arriving at a company’s net income. For a company that sells...
Is depreciation an operating expense? Depreciation Could Be Either an Operating Expense or a Non-operating Expense Depreciation is an operating expense if the asset being depreciated is used in an organization’s main...
What is the inventory turnover ratio? Definition of Inventory Turnover Ratio The inventory turnover ratio is an important financial ratio that indicates a company’s past ability to sell its goods. Converting inventory...
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 difference between a ledger and a trial balance? Definition of a Ledger A ledger is often defined as a book of accounts. Today the ledger and its accounts are likely to be an electronic record or file....
What are the top accounting schools? Many colleges and universities use their former students’ pass rates from earlier CPA Exams as an indicator of being a top accounting school. I recommend that you expand the...
What is a predetermined overhead rate? Definition of Predetermined Overhead Rate A predetermined overhead rate is often an annual rate used to assign or allocate indirect manufacturing costs to the goods it produces....
How do you calculate the average balance in accounts receivable? The average will be more representative if you include additional balances in the computation. For example, if you compute the average balance for the year...
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 does a balance sheet tell us? Definition of Balance Sheet A balance sheet reports the dollar amounts of a company’s assets, liabilities, and owner’s equity (or stockholders’ equity) as of midnight of the...
With regard to depreciation, what does the term mid-month convention mean? Definition of Mid-Month Convention In depreciation, the mid-month convention means that an asset placed into service anytime during a given...
What is the accounting equation? Definition of Accounting Equation The accounting equation of a sole proprietorship is assets = liabilities + owner’s equity. For a corporation, the accounting equation is assets =...
What is the full disclosure principle? Definition of Full Disclosure Principle The full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial...
What is the payout ratio? The payout ratio indicates the percentage of a corporation’s earnings which are distributed as cash dividends to its stockholders. Typically, the payout ratio is computed by using the per...
What are the notes to the financial statements? Definition of Notes to Financial Statements The notes to the financial statements are a required, integral part of a company’s external financial statements. They are...
What is a valuation account? Definition of Valuation Account In accounting, a valuation account is usually a balance sheet account that is used in combination with another balance sheet account in order to report the...
How do you compute the selling price of a bond? Definition of Selling Price of Bond The selling price (or the market value) of a bond is the present value of the future contractual cash amounts that are going to be...
What is a credit balance? Definition of Credit Balance In accounting and bookkeeping, a credit balance is the ending amount found on the right side of a general ledger account or subsidiary ledger account. Examples of...
Why would Prepaid Insurance have a credit balance? Definition of Prepaid Insurance Generally, Prepaid Insurance is a current asset account that has a debit balance. The debit balance indicates the amount that remains...
How do you calculate accrued vacation pay? Definition of Accrued Vacation Pay Accrued vacation pay is the amount of vacation pay that a company’s employees have earned, but the company has not yet paid. Example of...
What is an outstanding deposit? Definition of Outstanding Deposit An outstanding deposit refers to a company’s receipts (cash, checks from customers, etc.) which have been recorded in the company’s general ledger...
What is the difference between expense and loss? Definition of Expense An expense is a cost that a company incurs or uses up when it earns revenues. Examples of Expenses A few examples of the many expenses that a company...
How can a manufacturer determine the precise cost of its products? A manufacturer may never be able to determine the precise cost of its individual products. The reason is that most of the manufacturing costs (other than...
What is a contra revenue account? Definition of Contra Revenue Account A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its...
What is the stated interest rate of a bond payable? Definition of Stated Interest Rate of a Bond The stated interest rate of a bond payable is the annual interest rate that is printed on the face of the bond and stated...
What is the statement of cash flows? Definition of Statement of Cash Flows The statement of cash flows (SCF) is one of the required external financial statements. The SCF is commonly referred to as the cash flow...
What is the book value per share of stock? Definition of Book Value per Share of Stock The book value of a corporation is the amount of its stockholders’ equity. Assuming the corporation does not have preferred stock...
What is yield to maturity? Definition of Yield to Maturity Yield to maturity is the total return that will be earned by someone who purchases a bond and holds it until its maturity date. The yield to maturity might also...
What does crossfoot mean? Definition of Crossfoot or Crossfooting Accountants and auditors use the word foot to mean adding one or more columns of numbers. When there are several columns of numbers along with a...
Is depreciation a source of funds? Definition of Depreciation Depreciation is the systematic allocation of the cost of a business asset to expense over the useful life of the asset. The accounting for depreciation is a...
What is the interest coverage ratio? Definition of Interest Coverage Ratio The interest coverage ratio is a financial ratio used as an indicator of a company’s ability to pay the interest on its debt. (The required...
Should a manufacturer's selling prices be based on costs? A manufacturer’s selling prices should not be based on costs alone. One reason is that the actual cost of each product is not known with precision. At best,...
Why will some asset accounts have a credit balance? Definition of Asset Account Balances In accounting, asset accounts normally have debit balances. That is, the general ledger accounts for assets typically have their...
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....
What is interest income? Definition of Interest Income Interest income is the amount of interest earned on investments (that promise to pay interest) and/or compensation for agreeing to receive cash payments from...
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