According to the FASB, “the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use.” In terms of property, plant, and equipment, this means that all the reasonable and necessary costs required to get the asset to its location and ready …
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Presented below is a comparison of the effect of the FIFO, average cost, and LIFO cost flow assumptions on ending inventory, cost of goods sold, and gross margin for the Cerf Company (we have not included specific identification in this comparison because of its limited use). The highest gross margin and ending inventory and lowest …
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The data for the Cerf Company shown below will be used to demonstrate the computations required to apply three cost now assumptions and the specific Identification method. Three points should be made about this example. First, It is simplistic in that only six purchases are made during the year. However, the procedures In this example …
In order for a firm to calculate the total cost of its ending inventories, it is necessary first to determine the actual quantity of items in the ending inventory and then to attach a price to these items. This is usually done by taking a physical inventory at least once a year, usually at year-end. …
In some situations, it is impossible to determine the actual cost of the ending inventory. For example, a firm’s inventory may be destroyed by fire or flood, and the cost of the inventory lost must be estimated. The gross margin method can be used in such circumstances. For a retail store, taking inventory at cost …
What is meant by Lower of cost or market? Lower of cost or market is a method of inventory pricing by which the inventory is priced at cost or market, whichever is lower. It is an application of conservatism in accounting. Explanation Under generally accepted accounting principles (GAAP), the presumption is that inventories will be …
What is a Perpetual Inventory System? – Definition: Perpetual inventory system is a method of accounting for inventory where transactions are recorded and reported as soon as they take place. Usually, in this inventory system, computerized systems and software are used to immediately record the sales and purchases. Explanation: Before advancements in technology, companies would …
What is Sensitivity Analysis? – Definition Sensitivity analysis involves examining what happens to a budget when changes are made in the assumption on which it is based. It is also known as ‘what-if’ analysis, and can be carried out using a spreadsheet or with manual calculations. Manual calculations are easier if they focus only on …
Time Series Analysis Definition When preparing a cash budget, or the forecasts on which it is based. there are some ‘statistical techniques that may help to arrive at valid estimates. Time series analysis concerned with numerical ways that the past can be used to forecast the future. The term trend analysis also used to describe …
A manufacturing business is typically more complex than a business that just buys and sells, there is a wider range of budgets for a manufacturing business that may be used to build-up to the master budget and cash budget. The budgets will need to be based on the same set of assumptions about the way …
In this article, we are going to see how we can build up a cash budget using the receipts and payments account. We will start by looking at the cash budget for a new trading organisation, so that we can get a clear idea of the main principles. We will also see how the cash …
What are Control Ratios? Under the system of budgetary control, the actual performances are compared with budgeted performances so as to determine the deviations or variances. The deviations or variances may be favorable or unfavorable and may be expressed in terms of absolute figures or in terms of ratios. The ratios in terms of which …
What is Budget? – Definition In business, a budget may be defined as a formal expression of the expected income and expenditure for a definite future period. According to J. Fred Meston: “A budget is the expression of a firm’s plan in financial form for a period of time in the future.” According to J.L. …
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The following are three methods of preparing cash budget: (i) Receipt and Payment Method (ii) Adjusted Project and Loss Method (iii) Balance Sheet Method Receipt and Payment Method Here cash is received from cash sales, receipt from debtors, sale of fixed assets and investments, issue of shares and debentures. Both capital and revenue receipts are …
Why a business needs cash management? Cash is important Current Asset for running a business. Cash is always needed for running a business enterprise on scientific lines. A reasonable cash balance is always preferred it should not be less than the demand nor more than the reasonable demand. The lesser quantity of cash then legitimate …
Definition of Cost Audit The term Cost Audit means the examination of books of account and vouchers to ascertain their accuracy. The exact calculation of the cost of a product is called Cost Audit. Meaning ‘Audit‘ may be described as a systematic examination of the books, vouchers and records of a business to enable the …
Inventory is an important item of current Assets which also form an important element of firm’s working capital. The capable finance manager will follow proper balance of inventories needed for production schedule and this ultimately suits the interests of its valued customers. The management of inventories faces the following two basic problems. (a) Management of …
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Definition Inventory Management refers to fixation of minimum and maximum limits, determining the size of inventory to be maintained. Consideration regarding issue prices, norms of receipts and inspection, determining the EOQ, providing proper store facilities and keeping an effective check on obsolescence are some of the considerations which are covered under inventory management. Inventories are …
The Cost Auditor should keep in mind the object of Cost Audit while preparing the Plan of Cost Audit. He should distribute the work to his subordinates. He should have detailed knowledge about the organisation. The Cost Audit programme should be designed in such a way that the work should be finished within minimum period …
What is Management Audit? In Management Audit the evaluation of managerial abilities and techniques is carried out. The various plans prepared by management, its policies, programs, procedures their Audit is management Audit. It is popularly known as operational management or efficiency Auditor. The Accounting kept for managerial purpose are called Management Accounting, similarly, the detailed …
The management of business at present becoming more and more complex. The use of specialised techniques such as operational research, statistical sampling, electronic data processing, production control etc. require the services of experts. The directors are not experts in every field of Management. If anything goes wrong then directors have to face the criticism. This …
What is the relevance theory of dividend? M. Gorden, John Linter, James Walter and Richardson are associated with the relevance theory of dividend. According to them, Dividend Policy has a positive impact on the firm’s position in the stock market. Higher Dividend will increase the value of stock whereas low dividend wise reverse. More and …
Theories of Dividend There are conflicting theories of dividend regarding impact of Dividend Decision on the valuation of the firm. As one school of thought feels that dividend decision does not affect the shareholders’ wealth and also the valuation of firm. While another thought feels Divided Decision materially affects the shareholders’ wealth and also the …
Management Audit requires a review of all aspects of Management. One person cannot be an expert in every field of Management, so their should be a team to conduct Management audit. The team of auditors should include on account, an industrial engineer; an operations research specialist, a social scientist and so on. Each member should …
1. Estimating working capital requirement using operating cycle method: Problem: X Ltd Co. wants to know working capital by operating cycle methods when : Estimated Sales 20,000 units @ $5 P.U. Production and Sales will remain similar throughout the year. Production costs: M – 2.5 P.U., Labour 1.00 P.U. Overheads $17.500. Customers are given 60 …
What is Working Capital?- Definition The term working capital refers to the portion of total capital which is used to run the business efficiently and regularly. It is also known as short term capital, circulating capital or liquid capital. Explanation Working capital, in other words, means management of Current Assets: Cash in hand, Cash at …
Aspects of Financial Planning 1. Amount of Capital to be raised. Financial planning anticipates the amount of capital required for the establishment of the enterprise and also for carrying out business operations. 2. Determining the form and proportionate amount of securities to be raised. The financial manager has to take decisions about the capital structure …
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Introduction The cost of capital is very important factor in formulating firm’s capital structure. It is one of the cornerstones of the theory of financial management while deciding capital structure it is necessary to consider the cost of each source of capital and compare them to decide which source of capital is in the interest …
Capitalization meanings: Capitalization refers to the amount of capital required by the business enterprise. The capital may be obtained: (a) by issue of equity and preference shares, (b) by issue of debentures, (c) by obtaining loans, and (d) by retained earning. Thus capitalization is the sum total of funds received through shares, bonds, loans and …
Definition and Explanation Over-capitalization is that aspect of a business enterprise, wherein long term funds (share capital, debentures and loans) exceed the amount of optimum capitalization. The company earns reasonably fair return on its investment in case of proper capitalization. In case of over-capitalization, the rate of return in lesser than the rate of return …
Problem 1 The cost of a project is $50,000 and it generates cash inflows of $20,000, $15,000, $25,000 and $10,000 in four years. Using present value index method, appraise profitability of the proposed investment assuming a 10% rate of discount. Solution Calculation of present value and profitability index Year Cash Inflows Present Value Factor Present …
Capital budgeting important problems and solutions Read More »
The techniques/methods of evaluation of capital budgeting proposals are as under: (i) Degree of urgency method. (ii) Pay-back period method. (iii) Unadjusted rate of return method. (iv) Present value method. (a) Time Adjusted Rate of Return method. (b) Net present value method. 1. Urgency Method As a matter of fact, urgency method does not suggest …
Capital budgeting tries to determine the capital investment requirements of the business, e.g., acquisition of machinery, building, etc. The plans of the business to modernize or go in for additions of long-term investment will influence the cash budget in the current year. Therefore, capital expenditure decisions must be anticipated in advance and integrated into the …
What is undercapitalization? Under-capitalization is a situation, wherein the company has insufficient capital but large amount of secret reserve. There is generally appreciation in the value of land and building, plant, machinery, and goodwill etc. but the company does not show the appreciation in its books of accounts. These assets earn handsome earning and the …
Question 1 Prepare fund flow statement from the following: 1. Increase in working capital: $4,000 2. Net profit $10,750 before written off goodwill 3. Depreciation on fixed assets: $1,750 4. Dividend paid: $3,500 5. Goodwill written off $5,000 out of profits 6. $5,000 share capital was issued for cash 7. Machinery purchased for $10,000 Solution …
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Capital Structure While deciding the capital structure of the company the promoters will have to decide the proportion of capital to be raised by issue of shares and debentures. It should be noted that shareholders are paid dividend out of profit so they bear the risk involved in carrying out the business activities. According to …
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Difference between Fund Flow Statement and Balance Sheet The main differences between fund flow statement and balance sheet are as under. Basis of difference Fund Flow Statement Balance Sheet Nature Fund flow statement is designed to show changes in financial position of an organization. Thus it is dynamic in nature. Balance sheet is to highlight …
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Introduction What is a fund flow statement? In general financial statement is Balance Sheet and profit and loss account, popularly known as income statement speaks about the net effect of various transactions on the operational and financial position of the company. Thus, the Balance sheet is a statement of Assets and liabilities of an organization …
Below are the important accounting ratios and formulas: Test of liquidity Ratios to be computed: 1. Current ratio Formula: = Current Assets / Current liabilities 2. Quick or acid test or liquid ratio (for immediate solvency) Formula = (Liquid/Quick Assets) / Current liabilities 3. Absolute Liquid ratio Formula = Absolute liquid assets / Current liabilities …
Sources of Business Finance To meet long term, medium term and short term financial requirements, the company may adopt the following sources of fund raising derives. Methods for Raising Long Term Funds 1. Issue of shares. 2. Issue of Debentures. 3. Loan from specialized financial institutions. 4. Ploughing back of earnings (for existing companies) Methods …
The capital of a company is divided into units, called shares. A company, to raise funds, can issue the following types of shares, namely, equity shares and preference shares. (a) Equity or ordinary shares A share which is not a preference share is an equity share. It means that if the shareholder is not entitled …
Answer Meaning of ratio The term ratio analysis is used in quantitative relationship between two variables. The Ratios are needed for evaluating the financial statement. The use of ratios in the hands of financial experts works as a tool for evaluating different financial statements. Definitions of Ratio Analysis Following are some authentic definitions of Ratio …
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Question 1. A company producing 500 units its variable cost $200 per unit and sale price 250 per unit, fixed expenses are $12,000 per month. Required Calculate BEP in units and sales and show profit at 90% capacity. Answer (i). BEP (units) = Fixed Expenses / C = ($5,42,000 + $2,52,000) / 6 = 7,92,000 …
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Definition and Explanation Debenture is an instrument issued by the company acknowledging its debts to the holder under its seal. Debentures carry interest at certain percent. As it is loan taken by the company, it is repaid after a certain specified period or at the option of the company as per the terms of their …
What is a debenture? How to raise fund by issuing debentures? Read More »
Marginal Costing definition Marginal costing refers to the method of costing which is concerned with changes in costs resulting from changes in the volume or range of output and sales. Increase or decrease in total costs which are brought about by an increase or decrease in the volume of production and sale is known as …
Answer The following are the important balance sheet ratios: Current Ratio Current ratio can be calculated as: Current ratio = Current assets / Current liabilities Current assets are: cash in hand, cash at bank, bills receivable, sundry debtors, inventories, work in progress and prepaid expenses. Current liabilities are: Bills payable, sundry creditors, sundry outstanding expenses. …
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Answer Contribution: The term contribution refers to the excess of selling price over variable cost of a product. Thus, it is a difference between sale price and variable cost. Contribution (C) = Sales – Variable Cost or Fixed Cost + Profit Example When sale is $80,000 variable cost 40,000, fixed cost $30,000. Calculate contribution. Contribution …
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Answer Profitability Ratio The main aim of all business enterprises is to earn profit. Moreover, profit earning is considered essential for business prosperity. The profit is like an engine which drives the business forever. It is also the entire business efficiency. Profits are always measured in terms of sales or investment. These ratios are expressed …
Answer Cost Volume Profit (C. V. P.). Profit depends upon many factors, but most important is the cost of Manufacturer, volume of sales and selling price of the product. The three factors of cost, volume and profit are inter-connected and dependent on each other. Profit depends upon sales, slaes price depends upon cost, volume of …
Answer Return on equity capital The equity shareholders are the real owners of the company. They bear all risk whereas preference shareholders have priority of payments of dividends and as well as capital. The rate of dividend on equity shares differs year to year, depending upon the amount of profit. The performance of a company …
Q. 4. Explain Return on equity capital with examples Read More »