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Return on Assets | The return on assets indicates how profitably a company has used its assets. The calculation is the company’s net income for a year divided by the average amount of assets during the same year. If the corporation’s net income for the year was $100,000 and the average amount of assets was $1,000,000 the return on assets... | This is a cheet sheet Question |
Return on Equity | Return on equity (with no preferred stock) is a corporation’s net income for a year divided by the average amount of stockholders’ equity during the year. If the corporation’s net income was $100,000 and its stockholders’ equity averaged $500,000 during the year, the return on equity was 20%. | This is a cheet sheet Question |
Asset Turnover Ratio | The calculation of the asset turnover ratio is: net sales for a year divided by the average amount of assets during the same year. If net sales were $800,000 and the average amount of assets was $1,000,000 the asset turnover ratio was 0.8:1 [$800,000/$1,000,000]. | This is a cheet sheet Question |
Evaluating Business Investments | When someone is deciding to invest in business assets that have a life of more than one year, it is important that the time value of money be considered. The time value of money means that the dollars (or other currency) invested or paid today are more valuable than the dollars that will be received in the future years... | This is a cheet sheet Question |
Discounting Future Cash Flows | To recognize the time value of money, the future cash flows are discounted to their “present value.” Discounting can be thought of as removing the interest or necessary earnings that is included in the future cash amounts. After the interest has been removed the resulting amount is the present value or the discounted c... | This is a cheet sheet Question |
Present Value Tables | In classrooms, textbooks, and in our explanation, the calculation of the present values will be done by using present value tables. If there is a stream of equal cash amounts occurring at equal time intervals, the present value of an annuity table can be used. When there is a single future amount, or when the future am... | This is a cheet sheet Question |
Net Present Value Model | Net present value (NPV) is one of the discounted cash flow models used to evaluate investments in long-lived assets. In the NPV model, the future cash flows are discounted to their present values and then all of the present values (including the investment outflow of cash) are summed into a single amount. That single a... | This is a cheet sheet Question |
Internal Rate of Return | The internal rate of return (IRR) is a discounted flow model that computes the exact rate of return earned on an investment. In other words, the internal rate of return tells you the rate that will discount all of the investment’s cash flows to a net present value of exactly $0. If a present value table is used, it req... | This is a cheet sheet Question |
Recap of NPV and IRR | Both the net present value (NPV) and the internal rate of return (IRR) models are recommended because of the following: 1. Both use all of the cash flows that occur during the entire life of the investment 2. Both recognize the time value of money (future amounts are discounted) 3. Because the present value factors ... | This is a cheet sheet Question |
Payback Period | Another model that is often used when evaluating business investments is the payback period. The payback period simply indicates the number of years it takes for a company to recover its investment. The payback period is easy to understand, but it has two drawbacks: • The future cash amounts are not discounted to thei... | This is a cheet sheet Question |
Financial Accounting | Financial accounting is a type or branch of accounting that begins with the recording, sorting and storing of a business’s transactions in accounts contained in its general ledger. After reviewing and adjusting the amounts to comply with generally accepted accounting principles, the amounts are summarized and presented... | This is a cheet sheet Question |
Double-Entry; Debit and Credit | It is the norm for a corporation to use the double-entry accounting system. Double-entry accounting means that every transaction will affect two or more accounts. It also uses the terms debit and credit, which had their origin five centuries ago. Today, you should associate debit with left side of an account, and assoc... | This is a cheet sheet Question |
Generally Accepted Accounting Principles (GAAP) | When a U.S. corporation’s financial statements are distributed to someone outside of the corporation, they must comply with generally accepted accounting principles (GAAP or US GAAP). GAAP includes underlying concepts such as the historical cost principle, matching principle, revenue recognition, full disclosure princi... | This is a cheet sheet Question |
Accrual Method of Accounting | US GAAP usually requires that a corporation’s financial statements be prepared using the accrual method (or basis) of accounting. (Individuals on the other hand are likely to use the cash method of accounting.) Under the accrual method, revenues are reported on the income statement and the related receivable will be re... | This is a cheet sheet Question |
Other Types or Branches of Accounting | As noted earlier financial accounting is just one type or branch of accounting. The others include cost accounting, management accounting, not-for-profit accounting, governmental accounting, income tax accounting, auditing, forensic accounting, accounting systems, auditing, and more. For personal use by the original pu... | This is a cheet sheet Question |
Depreciation | In accounting, depreciation is the spreading (allocation) of an asset’s cost over the many accounting periods in which it is used. The assets that are depreciated include buildings, equipment, furnishings, vehicles, land improvements (but not the land), and similar long-term assets that are used in a business. The purp... | This is a cheet sheet Question |
Tax Return | The depreciation that we are discussing is the depreciation reported on the financial statements. This depreciation is almost always different from the depreciation reported on the corporation’s income tax returns. The reason is that the financial statement depreciation is based on the matching principle of accounting ... | This is a cheet sheet Question |
Cost | An asset’s cost is the cash equivalent amount paid for the asset plus the necessary costs to get the asset in place and ready for use. The asset’s cost is the maximum total amount of depreciation expense over the years of the asset’s useful life. Once the asset’s cost is fully depreciated, the depreciation expense stop... | This is a cheet sheet Question |
Useful Life | An asset’s useful life is the estimated number of years (or units of output) that the asset will be economically useful. This estimate is made when the asset is placed into service. For example, if a company estimates that a machine with a cost of $100,000 will have a useful life of 10 years, its financial statements w... | This is a cheet sheet Question |
Depreciable Cost | An asset’s depreciable cost is the asset’s cost minus the asset’s estimated salvage value at the end of its useful life. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
Half-year Convention | The half-year convention assumes that a newly acquired asset was placed in service at the midpoint of a year. As a result, one-half of the annual depreciation is charged to depreciation expense in the first year (and in the final year) of the asset’s useful life. Example 2. If an asset has a cost of $100,000 and an est... | This is a cheet sheet Question |
Straight-Line Depreciation | Straight-line depreciation is the common method for computing the depreciation reported on the financial statements. Straight-line depreciation results in the same amount of annual depreciation in each year (except for partial years). The full-year, annual depreciation is computed by taking the asset’s depreciable cost... | This is a cheet sheet Question |
Accelerated Depreciation | Accelerated depreciation refers to the depreciation methods in which larger amounts of annual depreciation are taken in the early years of an asset’s life, and smaller amounts of annual depreciation are taken in the later years. (Over the entire useful life of the asset the total amount of depreciation is the same as t... | This is a cheet sheet Question |
Sum-of-the-Years’-Digits (SYD) Method | Sum-of-the-years’-digits (SYD) method of depreciation is also an accelerated method of depreciation. Its name comes from summing all of the digits in the years of the asset’s useful life (see Example 4 below). This sum will become the denominator of the fraction that will be used. The numerator of the fraction is the y... | This is a cheet sheet Question |
Meaning of Debits and Credits | Debit and credit are related to the terms used in Italy 500 years ago to record business transactions using the double-entry system of accounting. Today, you should memorize the following meanings: • Debit means left or left side of an account • Credit means right or right side of an account An amount recorded on the... | This is a cheet sheet Question |
Account | An account is a record in which the amounts from a company’s transactions are posted (or recorded) in order to sort and store similar amounts. The following are common account titles: Cash, Accounts Receivable, Accounts Payable, Loans Payable, Sales, Advertising Expense, Rent Expense, Interest Expense, and perhaps hund... | This is a cheet sheet Question |
Double-Entry Accounting or Bookkeeping | The double-entry system requires that the amount(s) in a transaction must be entered in the general ledger accounts as a debit and as a credit in another account(s). In other words, every transaction will involve: • A minimum of two accounts • One or more of the accounts must have an amount entered as a debit, and • ... | This is a cheet sheet Question |
Understand Debits and Credits | The accounting equation is: Assets = Liabilities + Stockholders’ (or Owner’s) Equity Asset accounts, which are on the left side of the equation, will usually have their balances on the left side of the general ledger account. Since debit means left side, an asset account will normally have a debit balance. For perso... | This is a cheet sheet Question |
Balances | Examples of asset accounts are: • Cash • Accounts Receivable • Inventory • Prepaid Expenses • Investments • Land • Buildings • Furniture and Fixtures • Vehicles, and more Generally, asset accounts will have debit balances and their account balances will be increased with a debit entry. Therefore, a credit entr... | This is a cheet sheet Question |
Liability Accounts Will Likely Have Credit Balances | Some examples of liability accounts include: • Accounts Payable • Loans Payable (or Notes Payable) • Interest Payable • Wages Payable • Income Taxes Payable • Accrued Expenses Payable (or Accrued Liabilities) • Deferred Revenues, and others Generally, liability accounts are expected to have credit balances and t... | This is a cheet sheet Question |
Will Have Credit Balances | Some examples of stockholders’ (or owner’s) equity accounts include: • Common Stock • Paid-in Capital in Excess of Par • Retained Earnings • Accumulated Other Comprehensive Income • Mary Smith, Capital Generally, these accounts are expected to have credit balances and their account balances will be increased with ... | This is a cheet sheet Question |
Expense Accounts Will Have Debit Balances | The following are just a few of the many general ledger accounts for expenses: • Salaries Expense • Rent Expense • Utilities Expense • Repairs and Maintenance Expense • Advertising Expense • Depreciation Expense • Interest Expense • Income Tax Expense For personal use by the original purchaser only. Copyright ©... | This is a cheet sheet Question |
Temporary Accounts | At the end of each accounting year, the income statement accounts (revenues, expenses, gains, losses) are closed to a stockholders’ (owner’s) equity account. As a result, the income statement accounts will begin each accounting year with zero balances. This is the reason that the income statement accounts are known as ... | This is a cheet sheet Question |
Learning Which Accounts to Debit and Credit | Since many business transactions involve cash, a good place to begin learning debits and credits is with the general ledger account Cash. Since Cash is an asset account: • Cash will be debited when cash is received. (Recall that a debit will increase an asset account’s balance.) • Cash will be credited when cash is p... | This is a cheet sheet Question |
Additional Tips for Accounts to be Debited and Credited | You might think of the acronym DEAL when learning which accounts will be increased with a debit entry. Use the first letter from the following four types of accounts to spell D-E-A-L: Dividends Expenses Assets Losses You could think of the acronym GIRLS when learning which accounts will be increased with a credit entry... | This is a cheet sheet Question |
Trial Balance | If each transaction is recorded with debits equal to credits, and there are no math errors in calculating the account balances, then the accounts will be in balance. A trial balance is an internal report that lists all of the account balances in the respective debit or credit column. The amounts in each column should s... | This is a cheet sheet Question |
Financial Ratios Including Limitations | Financial ratios are one component of financial analysis. Financial ratios are often calculated by using amounts from previously issued annual financial statements. In that case the resulting ratios are history and may not be indicative of the present and future situation. It is also wise to consider the financial rati... | This is a cheet sheet Question |
Working Capital | Working capital is actually an amount (rather than a ratio) which is an indicator of a company’s ability to meet its obligations. It is calculated as follows: current assets minus current liabilities. For example, if a business has $280,000 of current assets and $260,000 of current liabilities, its working capital is $... | This is a cheet sheet Question |
Current Ratio | The current ratio is also an indicator of a company’s ability to pay its current obligations. The calculation is: current assets divided by current liabilities. If a company has current assets of $300,000 and current liabilities of $150,000 the company’s current ratio is 2:1 [($300,000/$150,000):1]. | This is a cheet sheet Question |
Acid-Test Ratio or Quick Ratio | The acid-test ratio is also known as the quick ratio. It is a more conservative indicator of a company’s ability to pay its current obligations (than the current ratio) since inventory is excluded from the calculation. In other words, the calculation is: [cash + marketable securities + accounts receivable] divided by c... | This is a cheet sheet Question |
Receivables Turnover Ratio | The receivables turnover ratio is an indicator of how fast a company’s accounts receivable are (or were) collected. The calculation is: credit sales for a year divided by the average balance in accounts receivable during the same year. If credit sales for the year were $800,000 and the average amount of accounts receiv... | This is a cheet sheet Question |
Average Collection Period or Days’ Sales in Receivables | The average collection period tells how many days (on average) it takes to collect a company’s accounts receivable. The calculation is: 360 or 365 days divided by the receivables turnover ratio. Using the information in our previous calculation, the receivables turnover ratio was 8. Therefore, the average collection pe... | This is a cheet sheet Question |
Inventory Turnover Ratio | The inventory turnover ratio indicates how many times a company’s inventory turns over in a year. The calculation is: cost of goods sold for a year divided by the average inventory during the same year. Since a company records inventory at cost, it is logical to use the cost of goods sold from the income statement. If ... | This is a cheet sheet Question |
Days’ Sales in Inventory or Days to Sell | The days’ sales in inventory indicates how many days of sales are in inventory. The calculation is: 360 or 365 days divided by the inventory turnover ratio. If the inventory turnover ratio is 3, the days’ sales in inventory will be 120 days [360 days/3]. | This is a cheet sheet Question |
Free Cash Flow | The calculation of free cash flow is: net cash flow from operating activities minus the necessary capital expenditures. (Sometimes a company’s dividend payments are deducted along with the capital expenditures.) If a corporation had cash from operating activities of $200,000 and necessary capital expenditures of $60,00... | This is a cheet sheet Question |
Times Interest Earned | Times interest earned indicates a company’s ability to pay the interest on its debt. The calculation is: income before interest expense and income tax expense divided by interest expense. If a company’s net income was $100,000 after interest expense of $40,000 and income tax expense of $20,000 the times interest earned... | This is a cheet sheet Question |
Percentage | The gross profit percentage is the dollars of gross profit divided by the dollars of net sales. If the gross profit was $200,000 and the net sales were $800,000 the gross profit percentage or gross margin was 25%. | This is a cheet sheet Question |
Return on Assets | The return on assets indicates how profitably a company has used its assets. The calculation is the company’s net income for a year divided by the average amount of assets during the same year. If the corporation’s net income for the year was $100,000 and the average amount of assets was $1,000,000 the return on assets... | This is a cheet sheet Question |
Return on Equity | Return on equity (with no preferred stock) is a corporation’s net income for a year divided by the average amount of stockholders’ equity during the year. If the corporation’s net income was $100,000 and its stockholders’ equity averaged $500,000 during the year, the return on equity was 20%. | This is a cheet sheet Question |
Asset Turnover Ratio | The calculation of the asset turnover ratio is: net sales for a year divided by the average amount of assets during the same year. If net sales were $800,000 and the average amount of assets was $1,000,000 the asset turnover ratio was 0.8:1 [$800,000/$1,000,000]. For personal use by the original purchaser only. Copyrig... | This is a cheet sheet Question |
Financial Accounting | Financial accounting is a type or branch of accounting that begins with the recording, sorting and storing of a business’s transactions in accounts contained in its general ledger. After reviewing and adjusting the amounts to comply with generally accepted accounting principles, the amounts are summarized and presented... | This is a cheet sheet Question |
Double-Entry; Debit and Credit | It is the norm for a corporation to use the double-entry accounting system. Double-entry accounting means that every transaction will affect two or more accounts. It also uses the terms debit and credit, which had their origin five centuries ago. Today, you should associate debit with left side of an account, and assoc... | This is a cheet sheet Question |
Generally Accepted Accounting Principles (GAAP) | When a U.S. corporation’s financial statements are distributed to someone outside of the corporation, they must comply with generally accepted accounting principles (GAAP or US GAAP). GAAP includes underlying concepts such as the historical cost principle, matching principle, revenue recognition, full disclosure princi... | This is a cheet sheet Question |
Accrual Method of Accounting | US GAAP usually requires that a corporation’s financial statements be prepared using the accrual method (or basis) of accounting. (Individuals on the other hand are likely to use the cash method of accounting.) Under the accrual method, revenues are reported on the income statement and the related receivable will be re... | This is a cheet sheet Question |
Other Types or Branches of Accounting | As noted earlier financial accounting is just one type or branch of accounting. The others include cost accounting, management accounting, not-for-profit accounting, governmental accounting, income tax accounting, auditing, forensic accounting, accounting systems, auditing, and more. For personal use by the original pu... | This is a cheet sheet Question |
Evaluating Business Investments | When someone is deciding to invest in business assets that have a life of more than one year, it is important that the time value of money be considered. The time value of money means that the dollars (or other currency) invested or paid today are more valuable than the dollars that will be received in the future years... | This is a cheet sheet Question |
Discounting Future Cash Flows | To recognize the time value of money, the future cash flows are discounted to their “present value.” Discounting can be thought of as removing the interest or necessary earnings that is included in the future cash amounts. After the interest has been removed the resulting amount is the present value or the discounted c... | This is a cheet sheet Question |
Present Value Tables | In classrooms, textbooks, and in our explanation, the calculation of the present values will be done by using present value tables. If there is a stream of equal cash amounts occurring at equal time intervals, the present value of an annuity table can be used. When there is a single future amount, or when the future am... | This is a cheet sheet Question |
Net Present Value Model | Net present value (NPV) is one of the discounted cash flow models used to evaluate investments in long-lived assets. In the NPV model, the future cash flows are discounted to their present values and then all of the present values (including the investment outflow of cash) are summed into a single amount. That single a... | This is a cheet sheet Question |
Internal Rate of Return | The internal rate of return (IRR) is a discounted flow model that computes the exact rate of return earned on an investment. In other words, the internal rate of return tells you the rate that will discount all of the investment’s cash flows to a net present value of exactly $0. If a present value table is used, it req... | This is a cheet sheet Question |
Recap of NPV and IRR | Both the net present value (NPV) and the internal rate of return (IRR) models are recommended because of the following: 1. Both use all of the cash flows that occur during the entire life of the investment 2. Both recognize the time value of money (future amounts are discounted) 3. Because the present value factors ... | This is a cheet sheet Question |
Payback Period | Another model that is often used when evaluating business investments is the payback period. The payback period simply indicates the number of years it takes for a company to recover its investment. The payback period is easy to understand, but it has two drawbacks: • The future cash amounts are not discounted to thei... | This is a cheet sheet Question |
Depreciation | In accounting, depreciation is the spreading (allocation) of an asset’s cost over the many accounting periods in which it is used. The assets that are depreciated include buildings, equipment, furnishings, vehicles, land improvements (but not the land), and similar long-term assets that are used in a business. The purp... | This is a cheet sheet Question |
Tax Return | The depreciation that we are discussing is the depreciation reported on the financial statements. This depreciation is almost always different from the depreciation reported on the corporation’s income tax returns. The reason is that the financial statement depreciation is based on the matching principle of accounting ... | This is a cheet sheet Question |
Cost | An asset’s cost is the cash equivalent amount paid for the asset plus the necessary costs to get the asset in place and ready for use. The asset’s cost is the maximum total amount of depreciation expense over the years of the asset’s useful life. Once the asset’s cost is fully depreciated, the depreciation expense stop... | This is a cheet sheet Question |
Useful Life | An asset’s useful life is the estimated number of years (or units of output) that the asset will be economically useful. This estimate is made when the asset is placed into service. For example, if a company estimates that a machine with a cost of $100,000 will have a useful life of 10 years, its financial statements w... | This is a cheet sheet Question |
Depreciable Cost | An asset’s depreciable cost is the asset’s cost minus the asset’s estimated salvage value at the end of its useful life. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
Half-year Convention | The half-year convention assumes that a newly acquired asset was placed in service at the midpoint of a year. As a result, one-half of the annual depreciation is charged to depreciation expense in the first year (and in the final year) of the asset’s useful life. Example 2. If an asset has a cost of $100,000 and an est... | This is a cheet sheet Question |
Straight-Line Depreciation | Straight-line depreciation is the common method for computing the depreciation reported on the financial statements. Straight-line depreciation results in the same amount of annual depreciation in each year (except for partial years). The full-year, annual depreciation is computed by taking the asset’s depreciable cost... | This is a cheet sheet Question |
Accelerated Depreciation | Accelerated depreciation refers to the depreciation methods in which larger amounts of annual depreciation are taken in the early years of an asset’s life, and smaller amounts of annual depreciation are taken in the later years. (Over the entire useful life of the asset the total amount of depreciation is the same as t... | This is a cheet sheet Question |
Sum-of-the-Years’-Digits (SYD) Method | Sum-of-the-years’-digits (SYD) method of depreciation is also an accelerated method of depreciation. Its name comes from summing all of the digits in the years of the asset’s useful life (see Example 4 below). This sum will become the denominator of the fraction that will be used. The numerator of the fraction is the y... | This is a cheet sheet Question |
Chart of Accounts | A chart of accounts is a list of the general ledger accounts (and subaccounts) available for recording an organization’s transactions. The chart of accounts will likely include an account number and account title. However, there could also be a brief description of the transactions that should be recorded in each of th... | This is a cheet sheet Question |
How the Chart of Accounts Is Organized | The chart of accounts will have the accounts arranged in the same order as the general ledger. A common order for a business corporation is: Asset accounts Current assets Noncurrent assets Liability accounts Current liabilities Noncurrent liabilities Stockholders’ equity accounts Paid-in capital Retained earnings Accum... | This is a cheet sheet Question |
Account Numbers | It is common for the first digit of each account number to indicate the type of account. For example, the first digit of an asset account number will usually begin with a “1”. The first digit of the liability accounts will begin with the digit “2”. Perhaps marketing expenses will begin with the digit “5” and administr... | This is a cheet sheet Question |
Other Comments | The chart of accounts often reflects a company’s organization chart. With that arrangement, the internal financial statements can be prepared for each division, department, cost center, etc. This allows a company to give the person who is responsible for a specific department only the financial information for which th... | This is a cheet sheet Question |
Cash Flow Statement | The cash flow statement is officially known as the statement of cash flows (SCF). It reports the major cash inflows and outflows that have occurred during the accounting period specified in its heading. Expressed another way, the SCF for the calendar year 2023 will list the major cash flows that caused the change in a ... | This is a cheet sheet Question |
Format of SCF | The statement of cash flows has three major sections: • Cash flows from operating activities • Cash flows from investing activities • Cash flows from financing activities In addition, the SCF must disclose some supplemental or supplementary information, including significant noncash transactions (such as an exchange... | This is a cheet sheet Question |
How a Positive Amount is Determined | If a balance sheet asset (other than cash) has decreased it usually means that cash was provided. Therefore, the SCF will report the amount of the asset’s decrease as a positive amount. For instance, if the asset Accounts Receivable has decreased by $2,000, the SCF will report this as a positive $2,000 since decreasing... | This is a cheet sheet Question |
How a Negative Amount is Determined | If the asset Inventory has increased, the SCF will report this as a negative amount. The reasoning is that increasing Inventory likely meant a cash outflow, cash was used, and/or it was not good for the corporation’s cash balance. When a liability has decreased, it is also assumed that cash was used and it is presented... | This is a cheet sheet Question |
Indirect Method of Preparing SCF | The indirect method of preparing the statement of cash flows is used by nearly all large corporations. (The alternative is the direct method, which is actually preferred by the Financial Accounting Standards Board or FASB.) Under the indirect method the first section of the SCF (which is the cash flows from operating a... | This is a cheet sheet Question |
Cash Flows from Operating Activities | The cash flows from operating activities is the heading of the first section of the cash flow statement. Under the indirect method, this section begins with a corporation’s net income and is then adjusted from the accrual accounting amounts to the cash amounts. For example, there will be a positive adjustment to net in... | This is a cheet sheet Question |
Cash Flows from Investing Activities | The cash flows from investing activities is the second section of the SCF. This section reports the amounts pertaining to the purchase and sale of a corporation’s noncurrent (or long-term) assets. For example, capital expenditures (amounts spent for property, plant and equipment used in the business) and the purchase o... | This is a cheet sheet Question |
Cash Flows from Financing Activities | The third section of SCF is the cash flows from financing activities. The amounts reported in this section involve the increases and decreases in noncurrent liabilities, stockholders’ equity, and short- term loans. For example, if the corporation issues common stock or bonds, the amount received will be reported as a p... | This is a cheet sheet Question |
Total of Three Sections = Change in Cash and Cash Equivalents | After the three sections, the SCF will show the grand total of the three sections. The grand total is followed by a reconciliation with the change in the corporation’s cash and cash equivalents. | This is a cheet sheet Question |
Supplemental Information | In addition to the amounts reported in the three sections of the face of the cash flow statement, the statement must also disclose supplemental or supplementary information. One example is the acquisition of an asset in exchange for shares of stock. In this example, no cash was involved, but the transaction did involve... | This is a cheet sheet Question |
Break-even Point | The break-even point is the level of sales that result in a business having a net income of zero. In other words, its revenues will be exactly equal to its expenses. The break-even point calculation that is found in managerial accounting textbooks is based on knowing how a company’s costs or expenses will change as the... | This is a cheet sheet Question |
Fixed Expenses | Fixed expenses are the expenses that will not change in total as the sales volume changes. For example, if a retail store’s rent is $30,000 per year and will not change within a reasonable range of sales, the rent is a fixed expense. Other examples are managers’ salaries, property insurance, property tax, etc. | This is a cheet sheet Question |
Variable Expenses | Variable expenses are the expenses that change in total as volume changes. For example, if a retailer purchases a product at a cost of $11 and sells it for $20, the $11 per unit is a variable expense. Another variable expense would be a sales commission of 5% that is given on every sale. In this example, the variable e... | This is a cheet sheet Question |
Selling Price | In the calculation of the break-even point, the selling price of a product is assumed to be a constant amount per unit. If the selling price is $20 per unit, the break-even calculation assumes that the selling price will remain $20 whether 50 units are sold or 50,000 are sold. | This is a cheet sheet Question |
Contribution Margin per Unit | Contribution margin per unit = selling price per unit minus the variable expenses per unit. If the selling price per unit is $20 and the variable expenses are $12, the resulting contribution margin per unit is $8. Contribution Margin Ratio (using the per unit amounts) Contribution margin ratio (using the per unit amoun... | This is a cheet sheet Question |
Total Contribution Margin | If a company has total sales of $200,000 and total variable expenses of $120,000 its total contribution margin is $80,000. Contribution Margin Ratio (using totals) The contribution margin ratio using totals = total contribution margin divided by total sales. If a company has a total contribution margin of $80,000 and i... | This is a cheet sheet Question |
Break-even Calculations | Here’s a recap of the information we discussed above and some other information which we will use in the break-even calculations that follow: • The company had only one product and its selling price was $20 per unit • The total fixed expenses were $66,000 per year • The variable expenses were $12 per unit, which is ... | This is a cheet sheet Question |
The Mix of Products Sold May Change | The break-even model has some limitations. For example, a company often sells many different products (and/or services) with a wide range of contribution margins (and a variety of contribution margin ratios). Therefore, the same total number of units sold could result in vastly different profits if the sales mix change... | This is a cheet sheet Question |
Not All Variable Expenses Are Linear | Another limitation is that many variable expenses will not change in direct proportion to the change in volume. In other words, if the total variable expenses were graphed according to sales volume, the resulting line would not be a straight line. Perhaps the line will curve upward thereby revealing that some variable ... | This is a cheet sheet Question |
Fixed Expenses Could Change | Some fixed expenses could increase when a very large change in volume occurs. That is why the definition of fixed expense has a qualifier: The total expense is fixed “within a relevant range of sales or volume.” For example, if the volume increases by such a large amount that another salaried supervisor is required, th... | This is a cheet sheet Question |
Selling Prices May Have to Change | A company may find that in order to increase its sales, it will have to lower its selling prices. This in turn reduces the contribution margin per unit. Competitors may also enter the market and offer lower selling prices in order to attract customers. | This is a cheet sheet Question |
Electronic Worksheets | The simple break-even point models were developed prior to electronic worksheets and personal computers. Now that these inexpensive tools are available, it makes sense to develop electronic worksheets with more sophistication than the simple break-even models. With formulas in the electronic worksheet cells, accountant... | This is a cheet sheet Question |
Bookkeeping in the Past | Historically, bookkeepers were responsible for the following steps in the accounting cycle: • Record all the company’s transactions in journals • Post the amounts from the journals to accounts in the general ledger and subsidiary ledgers • Calculate the balance in each of the accounts • Prepare a trial balance (a l... | This is a cheet sheet Question |
Bookkeeping Today | Thanks to computers and the discipline imposed by the accounting software, the accounts and trial balance will always be in balance. Further, the previously distinct steps in the accounting cycle now appear to happen simultaneously. For example, when a distributor sells goods on credit, the software prepares the sales ... | This is a cheet sheet Question |
Double-entry Accounting System | Behind the computer screens, most accounting software is based on the double-entry system of accounting which has been in existence for more than 500 years. The double-entry system means the following: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. • Every transaction affects two (o... | This is a cheet sheet Question |
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