Business Operations

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The Revenue Recognition Principle

The matching principle requires that you match costs incurred with the revenue a company generates. The revenue recognition principle requires that, if you use the accrual basis of accounting, you recognize [more…]

Accounting for Merchandising Company Inventory

Accounting for merchandise inventory is generally easier than accounting for manufacturing inventory. That’s because a merchandising company, such as a retail store, has only one class of inventory to [more…]

Accounting for Manufacturing Company Inventory

To account for all expenses it incurs while making products for resale, a manufacturing company has a cost of goods manufactured account. The cost of goods manufactured includes three types of inventory [more…]

Inventory Valuation Methods

Most companies choose one of four methods to value their ending inventory: specific identification; weighted average; first-in, first-out (FIFO); and last-in, first-out [more…]

Incremental and Opportunity Costs

When faced with two or more alternatives, incremental costs are those costs that change, depending on which alternative you choose. Suppose you want to buy a new bicycle. Incremental costs of buying the [more…]

The Cash Payback Method of Cost Estimation

Companies invest in capital projects — buying big things like factories, equipment, and vehicles — to earn profits and a return on their investment. Therefore, managers need tools and techniques to evaluate [more…]

The Net Present Value (NPV) Method of Cost Estimation

Over time, the value of money changes. Given the choice between receiving $1,000 today and receiving $1,000 a year from now, most people would take the cash now because the value of money decreases with [more…]

How to Measure the Internal Rate of Return (IRR)

When evaluating a capital project, internal rate of return (IRR) measures the estimated percentage return from the project. It uses the initial cost of the project and estimates of the future cash flows [more…]

Qualitative Factors and Projections of Future Cash Flows

As much as accountants hate to admit it, some things in life just can’t be measured. Projections of future cash flows, for example, inherently ignore certain factors that can’t be monetized — qualitative [more…]

The Basics of Debt Capital

Debt-based capital is money contributed to the business in the form of a loan. It represents a liability or obligation to a business because it’s generally governed by set repayment terms as provided by [more…]

What Is Debt Security?

Debt security refers to the type of asset the debt is supported by or secured with. If a bank lends $2 million to support the expansion of a manufacturing facility, the bank takes a “secured position” [more…]

Securing Capital from Banks

Looking to secure capital from banks in the form of loans is one of the most tried and proven sources of capital. The old (and possibly outdated) image of a business looking to grow and in need of a loan [more…]

Asset-Based Lending

Asset-based lending utilizes the same criteria as banks but with one critical difference. Asset-based lenders (ABLs) focus on the quality of the asset [more…]

Leasing as a Source of Capital

Leasing or renting an asset is an effective source of debt-based capital. The most common example is leasing office space. Instead of tying up cash in purchasing a building or investing in leasehold improvements [more…]

Get Creative with Capital

The number of creative capital sources is endless, so rather than attempt to cover every trick of the trade, following are some diverse examples to provide you with a sense of how businesses manufacture [more…]

How to Judge Profit Performance

A business earns profit by making sales and by keeping expenses less than sales revenue, so the best place to start in analyzing profit performance is not the bottom line but the top line: [more…]

Testing Earnings per Share (EPS) Against Change in Bottom Line

Managers should keep in mind that company shareholders expect to profit from stock ownership. The more earnings per share (EPS) your company can generate, the more likely investors are to receive dividends [more…]

The Risks of Restatement

Restatement is the process of revising and distributing one or more of a company’s previously issued financial statements. Investors and creditors provide the capital for a manager to run a business. It’s [more…]

Extraordinary Gains and Losses

Extraordinary gains and losses are non-recurring gains and losses that aren’t part of normal business operations. Here are some examples of extraordinary gains and losses: [more…]

How to Judge the Company’s Cash Position

The objective of a business is not simply to earn a profit, but to generate cash inflows as quickly as possible. The faster a company collects cash, the less cash it needs to raise from investors or creditors [more…]

What Are Cost Objects?

A cost object is anything that causes you to incur costs. Think about a cost object as a sponge that absorbs your money. The object can be a customer, job, product line, or company division. Carefully [more…]

Charging Customers for Direct and Indirect Costs

To bill a customer and calculate a profit, you add up all the costs for that customer, whether they’re direct or indirect costs. If, for example, you manufacture kitchen countertops, you include all direct [more…]

What Are Control Accounts?

Control accounts are temporary holding places for costs. Managing costs has to start somewhere, and in accounting, that process most often starts with control accounts. [more…]

What Is Peanut Butter Costing?

Despite the benefits of activity-based costing(ABC), many business managers use cost smoothing, or peanut butter costing, instead, which spreads costs over a broad range of cost objects. [more…]

How to Design an Activity-Based Costing System

If your activity-based accounting (ABC) system is well designed, you allocate costs more precisely. You carefully separate costs between direct costs and indirect costs. You also consider the specific [more…]

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