{"appState":{"pageLoadApiCallsStatus":true},"categoryState":{"relatedCategories":{"headers":{"timestamp":"2023-09-15T12:01:14+00:00"},"categoryId":34226,"data":{"title":"Accounting","slug":"accounting","image":{"src":null,"width":0,"height":0},"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226}],"parentCategory":{"categoryId":34225,"title":"Business","slug":"business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"}},"childCategories":[{"categoryId":34227,"title":"Audits","slug":"audits","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34227"},"image":{"src":"/img/background-image-2.fabfbd5c.png","width":0,"height":0},"hasArticle":true,"hasBook":true,"articleCount":126,"bookCount":3},{"categoryId":34228,"title":"Bookkeeping","slug":"bookkeeping","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34228"},"image":{"src":"/img/background-image-1.daf74cf0.png","width":0,"height":0},"hasArticle":true,"hasBook":true,"articleCount":118,"bookCount":7},{"categoryId":34229,"title":"Calculation & Analysis","slug":"calculation-analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"},"image":{"src":"/img/background-image-2.fabfbd5c.png","width":0,"height":0},"hasArticle":true,"hasBook":true,"articleCount":216,"bookCount":3},{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"image":{"src":"/img/background-image-1.daf74cf0.png","width":0,"height":0},"hasArticle":true,"hasBook":true,"articleCount":678,"bookCount":13}],"description":"Accounting is the language of business. With help from Dummies, you can be fluent in no time.","relatedArticles":{"self":"https://dummies-api.dummies.com/v2/articles?category=34226&offset=0&size=5"},"hasArticle":true,"hasBook":true,"articleCount":1139,"bookCount":26},"_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"}},"relatedCategoriesLoadedStatus":"success"},"listState":{"list":{"count":10,"total":1141,"items":[{"headers":{"creationTime":"2016-03-27T16:56:32+00:00","modifiedTime":"2023-09-05T19:01:19+00:00","timestamp":"2023-09-05T21:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Bookkeeping","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34228"},"slug":"bookkeeping","categoryId":34228}],"title":"Nonprofit Bookkeeping & Accounting For Dummies Cheat Sheet","strippedTitle":"nonprofit bookkeeping & accounting for dummies cheat sheet","slug":"nonprofit-bookkeeping-accounting-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Keep your finger on the pulse of your nonprofit's budget and expenses with these handy reminders and tasks.","noIndex":0,"noFollow":0},"content":"To stay organized and on top of your nonprofit’s bookkeeping and accounting responsibilities, timely complete accounting tasks need to be done daily, weekly, quarterly, and yearly.\r\n\r\nKeep necessary financial information up to date so you’re prepared to submit paperwork to your independent certified public accountant (CPA), the government, and all stakeholders, both within and outside your nonprofit organization.\r\n\r\nTo ensure your nonprofit’s activities are completed, organize a to-do list, prioritizing the tasks so the important ones are done first, and other jobs are scheduled around them. Managing your nonprofit means sticking to your plan to stay organized and run efficiently.\r\n\r\nApply these guidelines to your nonprofit’s weekly plan:\r\n<ul>\r\n \t<li><strong>Set up daily priorities.</strong> Knowing what you need to accomplish each day allows you to take care of the most pressing matters.</li>\r\n \t<li><strong>Surround yourself with professional staff.</strong> Surrounding yourself with professionals eliminates the pettiness of daily office drama! Professionals are self-motivated and focused on doing their jobs, and they require minimum supervision.</li>\r\n \t<li><strong>Keep your goals before you.</strong> To maintain a clear vision, keep your eyes on the prize. Post your vision or your goals in a place where they’re visible to you every day.</li>\r\n \t<li><strong>Manage your time by planning and scheduling your daily activities.</strong> Be mindful of distractions that pull you away from completing your tasks.</li>\r\n \t<li><strong>Stay out of politics.</strong> Avoiding politics at work protects your nonprofit’s status.</li>\r\n</ul>","description":"To stay organized and on top of your nonprofit’s bookkeeping and accounting responsibilities, timely complete accounting tasks need to be done daily, weekly, quarterly, and yearly.\r\n\r\nKeep necessary financial information up to date so you’re prepared to submit paperwork to your independent certified public accountant (CPA), the government, and all stakeholders, both within and outside your nonprofit organization.\r\n\r\nTo ensure your nonprofit’s activities are completed, organize a to-do list, prioritizing the tasks so the important ones are done first, and other jobs are scheduled around them. Managing your nonprofit means sticking to your plan to stay organized and run efficiently.\r\n\r\nApply these guidelines to your nonprofit’s weekly plan:\r\n<ul>\r\n \t<li><strong>Set up daily priorities.</strong> Knowing what you need to accomplish each day allows you to take care of the most pressing matters.</li>\r\n \t<li><strong>Surround yourself with professional staff.</strong> Surrounding yourself with professionals eliminates the pettiness of daily office drama! Professionals are self-motivated and focused on doing their jobs, and they require minimum supervision.</li>\r\n \t<li><strong>Keep your goals before you.</strong> To maintain a clear vision, keep your eyes on the prize. Post your vision or your goals in a place where they’re visible to you every day.</li>\r\n \t<li><strong>Manage your time by planning and scheduling your daily activities.</strong> Be mindful of distractions that pull you away from completing your tasks.</li>\r\n \t<li><strong>Stay out of politics.</strong> Avoiding politics at work protects your nonprofit’s status.</li>\r\n</ul>","blurb":"","authors":[{"authorId":35327,"name":"Maire Loughran","slug":"maire-loughran","description":"<strong>Maire Loughran</strong>, CPA, is an accountant and auditor with 20 years of experience as a full, adjunct accounting professor. She is author of <em>Financial Accounting For Dummies</em>, <em>Auditing For Dummies</em>, and <em>Intermediate Accounting For Dummies</em>.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35327"}}],"primaryCategoryTaxonomy":{"categoryId":34228,"title":"Bookkeeping","slug":"bookkeeping","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34228"}},"secondaryCategoryTaxonomy":{"categoryId":34246,"title":"Nonprofits","slug":"nonprofits","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34246"}},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":192926,"title":"Annual Reminders for Your Nonprofit 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Sheet","slug":"bookkeeping-for-canadians-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/208256"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282422,"slug":"nonprofit-bookkeeping-and-accounting-for-dummies","isbn":"9781394206018","categoryList":["business-careers-money","business","accounting","bookkeeping"],"amazon":{"default":"https://www.amazon.com/gp/product/1394206011/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1394206011/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1394206011-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1394206011/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1394206011/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781394206018-203x255.jpg","width":203,"height":255},"title":"Nonprofit Bookkeeping and Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"","authors":[{"authorId":9470,"name":"","slug":null,"description":null,"hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9470"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;bookkeeping&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781394206018&quot;]}]\" id=\"du-slot-64f7970eec3b7\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;bookkeeping&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781394206018&quot;]}]\" id=\"du-slot-64f7970eecbe2\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":192924,"title":"Weekly Reminders for Your Nonprofit Organization","slug":"weekly-reminders-for-your-nonprofit-organization","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192924"}},{"articleId":192918,"title":"Monthly Budgeting Tasks for Your Nonprofit Organization","slug":"monthly-budgeting-tasks-for-your-nonprofit-organization","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192918"}},{"articleId":192917,"title":"Quarterly Accounting Reminders for Your Nonprofit Organization","slug":"quarterly-accounting-reminders-for-your-nonprofit-organization","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192917"}},{"articleId":192926,"title":"Annual Reminders for Your Nonprofit Business","slug":"annual-reminders-for-your-nonprofit-business","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192926"}}],"content":[{"title":"Monthly budgeting tasks for your nonprofit organization","thumb":null,"image":null,"content":"<p>As a director or manager of a nonprofit, you require monthly budget assessments to track and manage your nonprofit’s finances. Monthly meetings, which should happen after a cost-benefit analysis, should involve your finance committee, budget staff, and/or budget task force.</p>\n<p>These meetings should go over management efficiency and include these items:</p>\n<ul>\n<li><strong>Review budget projections and compare the projected budget to actual results.</strong> To ensure that you have revenues to take care of expenses, evaluate what happened the previous month and what the impact will be on future months. If necessary, make adjustments to future planned actions based on your actual results to date.</li>\n<li><strong>Trim the fat from your budget.</strong> Analyze every line item and look for ways to cut costs.</li>\n<li><strong>Meet with your budget task group to analyze every cost and get rid of unnecessary ones.</strong> Consider everything that will keep you efficient without compromising program quality.</li>\n<li><strong>Submit grant proposals and contracts to stabilize your funding streams.</strong> Be aggressive in seizing funding opportunities to sustain and expand your organization’s existing programs while adding new ones.</li>\n<li><strong>Search your local newspaper and online sources</strong> <strong>for new businesses in your area that may support your cause.</strong> Find out what their areas of interest are and talk to them about working together.</li>\n<li><strong>Look for ways to collaborate with other nonprofits in your community.</strong> Form partnerships with larger nonprofits for fundraising activities.</li>\n</ul>\n"},{"title":"Quarterly accounting reminders for your nonprofit organization","thumb":null,"image":null,"content":"<p>To analyze the financial health of your nonprofit organization, the board of directors needs quarterly financial statements, which monitor the flow of revenue. Likewise, for taxes, grants, and contracts, quarterly reports are required by federal and state government organizations. Make sure to take care of the following nonprofit accounting tasks:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Report payroll taxes to the IRS at the end of the quarter by submitting Form 941.</b> The Federal Insurance Contributions Act (FICA) taxes are funds for the payment of old-age, survivors, and medical benefits. Employers must pay 7.65 percent of an employee’s gross salary to the IRS.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Prepare quarterly financial statements for your board of directors.</b> Your board needs to know your financial status to plan future activities and to offset potential financial problems.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Complete quarterly financial status reports for government grants and contracts.</b> The government expects you to track all expenditures and submit a report of what you have spent and how much you have left according to your records.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Complete quarterly progress reports for government grants and contracts.</b> Quarterly progress reports indicate performance results in terms of numbers. They evaluate your progress by comparing what you expected to accomplish with what actually happened.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Meet with your board of directors.</b> Your board must meet at least four times a year to fulfill federal and state requirements.</p>\n</li>\n</ul>\n"},{"title":"Annual reminders for your nonprofit business","thumb":null,"image":null,"content":"<p>Running a nonprofit requires that you annually prepare and submit paperwork to your employees, the Board of Directors, the Social Security Administration, and the IRS. Each year, you should evaluate your nonprofit’s progress, go over your strategic plan, and celebrate the year’s successes. This list represents tasks you should complete yearly:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Submit Form 990, Annual Information Report, to the IRS.</b> This form is where you report all financial activities to the IRS. It reveals your financial strengths and weaknesses, sources of income, and how you’re spending your funds. This information helps the government determine whether you’re engaging in activities that could cause you to jeopardize your tax-exempt status.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Submit annual payroll reports to the Social Security Administration, IRS, and your employees.</b> Form 941 is due no later than January 31. W-2s, W-3s, and 1099s must be handled properly.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Contact a CPA to audit your financial statements.</b> Having audited records is like getting a professional second opinion about the validity of your financial health. It adds credibility to your record-keeping and accounting practices.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Celebrate your success and hard work with your staff and board members by having an annual office party.</b> Reward everyone for a job well done.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Organize your budget task force for the next year.</b> Single out the analytical minds or penny-pinchers on your staff and board. These folks will make up your budget task force, which assesses all budget costs and does a benefit analysis of each line item.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Organize a proposal development team for the next year.</b> Find three people who are organized, enjoy reading technical stuff, and are willing to write. Then organize them into your proposal development team to research, develop, and submit grant applications and contracts for your organization.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Prepare for your annual board meeting by re-evaluating your organization’s goals.</b> Cross out goals you’ve met and develop new goals for the upcoming year.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Declutter your office files and prepare for the next year.</b> Getting rid of the clutter frees your mind and saves time. It’s important that you know where things are and can put your hands on them when needed.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2023-09-05T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":209083},{"headers":{"creationTime":"2016-03-26T14:50:26+00:00","modifiedTime":"2023-08-01T14:33:07+00:00","timestamp":"2023-08-01T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"How to Create a Normal Job Cost Sheet for Cost Accounting","strippedTitle":"how to create a normal job cost sheet for cost accounting","slug":"how-to-create-a-normal-job-cost-sheet-for-cost-accounting","canonicalUrl":"","seo":{"metaDescription":"When cost accounting, you put together your budgeting process for indirect costs with a plan for direct costs. Think of the combined process as normal costing .","noIndex":0,"noFollow":0},"content":"<p>When cost accounting, you put together your budgeting process for indirect costs with a plan for direct costs. Think of the combined process as <i>normal costing</i>. This is an important point: You <i>trace</i> direct costs and <i>allocate</i> indirect costs.</p>\r\n<p>Normal costing combines indirect cost rate with actual production. The process gets you closer to actual total costs for your product.</p>\r\n<p>Here are the two steps to implement normal costing:</p>\r\n<ul>\r\n <li><b>Direct costs:</b> Traced to the cost object by multiplying (actual prices/rates) x (actual quantity for a specific job object)</li>\r\n <li><b>Indirect costs:</b> Allocated to the cost object multiplying (predetermined or budgeted indirect cost rate) x (actual quantity for a specific job object)</li>\r\n</ul>\r\n<p>Note that both direct and indirect costs use actual quantity in the formula. While you come up with an indirect cost rate in planning, the rate is multiplied by actual quantities. In this case, the quantity is jobs for the month.</p>\r\n<p>A <i>job cost sheet</i> lists every cost you’ve incurred for a particular job. That includes direct material, direct labor, and all indirect costs. The job cost sheet is your basis for computing your sale price and your profit. You use this document to prepare a cost estimate for a client. Here is a job cost sheet using normal costing for a landscaping job.</p>\r\n<h2 id=\"tab1\" >Normal Job Cost Sheet — Landscaping Job</h2>\r\n<table>\r\n<tr>\r\n<th>Type of Cost</th>\r\n<th>Amount or Quantity</th>\r\n<th>Price or Rate</th>\r\n<th>Total Cost (Rounded)</th>\r\n</tr>\r\n<tr>\r\n<td>Direct material</td>\r\n<td>100 square feet of grass seed</td>\r\n<td>$12 per square foot</td>\r\n<td>$1,200</td>\r\n</tr>\r\n<tr>\r\n<td>Direct labor</td>\r\n<td>15 hours of labor</td>\r\n<td>$15 per hour</td>\r\n<td>$225</td>\r\n</tr>\r\n<tr>\r\n<td>Mileage</td>\r\n<td>30 miles driven</td>\r\n<td>$0.18 per mile</td>\r\n<td>$5</td>\r\n</tr>\r\n<tr>\r\n<td>Indirect costs</td>\r\n<td>30 miles driven</td>\r\n<td>$5.36 per mile</td>\r\n<td>$161</td>\r\n</tr>\r\n<tr>\r\n<td>\r\n</td>\r\n<td>\r\n</td>\r\n<td><b>Total job costs</b></td>\r\n<td><b>$1,591</b></td>\r\n</tr>\r\n</table>\r\n<p>The indirect cost calculation (vehicle and equipment costs) uses the actual quantity (miles driven) and the estimated rate per mile. The other direct costs on the job sheet use actual quantities and actual prices/rates.</p>","description":"<p>When cost accounting, you put together your budgeting process for indirect costs with a plan for direct costs. Think of the combined process as <i>normal costing</i>. This is an important point: You <i>trace</i> direct costs and <i>allocate</i> indirect costs.</p>\r\n<p>Normal costing combines indirect cost rate with actual production. The process gets you closer to actual total costs for your product.</p>\r\n<p>Here are the two steps to implement normal costing:</p>\r\n<ul>\r\n <li><b>Direct costs:</b> Traced to the cost object by multiplying (actual prices/rates) x (actual quantity for a specific job object)</li>\r\n <li><b>Indirect costs:</b> Allocated to the cost object multiplying (predetermined or budgeted indirect cost rate) x (actual quantity for a specific job object)</li>\r\n</ul>\r\n<p>Note that both direct and indirect costs use actual quantity in the formula. While you come up with an indirect cost rate in planning, the rate is multiplied by actual quantities. In this case, the quantity is jobs for the month.</p>\r\n<p>A <i>job cost sheet</i> lists every cost you’ve incurred for a particular job. That includes direct material, direct labor, and all indirect costs. The job cost sheet is your basis for computing your sale price and your profit. You use this document to prepare a cost estimate for a client. Here is a job cost sheet using normal costing for a landscaping job.</p>\r\n<h2 id=\"tab1\" >Normal Job Cost Sheet — Landscaping Job</h2>\r\n<table>\r\n<tr>\r\n<th>Type of Cost</th>\r\n<th>Amount or Quantity</th>\r\n<th>Price or Rate</th>\r\n<th>Total Cost (Rounded)</th>\r\n</tr>\r\n<tr>\r\n<td>Direct material</td>\r\n<td>100 square feet of grass seed</td>\r\n<td>$12 per square foot</td>\r\n<td>$1,200</td>\r\n</tr>\r\n<tr>\r\n<td>Direct labor</td>\r\n<td>15 hours of labor</td>\r\n<td>$15 per hour</td>\r\n<td>$225</td>\r\n</tr>\r\n<tr>\r\n<td>Mileage</td>\r\n<td>30 miles driven</td>\r\n<td>$0.18 per mile</td>\r\n<td>$5</td>\r\n</tr>\r\n<tr>\r\n<td>Indirect costs</td>\r\n<td>30 miles driven</td>\r\n<td>$5.36 per mile</td>\r\n<td>$161</td>\r\n</tr>\r\n<tr>\r\n<td>\r\n</td>\r\n<td>\r\n</td>\r\n<td><b>Total job costs</b></td>\r\n<td><b>$1,591</b></td>\r\n</tr>\r\n</table>\r\n<p>The indirect cost calculation (vehicle and equipment costs) uses the actual quantity (miles driven) and the estimated rate per mile. The other direct costs on the job sheet use actual quantities and actual prices/rates.</p>","blurb":"","authors":[{"authorId":9050,"name":"Kenneth Boyd","slug":"kenneth-boyd","description":"Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (<a href=\"https://www.accountingaccidentally.com/\" target=\"_blank\" rel=\"noopener\">www.accountingaccidentally.com</a>), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (<a href=\"https://www.youtube.com/user/kenboydstl\" target=\"_blank\" rel=\"noopener\">kenboydstl</a>) has hundreds of videos on accounting and finance.\r\n\r\nIn recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9050"}}],"primaryCategoryTaxonomy":{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Normal Job Cost Sheet — Landscaping Job","target":"#tab1"}],"relatedArticles":{"fromBook":[{"articleId":208104,"title":"Cost Accounting For Dummies Cheat Sheet","slug":"cost-accounting-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/208104"}},{"articleId":171024,"title":"Must Know Formulas for Cost Accounting","slug":"must-know-formulas-for-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171024"}},{"articleId":171020,"title":"Important Terms and Principles Cost Accountants Should Know","slug":"important-terms-and-principles-cost-accountants-should-know","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171020"}},{"articleId":171019,"title":"Avoiding Pitfalls on Cost Accounting Exams","slug":"avoiding-pitfalls-on-cost-accounting-exams","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171019"}},{"articleId":166828,"title":"Accrual Accounting in Cost Accounting","slug":"accrual-accounting-in-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/166828"}}],"fromCategory":[{"articleId":277438,"title":"Financial Accounting: The Effect of Business Transactions","slug":"financial-accounting-the-effect-of-business-transactions","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277438"}},{"articleId":277429,"title":"What Are Accounting Journals?","slug":"what-are-accounting-journals","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277429"}},{"articleId":277423,"title":"How to Read Corporate Annual Reports","slug":"how-to-read-corporate-annual-reports","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277423"}},{"articleId":277418,"title":"Showing the Money: The Statement of Cash Flows","slug":"showing-the-money-the-statement-of-cash-flows","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277418"}},{"articleId":277410,"title":"10 Accounting Career Opportunities","slug":"10-accounting-career-opportunities","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277410"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282119,"slug":"cost-accounting-for-dummies","isbn":"9781119856023","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"https://www.amazon.com/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119856027-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781119856023-203x255.jpg","width":203,"height":255},"title":"Cost Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b><b data-author-id=\"34810\">Kenneth W. Boyd</b></b> has 30 years of experience in accounting and financial services. He is a four&#45;time Dummies book author, a blogger, and a video host on accounting and finance topics.</p>","authors":[{"authorId":34810,"name":"Kenneth W. Boyd","slug":"kenneth-w-boyd","description":" <p><b>Kenneth W. Boyd</b> has 30 years of experience in accounting and financial services. He is a four&#45;time Dummies book author, a blogger, and a video host on accounting and finance topics. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/34810"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119856023&quot;]}]\" id=\"du-slot-64c91e2ee8ff9\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119856023&quot;]}]\" id=\"du-slot-64c91e2ee9537\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2023-08-01T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":165636},{"headers":{"creationTime":"2016-03-26T08:14:22+00:00","modifiedTime":"2023-07-10T15:13:50+00:00","timestamp":"2023-07-10T18:01:03+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Calculation & Analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"},"slug":"calculation-analysis","categoryId":34229}],"title":"How to Use the Central Limit Theorem in Statistics","strippedTitle":"how to use the central limit theorem in statistics","slug":"how-to-convert-a-sampling-distribution-to-a-standard-normal-random-variable-using-the-central-limit-theorem","canonicalUrl":"","seo":{"metaDescription":"Learn how to convert a sampling distribution to a standard normal random variable using the central limit theorem in business statistics.","noIndex":0,"noFollow":0},"content":"You can use the Central Limit Theorem to convert a sampling distribution to a standard normal random variable. Based on the Central Limit Theorem, if you draw samples from a population that is greater than or equal to 30, then the sample mean is a normally distributed random variable. To determine probabilities for the sample mean\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460170.image0.png\" alt=\"image0.png\" width=\"35\" height=\"25\" />\r\n\r\nthe standard normal tables requires you to convert\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460171.image1.png\" alt=\"image1.png\" width=\"20\" height=\"21\" />\r\n\r\nto a standard normal random variable.\r\n<p class=\"Remember\">The standard normal distribution is the special case where the mean</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460172.image2.png\" alt=\"image2.png\" width=\"27\" height=\"23\" />\r\n\r\nequals 0, and the standard deviation\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460173.image3.png\" alt=\"image3.png\" width=\"28\" height=\"23\" />\r\n\r\nequals 1.\r\n\r\nFor any normally distributed random variable <i>X</i> with a mean\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460174.image4.png\" alt=\"image4.png\" width=\"16\" height=\"19\" />\r\n\r\nand a standard deviation\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460175.image5.png\" alt=\"image5.png\" width=\"20\" height=\"17\" />\r\n\r\nyou find the corresponding standard normal random variable (<i>Z</i>) with the following equation:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460176.image6.png\" alt=\"image6.png\" width=\"80\" height=\"47\" />\r\n\r\nFor the sampling distribution of\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460177.image7.png\" alt=\"image7.png\" width=\"23\" height=\"24\" />\r\n\r\nthe corresponding equation is\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460178.image8.png\" alt=\"image8.png\" width=\"92\" height=\"52\" />\r\n\r\nAs an example, say that there are 10,000 stocks trading each day on a regional stock exchange. It's known from historical experience that the returns to these stocks have a mean value of 10 percent per year, and a standard deviation of 20 percent per year.\r\n\r\nAn investor chooses to buy a random selection of 100 of these stocks for his portfolio. What's the probability that the mean rate of return among these 100 stocks is greater than 8 percent?\r\n\r\nThe investor's portfolio can be thought of as a sample of stocks chosen from the population of stocks trading on the regional exchange. The first step to finding this probability is to compute the moments of the sampling distribution.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Compute the mean: </b></p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460179.image9.png\" alt=\"image9.png\" width=\"112\" height=\"27\" /></li>\r\n</ul>\r\nThe mean of the sampling distribution equals the population mean.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Determine the standard error:</b> This calculation is a little trickier because the standard error depends on the size of the sample relative to the size of the population. In this case, the sample size (<i>n</i>) is 100, while the population size (<i>N</i>) is 10,000. So you first have to compute the sample size relative to the population size, like so:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460180.image10.png\" alt=\"image10.png\" width=\"227\" height=\"25\" />\r\n<p class=\"child-para\">Because 1 percent is less than 5 percent, you don't use the finite population correction factor to compute the standard error. Note that in this case, the value of the finite population correction factor is:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460181.image11.png\" alt=\"image11.png\" width=\"323\" height=\"53\" /></li>\r\n</ul>\r\nBecause this value is so close to 1, using the finite population correction factor in this case would have little or no impact on the resulting probabilities.\r\n\r\nAnd because the finite population correction factor isn't needed in this case, the standard error is computed as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460182.image12.png\" alt=\"image12.png\" width=\"91\" height=\"197\" />\r\n\r\nTo determine the probability that the sample mean is greater than 8 percent, you must now convert the sample mean into a standard normal random variable using the following equation:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460183.image13.png\" alt=\"image13.png\" width=\"92\" height=\"52\" />\r\n\r\nTo compute the probability that the sample mean is greater than 8 percent, you apply the previous formula as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460184.image14.png\" alt=\"image14.png\" width=\"252\" height=\"55\" />\r\n\r\nBecause\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460185.image15.png\" alt=\"image15.png\" width=\"197\" height=\"27\" />\r\n\r\nthese values are substituted into the previous expression as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460186.image16.png\" alt=\"image16.png\" width=\"423\" height=\"55\" />\r\n\r\nYou can calculate this probability by using the properties of the standard normal distribution along with a standard normal table such as this one.\r\n<table><caption>Standard Normal Table — Negative Values</caption>\r\n<tbody>\r\n<tr>\r\n<th><b><i>Z</i></b></th>\r\n<th>0.00</th>\r\n<th>0.01</th>\r\n<th>0.02</th>\r\n<th>0.03</th>\r\n</tr>\r\n<tr>\r\n<td>–1.3</td>\r\n<td>0.0968</td>\r\n<td>0.0951</td>\r\n<td>0.0934</td>\r\n<td>0.0918</td>\r\n</tr>\r\n<tr>\r\n<td>–1.2</td>\r\n<td>0.1151</td>\r\n<td>0.1131</td>\r\n<td>0.1112</td>\r\n<td>0.1093</td>\r\n</tr>\r\n<tr>\r\n<td>–1.1</td>\r\n<td>0.1357</td>\r\n<td>0.1335</td>\r\n<td>0.1314</td>\r\n<td>0.1292</td>\r\n</tr>\r\n<tr>\r\n<td>–1.0</td>\r\n<td>0.1587</td>\r\n<td>0.1562</td>\r\n<td>0.1539</td>\r\n<td>0.1515</td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nThe table shows the probability that a standard normal random variable (designated <i>Z</i>) is <i>less than or equal to</i> a specific value. For example, you can write the probability that\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460187.image17.png\" alt=\"image17.png\" width=\"77\" height=\"19\" />\r\n\r\n(one standard deviation below the mean) as\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460188.image18.png\" alt=\"image18.png\" width=\"108\" height=\"31\" />\r\n\r\nYou find the probability from the table with these steps:\r\n<ol class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\">Locate the first digit before and after the decimal point (–1.0) in the first (<i>Z</i>) column.</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Find the second digit after the decimal point (0.00) in the second (0.00) column.</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">See where the row and column intersect to find the probability:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460189.image19.png\" alt=\"image19.png\" width=\"176\" height=\"31\" /></li>\r\n</ol>\r\nBecause you're actually looking for the probability that <i>Z</i> is greater than or equal to –1, one more step is required.\r\n\r\nDue to the symmetry of the standard normal distribution, the probability that <i>Z</i> is greater than or equal to a negative value equals one minus the probability that <i>Z</i> is less than or equal to the same negative value.\r\n\r\nFor example,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460190.image20.png\" alt=\"image20.png\" width=\"224\" height=\"31\" />\r\n\r\nThis is because\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460191.image21.png\" alt=\"image21.png\" width=\"188\" height=\"19\" />\r\n\r\nare <i>complementary</i> events. This means that <i>Z</i> must either be greater than or equal to –2 or less than or equal to –2. Therefore,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460192.image22.png\" alt=\"image22.png\" width=\"224\" height=\"31\" />\r\n\r\nThis is true because the occurrence of one of these events is <i>certain</i>, and the probability of a certain event is 1.\r\n\r\nAfter algebraically rewriting this equation, you end up with the following result:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460193.image23.png\" alt=\"image23.png\" width=\"224\" height=\"31\" />\r\n\r\nFor the portfolio example,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460194.image24.png\" alt=\"image24.png\" width=\"256\" height=\"57\" />\r\n\r\nThe result shows that there's an 84.13 percent chance that the investor's portfolio will have a mean return greater than 8 percent.","description":"You can use the Central Limit Theorem to convert a sampling distribution to a standard normal random variable. Based on the Central Limit Theorem, if you draw samples from a population that is greater than or equal to 30, then the sample mean is a normally distributed random variable. To determine probabilities for the sample mean\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460170.image0.png\" alt=\"image0.png\" width=\"35\" height=\"25\" />\r\n\r\nthe standard normal tables requires you to convert\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460171.image1.png\" alt=\"image1.png\" width=\"20\" height=\"21\" />\r\n\r\nto a standard normal random variable.\r\n<p class=\"Remember\">The standard normal distribution is the special case where the mean</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460172.image2.png\" alt=\"image2.png\" width=\"27\" height=\"23\" />\r\n\r\nequals 0, and the standard deviation\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460173.image3.png\" alt=\"image3.png\" width=\"28\" height=\"23\" />\r\n\r\nequals 1.\r\n\r\nFor any normally distributed random variable <i>X</i> with a mean\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460174.image4.png\" alt=\"image4.png\" width=\"16\" height=\"19\" />\r\n\r\nand a standard deviation\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460175.image5.png\" alt=\"image5.png\" width=\"20\" height=\"17\" />\r\n\r\nyou find the corresponding standard normal random variable (<i>Z</i>) with the following equation:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460176.image6.png\" alt=\"image6.png\" width=\"80\" height=\"47\" />\r\n\r\nFor the sampling distribution of\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460177.image7.png\" alt=\"image7.png\" width=\"23\" height=\"24\" />\r\n\r\nthe corresponding equation is\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460178.image8.png\" alt=\"image8.png\" width=\"92\" height=\"52\" />\r\n\r\nAs an example, say that there are 10,000 stocks trading each day on a regional stock exchange. It's known from historical experience that the returns to these stocks have a mean value of 10 percent per year, and a standard deviation of 20 percent per year.\r\n\r\nAn investor chooses to buy a random selection of 100 of these stocks for his portfolio. What's the probability that the mean rate of return among these 100 stocks is greater than 8 percent?\r\n\r\nThe investor's portfolio can be thought of as a sample of stocks chosen from the population of stocks trading on the regional exchange. The first step to finding this probability is to compute the moments of the sampling distribution.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Compute the mean: </b></p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460179.image9.png\" alt=\"image9.png\" width=\"112\" height=\"27\" /></li>\r\n</ul>\r\nThe mean of the sampling distribution equals the population mean.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Determine the standard error:</b> This calculation is a little trickier because the standard error depends on the size of the sample relative to the size of the population. In this case, the sample size (<i>n</i>) is 100, while the population size (<i>N</i>) is 10,000. So you first have to compute the sample size relative to the population size, like so:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460180.image10.png\" alt=\"image10.png\" width=\"227\" height=\"25\" />\r\n<p class=\"child-para\">Because 1 percent is less than 5 percent, you don't use the finite population correction factor to compute the standard error. Note that in this case, the value of the finite population correction factor is:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460181.image11.png\" alt=\"image11.png\" width=\"323\" height=\"53\" /></li>\r\n</ul>\r\nBecause this value is so close to 1, using the finite population correction factor in this case would have little or no impact on the resulting probabilities.\r\n\r\nAnd because the finite population correction factor isn't needed in this case, the standard error is computed as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460182.image12.png\" alt=\"image12.png\" width=\"91\" height=\"197\" />\r\n\r\nTo determine the probability that the sample mean is greater than 8 percent, you must now convert the sample mean into a standard normal random variable using the following equation:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460183.image13.png\" alt=\"image13.png\" width=\"92\" height=\"52\" />\r\n\r\nTo compute the probability that the sample mean is greater than 8 percent, you apply the previous formula as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460184.image14.png\" alt=\"image14.png\" width=\"252\" height=\"55\" />\r\n\r\nBecause\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460185.image15.png\" alt=\"image15.png\" width=\"197\" height=\"27\" />\r\n\r\nthese values are substituted into the previous expression as follows:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460186.image16.png\" alt=\"image16.png\" width=\"423\" height=\"55\" />\r\n\r\nYou can calculate this probability by using the properties of the standard normal distribution along with a standard normal table such as this one.\r\n<table><caption>Standard Normal Table — Negative Values</caption>\r\n<tbody>\r\n<tr>\r\n<th><b><i>Z</i></b></th>\r\n<th>0.00</th>\r\n<th>0.01</th>\r\n<th>0.02</th>\r\n<th>0.03</th>\r\n</tr>\r\n<tr>\r\n<td>–1.3</td>\r\n<td>0.0968</td>\r\n<td>0.0951</td>\r\n<td>0.0934</td>\r\n<td>0.0918</td>\r\n</tr>\r\n<tr>\r\n<td>–1.2</td>\r\n<td>0.1151</td>\r\n<td>0.1131</td>\r\n<td>0.1112</td>\r\n<td>0.1093</td>\r\n</tr>\r\n<tr>\r\n<td>–1.1</td>\r\n<td>0.1357</td>\r\n<td>0.1335</td>\r\n<td>0.1314</td>\r\n<td>0.1292</td>\r\n</tr>\r\n<tr>\r\n<td>–1.0</td>\r\n<td>0.1587</td>\r\n<td>0.1562</td>\r\n<td>0.1539</td>\r\n<td>0.1515</td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nThe table shows the probability that a standard normal random variable (designated <i>Z</i>) is <i>less than or equal to</i> a specific value. For example, you can write the probability that\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460187.image17.png\" alt=\"image17.png\" width=\"77\" height=\"19\" />\r\n\r\n(one standard deviation below the mean) as\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460188.image18.png\" alt=\"image18.png\" width=\"108\" height=\"31\" />\r\n\r\nYou find the probability from the table with these steps:\r\n<ol class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\">Locate the first digit before and after the decimal point (–1.0) in the first (<i>Z</i>) column.</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Find the second digit after the decimal point (0.00) in the second (0.00) column.</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">See where the row and column intersect to find the probability:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460189.image19.png\" alt=\"image19.png\" width=\"176\" height=\"31\" /></li>\r\n</ol>\r\nBecause you're actually looking for the probability that <i>Z</i> is greater than or equal to –1, one more step is required.\r\n\r\nDue to the symmetry of the standard normal distribution, the probability that <i>Z</i> is greater than or equal to a negative value equals one minus the probability that <i>Z</i> is less than or equal to the same negative value.\r\n\r\nFor example,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460190.image20.png\" alt=\"image20.png\" width=\"224\" height=\"31\" />\r\n\r\nThis is because\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460191.image21.png\" alt=\"image21.png\" width=\"188\" height=\"19\" />\r\n\r\nare <i>complementary</i> events. This means that <i>Z</i> must either be greater than or equal to –2 or less than or equal to –2. Therefore,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460192.image22.png\" alt=\"image22.png\" width=\"224\" height=\"31\" />\r\n\r\nThis is true because the occurrence of one of these events is <i>certain</i>, and the probability of a certain event is 1.\r\n\r\nAfter algebraically rewriting this equation, you end up with the following result:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460193.image23.png\" alt=\"image23.png\" width=\"224\" height=\"31\" />\r\n\r\nFor the portfolio example,\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460194.image24.png\" alt=\"image24.png\" width=\"256\" height=\"57\" />\r\n\r\nThe result shows that there's an 84.13 percent chance that the investor's portfolio will have a mean return greater than 8 percent.","blurb":"","authors":[{"authorId":9080,"name":"Alan Anderson","slug":"alan-anderson","description":" <p><b>Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9080"}}],"primaryCategoryTaxonomy":{"categoryId":34229,"title":"Calculation & Analysis","slug":"calculation-analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":207822,"title":"Business Statistics For Dummies Cheat Sheet","slug":"business-statistics-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/207822"}},{"articleId":162083,"title":"How Businesses Use Regression Analysis Statistics","slug":"how-businesses-use-regression-analysis-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162083"}},{"articleId":162074,"title":"Random Variables and Probability Distributions in Business Statistics","slug":"random-variables-and-probability-distributions-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162074"}},{"articleId":162073,"title":"Explore Hypothesis Testing in Business Statistics","slug":"explore-hypothesis-testing-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162073"}},{"articleId":162066,"title":"3 Ways to Describe Populations and Samples in Business Statistics","slug":"3-ways-to-describe-populations-and-samples-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162066"}}],"fromCategory":[{"articleId":254831,"title":"Important Terms in Game Theory","slug":"important-terms-game-theory","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254831"}},{"articleId":254827,"title":"How to Create a Matrix from a Transition Diagram","slug":"create-matrix-transition-diagram","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254827"}},{"articleId":254821,"title":"How to Use Transition Matrices","slug":"use-transition-matrices","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254821"}},{"articleId":254814,"title":"How to Analyze Arguments with Euler Diagrams","slug":"analyze-arguments-euler-diagrams","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254814"}},{"articleId":254811,"title":"How to Analyze Compound Statements","slug":"analyze-compound-statements","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254811"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282040,"slug":"business-statistics-for-dummies","isbn":"9781118630693","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"amazon":{"default":"https://www.amazon.com/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1118630696-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/business-statistics-for-dummies-cover-9781118630693-203x255.jpg","width":203,"height":255},"title":"Business Statistics For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9080\">Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","authors":[{"authorId":9080,"name":"Alan Anderson","slug":"alan-anderson","description":" <p><b>Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9080"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;calculation-analysis&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118630693&quot;]}]\" id=\"du-slot-64ac475f1a605\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;calculation-analysis&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118630693&quot;]}]\" id=\"du-slot-64ac475f1aeae\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-09-22T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":146051},{"headers":{"creationTime":"2016-03-27T16:47:26+00:00","modifiedTime":"2023-07-06T13:25:46+00:00","timestamp":"2023-07-06T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226}],"title":"Bookkeeping & Accounting All-in-One For Dummies Cheat Sheet (UK Edition)","strippedTitle":"bookkeeping & accounting all-in-one for dummies cheat sheet (uk edition)","slug":"bookkeeping-accounting-all-in-one-for-dummies-cheat-sheet-uk-edition","canonicalUrl":"","seo":{"metaDescription":"Accounting can be overwhelming at times. This cheat sheet gives you some useful checklists, ratios and rules that you can use both in bookkeeping and accounting","noIndex":0,"noFollow":0},"content":"Accounting can be overwhelming at times. This cheat sheet gives you some useful checklists, ratios and rules that you can use both in bookkeeping and accounting roles. Keep them to hand.","description":"Accounting can be overwhelming at times. This cheat sheet gives you some useful checklists, ratios and rules that you can use both in bookkeeping and accounting roles. Keep them to hand.","blurb":"","authors":[{"authorId":8972,"name":"Jane Kelly","slug":"jane-e-kelly","description":"Jane Kelly is a chartered management accountant, bookkeeping teacher, and business author.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8972"}}],"primaryCategoryTaxonomy":{"categoryId":34226,"title":"Accounting","slug":"accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[],"fromCategory":[]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":0,"slug":null,"isbn":null,"categoryList":null,"amazon":null,"image":null,"title":null,"testBankPinActivationLink":null,"bookOutOfPrint":false,"authorsInfo":null,"authors":null,"_links":null},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-64a6d72ede1dc\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[null]}]\" id=\"du-slot-64a6d72edeac6\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":145055,"title":"Creating a Monthly Bookkeeping Checklist","slug":"creating-a-monthly-bookkeeping-checklist","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/145055"}},{"articleId":145054,"title":"Following the Golden Rules of Bookkeeping","slug":"following-the-golden-rules-of-bookkeeping","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/145054"}},{"articleId":145053,"title":"Remembering Important Ratios for Bookkeeping","slug":"remembering-important-ratios-for-bookkeeping","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/145053"}},{"articleId":145049,"title":"Classifying Costs within a Business for Bookkeeping","slug":"classifying-costs-within-a-business-for-bookkeeping","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/145049"}}],"content":[{"title":"Creating a Monthly Bookkeeping Checklist","thumb":null,"image":null,"content":"<p>Checklists are always useful when you’re a bookkeeper. They help to keep you on track for the day-to-day and month-to-month tasks that you need to carry out. Here is a list of tasks which you can adapt to create your own checklist.</p>\n<ul>\n<li>Enter sales invoices.</li>\n<li>Enter purchase invoices.</li>\n<li>Enter cheque payments.</li>\n<li>Enter bank receipts.</li>\n<li>Enter petty cash receipts.</li>\n<li>Reconcile bank accounts.</li>\n<li>Reconcile credit card accounts.</li>\n<li>Enter prepayments and accruals journals.</li>\n<li>Enter depreciation journals.</li>\n<li>Enter payroll journals (if required).</li>\n<li>Enter stock journals (if required).</li>\n<li>Run VAT return (if required).</li>\n<li>Run aged debtor and aged creditor reports.</li>\n<li>Run Profit and Loss statement.</li>\n<li>Run Balance Sheet.</li>\n<li>Check all reports for accuracy.</li>\n</ul>\n"},{"title":"Following the Golden Rules of Bookkeeping","thumb":null,"image":null,"content":"<p>Some people find double-entry bookkeeping a bit tricky to start with, but stick to these simple golden rules and you’ll never be stuck when you need to create a journal.</p>\n<ul>\n<li>To increase an asset, debit the asset account.</li>\n<li>To decrease an asset, credit the asset account.</li>\n<li>To increase a liability, credit the liability account.</li>\n<li>To decrease a liability, debit the liability account.</li>\n<li>To record an expense, debit the expense account.</li>\n<li>To reduce an expense, credit the expense account.</li>\n<li>To record income, credit the income account.</li>\n<li>To reduce income, debit the income account.</li>\n</ul>\n<p class=\"Remember\">Debit on the left, credit on the right.</p>\n"},{"title":"Remembering Important Ratios for Bookkeeping","thumb":null,"image":null,"content":"<p>For bookkeeping purposes, there may come a time when you need to see how a company is doing. If you need to check the financial health of a company, you can analyse the accounts by using some or all of the following ratios.</p>\n<ul>\n<li><b>Net profit ratio:</b> This indicates how much profit was earned for every £100 of sales revenue. The equation is as follows:\n<ul>\n<li>Net profit ÷ Sales revenue = Net profit ratio</li>\n</ul>\n<p>For example, a business earns £1.9 million net profit and has sales revenue of £52 million. The net profit ratio is 1.9 million divided by 52 million, which is £3.65 net profit for each £100 net profit.</li>\n<li><b>Return on equity:</b> Tells you how much profit a business earned in comparison to the book value of the shareholder’s equity. Here’s the maths:\n<ul>\n<li>Net profit ÷ Owners’ equity = Return on equity</li>\n</ul>\n<p>If the net profit is £1.9 million and the owners’ equity is £15.9 million then the return on equity is 0.119 (£1.9 million ÷ £15.9 million), or 11.9 per cent expressed as a percentage.</li>\n<li><b>Current ratio:</b> This ratio is a rough indicator as to whether the business has enough cash in hand (including the cash to be converted from stock and debtors) to pay off the liabilities within the next year. Here’s the equation:\n<ul>\n<li>Current assets ÷ Current liabilities = Current ratio</li>\n</ul>\n<p>Businesses are expected to maintain a ratio of 2:1, meaning they have twice as many assets as liabilities. As an example, if the business has £17.2 million in current assets and £7.9 million in current liabilities, the ratio would be £17.2 million divided by £7.9 million, which equals 2.2. The business wouldn’t need to worry because the financial position is fine.</li>\n</ul>\n"},{"title":"Classifying Costs within a Business for Bookkeeping","thumb":null,"image":null,"content":"<p>Accountants must be aware of the different types of costs. Many different cost types exist within businesses, particularly manufacturing businesses. Following, you’ll find a selection of costs that an accountant might look at and analyse, as part of their role.</p>\n<ul>\n<li><b>Fixed cost:</b> A cost that remains the same over a specified period, regardless of the level of production output; for example, rent.</li>\n<li><b>Variable cost:</b> A cost that varies depending on the level of sales or production output. For example, if you increase the number of books sold, the cost of paper and ink increases.</li>\n<li><b>Direct cost:</b> A cost that you can clearly attribute to either a product or service. For example, a direct cost in the book publishing industry is paper.</li>\n<li><b>Indirect cost:</b> A cost you can’t specifically attribute to a product or service. For example, in the book publishing industry the cost of heating the building where the books are produced is an indirect cost of producing the books. It’s a cost of doing business, but you can’t specifically allocate it to a product.</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2023-07-03T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":207557},{"headers":{"creationTime":"2016-03-26T08:13:24+00:00","modifiedTime":"2023-05-03T18:51:40+00:00","timestamp":"2023-05-03T21:01:03+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Calculation & Analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"},"slug":"calculation-analysis","categoryId":34229}],"title":"The Regression Equation in Business Statistics","strippedTitle":"the regression equation in business statistics","slug":"test-the-estimated-regression-equation-using-the-coefficient-of-determination-r2","canonicalUrl":"","seo":{"metaDescription":"You can check whether a regression equation makes sense by using the coefficient of determination, also known as R2 (R squared).","noIndex":0,"noFollow":0},"content":"After you estimate the population regression line, you can check whether the regression equation makes sense by using the coefficient of determination, also known as <i>R</i><sup>2</sup> (<i>R</i> squared). This is used as a measure of how well the regression equation actually describes the relationship between the dependent variable (<i>Y</i>) and the independent variable (<i>X</i>).\r\n\r\nIt may be the case that there is no real relationship between the dependent and independent variables; simple regression generates results even if this is the case. It is, therefore, important to subject the regression results to some key tests that enable you to determine if the results are reliable.\r\n\r\nThe coefficient of determination, <i>R</i><sup>2</sup>, is a statistical measure that shows the proportion of <i>variation</i> explained by the estimated regression line. Variation refers to the sum of the squared differences between the values of <i>Y</i> and the mean value of <i>Y</i>, expressed mathematically as\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460867.image0.png\" alt=\"image0.png\" width=\"91\" height=\"53\" />\r\n\r\n<i>R</i><sup>2</sup> always takes on a value between 0 and 1. The closer <i>R</i><sup>2</sup> is to 1, the better the estimated regression equation fits or explains the relationship between <i>X</i> and <i>Y</i>.\r\n\r\nThe expression\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460868.image1.png\" alt=\"image1.png\" width=\"91\" height=\"53\" />\r\n\r\nis also known as the <i>total sum of squares</i> (TSS).\r\n\r\nThis sum can be divided into the following two categories:\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Explained sum of squares (ESS):</b> Also known as the <i>explained variation</i>, the ESS is the portion of total variation that measures how well the regression equation explains the relationship between <i>X</i> and <i>Y</i>.</p>\r\n<p class=\"child-para\">You compute the ESS with the formula</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460869.image2.png\" alt=\"image2.png\" width=\"143\" height=\"53\" /></li>\r\n \t<li>\r\n<p class=\"first-para\"><b>Residual sum of squares (RSS):</b> This expression is also known as <i>unexplained variation</i> and is the portion of total variation that measures discrepancies (errors) between the actual values of <i>Y</i> and those estimated by the regression equation.</p>\r\n<p class=\"child-para\">You compute the RSS with the formula</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460870.image3.png\" alt=\"image3.png\" width=\"147\" height=\"53\" /></li>\r\n</ul>\r\nThe smaller the value of RSS relative to ESS, the better the regression line fits or explains the relationship between the dependent and independent variable.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Total sum of squares (TSS):</b></p>\r\n<p class=\"child-para\">The sum of RSS and ESS equals TSS.</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460871.image4.png\" alt=\"image4.png\" width=\"297\" height=\"53\" />\r\n<p class=\"child-para\"><i>R</i><sup>2</sup> is the ratio of explained sum of squares (ESS) to total sum of squares (TSS):</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460872.image5.png\" alt=\"image5.png\" width=\"83\" height=\"47\" />\r\n<p class=\"child-para\">You can also use this formula:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460873.image6.png\" alt=\"image6.png\" width=\"105\" height=\"47\" />\r\n<p class=\"child-para\">Based on the definition of <i>R</i><sup>2</sup>, its value can never be negative. Also, <i>R</i><sup>2</sup> can't be greater than 1, so</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460874.image7.png\" alt=\"image7.png\" width=\"77\" height=\"24\" /></li>\r\n</ul>\r\nWith simple regression analysis, <i>R</i><sup>2</sup> equals the square of the correlation between <i>X</i> and <i>Y</i>.\r\n\r\nThe coefficient of determination is used as a measure of how well a regression line explains the relationship between a dependent variable (<i>Y</i>) and an independent variable (<i>X</i>). The closer the coefficient of determination is to 1, the more closely the regression line fits the sample data.\r\n\r\nThe coefficient of determination is computed from the sums of squares. These calculations are summarized in the following table.\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460875.image8.png\" alt=\"image8.png\" width=\"447\" height=\"319\" />\r\n\r\nTo compute ESS, you subtract the mean value of <i>Y</i> from each of the estimated values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460876.image9.png\" alt=\"image9.png\" width=\"205\" height=\"53\" />\r\n\r\nTo compute RSS, you subtract the estimated value of <i>Y</i> from each of the actual values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460877.image10.png\" alt=\"image10.png\" width=\"197\" height=\"53\" />\r\n\r\nTo compute TSS, you subtract the mean value of <i>Y</i> from each of the actual values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460878.image11.png\" alt=\"image11.png\" width=\"191\" height=\"53\" />\r\n\r\nAlternatively, you can simply add ESS and RSS to obtain TSS:\r\n\r\nTSS = ESS + RSS = 0.54 + 0.14 = 0.68\r\n\r\nThe coefficient of determination (<i>R</i><sup>2</sup>) is the ratio of ESS to TSS:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460879.image12.png\" alt=\"image12.png\" width=\"204\" height=\"47\" />\r\n\r\nThis shows that 79.41 percent of the variation in <i>Y</i> is explained by variation in <i>X</i>. Because the coefficient of determination can't exceed 100 percent, a value of 79.41 indicates that the regression line closely matches the actual sample data.","description":"After you estimate the population regression line, you can check whether the regression equation makes sense by using the coefficient of determination, also known as <i>R</i><sup>2</sup> (<i>R</i> squared). This is used as a measure of how well the regression equation actually describes the relationship between the dependent variable (<i>Y</i>) and the independent variable (<i>X</i>).\r\n\r\nIt may be the case that there is no real relationship between the dependent and independent variables; simple regression generates results even if this is the case. It is, therefore, important to subject the regression results to some key tests that enable you to determine if the results are reliable.\r\n\r\nThe coefficient of determination, <i>R</i><sup>2</sup>, is a statistical measure that shows the proportion of <i>variation</i> explained by the estimated regression line. Variation refers to the sum of the squared differences between the values of <i>Y</i> and the mean value of <i>Y</i>, expressed mathematically as\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460867.image0.png\" alt=\"image0.png\" width=\"91\" height=\"53\" />\r\n\r\n<i>R</i><sup>2</sup> always takes on a value between 0 and 1. The closer <i>R</i><sup>2</sup> is to 1, the better the estimated regression equation fits or explains the relationship between <i>X</i> and <i>Y</i>.\r\n\r\nThe expression\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460868.image1.png\" alt=\"image1.png\" width=\"91\" height=\"53\" />\r\n\r\nis also known as the <i>total sum of squares</i> (TSS).\r\n\r\nThis sum can be divided into the following two categories:\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Explained sum of squares (ESS):</b> Also known as the <i>explained variation</i>, the ESS is the portion of total variation that measures how well the regression equation explains the relationship between <i>X</i> and <i>Y</i>.</p>\r\n<p class=\"child-para\">You compute the ESS with the formula</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460869.image2.png\" alt=\"image2.png\" width=\"143\" height=\"53\" /></li>\r\n \t<li>\r\n<p class=\"first-para\"><b>Residual sum of squares (RSS):</b> This expression is also known as <i>unexplained variation</i> and is the portion of total variation that measures discrepancies (errors) between the actual values of <i>Y</i> and those estimated by the regression equation.</p>\r\n<p class=\"child-para\">You compute the RSS with the formula</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460870.image3.png\" alt=\"image3.png\" width=\"147\" height=\"53\" /></li>\r\n</ul>\r\nThe smaller the value of RSS relative to ESS, the better the regression line fits or explains the relationship between the dependent and independent variable.\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\"><b>Total sum of squares (TSS):</b></p>\r\n<p class=\"child-para\">The sum of RSS and ESS equals TSS.</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460871.image4.png\" alt=\"image4.png\" width=\"297\" height=\"53\" />\r\n<p class=\"child-para\"><i>R</i><sup>2</sup> is the ratio of explained sum of squares (ESS) to total sum of squares (TSS):</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460872.image5.png\" alt=\"image5.png\" width=\"83\" height=\"47\" />\r\n<p class=\"child-para\">You can also use this formula:</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460873.image6.png\" alt=\"image6.png\" width=\"105\" height=\"47\" />\r\n<p class=\"child-para\">Based on the definition of <i>R</i><sup>2</sup>, its value can never be negative. Also, <i>R</i><sup>2</sup> can't be greater than 1, so</p>\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460874.image7.png\" alt=\"image7.png\" width=\"77\" height=\"24\" /></li>\r\n</ul>\r\nWith simple regression analysis, <i>R</i><sup>2</sup> equals the square of the correlation between <i>X</i> and <i>Y</i>.\r\n\r\nThe coefficient of determination is used as a measure of how well a regression line explains the relationship between a dependent variable (<i>Y</i>) and an independent variable (<i>X</i>). The closer the coefficient of determination is to 1, the more closely the regression line fits the sample data.\r\n\r\nThe coefficient of determination is computed from the sums of squares. These calculations are summarized in the following table.\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460875.image8.png\" alt=\"image8.png\" width=\"447\" height=\"319\" />\r\n\r\nTo compute ESS, you subtract the mean value of <i>Y</i> from each of the estimated values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460876.image9.png\" alt=\"image9.png\" width=\"205\" height=\"53\" />\r\n\r\nTo compute RSS, you subtract the estimated value of <i>Y</i> from each of the actual values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460877.image10.png\" alt=\"image10.png\" width=\"197\" height=\"53\" />\r\n\r\nTo compute TSS, you subtract the mean value of <i>Y</i> from each of the actual values of <i>Y</i>; each term is squared and then added together:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460878.image11.png\" alt=\"image11.png\" width=\"191\" height=\"53\" />\r\n\r\nAlternatively, you can simply add ESS and RSS to obtain TSS:\r\n\r\nTSS = ESS + RSS = 0.54 + 0.14 = 0.68\r\n\r\nThe coefficient of determination (<i>R</i><sup>2</sup>) is the ratio of ESS to TSS:\r\n\r\n<img src=\"https://www.dummies.com/wp-content/uploads/460879.image12.png\" alt=\"image12.png\" width=\"204\" height=\"47\" />\r\n\r\nThis shows that 79.41 percent of the variation in <i>Y</i> is explained by variation in <i>X</i>. Because the coefficient of determination can't exceed 100 percent, a value of 79.41 indicates that the regression line closely matches the actual sample data.","blurb":"","authors":[{"authorId":9080,"name":"Alan Anderson","slug":"alan-anderson","description":" <p><b>Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9080"}}],"primaryCategoryTaxonomy":{"categoryId":34229,"title":"Calculation & Analysis","slug":"calculation-analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":207822,"title":"Business Statistics For Dummies Cheat Sheet","slug":"business-statistics-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/207822"}},{"articleId":162083,"title":"How Businesses Use Regression Analysis Statistics","slug":"how-businesses-use-regression-analysis-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162083"}},{"articleId":162074,"title":"Random Variables and Probability Distributions in Business Statistics","slug":"random-variables-and-probability-distributions-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162074"}},{"articleId":162073,"title":"Explore Hypothesis Testing in Business Statistics","slug":"explore-hypothesis-testing-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162073"}},{"articleId":162066,"title":"3 Ways to Describe Populations and Samples in Business Statistics","slug":"3-ways-to-describe-populations-and-samples-in-business-statistics","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/162066"}}],"fromCategory":[{"articleId":254831,"title":"Important Terms in Game Theory","slug":"important-terms-game-theory","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254831"}},{"articleId":254827,"title":"How to Create a Matrix from a Transition Diagram","slug":"create-matrix-transition-diagram","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254827"}},{"articleId":254821,"title":"How to Use Transition Matrices","slug":"use-transition-matrices","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254821"}},{"articleId":254814,"title":"How to Analyze Arguments with Euler Diagrams","slug":"analyze-arguments-euler-diagrams","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254814"}},{"articleId":254811,"title":"How to Analyze Compound Statements","slug":"analyze-compound-statements","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254811"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282040,"slug":"business-statistics-for-dummies","isbn":"9781118630693","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"amazon":{"default":"https://www.amazon.com/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1118630696-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1118630696/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/business-statistics-for-dummies-cover-9781118630693-203x255.jpg","width":203,"height":255},"title":"Business Statistics For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9080\">Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","authors":[{"authorId":9080,"name":"Alan Anderson","slug":"alan-anderson","description":" <p><b>Alan Anderson</b>, PhD is a teacher of finance, economics, statistics, and math at Fordham and Fairfield universities as well as at Manhattanville and Purchase colleges. Outside of the academic environment he has many years of experience working as an economist, risk manager, and fixed income analyst. Alan received his PhD in economics from Fordham University, and an M.S. in financial engineering from Polytechnic University.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9080"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;calculation-analysis&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118630693&quot;]}]\" id=\"du-slot-6452cb8f3b35c\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;calculation-analysis&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781118630693&quot;]}]\" id=\"du-slot-6452cb8f3ba30\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-10-06T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":145936},{"headers":{"creationTime":"2016-03-27T16:46:41+00:00","modifiedTime":"2023-04-17T14:30:14+00:00","timestamp":"2023-04-17T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Bookkeeping","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34228"},"slug":"bookkeeping","categoryId":34228}],"title":"Bookkeeping For Dummies Cheat Sheet (UK Edition)","strippedTitle":"bookkeeping for dummies cheat sheet (uk edition)","slug":"bookkeeping-for-dummies-cheat-sheet-uk-edition","canonicalUrl":"","seo":{"metaDescription":"There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get you","noIndex":0,"noFollow":0},"content":"There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get your head around the trickier bits of keeping the books and to know the process in order to better check and control those incomings and outgoings.","description":"There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get your head around the trickier bits of keeping the books and to know the process in order to better check and control those incomings and outgoings.","blurb":"","authors":[{"authorId":8972,"name":"Jane Kelly","slug":"jane-e-kelly","description":"Jane Kelly is a chartered management accountant, bookkeeping teacher, and business author.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8972"}},{"authorId":8973,"name":"Paul Barrow","slug":"paul-barrow","description":" <p><b>Jane Kelly,</b> a Chartered Management Accountant and author of <i>Bookkeeping &#38; Accounting All&#45;In&#45;One For Dummies,</i> teaches bookkeeping courses for small businesses. <b>Paul Barrow</b> is a Chartered Accountant with more than 20 years&#39; consulting, training and writing experience. <b>Lita Epstein</b> designs and teaches online investing, finance and tax courses. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8973"}},{"authorId":8974,"name":"Lita Epstein","slug":"lita-epstein","description":" <p><b>Lita Epstein, MBA,</b> is the author of more than 35 books, including <i>Bookkeeping For Dummies</i> and <i>Reading Financial Reports For Dummies</i>.</p> <p><b>Grayson D. Roze</b> has worked in the financial services industry for StockCharts.com since 2012. He now serves as a business manager at the company. He is the author of <i>Tensile Trading: The 10 Essential Stages of Stock Market Mastery</i>.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8974"}}],"primaryCategoryTaxonomy":{"categoryId":34228,"title":"Bookkeeping","slug":"bookkeeping","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34228"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":275290,"title":"Break-Even Point Formula for Businesses","slug":"break-even-point-formula-for-businesses","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/275290"}},{"articleId":265567,"title":"Accounting and Financial Reporting Standards","slug":"accounting-and-financial-reporting-standards","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/265567"}},{"articleId":265558,"title":"Internal Profit Reporting","slug":"internal-profit-reporting","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/265558"}},{"articleId":209083,"title":"Nonprofit Bookkeeping & Accounting For Dummies Cheat Sheet","slug":"nonprofit-bookkeeping-accounting-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/209083"}},{"articleId":208436,"title":"Bookkeeping For Dummies Cheat Sheet","slug":"bookkeeping-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","bookkeeping"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/208436"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":298353,"slug":"bookkeeping-for-dummies-4th-uk-edition","isbn":" 9781119189138","categoryList":["business-careers-money","business","accounting","bookkeeping"],"amazon":{"default":"https://www.amazon.com/gp/product/1119189136/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119189136/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119189136-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119189136/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119189136/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/bookkeeping-for-dummies-4th-uk-edition-cover-9781119189138-203x255.jpg","width":203,"height":255},"title":"Bookkeeping For Dummies, 4th UK Edition","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><b data-author-id=\"35157\">Jane Kelly</b>, ACMA is a Chartered Management Accountant and Sage trainer. She writes the Sage Made Simple blog, which offers support for businesses using Sage accounting packages.</p> <p><b>Jane Kelly,</b> a Chartered Management Accountant and author of <i>Bookkeeping &#38; Accounting All&#45;In&#45;One For Dummies,</i> teaches bookkeeping courses for small businesses. <b><b data-author-id=\"8973\">Paul Barrow</b></b> is a Chartered Accountant with more than 20 years&#39; consulting, training and writing experience. <b>Lita Epstein</b> designs and teaches online investing, finance and tax courses. <p><b><b data-author-id=\"8974\">Lita Epstein</b>, MBA,</b> is the author of more than 35 books, including <i>Bookkeeping For Dummies</i> and <i>Reading Financial Reports For Dummies</i>.</p> <p><b>Grayson D. Roze</b> has worked in the financial services industry for StockCharts.com since 2012. He now serves as a business manager at the company. He is the author of <i>Tensile Trading: The 10 Essential Stages of Stock Market Mastery</i>.</p>","authors":[{"authorId":35157,"name":"Jane Kelly","slug":"jane-kelly","description":" <p>Jane Kelly, ACMA is a Chartered Management Accountant and Sage trainer. She writes the Sage Made Simple blog, which offers support for businesses using Sage accounting packages.</p> ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35157"}},{"authorId":8973,"name":"Paul Barrow","slug":"paul-barrow","description":" <p><b>Jane Kelly,</b> a Chartered Management Accountant and author of <i>Bookkeeping &#38; Accounting All&#45;In&#45;One For Dummies,</i> teaches bookkeeping courses for small businesses. <b>Paul Barrow</b> is a Chartered Accountant with more than 20 years&#39; consulting, training and writing experience. <b>Lita Epstein</b> designs and teaches online investing, finance and tax courses. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8973"}},{"authorId":8974,"name":"Lita Epstein","slug":"lita-epstein","description":" <p><b>Lita Epstein, MBA,</b> is the author of more than 35 books, including <i>Bookkeeping For Dummies</i> and <i>Reading Financial Reports For Dummies</i>.</p> <p><b>Grayson D. Roze</b> has worked in the financial services industry for StockCharts.com since 2012. He now serves as a business manager at the company. He is the author of <i>Tensile Trading: The 10 Essential Stages of Stock Market Mastery</i>.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8974"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;bookkeeping&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot; 9781119189138&quot;]}]\" id=\"du-slot-643d5f2ed9425\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;bookkeeping&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot; 9781119189138&quot;]}]\" id=\"du-slot-643d5f2eda4e8\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":138457,"title":"The Flow of Credits and Debits in Double-Entry Bookkeeping","slug":"the-flow-of-credits-and-debits-in-double-entry-bookkeeping","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138457"}},{"articleId":138452,"title":"Building Blocks of a Bookkeeping System","slug":"building-blocks-of-a-bookkeeping-system","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138452"}},{"articleId":138455,"title":"Key Steps to Keeping the Books","slug":"key-steps-to-keeping-the-books","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138455"}},{"articleId":138453,"title":"Tips for Controlling Your Business Cash","slug":"tips-for-controlling-your-business-cash","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138453"}},{"articleId":138456,"title":"Getting to Grips with Bookkeeping: The Current Ratio","slug":"getting-to-grips-with-bookkeeping-the-current-ratio","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138456"}},{"articleId":138454,"title":"Stricter Bookkeeping Methods: The Acid Test Ratio","slug":"stricter-bookkeeping-methods-the-acid-test-ratio","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/138454"}}],"content":[{"title":"Double-entry bookkeeping","thumb":null,"image":null,"content":"<p>In double-entry bookkeeping you enter all transactions in the books <i>twice:</i> once as a debit and once as a credit. To keep your debits and credits straight follow this table which shows you how both impact on your various business accounts.</p>\n<p>Put a copy of this up by your desk to check back to for quick reference:</p>\n<table>\n<tbody>\n<tr>\n<th>Account Type</th>\n<th>Debits</th>\n<th>Credits</th>\n</tr>\n<tr>\n<td>Assets</td>\n<td>Increase</td>\n<td>Decrease</td>\n</tr>\n<tr>\n<td>Liabilities</td>\n<td>Decrease</td>\n<td>Increase</td>\n</tr>\n<tr>\n<td>Income</td>\n<td>Decrease</td>\n<td>Increase</td>\n</tr>\n<tr>\n<td>Expenses<br />\n_______________</td>\n<td>Increase<br />\n_______________</td>\n<td>Decrease<br />\n_______________</td>\n</tr>\n<tr>\n<td>Capital</td>\n<td>Decrease</td>\n<td>Increase</td>\n</tr>\n</tbody>\n</table>\n"},{"title":"Building blocks of a bookkeeping system","thumb":null,"image":null,"content":"<p>At the root of any system you’ll find the essential elements that form the basis of that system. In the world of bookkeeping, the three most fundamental building blocks to any bookkeeping system are:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Chart of Accounts:</b> Lists all accounts in the books and is the road map of a business’s financial transactions</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Journals:</b> Place in the books where transactions are first entered</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Nominal Ledger:</b> The book that summarises all a business’s account transactions</p>\n</li>\n</ul>\n"},{"title":"Key steps to keeping the books","thumb":null,"image":null,"content":"<p>Bookkeeping involves following a set procedure of major stages. Take a look at these steps that detail the processes involved – from start to finish in the bookkeeping sequence:</p>\n<ol class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Transactions:</b> The purchases or sales of items start the process of bookkeeping, but there are other financial transactions such as nominal journals that will be posted too.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Reconciliations:</b> Once all transactions are posted, you need to reconcile each of the bank accounts including credit cards.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Trial balance:</b> A review of the Trial Balance will discover any anomalies or adjustments that exist or need to be made in the Nominal Ledger.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Adjusting journal entries:</b> Once you have reviewed the Trial Balance, you may need to make correcting entries to the Nominal Ledger by posting journals. There may also be standard journals such as depreciation and stock journals that need to be completed.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Financial statements:</b> Prepare the balance sheet and Profit and Loss Account using the corrected account balances.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Closing:</b> Close the books for the revenue and expense accounts, and start the entire cycle again with zero balances in both accounts.</p>\n</li>\n</ol>\n"},{"title":"Tips for controlling your business cash","thumb":null,"image":null,"content":"<p>If keeping the books is your responsibility, the good news is that you can implement the following function separations to control your business cash much more easily:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Separate cash handlers.</b> Be sure that the person who accepts cash isn’t also recording the transaction.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Separate authorization responsibilities.</b> Be sure that the person who authorizes a payment isn’t also signing the cheque or dispersing the cash.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Separate the duties of your bookkeeping function to ensure a good system of checks and balances.</b> Don’t put too much trust in one person — unless it’s yourself.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Separate operational responsibility (actual day-to-day transactions) from record-keeping responsibility (entering transactions in the books).</b></p>\n</li>\n</ul>\n"},{"title":"The current ratio","thumb":null,"image":null,"content":"<p>The current ratio compares your current assets to your current liabilities, providing a quick glimpse of your business’s ability to pay its bills. The formula for calculating the current ratio is</p>\n<blockquote><p>Current assets ÷ Current liabilities = Current ratio</p></blockquote>\n<p>The following is an example of a current ratio calculation:</p>\n<blockquote><p>£5,200 ÷ £2,200 = 2.36 (current ratio)</p></blockquote>\n<p>Lenders usually look for current ratios of 1.2 to 2, so any bank would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because that indicates the business doesn’t have enough cash to pay its current bills. However, some business sectors have traditionally lower acceptable current ratio values, so find out about these before you leap to a judgement.</p>\n"},{"title":"The acid test ratio","thumb":null,"image":null,"content":"<p>Many lenders prefer the acid test ratio when deciding whether to give you a loan because of the test’s strictness. Stock isn’t included in calculating the ratio.</p>\n<p>To calculate the acid test ratio you must do a two-step process:</p>\n<p><b>Determine your quick assets.</b> Cash + Debtors (Accounts Receivable) + Marketable securities = Quick assets</p>\n<p><b>Calculate your quick ratio.</b> Quick assets ÷ Current liabilities = Quick ratio</p>\n<p>The following is an example of an acid test ratio calculation:</p>\n<blockquote><p>£2,000 + £1,000 + £1,000 = £4,000 (quick assets)</p></blockquote>\n<blockquote><p>£4,000 ÷ £2,200 = 1.8 (acid test ratio)</p></blockquote>\n<p>Lenders consider a business with an acid test ratio around 1 to be in good condition. An acid test ratio less than 1 indicates that the business may have some difficulty settling its day-to-day liabilities.</p>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2023-04-17T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":207392},{"headers":{"creationTime":"2016-03-26T13:14:25+00:00","modifiedTime":"2022-09-15T15:39:27+00:00","timestamp":"2022-09-15T18:01:20+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Audits","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34227"},"slug":"audits","categoryId":34227}],"title":"13 Ways to Spot Fraud in Business Financial Statements","strippedTitle":"13 ways to spot fraud in business financial statements","slug":"13-ways-to-spot-fraud-in-business-financial-statements","canonicalUrl":"","seo":{"metaDescription":"These 13 scenarios, including inventory growth that doesn't match sales growth, are indications of business financial fraud.","noIndex":0,"noFollow":0},"content":"Financial statement fraud, commonly referred to as \"cooking the books,\" involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices.\r\n\r\nThese red flags include the following:\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\">Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Unusually high revenues and low expenses at period end that can't be attributed to seasonality</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Growth in inventory that doesn't match growth in sales</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Improper capitalization of expenses in excess of industry norms</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Reported earnings that are positive and growing but operating cash flow that's declining</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Growth in revenues that's far greater than growth in other companies in the same industry or peer group</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Gross margin or operating margins out of line with peer companies</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Unusual increases in the book value of assets, such as inventory and receivables</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Invoices that go unrecorded in the company's financial books</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Loans to executives or other related parties that are written off</p>\r\n</li>\r\n</ul>\r\n<p class=\"Warning\">A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.</p>","description":"Financial statement fraud, commonly referred to as \"cooking the books,\" involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices.\r\n\r\nThese red flags include the following:\r\n<ul class=\"level-one\">\r\n \t<li>\r\n<p class=\"first-para\">Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Unusually high revenues and low expenses at period end that can't be attributed to seasonality</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Growth in inventory that doesn't match growth in sales</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Improper capitalization of expenses in excess of industry norms</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Reported earnings that are positive and growing but operating cash flow that's declining</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Growth in revenues that's far greater than growth in other companies in the same industry or peer group</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Gross margin or operating margins out of line with peer companies</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Unusual increases in the book value of assets, such as inventory and receivables</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Invoices that go unrecorded in the company's financial books</p>\r\n</li>\r\n \t<li>\r\n<p class=\"first-para\">Loans to executives or other related parties that are written off</p>\r\n</li>\r\n</ul>\r\n<p class=\"Warning\">A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.</p>","blurb":"","authors":[{"authorId":9050,"name":"Kenneth Boyd","slug":"kenneth-boyd","description":"Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (<a href=\"https://www.accountingaccidentally.com/\" target=\"_blank\" rel=\"noopener\">www.accountingaccidentally.com</a>), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (<a href=\"https://www.youtube.com/user/kenboydstl\" target=\"_blank\" rel=\"noopener\">kenboydstl</a>) has hundreds of videos on accounting and finance.\r\n\r\nIn recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9050"}},{"authorId":8974,"name":"Lita Epstein","slug":"lita-epstein","description":" <b>Lita Epstein,</b> who earned her MBA from Emory University&#8217;s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.<br /> While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.<br /> She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She&#8217;s written over 20 books including <i>Reading Financial Reports For Dummies</i> and <i>Trading For Dummies.<br /> </i>Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8974"}},{"authorId":9468,"name":"Mark P. Holtzman","slug":"mark-p-holtzman","description":" <p><b>Mark P. Holtzman, PhD, CPA</b>, is Chair of the Department of Accounting and Taxation at Seton Hall University. He has taught accounting at the college level for 17 years and runs the Accountinator website at www.accountinator.com, which gives practical accounting advice to entrepreneurs.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9468"}},{"authorId":9469,"name":"Frimette Kass-Shraibman","slug":"frimette-kass-shraibman","description":" <p><b>Frimette Kass&#45;Shraibman</b> is Associate Professor of Accounting at Brooklyn College &#151; CUNY. <b>Vijay S. Sampath</b> is Managing Director in the Forensic and Litigation Consulting business segment of FTI Consulting, Inc. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9469"}},{"authorId":9470,"name":"Maire Loughran","slug":"maire-loughran","description":" <b>Maire Loughran</b> is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9470"}},{"authorId":9471,"name":"Vijay S. Sampath","slug":"vijay-s-sampath","description":" <p><b>Frimette Kass&#45;Shraibman</b> is Associate Professor of Accounting at Brooklyn College &#151; CUNY. <b>Vijay S. Sampath</b> is Managing Director in the Forensic and Litigation Consulting business segment of FTI Consulting, Inc. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9471"}},{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9472"}},{"authorId":9473,"name":"Tage C. Tracy","slug":"tage-c-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9473"}},{"authorId":9474,"name":"Jill Gilbert Welytok","slug":"jill-gilbert-welytok","description":" <b>Jill Gilbert Welytok, JD, CPA, LLM,</b> practices in the areas of corporate law, nonprofit law, and intellectual property. She is the founder of Absolute Technology Law Group, LLC (www.abtechlaw.com). She went to law school at DePaul University in Chicago, where she was on the Law Review, and picked up a Masters Degree in Computer Science from Marquette University in Wisconsin where she now lives. Ms. Welytok also has an LLM in Taxation from DePaul. She was formerly a tax consultant with the predecessor firm to Ernst &amp; Young. She frequently speaks on nonprofit, corporate governance&#8211;taxation issues and will probably come to speak to your company or organization if you invite her. You may e-mail her with questions you have about Sarbanes-Oxley or anything else in this book at [email protected]. You can find updates to this book and ongoing information about SOX developments at the author&#8217;s website located at www.abtechlaw.com. <p><b>Daniel S. Welytok, JD, LLM,</b> is a partner in the business practice group of Whyte Hirschboeck Dudek S.C., where he concentrates in the areas of taxation and business law. Dan advises clients on strategic planning, federal and state tax issues, transactional matters, and employee benefits. He represents clients before the IRS and state taxing authorities concerning audits, tax controversies, and offers in compromise. He has served in various leadership roles in the American Bar Association and as Great Lakes Area liaison with the IRS. He can be reached at [email protected].</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9474"}}],"primaryCategoryTaxonomy":{"categoryId":34227,"title":"Audits","slug":"audits","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34227"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":209222,"title":"Sarbanes-Oxley For Dummies Cheat Sheet","slug":"sarbanes-oxley-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","audits"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/209222"}},{"articleId":209016,"title":"Auditing For Dummies Cheat 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years","lifeExpectancySetFrom":"2022-09-15T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":156777},{"headers":{"creationTime":"2016-03-27T16:56:22+00:00","modifiedTime":"2022-09-02T13:54:11+00:00","timestamp":"2022-09-14T18:20:01+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"Accounting Workbook For Dummies Cheat 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Correctly preparing financial statements, financial analyses, and accounting reports involves knowing all the financial data and information that needs to appear in these items.\r\n\r\nMaking a profit helps keep you in business, while maintaining a strong balance sheet ensures you can stay in business. So, make sure you understand the financial statements, record adjustments if needed, and follow some basic rules for presenting accounting information to your business’s managers, owners, investors, and creditors.","description":"As a business manager or owner, taking care of your company’s accounting needs is a top priority. Correctly preparing financial statements, financial analyses, and accounting reports involves knowing all the financial data and information that needs to appear in these items.\r\n\r\nMaking a profit helps keep you in business, while maintaining a strong balance sheet ensures you can stay in business. So, make sure you understand the financial statements, record adjustments if needed, and follow some basic rules for presenting accounting information to your business’s managers, owners, investors, and creditors.","blurb":"","authors":[{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. 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Tracy</b></b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies.</p>","authors":[{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9472"}},{"authorId":9473,"name":"Tage C. Tracy","slug":"tage-c-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9473"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119897637&quot;]}]\" id=\"du-slot-63221b5116c3d\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119897637&quot;]}]\" id=\"du-slot-63221b511762b\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":192701,"title":"Formulas and Functions for Financial Statements","slug":"formulas-and-functions-for-financial-statements","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192701"}},{"articleId":192700,"title":"Making Accounting Adjustments to Reach Profit Potential","slug":"making-accounting-adjustments-to-reach-profit-potential","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/192700"}}],"content":[{"title":"Formulas and functions for financial statements","thumb":null,"image":null,"content":"<p>As the accounting controller, you’re in command of your business’s accounting needs, so you need a strong understanding of the ins and outs of financial statements, including what goes on them and in what order.</p>\n<p>If you don’t prepare them correctly, they won’t reflect a true picture of your business’s financial status. Keep the following important rules and points in mind as you prepare and use your business’s financial statements.</p>\n<h2>Accounting equation</h2>\n<p>Assets = Liabilities + Owners’ Equity</p>\n<p>Liabilities and owners’ equity are the two basic types of claims on the assets of an entity. The two-sided nature of the accounting equation is the basis for double entry accounting that records both sides of the entity’s transactions — what is received and what is given in the economic exchange.</p>\n<h3>Financial effects of revenues and expenses</h3>\n<p>Revenue = Asset increase (debit) or Liability decrease (debit)<br />\nExpense = Asset decrease (credit) or Liability increase (credit)</p>\n<h3>Connections between income statement and balance sheet accounts</h3>\n<p>Sales revenue → Cash and Accounts receivable</p>\n<p>Cost of goods sold expense ← Inventory</p>\n<p>Operating expenses → Cash</p>\n<p>Operating expenses ← Prepaid expenses</p>\n<p>Operating expenses → Accounts payable</p>\n<p>Operating expenses → Accrued expenses payable</p>\n<p>Depreciation expense ← Fixed assets</p>\n<p>Interest expense → Accrued expenses payable</p>\n<p>Income tax expense → Accrued expenses payable</p>\n<h3>Bookkeeping cycle</h3>\n<p>In today’s economy and digital world, most of the bookkeeping cycle is handled by computers, which process vast amounts of digital data by capturing financial transactions and processing the information through original entries (in journals) and postings in the general ledger chart of accounts.</p>\n<p>As a refresher, the following bookkeeping cycle remains intact, whether the accounting function is fully automated or completed manually:</p>\n<blockquote><p>Financial Transactions (and certain other events) → Original Entries in Journals → Postings in General Ledger Chart of Accounts → End-of-Period Adjusting Entries → Preparation of Financial Statements, Tax Returns, and Internal Accounting Reports → Closing Entries at End of Year.</p></blockquote>\n"},{"title":"Making accounting adjustments to reach profit potential","thumb":null,"image":null,"content":"<p>Having your business reach a profit is important; if it doesn’t, sooner or later the business will fail. As a business manager, you want to keep a close eye on the financial statements and make the necessary (and legal) accounting adjustments to your financial records as needed.</p>\n<p>These tips can help you make the necessary adjustments to your business’s net income, eye two different profit analysis models, and communicate the reports to your managers.</p>\n<h3>Adjustments to net income for determining sash flow from operating activities</h3>\n<p>Accounts payable and accrued expenses payable are operating liabilities used in the profit-making process.</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\">Operating asset increases and operating liability decreases are negative adjustments (decrease cash flow from operating activities)</p>\n</li>\n<li>\n<p class=\"first-para\">Operating asset decreases and operating liability increases are positive adjustments (increase cash flow from operating activities)</p>\n</li>\n<li>\n<p class=\"first-para\">Depreciation and amortization expenses are positive adjustments (increase cash flow from operating activities)</p>\n</li>\n</ul>\n<p><b>Cardinal Rule:</b> Make all cash flow adjustments to net income; do not simply add back depreciation and amortization, which could be seriously misleading.</p>\n<h3>Two profit analysis models for management decision making</h3>\n<p><b>Contribution margin minus fixed expenses model</b><b>:</b></p>\n<table>\n<tbody>\n<tr>\n<td>Sales price</td>\n<td>$100</td>\n</tr>\n<tr>\n<td>Less variable costs per unit</td>\n<td><u>$60</u></td>\n</tr>\n<tr>\n<td>Equals contribution margin per unit</td>\n<td>$40</td>\n</tr>\n<tr>\n<td>Times annual sales volume, in units</td>\n<td><u>120,000</u></td>\n</tr>\n<tr>\n<td>Equals total contribution margin</td>\n<td>$4,800,000</td>\n</tr>\n<tr>\n<td>Less fixed operating expenses</td>\n<td><u>$3,000,000</u></td>\n</tr>\n<tr>\n<td>Equals operating profit</td>\n<td>$1,800,000</td>\n</tr>\n</tbody>\n</table>\n<p><b>Excess of sales over breakeven model:</b></p>\n<p>$3,000,000 annual fixed operating expenses ÷ $40 contribution margin per unit = 75,000 units breakeven point (volume)</p>\n<table>\n<tbody>\n<tr>\n<td>Annual sales volume for year, in units</td>\n<td>120,000</td>\n</tr>\n<tr>\n<td>Less annual breakeven volume, in units</td>\n<td><u>75,000</u></td>\n</tr>\n<tr>\n<td>Equals excess over breakeven, in units</td>\n<td>45,000</td>\n</tr>\n<tr>\n<td>Times contribution margin per unit</td>\n<td><u>$40</u></td>\n</tr>\n<tr>\n<td>Equals operating profit</td>\n<td>$1,800,000</td>\n</tr>\n</tbody>\n</table>\n<h3>Guidelines for internal accounting reports to managers</h3>\n<p>When you’re preparing financial information for your business’s managers, follow these tips:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\">Follow the organizational structure (responsibility accounting)</p>\n</li>\n<li>\n<p class=\"first-para\">Orient your report based on whether organization unit is a profit center or a cost center</p>\n</li>\n<li>\n<p class=\"first-para\">Know the mind of the manager</p>\n</li>\n<li>\n<p class=\"first-para\">Highlight significant factors and deemphasize non-significant factors</p>\n</li>\n<li>Keep in mind the acronym CART — always prepare <strong>C</strong>omplete, <strong>A</strong>ccurate, <strong>R</strong>eliable, and <strong>T</strong>imely financial reports, statements, and information</li>\n</ul>\n"},{"title":"Choosing an accounting method for your business","thumb":null,"image":null,"content":"<p>Different businesses make different accounting decisions. Some businesses choose conservative accounting methods, while others choose liberal accounting methods.</p>\n<p>Accounting is more than just reading the facts or interpreting the financial outcomes of business transactions. It also requires accountants to choose between alternative methods and why accounting being is as much of a form of art as science.</p>\n<p>Similar to the conservative states and liberal states addressed in politics, accounting has:</p>\n<ul>\n<li><strong>Conservative accounting methods:</strong> These tend to delay the recording of revenue and accelerate the recording of expenses. Profit is reported slowly and, generally, at lower levels in early reporting periods.</li>\n<li><strong>Liberal accounting methods:</strong> These tend to accelerate the recording of revenue and defer or delay the recording of expenses. Profit is reported quickly and, generally, at higher levels in early reporting periods.</li>\n</ul>\n<p>In general terms, conservative accounting methods are pessimistic, and liberal methods are optimistic. The choice of accounting method also affects the values reported for assets, liabilities, and owners’ equities in the balance sheet.</p>\n<p>Accounting methods must stay within the boundaries of Generally Accepted Accounting Principles (GAAP). A business can’t conjure up accounting methods out of thin air. GAAP isn’t a straitjacket; it leaves plenty of wiggle room. But the one fundamental constraint is that a business must stick with its accounting method once it makes a choice. If the business elects to change the accounting method, it must be fully and clearly disclosed.</p>\n<p>Consistency is the rule; the same accounting methods must be used year after year. The Internal Revenue Service allows businesses to change their accounting methods once in a while, but the justification has to be persuasive.</p>\n<p>A new business with no accounting history has to make accounting decisions, such as the following, for the first time:</p>\n<ul>\n<li>If the business sells products, it has to select which cost of goods sold expense method to use.</li>\n<li>If the business owns fixed assets, it has to select which depreciation method to use.</li>\n<li>If the business owns intangible assets, such as patents, it has to select an appropriate method to amortize the value of the intangible asset.</li>\n<li>If the business makes sales on credit, it has to decide which bad debts expense method to use.</li>\n<li>If the business offers a product warranty, it must establish a reasonable method to estimate future warranty claims for current products sold.</li>\n</ul>\n<p>The choices of accounting methods for these five expenses — cost of goods sold, depreciation, amortization, warranty, and bad debts — can make a sizable difference in the amount of profit or loss recorded for the year.</p>\n<p>Choosing conservative accounting methods for these three expenses can cause profit for the year to be lower by a relatively large percent compared with using liberal accounting methods for the expenses.</p>\n"},{"title":"Knowing your debits from your credits","thumb":null,"image":null,"content":"<p>Accountants and bookkeepers record transactions as debits and credits, while keeping the accounting equation constantly in balance. This process is called <a href=\"https://www.dummies.com/business/accounting/the-basics-of-double-entry-bookkeeping/\" target=\"_blank\" rel=\"noopener\"><em>double-entry bookkeeping</em></a>. Double-entry bookkeeping records both sides of a transaction — debits and credits — and the accounting equation remains in balance as transactions are recorded.</p>\n<p>For example, if a transaction decreases cash $25,000, then the other side of the transaction is a $25,000 increase in some other asset, or a $25,000 decrease in a liability, or a $25,000 increase in an expense (to cite three possibilities).</p>\n<p>The illustration below summarizes the basic rules for debits and credits. By long-standing convention, debits are shown on the left and credits on the right.</p>\n<p>An increase in a liability, owners’ equity, revenue, and income account is recorded as a credit, so the increase side is on the right. The recording of all transactions follows these rules for debits and credits:</p>\n<div class=\"figure-container\"><figure id=\"attachment_18207\" aria-labelledby=\"figcaption_attachment_18207\" class=\"wp-caption alignnone\" style=\"width: 545px\"><img loading=\"lazy\" class=\"size-full wp-image-18207\" src=\"https://www.dummies.com/wp-content/uploads/239192.image0.jpg\" alt=\"Rules for debits and credits.\" width=\"535\" height=\"187\" /><figcaption id=\"figcaption_attachment_18207\" class=\"wp-caption-text\">Rules for debits and credits.</figcaption></figure></div><div class=\"clearfix\"></div>\n<p>Notice the horizontal and vertical lines under the accounts in the illustration above. These lines form the letter T. Although the actual accounts maintained by a business don’t necessarily look like T accounts, they usually have one column for increases and another column for decreases. In other words, an account has a debit column and a credit column.</p>\n<p>Also, an account may have a running balance column to continuously keep track of the account’s balance. While T accounts represent an old school accounting concept (back in the days when accountants wore green eye shades and had no personalities), they do drive home a key concept in accounting related to ensuring debits and credits are properly recorded.</p>\n<p>Practically everyone has trouble with the rules of debits and credits. The rules aren’t very intuitive, but learning them is a rite of passage for bookkeepers and accountants. The only way to really understand the rules is to make accounting entries — over and over again. After a while, using the rules becomes like tying your shoes — you do it without even thinking about it.</p>\n"},{"title":"Classification of business transactions","thumb":null,"image":null,"content":"<p>In understanding accounting, you need to be very clear about which classification of business transaction you’re looking at. Almost all businesses are profit-motivated, so one basic type of transaction is obvious: profit-making transactions. In a nutshell, profit-making transactions consist of generating sales revenue and incurring business expenses.</p>\n<p>A business may have other income in addition to sales revenue, and it may record losses in addition to expenses. But the bread and butter profit-making activities of a business are generating sales and controlling expenses. The profit-making transactions of a business over a period of time are reported in its income statement.</p>\n<p>A business’s other transactions fall into three basic categories:</p>\n<ul>\n<li><strong>Set-up and follow-up transactions for sales and expenses: </strong>Includes collecting cash from customers after sales made on credit are recorded; the purchase of products (goods) that are held for some time before being sold, at which time the expense is recorded; and making cash payments for expenses some time after the expenses are recorded.</li>\n<li><strong>Investing activities (transactions):</strong> Includes the purchase, construction, and disposals of long-term operating assets such as buildings, machinery, equipment, and tools or investing in intangible assets, such as patents, or acquiring goodwill.</li>\n<li><strong>Financing activities (transactions):</strong> Includes borrowing money and repaying amounts borrowed; owners investing capital in the business and the business returning capital to them; and making cash distributions to owners based on the profit earned by the business.</li>\n</ul>\n<p>Investing and financing activities of a particular period are reported in that period’s statement of cash flows. In contrast, set-up and follow-up transactions for sales and expenses stay in the background, meaning that they are not reported in a financial statement. Nevertheless, these transactions are essential to the profit-making process.</p>\n<p>Consider, for instance, the purchase of products for inventory. As far as profit is concerned, nothing happens until the business makes a sale of that inventory and records the cost of goods sold expense against the revenue from the sale. Because the business needs to have the products available for sale, the purchase of inventory is the important first step, or set-up transaction.</p>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-02-28T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":209042},{"headers":{"creationTime":"2016-09-29T19:41:44+00:00","modifiedTime":"2022-08-19T17:07:05+00:00","timestamp":"2022-09-14T18:19:56+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"10 Tips for Reading a Financial Report","strippedTitle":"10 tips for reading a financial report","slug":"10-tips-reading-financial-report","canonicalUrl":"","seo":{"metaDescription":"Learn what to focus on in a business's financial report, including the relevant numbers, what parts to read, profit performance, and more.","noIndex":0,"noFollow":0},"content":"You can compare reading a business’s financial report with shucking an oyster: You have to know what you’re doing and work to get at the meat. You need a good reason to pry into a financial report. The main reason to become informed about the financial performance and condition of a business is <em>because you have a stake in the business.</em> The financial success or failure of the business makes a difference to you.\r\n<h2 id=\"tab1\" >Get in the right frame of mind</h2>\r\nYou don’t have to be a math wizard or rocket scientist to extract the essential points from a financial report. You can find the bottom line in the income statement and compare this profit number with other relevant numbers in the financial statements. You can read the amount of cash in the balance sheet. If the business has a zero or near-zero cash balance, you know that this is a serious — perhaps fatal — problem.\r\n\r\nGet in the right frame of mind. Don’t let a financial report bamboozle you. Locate the income statement, find bottom-line profit (or loss!), and get going. You can do it!\r\n<h2 id=\"tab2\" >Decide what to read</h2>\r\nSuppose you want more financial information than you can get in news articles. The annual financial reports of public companies contain lots of information: a letter from the chief executive, a highlights section, trend charts, financial statements, extensive footnotes to the financial statements, historical summaries, and a lot of propaganda. In contrast, the financial reports of most private companies are significantly smaller; they contain financial statements with footnotes and not much more.\r\n\r\nYou could read just the highlights section and let it go at that. This might do in a pinch. You should read the chief executive’s letter to shareowners as well. Ideally, the letter summarizes in an evenhanded and appropriately modest manner the main developments during the year. Be warned, however, that these letters from the top dog often are self-congratulatory and typically transfer blame for poor performance on factors beyond the control of the managers. Read them, but take these letters with a grain of salt.\r\n<p class=\"article-tips tip\">Many public businesses release a condensed summary version in place of their much longer and more detailed annual financial reports. The scaled-down, simplified, and shortened versions of annual financial reports are adequate for average stock investors. They aren’t adequate for serious investors and professional investment managers. These investors and money managers should read the full-fledged financial report of the business, and they perhaps should study the company’s annual 10-K report that is filed with the Securities and Exchange Commission (SEC).</p>\r\n\r\n<h2 id=\"tab3\" >Improve your accounting savvy</h2>\r\nFinancial statements — the income statement, balance sheet, and statement of cash flows — are the core of a financial report. To make sense of financial statements, you need at least a rudimentary understanding of financial statement accounting. You don’t have to be a CPA, but the accountants who prepare financial statements presume that you’re familiar with accounting terminology and financial reporting practices. If you’re an accounting illiterate, the financial statements probably look like a Sudoku puzzle. There’s no way around this demand on financial report readers. After all, accounting is the language of business.\r\n<h2 id=\"tab4\" >Judge profit performance</h2>\r\nA 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: <em>sales revenue.</em> Here are some questions to focus on:\r\n<ul>\r\n \t<li><strong>How does sales revenue in the most recent year compare with the previous year’s?</strong></li>\r\n \t<li><strong>What is the gross margin ratio of the business?</strong></li>\r\n \t<li><strong>Based on information from a company’s most recent income statement, how do gross margin and the company’s bottom line (net income, or net earnings) compare with its top line (sales revenue)?</strong></li>\r\n</ul>\r\nOne last point: Put a company’s profit performance in the context of general economic conditions.\r\n<h2 id=\"tab5\" >Test earnings per share (EPS) against change in bottom line</h2>\r\nAs you know, public companies report net income in their income statements. Below this total profit number for the period, public companies also report <a href=\"https://www.dummies.com/business/accounting/calculating-the-earnings-per-share-eps-ratio/\" target=\"_blank\" rel=\"noopener\">earnings per share</a> (EPS), which is the amount of bottom-line profit for each share of its stock. Strictly speaking, therefore, the bottom line of a public company is its EPS. Private companies don’t have to report EPS; however, the EPS for a private business is fairly easy to calculate: Divide its bottom-line net income by the number of ownership shares held by the equity investors in the company.\r\n\r\nThe market value of ownership shares of a public company depends mainly on its EPS. Individual investors obviously focus on EPS, which they know is the primary driver of the market value of their investment in the business. The book value per share of a private company is the closest proxy you have for the market value of its ownership shares. The higher the EPS, the higher the market value for a public company. And the higher the EPS, the higher the book value per share for a private company.\r\n\r\nNow, you would naturally think that if net income increases, say, 10 percent over last year, then EPS would increase 10 percent. Not so fast. EPS — the driver of market value and book value per share — may change more or less than 10 percent:\r\n<ul>\r\n \t<li>Less than 10 percent: The business may have issued additional stock shares during the year, or it may have issued additional management stock options that get counted in the number of shares used to calculate diluted EPS. The profit pie may have been cut up into a larger number of smaller pieces. How do you like that?</li>\r\n \t<li>More than the 10 percent: The business may have bought back some of its own shares, which decreases the number of shares used in calculating EPS. This could be a deliberate strategy for increasing EPS by a higher percent than the percent increase in net income.</li>\r\n</ul>\r\n<p class=\"article-tips tip\">Compare the percent increase/decrease in total bottom-line profit over last year with the corresponding percent increase/decrease in EPS. Why? Because the percent changes in EPS and profit can diverge. For a public company, use its diluted EPS if it’s reported. Otherwise, use its basic EPS.</p>\r\n\r\n<h2 id=\"tab6\" >Tackle unusual gains and losses</h2>\r\nMany income statements start out normally: sales revenue less the expenses of making sales and operating the business. But then there’s a jarring layer of <em>unusual gains and losses</em> on the way down to the final profit line. This could be the result of a flooded building or a lawsuit. What’s a financial statement reader to do when a business reports such unusual, nonrecurring gains and losses in its income statement?\r\n\r\nThere’s no easy answer to this question. You could blithely assume that these things happen to a business only once in a blue moon and should not disrupt the business’s ability to make profit on a sustainable basis. Think of this as the <em>earthquake mentality</em> approach: When there’s an earthquake, there’s a lot of damage, but most years have no serious tremors and go along as normal. Unusual gains and losses are supposed to be nonrecurring in nature and recorded infrequently. In actual practice, however, many businesses report these gains and losses on a regular and recurring basis — like having an earthquake every year or so.\r\n<h2 id=\"tab7\" >Check cash flow from profit</h2>\r\nThe objective of a business is not simply to make profit but to generate cash flow from making profit as quickly as possible. <a href=\"https://www.dummies.com/article/business-careers-money/business/accounting/general-accounting/the-relationship-between-cash-flow-and-profit-in-business-156778\" target=\"_blank\" rel=\"noopener\">Cash flow from making profit</a> is the most important stream of cash inflow to a business. A business could sell off some assets to generate cash, and it can borrow money or get shareowners to put more money in the business. But cash flow from making profit is the spigot that should always be turned on. A business needs this cash flow to make cash distributions from profit to shareowners, to maintain liquidity, and to supplement other sources of capital to grow the business.\r\n<p class=\"article-tips remember\">The income statement does not — this bears repeating, does not — report the cash inflows of sales and the cash outflows of expenses. Therefore, the bottom line of the income statement is not a cash flow number. The net cash flow from the profit-making activities of the business (its sales and expenses) is reported in the statement of cash flows. When you look there, you’ll undoubtedly discover that the cash flow from operating activities (the official term for cash flow from profit-making activities) is higher or lower than the bottom-line profit number in the income statement.</p>\r\n\r\n<h2 id=\"tab8\" >Look for signs of financial distress</h2>\r\nA business can build up a good sales volume and have very good profit margins, but if the company can’t pay its bills on time, its profit opportunities could go down the drain. <em>Solvency</em> refers to a business’s prospects of being able to meet its debt and other liability payment obligations on time, in full. <a href=\"https://www.dummies.com/business/start-a-business/business-solvency-measurements-tools/\" target=\"_blank\" rel=\"noopener\">Solvency analysis</a> looks for signs of financial distress that could cause serious disruptions in the business’s profit-making operations. Even if a business has a couple billion bucks in the bank, you should ask, “How does its solvency look? Is there any doubt it can pay its bills on time?”\r\n<h2 id=\"tab9\" >Recognize the possibility of restatement and fraud</h2>\r\nWhen a business restates its original financial report and issues a new version, it doesn’t make restitution for any losses that investors suffered by relying on the originally reported financial statements. In fact, few companies even say they’re sorry when they put out revised financial statements.\r\n\r\nAll too often, the reason for the restatement is that someone later discovered that the original financial statements were based on fraudulent accounting. Frankly speaking, CPAs don’t have a very good track record for discovering financial reporting fraud. What it comes down to is this: Investors take the risk that the information in the financial statements they use in making decisions is subject to revision at a later time.\r\n<h2 id=\"tab10\" >Remember the limits of financial reports</h2>\r\nThere’s a lot more to investing than reading financial reports. Financial reports are an important source of information, but investors also should stay informed about general economic trends and developments, political events, business takeovers, executive changes, technological changes, and much more.\r\n\r\nWhen you read financial statements, keep in mind that these accounting reports are somewhat tentative and conditional. Accountants make many estimates and predictions in recording sales revenue and income and recording expenses and losses. Some soft numbers are mixed in with hard numbers in financial statements. In short, financial statements are iffy to some extent. There’s no getting around this limitation of accounting.","description":"You can compare reading a business’s financial report with shucking an oyster: You have to know what you’re doing and work to get at the meat. You need a good reason to pry into a financial report. The main reason to become informed about the financial performance and condition of a business is <em>because you have a stake in the business.</em> The financial success or failure of the business makes a difference to you.\r\n<h2 id=\"tab1\" >Get in the right frame of mind</h2>\r\nYou don’t have to be a math wizard or rocket scientist to extract the essential points from a financial report. You can find the bottom line in the income statement and compare this profit number with other relevant numbers in the financial statements. You can read the amount of cash in the balance sheet. If the business has a zero or near-zero cash balance, you know that this is a serious — perhaps fatal — problem.\r\n\r\nGet in the right frame of mind. Don’t let a financial report bamboozle you. Locate the income statement, find bottom-line profit (or loss!), and get going. You can do it!\r\n<h2 id=\"tab2\" >Decide what to read</h2>\r\nSuppose you want more financial information than you can get in news articles. The annual financial reports of public companies contain lots of information: a letter from the chief executive, a highlights section, trend charts, financial statements, extensive footnotes to the financial statements, historical summaries, and a lot of propaganda. In contrast, the financial reports of most private companies are significantly smaller; they contain financial statements with footnotes and not much more.\r\n\r\nYou could read just the highlights section and let it go at that. This might do in a pinch. You should read the chief executive’s letter to shareowners as well. Ideally, the letter summarizes in an evenhanded and appropriately modest manner the main developments during the year. Be warned, however, that these letters from the top dog often are self-congratulatory and typically transfer blame for poor performance on factors beyond the control of the managers. Read them, but take these letters with a grain of salt.\r\n<p class=\"article-tips tip\">Many public businesses release a condensed summary version in place of their much longer and more detailed annual financial reports. The scaled-down, simplified, and shortened versions of annual financial reports are adequate for average stock investors. They aren’t adequate for serious investors and professional investment managers. These investors and money managers should read the full-fledged financial report of the business, and they perhaps should study the company’s annual 10-K report that is filed with the Securities and Exchange Commission (SEC).</p>\r\n\r\n<h2 id=\"tab3\" >Improve your accounting savvy</h2>\r\nFinancial statements — the income statement, balance sheet, and statement of cash flows — are the core of a financial report. To make sense of financial statements, you need at least a rudimentary understanding of financial statement accounting. You don’t have to be a CPA, but the accountants who prepare financial statements presume that you’re familiar with accounting terminology and financial reporting practices. If you’re an accounting illiterate, the financial statements probably look like a Sudoku puzzle. There’s no way around this demand on financial report readers. After all, accounting is the language of business.\r\n<h2 id=\"tab4\" >Judge profit performance</h2>\r\nA 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: <em>sales revenue.</em> Here are some questions to focus on:\r\n<ul>\r\n \t<li><strong>How does sales revenue in the most recent year compare with the previous year’s?</strong></li>\r\n \t<li><strong>What is the gross margin ratio of the business?</strong></li>\r\n \t<li><strong>Based on information from a company’s most recent income statement, how do gross margin and the company’s bottom line (net income, or net earnings) compare with its top line (sales revenue)?</strong></li>\r\n</ul>\r\nOne last point: Put a company’s profit performance in the context of general economic conditions.\r\n<h2 id=\"tab5\" >Test earnings per share (EPS) against change in bottom line</h2>\r\nAs you know, public companies report net income in their income statements. Below this total profit number for the period, public companies also report <a href=\"https://www.dummies.com/business/accounting/calculating-the-earnings-per-share-eps-ratio/\" target=\"_blank\" rel=\"noopener\">earnings per share</a> (EPS), which is the amount of bottom-line profit for each share of its stock. Strictly speaking, therefore, the bottom line of a public company is its EPS. Private companies don’t have to report EPS; however, the EPS for a private business is fairly easy to calculate: Divide its bottom-line net income by the number of ownership shares held by the equity investors in the company.\r\n\r\nThe market value of ownership shares of a public company depends mainly on its EPS. Individual investors obviously focus on EPS, which they know is the primary driver of the market value of their investment in the business. The book value per share of a private company is the closest proxy you have for the market value of its ownership shares. The higher the EPS, the higher the market value for a public company. And the higher the EPS, the higher the book value per share for a private company.\r\n\r\nNow, you would naturally think that if net income increases, say, 10 percent over last year, then EPS would increase 10 percent. Not so fast. EPS — the driver of market value and book value per share — may change more or less than 10 percent:\r\n<ul>\r\n \t<li>Less than 10 percent: The business may have issued additional stock shares during the year, or it may have issued additional management stock options that get counted in the number of shares used to calculate diluted EPS. The profit pie may have been cut up into a larger number of smaller pieces. How do you like that?</li>\r\n \t<li>More than the 10 percent: The business may have bought back some of its own shares, which decreases the number of shares used in calculating EPS. This could be a deliberate strategy for increasing EPS by a higher percent than the percent increase in net income.</li>\r\n</ul>\r\n<p class=\"article-tips tip\">Compare the percent increase/decrease in total bottom-line profit over last year with the corresponding percent increase/decrease in EPS. Why? Because the percent changes in EPS and profit can diverge. For a public company, use its diluted EPS if it’s reported. Otherwise, use its basic EPS.</p>\r\n\r\n<h2 id=\"tab6\" >Tackle unusual gains and losses</h2>\r\nMany income statements start out normally: sales revenue less the expenses of making sales and operating the business. But then there’s a jarring layer of <em>unusual gains and losses</em> on the way down to the final profit line. This could be the result of a flooded building or a lawsuit. What’s a financial statement reader to do when a business reports such unusual, nonrecurring gains and losses in its income statement?\r\n\r\nThere’s no easy answer to this question. You could blithely assume that these things happen to a business only once in a blue moon and should not disrupt the business’s ability to make profit on a sustainable basis. Think of this as the <em>earthquake mentality</em> approach: When there’s an earthquake, there’s a lot of damage, but most years have no serious tremors and go along as normal. Unusual gains and losses are supposed to be nonrecurring in nature and recorded infrequently. In actual practice, however, many businesses report these gains and losses on a regular and recurring basis — like having an earthquake every year or so.\r\n<h2 id=\"tab7\" >Check cash flow from profit</h2>\r\nThe objective of a business is not simply to make profit but to generate cash flow from making profit as quickly as possible. <a href=\"https://www.dummies.com/article/business-careers-money/business/accounting/general-accounting/the-relationship-between-cash-flow-and-profit-in-business-156778\" target=\"_blank\" rel=\"noopener\">Cash flow from making profit</a> is the most important stream of cash inflow to a business. A business could sell off some assets to generate cash, and it can borrow money or get shareowners to put more money in the business. But cash flow from making profit is the spigot that should always be turned on. A business needs this cash flow to make cash distributions from profit to shareowners, to maintain liquidity, and to supplement other sources of capital to grow the business.\r\n<p class=\"article-tips remember\">The income statement does not — this bears repeating, does not — report the cash inflows of sales and the cash outflows of expenses. Therefore, the bottom line of the income statement is not a cash flow number. The net cash flow from the profit-making activities of the business (its sales and expenses) is reported in the statement of cash flows. When you look there, you’ll undoubtedly discover that the cash flow from operating activities (the official term for cash flow from profit-making activities) is higher or lower than the bottom-line profit number in the income statement.</p>\r\n\r\n<h2 id=\"tab8\" >Look for signs of financial distress</h2>\r\nA business can build up a good sales volume and have very good profit margins, but if the company can’t pay its bills on time, its profit opportunities could go down the drain. <em>Solvency</em> refers to a business’s prospects of being able to meet its debt and other liability payment obligations on time, in full. <a href=\"https://www.dummies.com/business/start-a-business/business-solvency-measurements-tools/\" target=\"_blank\" rel=\"noopener\">Solvency analysis</a> looks for signs of financial distress that could cause serious disruptions in the business’s profit-making operations. Even if a business has a couple billion bucks in the bank, you should ask, “How does its solvency look? Is there any doubt it can pay its bills on time?”\r\n<h2 id=\"tab9\" >Recognize the possibility of restatement and fraud</h2>\r\nWhen a business restates its original financial report and issues a new version, it doesn’t make restitution for any losses that investors suffered by relying on the originally reported financial statements. In fact, few companies even say they’re sorry when they put out revised financial statements.\r\n\r\nAll too often, the reason for the restatement is that someone later discovered that the original financial statements were based on fraudulent accounting. Frankly speaking, CPAs don’t have a very good track record for discovering financial reporting fraud. What it comes down to is this: Investors take the risk that the information in the financial statements they use in making decisions is subject to revision at a later time.\r\n<h2 id=\"tab10\" >Remember the limits of financial reports</h2>\r\nThere’s a lot more to investing than reading financial reports. Financial reports are an important source of information, but investors also should stay informed about general economic trends and developments, political events, business takeovers, executive changes, technological changes, and much more.\r\n\r\nWhen you read financial statements, keep in mind that these accounting reports are somewhat tentative and conditional. Accountants make many estimates and predictions in recording sales revenue and income and recording expenses and losses. Some soft numbers are mixed in with hard numbers in financial statements. In short, financial statements are iffy to some extent. There’s no getting around this limitation of accounting.","blurb":"","authors":[{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9472"}}],"primaryCategoryTaxonomy":{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Get in the right frame of mind","target":"#tab1"},{"label":"Decide what to read","target":"#tab2"},{"label":"Improve your accounting savvy","target":"#tab3"},{"label":"Judge profit performance","target":"#tab4"},{"label":"Test earnings per share (EPS) against change in bottom line","target":"#tab5"},{"label":"Tackle unusual gains and losses","target":"#tab6"},{"label":"Check cash flow from profit","target":"#tab7"},{"label":"Look for signs of financial distress","target":"#tab8"},{"label":"Recognize the 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Transactions","slug":"financial-accounting-the-effect-of-business-transactions","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277438"}},{"articleId":277429,"title":"What Are Accounting Journals?","slug":"what-are-accounting-journals","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277429"}},{"articleId":277423,"title":"How to Read Corporate Annual Reports","slug":"how-to-read-corporate-annual-reports","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277423"}},{"articleId":277418,"title":"Showing the Money: The Statement of Cash Flows","slug":"showing-the-money-the-statement-of-cash-flows","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277418"}},{"articleId":277410,"title":"10 Accounting Career Opportunities","slug":"10-accounting-career-opportunities","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277410"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":281922,"slug":"accounting-for-dummies","isbn":"9781119837527","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"https://www.amazon.com/gp/product/1119837529/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119837529/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119837529-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119837529/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119837529/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781119837527-203x255.jpg","width":203,"height":255},"title":"Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. <b><b data-author-id=\"9472\">John A. Tracy</b></b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies.</p>","authors":[{"authorId":9473,"name":"Tage C. Tracy","slug":"tage-c-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9473"}},{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9472"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119837527&quot;]}]\" id=\"du-slot-63221b4c8aa27\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;business&quot;,&quot;accounting&quot;,&quot;general-accounting&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119837527&quot;]}]\" id=\"du-slot-63221b4c8b44a\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-08-19T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":226420},{"headers":{"creationTime":"2016-03-26T14:45:15+00:00","modifiedTime":"2022-08-11T17:10:57+00:00","timestamp":"2022-09-14T18:19:53+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"Separable Cost Reduction in Cost Accounting","strippedTitle":"separable cost reduction in cost accounting","slug":"separable-cost-reduction-in-cost-accounting","canonicalUrl":"","seo":{"metaDescription":"In cost accounting, you want to reduce separable costs, when possible. Learn how to figure joint costs and separable cost reduction.","noIndex":0,"noFollow":0},"content":"In cost accounting, the cost of goods available for sale represents the product’s total costs. Total costs have two components — joint costs and separable costs. When possible, you want to reduce separable costs, but first take a look at your company’s joint costs.\r\n\r\nAssume you manufacture leaf blowers. Your two products are heavy-duty blowers and yardwork blowers. The separable costs are $1,200,000 for the heavy-duty blower and $912,000 for the yardwork blower. If you know the separable costs and the cost of goods available for sale, you can compute the joint cost allocation. This table shows the process.\r\n<table><caption>Joint Cost Allocation</caption>\r\n<tbody>\r\n<tr>\r\n<th></th>\r\n<th>Heavy-Duty</th>\r\n<th>Yardwork</th>\r\n<th>Total</th>\r\n</tr>\r\n<tr>\r\n<td>Cost of goods available for sale</td>\r\n<td>$1,751,163</td>\r\n<td>$1,260,837</td>\r\n<td>$3,012,000</td>\r\n</tr>\r\n<tr>\r\n<td>Less separable costs</td>\r\n<td>$1,200,000</td>\r\n<td>$912,000</td>\r\n<td>$2,112,000</td>\r\n</tr>\r\n<tr>\r\n<td><b>Equals joint cost allocation</b></td>\r\n<td><b>$551,163</b></td>\r\n<td><b>$348,837</b></td>\r\n<td><b>$900,000</b></td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nEach company division provides the separable costs. So altogether, this table gives you a joint cost allocation.\r\n\r\nNow assume that the heavy-duty blower division is able to sharply reduce its separable costs to an amazingly low $500,000. The first table listed heavy-duty separable costs of $1,200,000. Consider what now happens to heavy-duty’s joint cost allocation. Take a look at the next table.\r\n<table><caption>Cost Allocation — Less Heavy Duty Separable Costs</caption>\r\n<tbody>\r\n<tr>\r\n<th></th>\r\n<th>Heavy-Duty</th>\r\n<th>Yardwork</th>\r\n<th>Total</th>\r\n</tr>\r\n<tr>\r\n<td>Cost of goods available for sale</td>\r\n<td>$1,751,163</td>\r\n<td>$1,260,837</td>\r\n<td>$3,012,000</td>\r\n</tr>\r\n<tr>\r\n<td>Less separable costs</td>\r\n<td>$500,000</td>\r\n<td>$912,000</td>\r\n<td>$1,412,000</td>\r\n</tr>\r\n<tr>\r\n<td><b>Equals joint cost allocation</b></td>\r\n<td><b>$1,251,163</b></td>\r\n<td><b>$348,837</b></td>\r\n<td><b>$1,600,000</b></td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nHeavy-duty’s joint cost allocation increases to $1,251,163 (from $551,163). That doesn’t seem right. The goal is to analyze costs to reduce or eliminate them. If you do, supposedly you increase your profits.\r\n\r\nIn this case, the heavy-duty division’s reducing separable costs <i>increased</i> its joint cost allocation. There doesn’t seem to be a benefit to operating more efficiently.\r\n\r\nHere’s an explanation: The gross margin percentage method (calculated as gross margin ÷ total sales value x 100) <i>locks</i> in total costs as a percentage of sales value. If the gross margin is about 12.5 percent of sales value, it means that costs must be about 87.5 percent of sales value. For heavy-duty, that 87.5 percent total cost number is $1,751,163. Those costs are either separable or joint costs. If one increases, the other decreases.\r\n\r\nThe heavy-duty manager may have a problem with this process. The manager works hard (using good old cost accounting) to lower the separable costs. The manager’s “reward” is a higher joint cost allocation. The heavy-duty division has lowered costs but doesn’t get any savings in total costs.\r\n\r\nThe constant gross margin percentage method clarifies the revenue and profit calculations company-wide. This method eliminates some of the variation between company divisions. Although some managers may complain, each division has the same gross margin percentage. The process makes managing company profit easier.\r\n<p class=\"Tip\">This is one of those “Here’s why the chief financial officer (CFO) makes the big bucks” moments. As CFO, you explain the gross margin percentage method to the heavy-duty division manager. The goal is to allocate joint costs so that each product maintains the same gross margin percentage of about 12.5 percent. If a division reduces separable costs, it must get a bigger joint cost allocation — <i>otherwise, the gross margin percentage would increase</i>.</p>\r\nNow heavy-duty’s manager should be evaluated based on the successful cost reduction. The manager had a success, and you want to encourage more cost savings. Although the gross margin percentage process requires a bigger joint cost allocation, that must not take away from the manager’s good performance.","description":"In cost accounting, the cost of goods available for sale represents the product’s total costs. Total costs have two components — joint costs and separable costs. When possible, you want to reduce separable costs, but first take a look at your company’s joint costs.\r\n\r\nAssume you manufacture leaf blowers. Your two products are heavy-duty blowers and yardwork blowers. The separable costs are $1,200,000 for the heavy-duty blower and $912,000 for the yardwork blower. If you know the separable costs and the cost of goods available for sale, you can compute the joint cost allocation. This table shows the process.\r\n<table><caption>Joint Cost Allocation</caption>\r\n<tbody>\r\n<tr>\r\n<th></th>\r\n<th>Heavy-Duty</th>\r\n<th>Yardwork</th>\r\n<th>Total</th>\r\n</tr>\r\n<tr>\r\n<td>Cost of goods available for sale</td>\r\n<td>$1,751,163</td>\r\n<td>$1,260,837</td>\r\n<td>$3,012,000</td>\r\n</tr>\r\n<tr>\r\n<td>Less separable costs</td>\r\n<td>$1,200,000</td>\r\n<td>$912,000</td>\r\n<td>$2,112,000</td>\r\n</tr>\r\n<tr>\r\n<td><b>Equals joint cost allocation</b></td>\r\n<td><b>$551,163</b></td>\r\n<td><b>$348,837</b></td>\r\n<td><b>$900,000</b></td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nEach company division provides the separable costs. So altogether, this table gives you a joint cost allocation.\r\n\r\nNow assume that the heavy-duty blower division is able to sharply reduce its separable costs to an amazingly low $500,000. The first table listed heavy-duty separable costs of $1,200,000. Consider what now happens to heavy-duty’s joint cost allocation. Take a look at the next table.\r\n<table><caption>Cost Allocation — Less Heavy Duty Separable Costs</caption>\r\n<tbody>\r\n<tr>\r\n<th></th>\r\n<th>Heavy-Duty</th>\r\n<th>Yardwork</th>\r\n<th>Total</th>\r\n</tr>\r\n<tr>\r\n<td>Cost of goods available for sale</td>\r\n<td>$1,751,163</td>\r\n<td>$1,260,837</td>\r\n<td>$3,012,000</td>\r\n</tr>\r\n<tr>\r\n<td>Less separable costs</td>\r\n<td>$500,000</td>\r\n<td>$912,000</td>\r\n<td>$1,412,000</td>\r\n</tr>\r\n<tr>\r\n<td><b>Equals joint cost allocation</b></td>\r\n<td><b>$1,251,163</b></td>\r\n<td><b>$348,837</b></td>\r\n<td><b>$1,600,000</b></td>\r\n</tr>\r\n</tbody>\r\n</table>\r\nHeavy-duty’s joint cost allocation increases to $1,251,163 (from $551,163). That doesn’t seem right. The goal is to analyze costs to reduce or eliminate them. If you do, supposedly you increase your profits.\r\n\r\nIn this case, the heavy-duty division’s reducing separable costs <i>increased</i> its joint cost allocation. There doesn’t seem to be a benefit to operating more efficiently.\r\n\r\nHere’s an explanation: The gross margin percentage method (calculated as gross margin ÷ total sales value x 100) <i>locks</i> in total costs as a percentage of sales value. If the gross margin is about 12.5 percent of sales value, it means that costs must be about 87.5 percent of sales value. For heavy-duty, that 87.5 percent total cost number is $1,751,163. Those costs are either separable or joint costs. If one increases, the other decreases.\r\n\r\nThe heavy-duty manager may have a problem with this process. The manager works hard (using good old cost accounting) to lower the separable costs. The manager’s “reward” is a higher joint cost allocation. The heavy-duty division has lowered costs but doesn’t get any savings in total costs.\r\n\r\nThe constant gross margin percentage method clarifies the revenue and profit calculations company-wide. This method eliminates some of the variation between company divisions. Although some managers may complain, each division has the same gross margin percentage. The process makes managing company profit easier.\r\n<p class=\"Tip\">This is one of those “Here’s why the chief financial officer (CFO) makes the big bucks” moments. As CFO, you explain the gross margin percentage method to the heavy-duty division manager. The goal is to allocate joint costs so that each product maintains the same gross margin percentage of about 12.5 percent. If a division reduces separable costs, it must get a bigger joint cost allocation — <i>otherwise, the gross margin percentage would increase</i>.</p>\r\nNow heavy-duty’s manager should be evaluated based on the successful cost reduction. The manager had a success, and you want to encourage more cost savings. Although the gross margin percentage process requires a bigger joint cost allocation, that must not take away from the manager’s good performance.","blurb":"","authors":[{"authorId":9050,"name":"Kenneth Boyd","slug":"kenneth-boyd","description":"Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (<a href=\"https://www.accountingaccidentally.com/\" target=\"_blank\" rel=\"noopener\">www.accountingaccidentally.com</a>), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (<a href=\"https://www.youtube.com/user/kenboydstl\" target=\"_blank\" rel=\"noopener\">kenboydstl</a>) has hundreds of videos on accounting and finance.\r\n\r\nIn recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9050"}}],"primaryCategoryTaxonomy":{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":208104,"title":"Cost Accounting For Dummies Cheat Sheet","slug":"cost-accounting-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/208104"}},{"articleId":171024,"title":"Must Know Formulas for Cost Accounting","slug":"must-know-formulas-for-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171024"}},{"articleId":171020,"title":"Important Terms and Principles Cost Accountants Should Know","slug":"important-terms-and-principles-cost-accountants-should-know","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171020"}},{"articleId":171019,"title":"Avoiding Pitfalls on Cost Accounting Exams","slug":"avoiding-pitfalls-on-cost-accounting-exams","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171019"}},{"articleId":166828,"title":"Accrual Accounting in Cost Accounting","slug":"accrual-accounting-in-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/166828"}}],"fromCategory":[{"articleId":277438,"title":"Financial Accounting: The Effect of Business Transactions","slug":"financial-accounting-the-effect-of-business-transactions","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277438"}},{"articleId":277429,"title":"What Are Accounting Journals?","slug":"what-are-accounting-journals","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277429"}},{"articleId":277423,"title":"How to Read Corporate Annual Reports","slug":"how-to-read-corporate-annual-reports","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277423"}},{"articleId":277418,"title":"Showing the Money: The Statement of Cash Flows","slug":"showing-the-money-the-statement-of-cash-flows","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277418"}},{"articleId":277410,"title":"10 Accounting Career Opportunities","slug":"10-accounting-career-opportunities","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277410"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282119,"slug":"cost-accounting-for-dummies","isbn":"9781119856023","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"https://www.amazon.com/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119856027-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781119856023-203x255.jpg","width":203,"height":255},"title":"Cost Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b><b data-author-id=\"34810\">Kenneth W. Boyd</b></b> has 30 years of experience in accounting and financial services. He is a four&#45;time Dummies book author, a blogger, and a video host on accounting and finance topics.</p>","authors":[{"authorId":34810,"name":"Kenneth W. Boyd","slug":"kenneth-w-boyd","description":" <p><b>Kenneth W. Boyd</b> has 30 years of experience in accounting and financial services. He is a four&#45;time Dummies book author, a blogger, and a video host on accounting and finance topics. 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1,141 results
Bookkeeping Nonprofit Bookkeeping & Accounting For Dummies Cheat Sheet

Cheat Sheet / Updated 09-05-2023

To stay organized and on top of your nonprofit’s bookkeeping and accounting responsibilities, timely complete accounting tasks need to be done daily, weekly, quarterly, and yearly. Keep necessary financial information up to date so you’re prepared to submit paperwork to your independent certified public accountant (CPA), the government, and all stakeholders, both within and outside your nonprofit organization. To ensure your nonprofit’s activities are completed, organize a to-do list, prioritizing the tasks so the important ones are done first, and other jobs are scheduled around them. Managing your nonprofit means sticking to your plan to stay organized and run efficiently. Apply these guidelines to your nonprofit’s weekly plan: Set up daily priorities. Knowing what you need to accomplish each day allows you to take care of the most pressing matters. Surround yourself with professional staff. Surrounding yourself with professionals eliminates the pettiness of daily office drama! Professionals are self-motivated and focused on doing their jobs, and they require minimum supervision. Keep your goals before you. To maintain a clear vision, keep your eyes on the prize. Post your vision or your goals in a place where they’re visible to you every day. Manage your time by planning and scheduling your daily activities. Be mindful of distractions that pull you away from completing your tasks. Stay out of politics. Avoiding politics at work protects your nonprofit’s status.

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General Accounting How to Create a Normal Job Cost Sheet for Cost Accounting

Article / Updated 08-01-2023

When cost accounting, you put together your budgeting process for indirect costs with a plan for direct costs. Think of the combined process as normal costing. This is an important point: You trace direct costs and allocate indirect costs. Normal costing combines indirect cost rate with actual production. The process gets you closer to actual total costs for your product. Here are the two steps to implement normal costing: Direct costs: Traced to the cost object by multiplying (actual prices/rates) x (actual quantity for a specific job object) Indirect costs: Allocated to the cost object multiplying (predetermined or budgeted indirect cost rate) x (actual quantity for a specific job object) Note that both direct and indirect costs use actual quantity in the formula. While you come up with an indirect cost rate in planning, the rate is multiplied by actual quantities. In this case, the quantity is jobs for the month. A job cost sheet lists every cost you’ve incurred for a particular job. That includes direct material, direct labor, and all indirect costs. The job cost sheet is your basis for computing your sale price and your profit. You use this document to prepare a cost estimate for a client. Here is a job cost sheet using normal costing for a landscaping job. Normal Job Cost Sheet — Landscaping Job Type of Cost Amount or Quantity Price or Rate Total Cost (Rounded) Direct material 100 square feet of grass seed $12 per square foot $1,200 Direct labor 15 hours of labor $15 per hour $225 Mileage 30 miles driven $0.18 per mile $5 Indirect costs 30 miles driven $5.36 per mile $161 Total job costs $1,591 The indirect cost calculation (vehicle and equipment costs) uses the actual quantity (miles driven) and the estimated rate per mile. The other direct costs on the job sheet use actual quantities and actual prices/rates.

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Calculation & Analysis How to Use the Central Limit Theorem in Statistics

Article / Updated 07-10-2023

You can use the Central Limit Theorem to convert a sampling distribution to a standard normal random variable. Based on the Central Limit Theorem, if you draw samples from a population that is greater than or equal to 30, then the sample mean is a normally distributed random variable. To determine probabilities for the sample mean the standard normal tables requires you to convert to a standard normal random variable. The standard normal distribution is the special case where the mean equals 0, and the standard deviation equals 1. For any normally distributed random variable X with a mean and a standard deviation you find the corresponding standard normal random variable (Z) with the following equation: For the sampling distribution of the corresponding equation is As an example, say that there are 10,000 stocks trading each day on a regional stock exchange. It's known from historical experience that the returns to these stocks have a mean value of 10 percent per year, and a standard deviation of 20 percent per year. An investor chooses to buy a random selection of 100 of these stocks for his portfolio. What's the probability that the mean rate of return among these 100 stocks is greater than 8 percent? The investor's portfolio can be thought of as a sample of stocks chosen from the population of stocks trading on the regional exchange. The first step to finding this probability is to compute the moments of the sampling distribution. Compute the mean: The mean of the sampling distribution equals the population mean. Determine the standard error: This calculation is a little trickier because the standard error depends on the size of the sample relative to the size of the population. In this case, the sample size (n) is 100, while the population size (N) is 10,000. So you first have to compute the sample size relative to the population size, like so: Because 1 percent is less than 5 percent, you don't use the finite population correction factor to compute the standard error. Note that in this case, the value of the finite population correction factor is: Because this value is so close to 1, using the finite population correction factor in this case would have little or no impact on the resulting probabilities. And because the finite population correction factor isn't needed in this case, the standard error is computed as follows: To determine the probability that the sample mean is greater than 8 percent, you must now convert the sample mean into a standard normal random variable using the following equation: To compute the probability that the sample mean is greater than 8 percent, you apply the previous formula as follows: Because these values are substituted into the previous expression as follows: You can calculate this probability by using the properties of the standard normal distribution along with a standard normal table such as this one. Standard Normal Table — Negative Values Z 0.00 0.01 0.02 0.03 –1.3 0.0968 0.0951 0.0934 0.0918 –1.2 0.1151 0.1131 0.1112 0.1093 –1.1 0.1357 0.1335 0.1314 0.1292 –1.0 0.1587 0.1562 0.1539 0.1515 The table shows the probability that a standard normal random variable (designated Z) is less than or equal to a specific value. For example, you can write the probability that (one standard deviation below the mean) as You find the probability from the table with these steps: Locate the first digit before and after the decimal point (–1.0) in the first (Z) column. Find the second digit after the decimal point (0.00) in the second (0.00) column. See where the row and column intersect to find the probability: Because you're actually looking for the probability that Z is greater than or equal to –1, one more step is required. Due to the symmetry of the standard normal distribution, the probability that Z is greater than or equal to a negative value equals one minus the probability that Z is less than or equal to the same negative value. For example, This is because are complementary events. This means that Z must either be greater than or equal to –2 or less than or equal to –2. Therefore, This is true because the occurrence of one of these events is certain, and the probability of a certain event is 1. After algebraically rewriting this equation, you end up with the following result: For the portfolio example, The result shows that there's an 84.13 percent chance that the investor's portfolio will have a mean return greater than 8 percent.

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Accounting Bookkeeping & Accounting All-in-One For Dummies Cheat Sheet (UK Edition)

Cheat Sheet / Updated 07-06-2023

Accounting can be overwhelming at times. This cheat sheet gives you some useful checklists, ratios and rules that you can use both in bookkeeping and accounting roles. Keep them to hand.

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Calculation & Analysis The Regression Equation in Business Statistics

Article / Updated 05-03-2023

After you estimate the population regression line, you can check whether the regression equation makes sense by using the coefficient of determination, also known as R2 (R squared). This is used as a measure of how well the regression equation actually describes the relationship between the dependent variable (Y) and the independent variable (X). It may be the case that there is no real relationship between the dependent and independent variables; simple regression generates results even if this is the case. It is, therefore, important to subject the regression results to some key tests that enable you to determine if the results are reliable. The coefficient of determination, R2, is a statistical measure that shows the proportion of variation explained by the estimated regression line. Variation refers to the sum of the squared differences between the values of Y and the mean value of Y, expressed mathematically as R2 always takes on a value between 0 and 1. The closer R2 is to 1, the better the estimated regression equation fits or explains the relationship between X and Y. The expression is also known as the total sum of squares (TSS). This sum can be divided into the following two categories: Explained sum of squares (ESS): Also known as the explained variation, the ESS is the portion of total variation that measures how well the regression equation explains the relationship between X and Y. You compute the ESS with the formula Residual sum of squares (RSS): This expression is also known as unexplained variation and is the portion of total variation that measures discrepancies (errors) between the actual values of Y and those estimated by the regression equation. You compute the RSS with the formula The smaller the value of RSS relative to ESS, the better the regression line fits or explains the relationship between the dependent and independent variable. Total sum of squares (TSS): The sum of RSS and ESS equals TSS. R2 is the ratio of explained sum of squares (ESS) to total sum of squares (TSS): You can also use this formula: Based on the definition of R2, its value can never be negative. Also, R2 can't be greater than 1, so With simple regression analysis, R2 equals the square of the correlation between X and Y. The coefficient of determination is used as a measure of how well a regression line explains the relationship between a dependent variable (Y) and an independent variable (X). The closer the coefficient of determination is to 1, the more closely the regression line fits the sample data. The coefficient of determination is computed from the sums of squares. These calculations are summarized in the following table. To compute ESS, you subtract the mean value of Y from each of the estimated values of Y; each term is squared and then added together: To compute RSS, you subtract the estimated value of Y from each of the actual values of Y; each term is squared and then added together: To compute TSS, you subtract the mean value of Y from each of the actual values of Y; each term is squared and then added together: Alternatively, you can simply add ESS and RSS to obtain TSS: TSS = ESS + RSS = 0.54 + 0.14 = 0.68 The coefficient of determination (R2) is the ratio of ESS to TSS: This shows that 79.41 percent of the variation in Y is explained by variation in X. Because the coefficient of determination can't exceed 100 percent, a value of 79.41 indicates that the regression line closely matches the actual sample data.

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Bookkeeping Bookkeeping For Dummies Cheat Sheet (UK Edition)

Cheat Sheet / Updated 04-17-2023

There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get your head around the trickier bits of keeping the books and to know the process in order to better check and control those incomings and outgoings.

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Audits 13 Ways to Spot Fraud in Business Financial Statements

Article / Updated 09-15-2022

Financial statement fraud, commonly referred to as "cooking the books," involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices. These red flags include the following: Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered Unusually high revenues and low expenses at period end that can't be attributed to seasonality Growth in inventory that doesn't match growth in sales Improper capitalization of expenses in excess of industry norms Reported earnings that are positive and growing but operating cash flow that's declining Growth in revenues that's far greater than growth in other companies in the same industry or peer group Gross margin or operating margins out of line with peer companies Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages Unusual increases in the book value of assets, such as inventory and receivables Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction Invoices that go unrecorded in the company's financial books Loans to executives or other related parties that are written off A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.

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General Accounting Accounting Workbook For Dummies Cheat Sheet

Cheat Sheet / Updated 09-02-2022

As a business manager or owner, taking care of your company’s accounting needs is a top priority. Correctly preparing financial statements, financial analyses, and accounting reports involves knowing all the financial data and information that needs to appear in these items. Making a profit helps keep you in business, while maintaining a strong balance sheet ensures you can stay in business. So, make sure you understand the financial statements, record adjustments if needed, and follow some basic rules for presenting accounting information to your business’s managers, owners, investors, and creditors.

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General Accounting 10 Tips for Reading a Financial Report

Article / Updated 08-19-2022

You can compare reading a business’s financial report with shucking an oyster: You have to know what you’re doing and work to get at the meat. You need a good reason to pry into a financial report. The main reason to become informed about the financial performance and condition of a business is because you have a stake in the business. The financial success or failure of the business makes a difference to you. Get in the right frame of mind You don’t have to be a math wizard or rocket scientist to extract the essential points from a financial report. You can find the bottom line in the income statement and compare this profit number with other relevant numbers in the financial statements. You can read the amount of cash in the balance sheet. If the business has a zero or near-zero cash balance, you know that this is a serious — perhaps fatal — problem. Get in the right frame of mind. Don’t let a financial report bamboozle you. Locate the income statement, find bottom-line profit (or loss!), and get going. You can do it! Decide what to read Suppose you want more financial information than you can get in news articles. The annual financial reports of public companies contain lots of information: a letter from the chief executive, a highlights section, trend charts, financial statements, extensive footnotes to the financial statements, historical summaries, and a lot of propaganda. In contrast, the financial reports of most private companies are significantly smaller; they contain financial statements with footnotes and not much more. You could read just the highlights section and let it go at that. This might do in a pinch. You should read the chief executive’s letter to shareowners as well. Ideally, the letter summarizes in an evenhanded and appropriately modest manner the main developments during the year. Be warned, however, that these letters from the top dog often are self-congratulatory and typically transfer blame for poor performance on factors beyond the control of the managers. Read them, but take these letters with a grain of salt. Many public businesses release a condensed summary version in place of their much longer and more detailed annual financial reports. The scaled-down, simplified, and shortened versions of annual financial reports are adequate for average stock investors. They aren’t adequate for serious investors and professional investment managers. These investors and money managers should read the full-fledged financial report of the business, and they perhaps should study the company’s annual 10-K report that is filed with the Securities and Exchange Commission (SEC). Improve your accounting savvy Financial statements — the income statement, balance sheet, and statement of cash flows — are the core of a financial report. To make sense of financial statements, you need at least a rudimentary understanding of financial statement accounting. You don’t have to be a CPA, but the accountants who prepare financial statements presume that you’re familiar with accounting terminology and financial reporting practices. If you’re an accounting illiterate, the financial statements probably look like a Sudoku puzzle. There’s no way around this demand on financial report readers. After all, accounting is the language of business. 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: sales revenue. Here are some questions to focus on: How does sales revenue in the most recent year compare with the previous year’s? What is the gross margin ratio of the business? Based on information from a company’s most recent income statement, how do gross margin and the company’s bottom line (net income, or net earnings) compare with its top line (sales revenue)? One last point: Put a company’s profit performance in the context of general economic conditions. Test earnings per share (EPS) against change in bottom line As you know, public companies report net income in their income statements. Below this total profit number for the period, public companies also report earnings per share (EPS), which is the amount of bottom-line profit for each share of its stock. Strictly speaking, therefore, the bottom line of a public company is its EPS. Private companies don’t have to report EPS; however, the EPS for a private business is fairly easy to calculate: Divide its bottom-line net income by the number of ownership shares held by the equity investors in the company. The market value of ownership shares of a public company depends mainly on its EPS. Individual investors obviously focus on EPS, which they know is the primary driver of the market value of their investment in the business. The book value per share of a private company is the closest proxy you have for the market value of its ownership shares. The higher the EPS, the higher the market value for a public company. And the higher the EPS, the higher the book value per share for a private company. Now, you would naturally think that if net income increases, say, 10 percent over last year, then EPS would increase 10 percent. Not so fast. EPS — the driver of market value and book value per share — may change more or less than 10 percent: Less than 10 percent: The business may have issued additional stock shares during the year, or it may have issued additional management stock options that get counted in the number of shares used to calculate diluted EPS. The profit pie may have been cut up into a larger number of smaller pieces. How do you like that? More than the 10 percent: The business may have bought back some of its own shares, which decreases the number of shares used in calculating EPS. This could be a deliberate strategy for increasing EPS by a higher percent than the percent increase in net income. Compare the percent increase/decrease in total bottom-line profit over last year with the corresponding percent increase/decrease in EPS. Why? Because the percent changes in EPS and profit can diverge. For a public company, use its diluted EPS if it’s reported. Otherwise, use its basic EPS. Tackle unusual gains and losses Many income statements start out normally: sales revenue less the expenses of making sales and operating the business. But then there’s a jarring layer of unusual gains and losses on the way down to the final profit line. This could be the result of a flooded building or a lawsuit. What’s a financial statement reader to do when a business reports such unusual, nonrecurring gains and losses in its income statement? There’s no easy answer to this question. You could blithely assume that these things happen to a business only once in a blue moon and should not disrupt the business’s ability to make profit on a sustainable basis. Think of this as the earthquake mentality approach: When there’s an earthquake, there’s a lot of damage, but most years have no serious tremors and go along as normal. Unusual gains and losses are supposed to be nonrecurring in nature and recorded infrequently. In actual practice, however, many businesses report these gains and losses on a regular and recurring basis — like having an earthquake every year or so. Check cash flow from profit The objective of a business is not simply to make profit but to generate cash flow from making profit as quickly as possible. Cash flow from making profit is the most important stream of cash inflow to a business. A business could sell off some assets to generate cash, and it can borrow money or get shareowners to put more money in the business. But cash flow from making profit is the spigot that should always be turned on. A business needs this cash flow to make cash distributions from profit to shareowners, to maintain liquidity, and to supplement other sources of capital to grow the business. The income statement does not — this bears repeating, does not — report the cash inflows of sales and the cash outflows of expenses. Therefore, the bottom line of the income statement is not a cash flow number. The net cash flow from the profit-making activities of the business (its sales and expenses) is reported in the statement of cash flows. When you look there, you’ll undoubtedly discover that the cash flow from operating activities (the official term for cash flow from profit-making activities) is higher or lower than the bottom-line profit number in the income statement. Look for signs of financial distress A business can build up a good sales volume and have very good profit margins, but if the company can’t pay its bills on time, its profit opportunities could go down the drain. Solvency refers to a business’s prospects of being able to meet its debt and other liability payment obligations on time, in full. Solvency analysis looks for signs of financial distress that could cause serious disruptions in the business’s profit-making operations. Even if a business has a couple billion bucks in the bank, you should ask, “How does its solvency look? Is there any doubt it can pay its bills on time?” Recognize the possibility of restatement and fraud When a business restates its original financial report and issues a new version, it doesn’t make restitution for any losses that investors suffered by relying on the originally reported financial statements. In fact, few companies even say they’re sorry when they put out revised financial statements. All too often, the reason for the restatement is that someone later discovered that the original financial statements were based on fraudulent accounting. Frankly speaking, CPAs don’t have a very good track record for discovering financial reporting fraud. What it comes down to is this: Investors take the risk that the information in the financial statements they use in making decisions is subject to revision at a later time. Remember the limits of financial reports There’s a lot more to investing than reading financial reports. Financial reports are an important source of information, but investors also should stay informed about general economic trends and developments, political events, business takeovers, executive changes, technological changes, and much more. When you read financial statements, keep in mind that these accounting reports are somewhat tentative and conditional. Accountants make many estimates and predictions in recording sales revenue and income and recording expenses and losses. Some soft numbers are mixed in with hard numbers in financial statements. In short, financial statements are iffy to some extent. There’s no getting around this limitation of accounting.

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General Accounting Separable Cost Reduction in Cost Accounting

Article / Updated 08-11-2022

In cost accounting, the cost of goods available for sale represents the product’s total costs. Total costs have two components — joint costs and separable costs. When possible, you want to reduce separable costs, but first take a look at your company’s joint costs. Assume you manufacture leaf blowers. Your two products are heavy-duty blowers and yardwork blowers. The separable costs are $1,200,000 for the heavy-duty blower and $912,000 for the yardwork blower. If you know the separable costs and the cost of goods available for sale, you can compute the joint cost allocation. This table shows the process. Joint Cost Allocation Heavy-Duty Yardwork Total Cost of goods available for sale $1,751,163 $1,260,837 $3,012,000 Less separable costs $1,200,000 $912,000 $2,112,000 Equals joint cost allocation $551,163 $348,837 $900,000 Each company division provides the separable costs. So altogether, this table gives you a joint cost allocation. Now assume that the heavy-duty blower division is able to sharply reduce its separable costs to an amazingly low $500,000. The first table listed heavy-duty separable costs of $1,200,000. Consider what now happens to heavy-duty’s joint cost allocation. Take a look at the next table. Cost Allocation — Less Heavy Duty Separable Costs Heavy-Duty Yardwork Total Cost of goods available for sale $1,751,163 $1,260,837 $3,012,000 Less separable costs $500,000 $912,000 $1,412,000 Equals joint cost allocation $1,251,163 $348,837 $1,600,000 Heavy-duty’s joint cost allocation increases to $1,251,163 (from $551,163). That doesn’t seem right. The goal is to analyze costs to reduce or eliminate them. If you do, supposedly you increase your profits. In this case, the heavy-duty division’s reducing separable costs increased its joint cost allocation. There doesn’t seem to be a benefit to operating more efficiently. Here’s an explanation: The gross margin percentage method (calculated as gross margin ÷ total sales value x 100) locks in total costs as a percentage of sales value. If the gross margin is about 12.5 percent of sales value, it means that costs must be about 87.5 percent of sales value. For heavy-duty, that 87.5 percent total cost number is $1,751,163. Those costs are either separable or joint costs. If one increases, the other decreases. The heavy-duty manager may have a problem with this process. The manager works hard (using good old cost accounting) to lower the separable costs. The manager’s “reward” is a higher joint cost allocation. The heavy-duty division has lowered costs but doesn’t get any savings in total costs. The constant gross margin percentage method clarifies the revenue and profit calculations company-wide. This method eliminates some of the variation between company divisions. Although some managers may complain, each division has the same gross margin percentage. The process makes managing company profit easier. This is one of those “Here’s why the chief financial officer (CFO) makes the big bucks” moments. As CFO, you explain the gross margin percentage method to the heavy-duty division manager. The goal is to allocate joint costs so that each product maintains the same gross margin percentage of about 12.5 percent. If a division reduces separable costs, it must get a bigger joint cost allocation — otherwise, the gross margin percentage would increase. Now heavy-duty’s manager should be evaluated based on the successful cost reduction. The manager had a success, and you want to encourage more cost savings. Although the gross margin percentage process requires a bigger joint cost allocation, that must not take away from the manager’s good performance.

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