What is the Profitability Index? The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment. The Profitability Index is also known as the Profit Investment Ratio (PIR)…
What are Revenue Streams? Revenue streams are the various sources from which a business earns money from the sale of goods or the provision of services. The types of revenue that a business records on its accounts depend on the types of activities carried out by the business. Generally speaking, the revenue accounts of retail…
What is Accounting Ethics? Accounting ethics is an important topic because, as accountants, we are the key personnel who access the financial information of individuals and entities. Such power also involves the potential and possibilities for abuse of information or manipulation of numbers to enhance company perceptions or enforce earnings management. Ethics is also absolutely…
What is the Marginal Cost of Production? The Marginal Cost of Production is the cost to provide one additional unit of a product or service. It is a fundamental principle that is used to derive economically optimal decisions and an important aspect of managerial accounting and financial analysis. It can be calculated as: If a company’s…
What is Calendarization? The process of standardizing the reporting time periods of financial statements is called calendarization. To make comparable companies “equal,” the financial data of each company must be standardized so that there is a fair basis for comparison. For example, if you are examining a set of companies with fiscal years ending March 31,…
What is Repo 105? Repo 105 is an accounting gimmick that was used within Lehman Brothers to classify short-term loans as a sale. It is a form of repurchase agreement that allows companies to borrow the excess funds of other companies for a short duration in exchange for collateral. The borrower promises to pay back the…
What is a Contingent Liability? A contingent liability is a potential liability that may or may not occur, depending on the result of an uncertain future event. The relevance of a contingent liability depends on the probability of the contingency becoming an actual liability, its timing, and the accuracy with which the amount associated with…
What is Cost Behavior Analysis? Cost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product. Management typically performs cost behavior analysis through mathematical…
What is Activity-Based Costing? Activity-based costing is a more specific way of allocating overhead costs based on “activities” that actually contribute to overhead costs. In job-order costing and variance analysis, overhead costs are applied based on a specific cost driver such as labor hours or machine hours. An activity is an event, task, or unit…
Accounting Forums – Overview There are several accounting forums on the internet that offer both students and professionals from different locations the opportunity to connect and reach out to one another. Businesses are also taking advantage of the growing number of online communities to find new customers and engage them. Online accounting forums are now the…
