Cost of Debt Capital

Cost of Debt Capital Definition The cost of debt capital is the interest to be paid to its owner.

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Financial Reporting

What Does Financial Reporting Mean? The scope of financial reporting is broader than just reporting information through income statements, balance sheets, authoritative pronouncements, and regulatory rules. Financial reporting concerns not only monetary information but also non-monetary information. Financial reporting does not mean reporting information only through income statements and balance…

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Inventory Control System

What Is an Inventory Control System? Inventory control systems are critical for businesses due to the importance of the inventory, which is a major asset. It is through the inventory that most of a business’s operating activities take place. Therefore, it is crucial to establish effective control systems to safeguard the inventory (e.g., to minimize costs and to prevent fraud, theft, damages to ph…

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Statement of Changes in Working Capital

What Is the Statement of Changes in Working Capital? A statement of changes in working capital is prepared by recording changes in current assets and current liabilities during the accounting period. Working capital during this period is bound to change due to an increase or decrease in the current assets and current liabilities. Purpose of Preparing the Statement A statement of changes in working…

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How to Measure the Acquisition Cost of Property, Plant and Equipment

According to the Financial Accounting Standards Board (FASB), the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. In terms of property, plant, and equipment, this means that all the reasonable and necessary costs required to get an asset to its location and ready for use are included in the acqu…

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Comparison Between Different Cost Flow Assumptions

This article compares the effect of different cost flow assumptions—FIFO, average cost, and LIFO—on ending inventory, cost of goods sold, and gross margin for the Cerf Company. As shown in the table below, the highest gross margin and ending inventory, as well as the lowest cost of goods sold, resulted when FIFO was used. The lowest gross margin and ending inventory and highest cost of goods sold…

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Application of Different Cost Flow Assumptions

In this article, the data for the Cerf Company shown below will be used to demonstrate the calculations that are needed to apply three cost flow assumptions and the specific identification method. Three points should be made about this example. First, it is overly simplistic in that only six purchases are made during the year. However, the procedures used in this example hold for more complex, rea…

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How to Determine the Cost of Ending Inventory

For a firm to calculate the total cost of its ending inventories, it is first necessary to determine the actual quantity of items in the ending inventory and then to attach a price to these items. This is usually done by taking a physical inventory at least once a year, usually at year-end. A physical inventory is required, regardless of whether a firm uses the perpetual or the periodic inventory…

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Methods of Estimating Ending Inventory

In some situations, it is impossible to determine the actual cost of the ending inventory. For example, if a firm’s inventory is destroyed in a fire and the cost of the lost inventory must be estimated, it is difficult to do so accurately. The gross margin method can be used in such circumstances. For a retail store, taking the inventory at cost is difficult, if not impossible. Therefore, the inve…

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Perpetual Inventory System

Perpetual Inventory System: Definition A perpetual inventory system is a method of continuously accounting for the current state of an organization’s inventory. In perpetual inventory systems, computer programs and software are typically used to record and report transactions as soon as they take place. Perpetual Inventory System: Explanation Before the rise of digital technology, companies avoide…

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