Articles
Net present value (NPV)
Net present value (NPV) is a method for investment appraisal that is based on discounted cash-flow methodology. It shows the amount by which shareholder´s wealth would be increased. It is calculated as the total of present values of future relevant cash-flows over the project life. It comes out from relevant future cash-flows (free cash-flow)...
Standard costing
Standard costing is a cost accounting measurement basis that predicts unit costs and production quantities based on predetermined standards before the production even begins and as such it is an alternative method to historical cost accounting. It is suitable for production, which is standardized and mass or repetitive. Standard costing serves as...
Liquidity indicators
Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) Indicators of liquidity Liquidity indicators show the extent to which the current assets of the company in various forms cover its short-term obligations. Thus, the num...
Disadvantages of accounting profit
Profit as a basic profitability indicator used by companies has the following drawbacks: profit does not equal net inflow of money, costs do not equal expenditures and incomes do not equal receipts profit includes the results of operations that are ad-hoc and will not be repeated in the future various methodologies particularly in the ar...
Inventory turnover ratio / Stock turnover ratio
Inventory turnover ratio (Stock turnover ratio) is one of the indicators of activity, which shows how many times during the period (year) is a unit of inventories converted into revenues (i.e. is sold). Calculation formula Inventories are often the average from the beg
Payables turnover ratio
Payables turnover ratio is one of the indicators of activity, which shows how many times during the period (year) is a unit of payables purchased. Calculation formula Trade payables are often the average from the beginning and final balance. Interpretation and
Internal rate of return (IRR)
Internal rate of return is method used for investment appraisal that calculates the rate of return that is expected to be achieved by the project. IRR is related with NPV method as it is the discount rate at which NPV is zero. if IRR > target rate (often WACC) → the investment adds value
Absorption costing
Absorption costing is a type costing method or rather the approach to costing. It is sometimes called as full costing method as it values the product (or jobs, batches, processes etc.) by direct costs and allocated, apportioned and absorbed share of production indirect costs (production overheads)
Product´s life cycle
Product´s life cycle stages Research and development product has not yet been launched to the market and pre-production costs such as research & development or costs of finding appropriate production premises are incurred this stage is included within introduction st
Measurement of inventories under IAS 2 Inventories
Under IAS 2 - Inventories, inventories are measured at the lower of cost and net realizable value. (5) Measurement of costs cost of purchase: covering: purchase price import duties and irrecoverable taxes (e.g. VAT for entities not registered for VAT) transportation, hand
Gross margin
Gross margin is one of profitability indicators. It can be expressed as a difference % Comparisons gross margin % will vary considerably between industries, so comparing companies in different industries makes little sense it makes sense to compare with the
Inventory period / Days inventory outstanding
Inventory period (Days inventory outstanding) is one of the indicators of activity, which indicates how many days is the inventory held in stock before it is sold. If we divide number of days in the year (365) by the indicator of Inventory period, we get the indicator of Inventory turnover ra
Marginal (variable) costing
Marginal costing is a type of costing method under which only variable costs are included to the value of the product (or job, contract, batch, process, etc.). Therefore, fixed costs are not allocated to the product and are expensed. It is also known as variable costing method. Th
Activity based costing (ABC)
Activity based costing (ABC) is costing method, under which all costs are allocated to company activities according to what are the drivers of the activities. Costs are then allocated to products based on product´s consumption of these activities. ABC was developed to overcome the disadvanta
Difference between direct and indirect costs, their division and accounting
According to the traceability to cost object (usually a specific type of product or service) the costs can be divided into DIRECT COSTS (PRIME COSTS) and INDIRECT COSTS (OVERHEADS). The reason for such classification is especially appropriate inventory (and possibly other assets as well) valuation.
Differences between Absorption costing, Activity Based Costing, Marginal costing and Througput costing
The basic difference between these costing approaches is what costs are assigned to the product. However, Absorption costing method and Activity Based Costing use different approach, but more about it can be found in separate articles. Under Throughput costing, only direct material co