Kenneth Boyd's Blog, page 42

Air vs. Sea Shipping: What’s the Best Choice for International Cargo Delivery?

There are tons of Filipino people and families that have migrated to different parts of the world. But despite that, they never forget the family they have left behind in the Philippines. You can expect them to buy plenty of stuff and save them all until they can send it in one big box.

 

Good thing, shipping internationally to and from different countries is possible – and even easier. You can quickly find a company that can help with cargo deliveries in the Philippines. From there, you’ll be asked whether you’ll have the cargo delivered via air or sea.

Now, this is where it gets a little tricky. But, here are a few things you have to consider before choosing which one to go for. When choosing a solution, you need to compare the costs, time frame and the type of cargo you want to be delivered.

 

What is the Cheaper Solution?

 

Of the two, sea freight is the cheaper solution. You can move bigger and heavier boxes and still save money more than choosing air delivery. The only thing is, air freights tend to have a higher quality of services. The difference between the costs could lessen when you’re sending smaller boxes and items.

To get an estimate of the costs, most companies have calculators on their websites. You only need to input the dimensions of the box as well as its weight. Through these calculators, you can check which solution works well for you.

 

What’s the Fastest Solution?

 

If time is a big deal and you the items delivered to its destination faster, air delivery is the better choice. On average, air freights can arrive as fast as three to five days, which guarantees your family will receive the package sooner. Meanwhile, sea freight can take between 20 to 45 days to arrive due to delays in the ports.

You also have to take into account the amount of time it takes your country’s customs to clear the package and have them sent to you. When choosing a cargo company, they typically add the estimated time of arrival of your cargo regardless of whether you want air or sea freight.

 

The Type of Cargo Matters

 

There are several limitations when it comes to air freights – and that’s one thing you should be wary of. When it comes to sea freight, there’s almost no limitation, and it is a good thing if you’re sending lots of stuff.

Additionally, you can easily send heavier and bulky cargo with sea freights, while air freights will limit the weight and size of your box. It’s best if you check whether your cargo is acceptable for both air and sea freights before having it sent.

Check their website and see if they have a list of what you can and can’t send, as well as the maximum weight and size of the box.

 

Sending packages internationally has become easier, thanks to cargo companies. Although it may cost you a hundred dollars or more, the smile on your family’s faces is a great payback once they receive your cargo.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

The post Air vs. Sea Shipping: What’s the Best Choice for International Cargo Delivery? appeared first on Accounting Accidentally.

What’s the Best Way for You to Invest?

There’s no right or wrong way for you to invest your money.

 

If you’re going to see the returns you want to see in the long-term, your focus should be on making sure that you take the approach that’s right for you. Everyone is different in pretty much every way and that applies to investing as well. Here are some tips to help you choose the best way of investing.

 

Do Plenty of Research

 

Doing your research will be one of the things that helps you out a lot when you’re just starting out.

 

When you know what you’re getting into and what an investment is all about, you’ll be informed and every investment should be an informed investment. Never go into an investment or decide on a type of investing to get involved in without doing your research first. It’s a big mistake that so often gets made.

 

What Keeps Interested?

 

When choosing a form of investing, you need to choose one that you know is capable of keeping you interested.

 

If you’re not interested in what you’re doing, you’ll throw in the towel and give up much faster. Investing doesn’t need to be dry and boring and, in fact, it really shouldn’t be. If you want to get this right and ensure you stick at it over the long-term, it needs to be fun.

 

Align Investing with Your Financial Goals

 

Aligning your finances and your investments is important.

 

Never invest more than you can afford to and make sure that the type of investing you’re doing match with your short and long-term goals. If you want to make money quickly, buying homes, renovating them and then selling them is probably not the way to go about it, for example.

 

Understanding Trends and Opportunities

 

There are always new investing trends, platforms and cryptocurrencies appearing and you should stay on top of these things.

 

This Genesis Mining Review, for example, will tell you what you need to know about a new thing so you can decide whether it’s right for you or not. Some trends are definitely worth exploiting and others might be best avoided. That’s for you to research and decide.

 

Know Your Limits and Blind Spots

 

Knowing your limits and understanding your blind spots is really important when investing.

 

Never assume you know it all. We all have things that we don’t know very much about and that includes when you’re investing. You just have to take that into account and know what your limits and blind spots are and factor these into the equation when making investing decisions.

 

Investing can be an enjoyable activity but it’s also something that has to be done carefully. If you don’t take it seriously or understand the risks you’re taking when you invest, you’ll run the risk of losing a lot of money and that’s the last thing you want. Don’t rush into it before considering the things discussed above.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

The post What’s the Best Way for You to Invest? appeared first on Accounting Accidentally.

What Morgan Stanley’s E*Trade Purchase Teaches Us About Activity-Based Costing

Buying another firm may create synergy, which can lead to higher sales and profits.

 

The combined firms can produce better results that if each business operated separately.

 

But if you don’t get costs assigned correctly, you won’t know if a company purchase is working as planned.

 

Morgan Stanley’s recent purchase may be wise move.

 

What Happened

 

As the Wall Street Journal wrote:

 

“Morgan Stanley MS -3.87% is buying E*Trade Financial Corp. ETFC -3.81% in a $13 billion deal that will reshape the storied investment bank and firmly stake its future on managing money for regular people.

 

E*Trade ETFC -3.81% brings five million retail customers, their $360 billion in assets and an online bank with cheap deposits that Morgan Stanley can funnel into loans.

 

Its crown jewel is a comparatively low-profile business: managing the stock that employees at hundreds of companies receive as part of their pay. Those shares are typically locked up for a few years and when they become available, E*Trade aims to move those employees into brokerage accounts.

 

Morgan Stanley expects to recoup that premium through $400 million of cost cuts and additional savings of $150 million from using E*Trade’s low-cost deposits to replace more expensive funding.”

 

Why The Purchase Makes Sense

 

Morgan Stanley can generate interest income on loans from E*Trade’s online bank deposits. The firm also has a potential pipeline of new brokerage business from stock awarded to employees as deferred compensation.

 

But the key to making the purchase work is cutting costs. You can’t intelligently reduce costs unless you understand the source of the spending.

 

Think about it.

 

The two firms will eliminate duplicate costs. There’s not longer a need for two accounting departments, two legal staffs, two payroll firms. Sure, there’s more work to be done in a much larger company, but some roles will overlap and not be necessary.

 

Before the combined firms start cutting costs, management needs to take a careful look at the activities that cause expenses to be incurred.

Activity-Based Costing

 

In my Accounting All-In-One For Dummies book, I explain that activity-based costing (ABC) allocates costs based on an activity level. ABC helps a business to assign costs more specifically.

 

Consider the stock-trading department for the combined firms.

 

Morgan Stanley and E*Trade serve different types of investors, but each company needs traders who can buy and sell stocks for clients. Now, much of the activity is automated, but the sheer volume of trading requires an investment in technology, and smart people who can monitor trading, and get the right trades assigned to the correct investors.

 

So, how can you allocate the stock-trading department costs?

 

By thinking about the activities that require more time and effort.

 

Morgan Stanley caters to larger clients, including institutions, who are placing much larger trades than individual investors at E*Trade. Larger trades involve more risk, and more effort to get the customer the right price.

 

If the stock-trading department spends 60% of its time on Morgan Stanley trades, 60% of the cost may be allocated to Morgan Stanley.

 

Other examples of ABC costing:

 

Legal costs are allocated, based on the total time spent on legal cases between the Morgan Stanley and E*Trade.
Payroll costs are assigned based on the number of employees at each company division.

 

The Lesson

 

Before you start to cut costs after a merger, you need to understand the activities that cause the businesses to incur expenses. If not, you may cut cost in the areas that drive the most revenue.

 

Food for thought.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

Image: Dmitry Moraine

The post What Morgan Stanley’s E*Trade Purchase Teaches Us About Activity-Based Costing appeared first on Accounting Accidentally.

What Pier 1’s Bankruptcy Teaches Us About Return on Assets

What’s the rate of return?

 

It’s a common investor question.

 

When you’re investing in stocks, bonds, or mutual funds, it’s helpful to know the investment’s historic rate of return. You compare the investment risks to the rate of return, and use that analysis to make a decision about investing.

 

A business owner should consider the rate of return on company assets. If you use assets productively, your firm will be more profitable over time.

 

Pier 1 Imports struggled with earning a return on assets- and it’s put them out of business.

 

What Happened

 

As the Wall Street Journal wrote:

 

“Pier 1 Imports Inc. the funky furniture retailer that started out selling bean bag chairs and love beads to hippies and later grew into a home-furnishings giant with more than 1,000 stores, filed for bankruptcy Monday, a victim of changing consumer tastes and an unforgiving retail environment.

 

It plans to close up to 450 stores and cut costs to slow down its cash burn.”

 

Ok, the company was burning cash- but why was the rate of cash burn so high?

 

“… the company’s struggles can be traced to increasing competition from online players, mass merchants and off-price retailers, such as Wayfair Inc., TJX Cos .’s HomeGoods, Bed Bath & Beyond Inc. s’ Cost Plus World Market and Amazon.com Inc.

 

The company was late to embrace e-commerce and was forced to build an online business from virtually nothing. Along the way, it had to absorb the costs of building distribution centers and other infrastructure, while also adjusting to the tighter margins from online sales.”

 

Earning a Return

 

In my Accounting All-In-One For Dummies book, I define several metrics for measuring rates of return:

 

Return on assets: (Net income) / (total assets)
Return on equity: (Net income) / (total stockholders equity)
Return on investment: (Net income) / (cost of investment)

 

To explain the accounting issues at Pier 1, consider this simple example:

 

Julie owns of Sideline Sports, a sporting goods manufacturer. On January 1st, she decides to raise money from outside investors for the first time, in order to start selling her merchandise using an ecommerce site.

 

Sideline issues $300,000 in equity, and uses the proceeds for these items:

 

Hardware, software, other tech purchases: $48,000
Training for employees: $2,000
Consulting fees to programmers: $250,000

 

The ecommerce business generates a $40,000 profit in year one.

 

Here are the rates of return for year one- just for the ecommerce portion of Julie’s business.

 

Return on assets

 

($40,000 net income) / ($48,000 total assets) = 83%

 

Now, that return is misleading, because the ecommerce site required $300,000 in spending.

 

Some businesses, such as banks, require a big investment in assets (bank locations, operations departments, hardware) to operate. Professional service companies, such as lawyers and accountants, don’t require a big asset investment. Service companies sell knowledge, and they don’t need a large asset base.

 

Return on equity

 

($40,000 net income) / ($300,000 total stockholders equity) = 13%

 

This ratio is more useful. Sideline earned a 13% return on the equity invested.

 

Return on investment

 

($40,000 net income) / ($300,000 cost of investment) = 13%

 

The $300,000 equity raised was invested in the ecommerce business, so the return on investment ratio is the same as the return on equity ratio.

 

It’s all about how much profit you can squeeze out of the assets you own, the equity you raise, and the investments you make.

 

Squeezing out Profits

 

Think about a plumber. He drives a $20,000 truck that carries $10,000 in equipment to do residential plumbing- a $30,000 investment in assets. If the plumber generates $60,000 in annual income, that’s a 200% return on assets.

 

Why is the return so high?

 

The plumber’s primary role is to provide a service. He can use the truck and the equipment over and over again.

 

Which brings us back to Pier 1’s issues.

 

Pier 1 had to make a huge investment in ecommerce. At the same time, online competition was forcing down profits on ecommerce business.

 

The result?

 

The shrinking profits could never generate a reasonable return on the ecommerce investment.

 

The Lesson

 

Before you make an investment, ask yourself: Are my assumptions about profits realistic? Are industry changes or competition reducing the future profits on the potential investment?

 

Food for thought.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 350+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

Image: Pier by Hernan Pinera, CC By-SA 2.0

The post What Pier 1’s Bankruptcy Teaches Us About Return on Assets appeared first on Accounting Accidentally.

What Airbnb’s Profit Struggles Teach Us About Contribution Margin

I like Airbnb, and I’ve used the service multiple times.

 

The company has huge brand awareness, but it’s struggling to produce consistent profits.

 

What Happened

 

The Wall Street Journal recently wrote about Airbnb’s profit struggles, as it consider launching an IPO. Here are some quotes:

 

“The company is the largest home-sharing platform in the U.S., with more than two million people on average booked every night into its listings worldwide.

 

The board in recent weeks grilled executives on why expenses are outpacing revenue, the people said.

 

Airbnb increased its revenue to $1.65 billion in the third quarter, up almost $400 million from a year earlier, one of the people said. But costs rose faster. Net profit for the quarter was $266 million—less than the $337 million profit for the same period in 2018.”

 

Airbnb’s costs will increase in several areas.

 

Safety program

 

Costs are likely to increase further, as a result of Airbnb’s recent move to spend more on safety issues affecting its platform. The company has struggled with theft, prostitution and other crimes among its hosts and guests since its founding in 2008.

 

Technology

 

Airbnb is also spending heavily on upgrading the technology of its platform, with costs running at more than $100 million a year, a person close to the company said.

 

Home office costs

 

One category of costs that has grown particularly fast is general and administrative expenses, which more than doubled year-over-year to total $175 million in the third quarter, according to another person close to the company. This category covers business overhead, such as the costs to run Airbnb’s San Francisco headquarters, and legal, accounting and human-resource functions.

 

Company growth is difficult to manage, and one useful accounting tool is contribution margin.

 

Contribution Margin

 

In my Accounting All-In-One For Dummies book, I define contribution margin as sales less variable costs.

 

Contribution margin covers your fixed costs, and the amount that remains is your profit.

 

Here’s a simple example:

 

Julie’s hardware store generates $600,000 in sales and $200,000 in variable costs. Her contribution margin is ($600,000 – $200,000), or $400,000. The $400,000 covers her $250,000 in fixed costs (rent, insurance premiums), and the remainder is a $150,000 profit.

 

Which brings us to the problem at Airbnb.

 

The goal is to grow sales at a faster percentage rate than your variable costs and your total fixed costs. When using contribution margin, always look at fixed costs in total dollars, not per unit. Think of fixed costs as a set amount of money that your have to pay, before you compute profitability.

 

Airbnb’s costs are growing at a faster rate than sales- both fixed costs and variable costs.

 

So, what to do?

 

The Lesson

 

You can’t “outrun” increasing costs by simply selling more. Cost control is a management issue, and if you make smart decisions about costs, you can improve profits- even in flat sales year.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

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What the $4.1 Billion Juul Writedown Teaches Us About Goodwill

Goodwill is one of the most misunderstood accounting concepts.

 

The stakes for getting goodwill accounting right are very high.

 

Altria, the cigarette manufacturer, recently took a huge financial hit on its investment in Juul, the firm that produces the smokeless/ vaping product.

 

What Happened

 

This Reuters article explains that: “Altria Inc said on Thursday it recorded a $4.1 billion charge in the fourth quarter for its investment in Juul Labs Inc, nearly three months after taking a $4.5 billion charge in the e-cigarette maker.

 

The Richmond, Virginia-based cigarette maker said the charge was mainly due to the increased number of legal cases pending against Juul and the expectation that the number will grow.”

 

Wow.

 

So what does “taking a charge” mean, exactly? Let’s start at the beginning.

The Basics of Goodwill

 

Assets are used to create revenue in your business.

 

A plumber uses his plumbing truck to visit homes and make repairs. Over time, the value of the truck will decline in value, and he’ll post depreciation expense to account for the truck’s decrease in value.

 

Goodwill is also an asset.

 

In my Accounting All-In-One For Dummies book, I explain the goodwill is an intangible asset, meaning an asset with no physical presence. Patents, copyrights, and trademarks are assets that are intangible.

 

Now, here’s the source of confusion. Goodwill cannot be internally generated.

 

That may sound strange.

 

When Apple created the iPhone, didn’t they take the R&D costs and capitalize them as an asset? After all, the iPhone has made Apple millions of dollars in profit.

 

The answer, in most cases, is no. Here’s why.

 

Accounting standards assume that it’s too difficult to identify the specific R&D costs that created a patent, copyright, or some other intangible asset. So to be conservative, accountants expense R&D costs as incurred.

 

You create goodwill when you purchase an asset for a price that’s greater than the fair market value of the assets. This video from my You Tube channel explains accounting for goodwill.

 

Which brings us to the Juul writedown.

 

You can’t have an asset on your balance sheet at a value that is more than it’s currently worth. So, when Altria determines that pending litigation has reduced the value of Juul, it must decrease the goodwill (asset) account and increase expenses.

 

The Lesson

 

If a company pays a premium for another business and posts a balance to goodwill, it’s taking a risk. If an acquired firm declines in value, the decrease in value must be immediately posted to expenses.

 

If you’re looking for an effective tool to prepare for the CPA Exam, this video provides a solution.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

The post What the $4.1 Billion Juul Writedown Teaches Us About Goodwill appeared first on Accounting Accidentally.

What to Know Before You Buy a Pre-Selling House and Lot

Buying a home is one of the biggest financial milestones in every Filipino’s life.

A house is a costly yet worthwhile investment, but it doesn’t need to be so expensive. There are tons of options that will save you money, while still allowing you to get the house of your dreams. One option is a pre-selling house and lot, which is a house sold before its completion, during its construction, or while in its initial planning stage.

There are several things to consider when thinking about purchasing a pre-selling property. This helpful guide will walk you through what to expect and if it’s right for you.

Costs

Pre-selling properties offer a low introductory price, which can be almost 30% cheaper than the completed property.

Developers have been known to offer 10% to 15% discounts and flexible payment schemes. Some payment plans offer down payments as low as 10% payable over three years, while the lump sum can be paid through bank financing, government home loans, or the developer’s in-house financing options. If you’re buying for investment purposes, this may be beneficial to you.

Since you’ll be buying low, if you plan to sell your house in the future, you might be able to earn back your investment since the property’s market value will increase by the time its finished.

The cost of a house will differ depending on the location. The price of a pre-selling property in Metro Manila will obviously be quite exorbitant, but you can find an affordable yet beautiful pre-selling house and lot in Cavite or in any city farther from the center.

Options

Besides costs, the biggest benefit of purchasing a pre-selling property are the customization options available to you.

Since the unit is not completed yet, some developers may allow you to customize the unit to your liking. You’ll also benefit from having new and unused amenities and facilities. Unlike ready for occupancy properties, you’ll be able to select your first preference for the property rather than only having to choose from what is available and offered to you by developers.

Move-in period

A pre-selling house cannot be moved into right away. Depending on the type of property you’re purchasing or the developer’s stipulations, the time frame to move-in could be anywhere from six months to one year, even more in some cases. Time frames also depend on what stage development of the property is in when inquiring about it.

A property in its early planning stage will obviously take longer to turn over. This may be a potential drawback for you, if you’re planning to use the house immediately. Therefore, it’s essential to make plans early on.

Depending on how soon you want to move in, you can always look for properties with a shorter turnover time. Usually, these are developments that are approaching completion. The amount of money you’ll save from planning beforehand with definitely be worth the effort.

Lastly, here are some practical things to keep in mind before making your final decision:

Choose a reputable developer with a verified history of developing quality projects

 

Do a background check on your sales agent or broker

 

Opt for a location that is accessible to other developments and major expressways and highways

 

Always ask about promos, discounts, and flexible payment terms available

 

Factor in additional expenses that purchasing the property will cost you, in addition to the total cost of the house

As with anything that requires you to spend money, it will be best to do your research. It’s better to be knowledgeable than to make an uninformed decision.

My next book, 50 Stories That Explain Accounting, will be out in 2020. More info to follow.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

The post What to Know Before You Buy a Pre-Selling House and Lot appeared first on Accounting Accidentally.

Give Yourself an Edge in Your Accounting Career

A career as an accountant can certainly be a lucrative one.

 

If you’re able to work with numbers and help businesses keep their finances in order, being an accountant can be rewarding. It is also a competitive career, with plenty of other accountants vying for work. If you want to be sure that you have a broad range of accountant jobs available to you, you need to be able to make yourself stand out.

 

Learn Digital Skills

 

Everyone in the working world can help himself or herself by learning key digital skills.

 

If you’re an accountant, you need to be familiar with different types of accounting software. Many businesses also use software developed in-house, and you can familiarize yourself with the core capabilities and features that they tend to have.

 

Develop Soft Skills

 

Your soft skills are often just as important as any technical and practical skills that you develop.

 

Working on skills, such as communication and teamwork, will help you to find the right jobs. Employers want accountants who are a good cultural fit for the company and have the best personality for the role.

 

Aim for an International Perspective

 

Globalization is an issue for all industries.

 

It’s something you should think about if you want to give yourself an edge when looking for work. If you are knowledgeable about international rules and regulations, it can put you in a good position when you’re looking for work. Develop an international perspective and you’ll be valued by employers.

Infographic Design By University of Alabama Birmingham

 

My next book, 50 Stories That Explain Accounting, will be out in 2020. More info to follow.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

The post Give Yourself an Edge in Your Accounting Career appeared first on Accounting Accidentally.

What a Pentagon Scandal Teaches Us About Accounting Changes

Accounting adjustments can be a red flag for an auditor.

 

If a company has an experienced accounting staff and strong internal controls, they’re going to get most things right. Each accounting entry is supported by sources documents, such as invoices, receipts, and purchase orders. Accounts are reconciled in a timely manner, and the financial statements are accurate.

 

The bottom line?

 

Company stakeholders- including investors, creditors, vendors, and regulations- have confidence in the financial statements.

 

Several types of adjustments are posted during a typical month and year.

 

Four Common Adjustments

 

Nearly all businesses use accrual accounting, which matches revenue earned with the expenses incurred to produce the revenue. Accrual accounting does not post income or expenses based on cash inflows and outflows, and it’s a more accurate way to calculate business profit.

 

These are common adjustments made to comply with the accrual basis of accounting:

#1- Converting an asset into an expense

 

Assets are purchased to generate revenue.

 

When you use assets in your business, you convert the asset balance into an expense over time. Each year the plumber uses his truck, he recognizes depreciation expense and accumulated deprecation for the truck. The book value (true value) of the truck is (original cost – accumulated depreciation).

 

#2- Converting liabilities to revenue

 

If a customer pays a deposit, the balance cannot be posted to revenue until you deliver a product or service. When the deposit is received, you debit cash and post a credit to customer deposits, a liability account.

 

Once the product or service is delivered, you debit (reduce) customer deposits and credit (increase) revenue.

 

#3- Accruing unpaid expenses

 

If you owe employees $3,000 in payroll at the end of December, you post an accrual to recognize the expense in December. When you run payroll in early January, you remove the accrual. This approach posts the payroll expense in the period when the employee work was performed (December).

 

#4- Accruing uncollected revenue

 

You can also post an accrual for revenue.

 

Say that you’re owed $50 in interest on a certificate of deposit, but the bank has not paid the interest as of December 31st. You would debit (increase) accounts receivable and credit (increase) interest income for $50 on 12/31.

 

When the interest posts to your bank in January, you increase cash and reduce (credit) accounts receivable.

 

Accrual entries are day-to-day, normal accounting transactions.

 

If accounting adjustments are required after the period ends, that’s a problem. If you don’t make that $3,000 payroll accrual on 12/31, for example, your accounting records are incorrect.

 

So, I about fell out of my chair when I read about a recent Pentagon audit.

 

What Happened

 

MSN reports that: “There were 546,433 adjustments in fiscal 2017 and 562,568 in 2018, according to figures provided by Representative Jackie Speier, who asked the Government Accountability Office to investigate. The watchdog agency will release a report on the subject Wednesday after reviewing more than 200,000 fourth-quarter 2018 adjustments totaling $15 trillion.”

 

I’m sorry- what?!

 

“The combined errors, shorthand, and sloppy record-keeping by DoD accountants do add up to a number nearly 1.5 times the size of the U.S. economy”, according to Representative Speier.

 

Image if the Pentagon was for-profit entity?

 

No stakeholders would have any confidence in the financial statements.

 

And why should they?

 

So this issue reveals some huge weaknesses in internal controls

 

Internal Control Issues

 

Think about your own business, and whether or not these issues impact your firm:

 

Source documents

 

Every accounting entry must be supported by source documents.

 

Sales are supported by an invoice and a product shipment to a customer.
No purchase happens, unless a purchase order is completed and properly approved.
When goods are received, you must confirm that the goods you received match the items of the purchase order.

 

Don’t fall behind

 

Have you reconciled using last month’s bank statement yet?

 

If you haven’t, you may be creating a real problem.

 

The cash account is typically produces more transactions than any other account, which increases the risk or error- or even fraud. The longer you put off reconciling the bank account, the harder it will be to uncover errors.

 

Don’t fall behind in accounting- it just makes life harder down the road.

 

Consistent use of accounting principles

 

Accountants like apples-to-apples comparisons.

 

Consistency allows stakeholders to identify trends in the financial statements, and to make comparisons. The principle of consistency states that you should stick with the same accounting methods each month and year. If you decide to change, you need a good reason.

 

Think about revenue recognition. Your policy is to post revenue when a customer order is shipped, and you’ve had that policy for years.

 

What if, in December of the year, you decide to start posting revenue when orders are placed? That’s a problem, because you can’t compare December’s results (new policy) with November activity (old policy).

 

In fact, a change in accounting principle can be a red flag that management is trying to manipulate company financial results to look better than they actually are. Fortunately, accounting standards require firms to disclose the financial impact of both the old and the new method.

 

So what have we learned?

 

The Lesson

 

Every business posts adjusting entries to comply with the accrual method of accounting, and that’s normal. Adjustments required for a prior period- including those identified by an auditor- are an indication of poor internal controls.

 

My next book, 50 Stories That Explain Accounting, will be out in 2020. More info to follow.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

Image: muffinmax71xx

The post What a Pentagon Scandal Teaches Us About Accounting Changes appeared first on Accounting Accidentally.

What the Amazon/ Fed-X Dispute Teaches Us About Cost Allocation

Do you notice all of the delivery trucks on the road?

 

At one point the other day, I saw Amazon Prime, USPS, and Fed-X trucks: all in the same block.

 

Sure, online business is booming, but a big factor is shipping costs. How to you properly assign company costs to each source of revenue?

 

The process can be difficult, and if you don’t allocate costs in a way that makes sense, your financial results will be distorted. You won’t understand how profitable a particular business line is, and that’s a big problem.

 

To illustrate this challenge, consider the recent dust-up between Amazon and Fed-X.

 

What Happened

 

This recent Wall Street Journal article explains that Amazon recently “notified its third-party merchants that they could once again use FedEx’s Ground network to ship orders placed under Amazon’s Prime membership program, nearly a month after imposing a ban on the service because of performance issues.”

 

What specific performance issues?

 

“An Amazon spokesman said FedEx Ground has been reinstated for Prime shipments fulfilled by third-party sellers now that the services are consistently meeting the retailer’s on-time delivery requirements.”

 

The issue here is that many third-party merchants (independent businesses that sell goods on Amazon) had to find a different method to ship goods while Fed-X Ground was not an option.

 

The other options were more expensive.

 

“With FedEx Ground off limits, the merchants had to use other options to ship Prime orders, including FedEx’s higher-priced air delivery service or services from rival United Parcel Service Inc.”

 

If your costs increase, how to you assign costs to products, and measure profitability?

Direct vs. Indirect Costs

 

At the beginning of my Cost Accounting For Dummies book, I make the distinction between direct and indirect costs. Assume, for example, that you manufacture baseball gloves.

 

Direct costs: Costs that can be directly traced to a product or service. The leather material and the labor costs to run machinery are direct costs.

 

Indirect costs: These costs are allocated, and cannot be directly traced to the product. The utility costs incurred to operate the baseball glove factory are indirect costs. You’ve got to heat and cool the factory; regardless of how many gloves you produce each month.

 

Let’s go back to our third-party merchant.

 

Cost vs. Benefits

 

You can determine the exact cost to ship a particular item to a customer, so, in that sense; it’s a direct cost. The question is how much effort do you want to invest to assign the exact cost?

 

Does the benefit of knowing the exact shipping costs outweigh the time and effort to collect the information?

 

With technology, many companies can nail down the exact cost to ship pretty easily.

 

You’ve probably had this experience. You buy something online and start the checkout process. You enter your address, and the e-commerce software computes the exact cost to ship and adds it to your bill.

 

Simple.

 

Why is this important?

 

Because the seller can confirm that exact cost to ship, which means the owner can make more informed business decisions. The owner can handle shipping costs in several ways:

 

Add the shipping cost to the invoice
Charge a flat rate for shipping, and use the actual shipping cost to calculate the specific profit (or loss) on each order
Offer free shipping, and use the actual shipping cost to calculate the specific profit (or loss) on each order

 

More information on costs helps you manage your business.

 

 

 

The Lesson

 

Every dollar your company spends must be traced or allocated to a product you sell. If apply this rule to your business, you’ll know your total costs, and you’ll be able to price your product more accurately.

 

My next book, 50 Stories That Explain Accounting, will be out in 2020. More info to follow.

 

For live CPA exam prep and accounting classes, join Conference Room for free. Members will be notified of course dates, times, costs, and how to attend these courses.

 

Get your questions answered to pass the CPA exam, and to learn accounting concepts.

 

Go to Accounting Accidentally for 300+ blog posts and 450+ You Tube videos on accounting and finance:

 

Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

 

The post What the Amazon/ Fed-X Dispute Teaches Us About Cost Allocation appeared first on Accounting Accidentally.