Author Archives: Karl

Financial ratios and measurement

The best way to measure two seemingly identical companies is using financial ratios. They are same for every company so obviously they give an independent and objective financial measure of the performance of each. However, do note that companies operating in totally different business sectors don’t necessarily have comparable ratios – like fruit seller compared to car manufacturer – the inventory turnover is completely different for those two.

A financial ratio simply put is a relative magnitude of two or more numerical values. The numbers are taken usually from company’s own financial statements (usually from balance sheet, income statement and statement of cash flows). The ratio is expressed either in decimal values or as a percentage. As a general rule, ratio lower than 1 is shown as a percentage and ratio above 1 is shown in decimal value.
Continue reading →

Activity based costing – costs per unit

As we have already discussed, activity based costing lets you measure the expenses certain process generates. This in turn helps in assessing either any alternative is necessary in terms of materials, methods or entire procedure. It also helps in determining the sales price for end or byproduct.

Although you may have the expenses measured in total, say on maintenance we used before 10,000 EUR, it still needs to be split onto measurable units. Now this part is way trickier than collecting all related expenses together. In order to do this, you need to follow the next steps.
Continue reading →

Basics of activity based costing (ABC)

Something like activity based costing or ABC comes into the scene when we are talking about some sort of production activity. Production essentially is a composition of procedures, which use materials, services etc to produce the end result, which normally are sellable goods. As such the company purchases materials, buys services, develops internal expenses (personnel, asset related depreciation etc) which usually are designated to their cost center on the income statement.

Although cost centers are essentially required to measure company’s performance in different departments, to help keeping costs on certain level and so on, it does not show you if certain procedure could be done more efficiently.
Continue reading →

Cost centers on the income statement

In a small company there is usually an admin team comprising of one accountant, assistant and manager, a sales team and perhaps a production and logistics team. While the last two are considerable in larger companies, it shows that within one company there may be numerous departments.

Although those departments vary depending on the business type and market sector, some of those are more or less described as cost centers and others profit centers. As the name suggests, cost centers are generating cost and profit centers generate revenue. Since they are within one company, profit centers take care of the revenue streams and cost centers are there to provide support for profit centers by making the products, organizing logistics, advertising, maintenance etc.
Continue reading →

Subsequent measurement of financial assets

When those financial assets (like cash, bank accounts, accounts and notes receivable etc) are initially recognized, at every balance sheet date they need to be again measured. They need to have a true and fair value on the balance sheet and it may not be the value it was initially recognized with. This is called measuring and there are specific terms for certain types of assets.

On initial recognition, the instruments are either measured at the transaction price or at the present value of future payments discounted at the market rate of interest for a similar debt instrument. The last one applies to all instruments which are considered as financing assets, i.e. when the payment is deferred beyond normal business terms. Now, this is initial recognition, however, as said before, the instruments need to be measured at every balance sheet date.
Continue reading →

What are financial assets and how are they initially recognized?

One side of the balance sheet is called ‘assets’ and they consist of various types of assets – there are inventories, accounts receivables, cash, fixed and immaterial assets etc. When some are physical and touchable sort of speak, then others are without any physical substance. Financial instruments considered also as financial assets are those without any physical substance obviously and are defined as contractual right for an asset. Essentially they form a part of assets.

Financial instruments on the asset side of the balance sheet are for example cash, deposits, bank accounts, commercial papers and bills, accounts and notes receivable, bonds, investments into shares etc. Those are all immaterial assets which arise more or less from contractual agreements.
Continue reading →

Counting cash balances

Some companies may have considerable amounts of cash meaning they deal on regular basis with cash payments. As such there is usually more than one place for keeping those cash amounts and obviously there are considerable security requirements and procedures introduced.

One thing that also must be remembered is that cash is like all assets, they need to be counted or confirmed for existence every now and then. When bank accounts are confirmed with bank statements, receivables with confirmation letters or payments, the cash is behaving in a way like the inventory.
Continue reading →