Author Archives: Karl

Consistency

It’s such a simple word, with a clear and simple meaning, and yet often neglected and outright ignored. Why is it so however, I have no idea.

Let me explain.

Consistency is by default presumed in your daily reporting and as such, it is assumed you would account similar transactions in a manner that is consistent from day to day, from period to period. It is also assumed that your accounting routines are similar from transaction to transaction, i.e. referencing documents, describing the entries within the accounting system, reading the subject matter of the transaction as opposed to what’s written on the document and giving all similar transactions the same accounting treatment.   Continue reading →

Deposit accounts with banks – disclosure on the statement of financial position

Deposits in banks are tricky when it comes to disclosing them on the statement of financial position or balance sheet. There are different types of deposits and it may very well that there are different types used in your company alone.

Factors to be considered when deciding whether the deposit is in fact a cash equivalent or a receivable are as follows:  Continue reading →

Whether to depreciate an asset into expenses over a shorter period or fully write it down or off from the balance sheet?

I can see where such a situation may arise from. There’s an asset you’re no longer using and you’re more than likely to either sell it to the scrap yard or if that’s not an option, just get rid of it. It’s no longer usable, requires enhancements, repairs or whatever for it to be usable and as such, it’s not generating any cash flows for your company.

The question is just in the sense that you need to do something with the asset and not bluntly continue depreciating it as you’ve been doing up to this point.  Continue reading →

EBIT

EBIT stands for Earnings Before Interest and Taxes.

Whilst you may hear many people talking about EBITDA, the use of EBIT is somewhat neglected, whereas if you think about it, the difference between EBIT and EBITDA is just depreciation and amortization.

Why would someone however prefer EBIT to EBITDA? Why is it so that one is preferred over another?   Continue reading →

EBITDA

BITDA stands in short for Earnings Before Interest, Taxes, Depreciation and Amortization.

When you think about your income statement, there’s revenue, there’s types of expenses and subtotal lines. There’s also the financial income and expenses, tax expense and at the bottom there’s the net profit after tax. To reach a company’s EBITDA you take this net profit and add back expenses like tax and interest for this period, you also add back depreciation and amortization for assets and as you do that, you reach the EBITDA for the period. Essentially one could say that EBITDA is what your operations earn you taking back non-cash expenses like depreciation and amortization as well as other expenses not related to business operations.  Continue reading →

Inventory turnover

Inventories are used in your selling activities, in production and whatnot. However, have you measured they’re turnover, namely how many times they’re sold and replaced over a period?

There are two methods reaching the ratio: (1) either you divide sales revenue with inventory balance or (2) you divide cost of goods sold with average inventory. Note that the result gives you the time the balance is “going through your profit and loss accounts”. To come back to the formulas, whilst the first one seems to be most popular, note that the second option is more accurate since inventory is recognized at its cost into cost of goods sold whereas sales revenue is made in selling prices including profit margins on top of the cost.  Continue reading →

ROI – Return on Investment

Return on investment or also known as ROI is a pretty commonly known and used in various contents, either for measuring whether an investment is essentially worth doing or basing bonuses and remunerations on. A company can find other usage for the ratio as it sees fit, but let’s first define what ROI really stands for.

Return on investment or ROI is essentially used to measure rates of return per period on money invested in order to decide whether or not to undertake an investment. ROI is also used to compare investments into different projects, assets and so on. It should be needless to say, that the higher the ROI, the higher the rate of return on investment.  Continue reading →