Finance Management Articles - Page 36 of 96

The term "deferred tax" refers to a tax which shall either be paid in future or has already been settled in advance. In this article, we will see why a company may differ its tax to a subsequent fiscal year or why a company may choose to pay the tax in advance.Most companies normally prepare an "income statement" and a "tax statement" every fiscal year because the guidelines that govern the recording of income and taxation are slightly different. It is this slight disparity between the guidelines that creates the scope for deferred tax.Types of Deferred TaxThere are two types ... Read More

Amortization vs. DepreciationBoth Amortization and Depreciation are concepts that are used to account for the consumption of assets and how they lose their value over their useful life.We understand that tangible assets such as plant machinery, furniture, buildings, and vehicles lose their value over a period, which is called "depreciation". But, what about intangible assets such as copyrights, trademarks, patents, agreements, etc.? Such intangible assets too lose their value over a course of their useful economic life.Amortization is a concept similar to depreciation, but it is applied primarily to intangible assets and their periodic reduction in value over time. The ... Read More

As the name suggests, an "installment sale" is an approach where the seller allows the buyer to make payments in installments over a period of time. It is a Revenue Recognition method in which the seller defers the revenues until the payment is received.In an Installment Sale, the revenues and the expenses are recognized at the time when the actual cash flow occurs, rather than at the time of sale. Installment Sales are quite prevalent in real-estate deals.Note that, although the buyer gets the goods at the beginning of the installment period, the ownership is not fully transferred at the ... Read More

Most of the big companies do business on credit. They supply goods and services for which the payments are received at a later stage or over a period of time. Hence, it becomes important for companies to follow a standard process to recognize the revenue from such transactions and record them in their financial statements.There are multiple stages at which a company can recognize the revenues in its books.Revenue Recognition CriteriaAccording to the International Financial Reporting Standards, the following conditions must be satisfied to have a company recognize its revenues −There should be sufficient assurance that the payment will be ... Read More

The Accrual Principle is a concept in Accounting where the financial transactions are recorded during the same time period in which they occur. Note that the actual cash flow may occur at a later stage. For example, suppose a company supplies goods worth $50, 000 in the first quarter of financial year, but the company receives the payment in the second quarter. In such a case, if we apply the Accrual Principle, then the company will record this financial transaction in its books in the first quarter itself.The Accrual Principle is useful when it is important to match the revenues ... Read More

Cost-Plus Pricing Vs Value-Based PricingIn general, companies calculate the selling price of a product or service based on the costs incurred in manufacturing that product or delivering that service. This is what we call Cost-Plus Pricing strategy where the price of a product is proportional to the manufacturing cost.We very well understand that a superior brand can charge slightly more for a product than a less-known company that produces the same product, which is the usual case. There's a brand value attached to products that belong to a superior brand. In such cases, the price difference between the products do ... Read More

We can define Marginal Benefit as the maximum amount a buyer can pay for an extra unit of product purchased after the first unit. Consumers normally tend to compare the marginal cost of purchasing an extra unit with the marginal benefit derived from purchasing it. In other words, we can also define Marginal Benefit as the satisfaction that a consumer gets after purchasing an extra unit. It is also known as marginal utility.How Do Companies Use Marginal Benefit?Marginal Benefit is a valuable tool that is heavily used in business market research and advertising. Companies evaluate marginal benefits and use that ... Read More

The "discounted payback period" is a modification of the simple payback version where the time value of money is considered in the calculation. In discounted payback period calculation, different metrics are used to measure the amount of time the project will take to "break-even."In some cases, the discounted payback is measured to the point of time where the net cash flows generated from the project cover the initial cost of the project.Simple and discounted payback periods are both used to measure the profitability and feasibility of an investment project.Underlying Meaning of Discounted Payback PeriodThe discounted payback period is used to ... Read More

All typical investments have the following three types of cash flows −Initial investmentYearly net cash flowsTerminal cash flowsInitial InvestmentThe initial cost is the cost of assets in the beginning phase of a project. It is the net outlay in the given period when an asset is purchased.Gross Outlay or Original Value (OV) is a major element of initial investment which includes the costs of accessories and spares, and freight and installation charges. The OV is included in the block of an asset to calculate the depreciation. Original value minus depreciation is the book value (BV) of the asset.A lumpsum investment ... Read More

The Profitability Index (PI) shows a parallel between the expenses and profits of a certain project. It is obtained by dividing the net present value of the property’s future cash flows by the initial investment.When the profitability index is over 1.0, it is positive and the investment will generate profits.If the PI is less than 1.0, then it is negative where the investment will probably fail.In other words, the profitability index is the ratio between the net present value of future cash flows and the initial investment.A profitability index number of 1.0 is likely the lowest desired number for investors. ... Read More