Elements of Financial Statements: Assets, Liabilities, Equity, Income, Expenses

Financial statements are written reports of a company's financial performance and position. These usually consist of the top three ones, the balance sheet, the income statement, and the cash flow statement. As implied by their name, each provides a different aspect of the company's performance or position. These financial statements also have some elements.

What do the Elements of Financial Statements mean?

The elements of financial statements are the primary components that make up a company's financial reports. Regardless of the type of company or organization, these elements are common. However, they may differ from one statement to another. On top of that, some have a higher importance than others due to how they work.

Companies can further classify the elements of financial statements into different categories based on the underlying report. In most cases, the components of the balance sheet and income statement are more important than others. The primary reason is that investors focus on these two financial statements due to their importance.

What are the Elements of Financial Statements?

As stated above, there are several elements of financial statements based on the underlying report. Among these, assets, liabilities, equity, income, and expenses are more prominent. The first three relate to the balance sheet, while the others come from the income statement. An explanation of each of these is as below.

Assets

Assets are resources that a company owns or controls that result in an inflow of economic benefits in the future. It is the accounting definition for the term. Typically, these resources include tangible or intangible costs that a company has acquired or produced over time and capitalized. These items help the company in running operations or generating revenues.

Some examples of assets include the following.

• Property, plant, and equipment
• Goodwill
• Investments
• Cash and cash equivalents
• Accounts receivable
• Inventory

Liabilities

Liabilities are the opposite of assets. These are obligations arising from past events that result in a probable outflow of economic benefits. In simpler words, it includes money or debt owed to third parties other than owners. Liabilities are one of the primary sources of finance for a company. These are part of a company's capital structure.

Some examples of liabilities include the following.

• Loans and mortgages
• Leases
• Accounts payable
• Short-term loans
• Accrued expenses
• Pension obligations

Equity

Equity includes any part of the business attributable to its owners or shareholders. In accounting, it is the residual interest of shareholders in a company after deducting its liabilities from its assets. Practically, it includes money the owners have contributed to the business and any profits or income attributable to them.

Some examples of equity include the following.

• Share capital
• Share premium
• Retained earnings
• Reserves

Income

Income includes the inflow of economic benefits during a fiscal year. Essentially, it consists of revenues and proceeds from sales and other activities. Income is a part of the income statement and is crucial in calculating profits. Usually, companies generate these from their primary activities, which fall under revenues. However, they may also get income from other sources.

Some examples of income include the following.

• Sales revenue
• Interest income
• Gain on sale of assets
• Rental income
• Royalty income
• Foreign exchange gains

Expenses

Expenses are the opposite of income and include the outflow of economic benefits during a fiscal year. Primarily, the term refers to costs or expenditures a company incurs to run its operations. Like income, expenses are a part of the income statement and help calculate profits. Companies divide these expenses based on the activities to which they relate.

Some examples of expenses include the following.

• Cost of goods sold
• General and administrative expenses
• Sales and marketing expenses
• Interest expenses
• Taxes

Conclusion

Financial statements are reports of a company’s position and performance. These reports include various elements that are common for all companies. Usually, investors focus on the balance sheet and income statement. The primary elements of these financial statements include assets, liabilities, equity, income, and expenses.

Article Source Here: Elements of Financial Statements: Assets, Liabilities, Equity, Income, Expenses

Clean Price Vs Dirty Price: What’s the Difference?

The price of a bond is a crucial metric for investors to consider when making decisions about their investment. It represents the amount at which the bond gets bought or sold. However, it is not as straightforward to determine this price. Several factors play a role in establishing the bond price. One of these includes interest rates, interest payments, and accrued interest.

When purchasing bonds, companies may come across different prices. Each may represent aspects of the bond and its valuation. Two of these include the clean and dirty price. Before discussing the differences, it is crucial to understand what each is.

What is the Clean Price of a bond?

Bonds come with a face value (or par value), the amount the issuer repays for the bond at maturity. It also comes with a coupon rate, which represents the percentage of interest the holder receives on the face value. This interest accrues on the bond over time. The clean price of the bond is its value without the impact of the accrued interest.

The clean price of a bond is also its quoted price in the market. Market facts can impact this price, causing it to fluctuate over time. Usually, these factors include interest rates, economic conditions, and the issuer’s creditworthiness. The clean price is also the amount the buyer pays to purchase the underlying bond. The difference between this price and the face value is the accrued interest on the bond.

What is the Dirty Price of a bond?

The dirty price of a bond is the amount that factors in its accrued interest and its clean price. Usually, it includes the coupon that the instrument has accumulated since its last coupon payment date. The dirty price of the bond is relevant when it gets traded between interest payment dates. Since the bond gains coupon payments on those dates, the buyer must pay the dirty price of the bond.

The dirty price of the bond also represents its purchase price. However, it only applies when there is accrued interest on that bond. This price is lower than the bond's clean price but still requires the latter for calculation. The formula for the dirty price of a bond is as follows.

Dirty price = Clean price + Accrued interest

Clean Price vs Dirty Price: What’s the difference?

The primary difference between the clean and dirty prices of a bond comes from accrued interest. As mentioned above, the former value does not consider this interest when determining the bond's price. On the other hand, a dirty price requires a clean price and the interest accrued to evaluate the bond. The clean price represents the principal amount of the bond, while the dirty price is what investors pay for it.

Another difference between them also relates to the interest accrued. In the market, the clean price of the bond is the quoted price between investors and brokers. It is the value the bond receives at the next interest payment. On the other hand, the dirty price represents the bond’s current value in the market. It is the value of that bond between interest payment dates.

Conclusion

The price of a bond may differ based on various factors. One of these differentiations comes from whether it comes with accrued interest. If the price does not consider this interest, it is called the bond's clean price. However, if the bond's price includes the clean price and accrued interest, it is called the dirty price.

Originally Published Here: Clean Price Vs Dirty Price: What’s the Difference?

Black Swan Event: Definition, Meaning, Examples, History

When it comes to the stock market, certain events can cause significant volatility in the markets and can lead to major losses for investors. One of the major events that can cause these kinds of losses is a black swan event.

The event can cause significant losses due to the occurrence of an unexpected event, which can cause a dramatic change in the markets. Black swan events are unpredictable and often have far-reaching consequences that can affect various aspects of the economy.

What is a Black Swan Event

A Black Swan event is an unpredictable and unforeseen event that has extreme consequences. It is typically a low-probability occurrence with potentially significant impacts on society or businesses.

The term was first coined by Nassim Taleb in his book The Black Swan: The Impact of the Highly Improbable, which explores the potential implications of highly improbable events.

The concept of a Black Swan event has subsequently been used in fields such as finance and economics to describe unexpected events that can have far-reaching effects on markets and economies.

For example, the 2008 financial crisis is often referred to as a Black Swan event due to its unexpected nature and devastating impact.

While it is impossible to predict a Black Swan event, it is important to prepare for one to minimize the risks of significant losses.

Understanding the Black Swan Event

The term ‘Black Swan’ is used to describe an event that is both unprecedented and highly improbable, yet has a significant impact on society or businesses.

These events are often attributed to “unknown unknowns” – things we didn’t know and weren’t expecting – but can also be caused by known risks that have been ignored or underestimated.

Most of the time, Black Swan events occur due to a combination of unforeseen circumstances coming together in dramatic and unpredictable ways, such as the 2008 financial crisis.

This event mainly hits the stock market and stock prices, but can also hit other areas such as the housing market, labor market, and technology sector.

The impact of the Black Swan events can be significant and long-lasting. It is therefore important to have strategies in place to identify potential risks and prepare for them.

Characteristics of a Black Swan Event

• Black swan events are unexpected and unpredictable
• The effects can last for extended periods
• Has a huge impact on the economy, markets, and society
• May cause global chaos or disruption
• Can have catastrophic consequences
• Difficult to detect and predict

Examples of the Black Swan Event

A good example of the Black Swan Event would be the 2008 Financial Crisis. This was caused by some factors such as high levels of debt, lax regulation, and excessive speculation in the housing market.

The event had a major global impact on economies, financial markets, and societies.

The terrorist attacks that occurred on September 11th, 2001 would also be considered to be an example of a Black Swan Event. This was an event that was not only unexpected and unpredictable but one that had a lasting effect on the world.

There are noticeable similarities between every Black Swan Event and the effects can be felt both in the short term and long term. They can have a devastating impact on society, economies, and financial markets.

Conclusion

The Black Swan is an unpredictable event that can have far-reaching consequences. While it is impossible to predict these events, it is important to be prepared for them to minimize the risks of significant losses. Understanding the characteristics of a Black Swan event and having strategies in place can help protect businesses from potential disasters.

Post Source Here: Black Swan Event: Definition, Meaning, Examples, History

Return on Net Operating Assets (RNOA): Definition, Formula, Calculation, Example, Analysis, Meaning

Return is the income an investor receives on their investment. It can be in the form of fixed income generated from the underlying asset. For example, dividends and interest receipts are a form of fixed income on instruments. However, a return can also come as capital gains or losses. Companies also use a return to calculate the wealth generated for their shareholders.

Companies use different metrics to understand how much resources go into generating income. One of these includes the return on net operating assets.

What is the Return on Net Operating Assets?

This term, return on net operating assets, refers to the income companies get from their net operating assets. As discussed in this article, these assets refer to the resources invested in a company's core operations. Its calculation involves subtracting non-operating assets and non-operating liabilities from total assets and liabilities.

Return on net operating assets measures a company's financial performance by using its net operating assets. While companies can calculate their returns on total assets, this metric provides a more relevant measure of profitability. Essentially, return on net operating assets gives better insights into the use of operating resources to generate profits.

What is the formula for Return on Net Operating Assets?

The formula for return on net operating assets is straightforward. It involves dividing operating income over net operating assets. However, it requires calculating the latter first. As previously discussed, the formula for net operating assets is as follows.

Net Operating Assets = Operating Assets - Operating Liabilities

Once companies calculate the net operating assets, they can use it in the formula for return on these assets. Alternatively, they can also put the above equation into the calculation directly. The first return on net operating assets formula is as below.

Returns on Net Operating Assets = Operating Income / Net Operating Assets

Similarly, companies can also use the following alternative formula for return on net operating assets.

Return on Net Operating Assets = Operating Income / (Operating Assets - Operating Liabilities)

Regardless of the return on net operating assets formula, the calculation provides the same ratio. The operating income in both comes from the income statement, usually as a separate line item. On the other hand, the operating assets and liabilities come from the balance sheet and may require additional calculations.

Example

A company, Red Co., generated an operating income of $100,000 during a fiscal period. At the same time, the company had net operating assets of $500,000. Based on the above, the return on net operating assets for Red Co. is as follows.

Returns on Net Operating Assets = Operating Income / Net Operating Assets

Returns on Net Operating Assets = $100,000 / $500,000

Returns on Net Operating Assets =0.2 or 20%

Interpreting the above metric is not as straightforward since it does not provide insights into Red Co.'s operations. The company must use the ratio comparatively to interpret the results better. Usually, it requires comparisons with past periods, competitors, and industry standards.

Conclusion

Return on net operating assets is metric companies use to measure their operating efficiency. Unlike other ratios, it focuses on net operating assets, which provides better insights into how a company utilizes its resources. However, companies cannot use the ratio on its own. Instead, they must compare it with others to understand it better.

Originally Published Here: Return on Net Operating Assets (RNOA): Definition, Formula, Calculation, Example, Analysis, Meaning

Goods in Transit: Definition, Accounting Treatment, Journal Entry, Example

Accounting standards require a company to record inventory when the risks and rewards associated with the goods get transferred to it. Sometimes, the company may not be in physical possession of those goods. However, they may still need to record the inventory they have not yet received. In most cases, this inventory falls under goods in transit.

The accounting for goods in transit may be complex due to its nature. However, it can be more straightforward through understanding what these goods are.

What are Goods in Transit?

Goods in transit refer to items that have not reached the final destination yet. It includes products that a company has purchased but not yet received. Technically, these goods are in possession of the carrier, i.e., the shipping company. However, it has not reached the buyer or the final recipient. Goods in transit may also have insurance set out against them.

Goods in transit can be complex to understand due to their nature. In short, these goods are neither with a supplier nor the customer. Instead, they include items that have left the supplier's location but have not yet reached the customer. However, the risks and rewards associated with these goods have been transferred to the customer. It usually means that the supplier has passed the legal ownership to the customer.

What is the accounting for Goods in Transit?

Accounting standards require the company that owns goods in transit to consider them as inventory. Therefore, they are a part of the company's balance sheet as a current asset. The accounting for goods in transit involves making entries in the company's general ledger when the risks and rewards get transferred. Until these goods reach the company, they are a part of the “goods in transit” account.

The accounting process records the movement of the goods from the supplier to the customer. When the supplier sends the goods, the customer must record them as goods in transit transaction. However, the legal ownership of these goods must be passed to the customer to count as a transit item. Once these goods reach the customer, they can move the balance to the inventory account.

What is the journal entry for Goods in Transit?

The journal entry for goods in transit is straightforward. It requires ascertaining that the legal ownership of the items has passed to the customer. However, the goods must not be in their possession. The journal entry to record these goods in transit will be as below.

Dr	Goods in transit
Cr	Bank or Cash or Accounts payable

Once the customer receives the goods, they must transfer the amount to the inventory account. The journal entry to do so is as follows.

Dr	Inventory
Cr	Goods in transit

Example

A company, Red Co., purchases $10,000 worth of inventory from an overseas supplier on credit. The supplier transfers the legal ownership of the goods to Red Co. However, the goods take 10 days to reach the company. At the time, Red Co. records the transaction as follows.

Dr	Goods in transit	$10,000
Cr	Accounts payable	$10,000

After 10 days, Red Co. receives the goods. The company transfers the amount from goods in transit to inventory as follows.

Dr	Inventory	$10,000
Cr	Goods in transit	$10,000

Conclusion

Goods in transit refer to inventory a company receives the risks and rewards from but not the physical possession. Usually, it includes products a supplier has shipped but has not reached the customer. The accounting for goods in transit may be complex due to the underlying concept. However, the journal entries are straightforward.

Originally Published Here: Goods in Transit: Definition, Accounting Treatment, Journal Entry, Example

Everyday Low Pricing: Definition, What It Is, Examples, Strategy, Advantages

Customer acquisition and retaining customers are top priorities for any business. One of the best ways to keep customers coming back is to provide them with everyday low pricing on their favorite products or services.

Everyday Low Pricing or EDLP is a pricing strategy in which the same price is given to all customers for all products. This helps build trust and loyalty, as customers know they can rely on you for consistently low prices.

What is Everyday Low Pricing

EDLP is a pricing strategy that offers low, consistent prices all day long. This means that the same price will be given to all customers regardless of their purchase frequency or quantity.

This helps businesses create a predictable pricing environment for their customers and also encourages repeat purchases from existing buyers.

To successfully implement an EDLP strategy, it's important to consider factors such as customer demand, competitor pricing, and cost structure.

This will help you determine the right price point to offer that gives your customers great value while also providing a profit margin for your business.

A good example of EDLP would be Walmart, which has consistently offered low prices to its customers. This strategy has helped them become one of the world’s largest retailers and a leader in customer satisfaction.

How Everyday Low Pricing Works

The pricing model of EDLP is different from other pricing strategies because it offers a consistent price for all its customers. It doesn't matter whether it's a sales day or a promotional event, the same price will be given to each customer.

This way customers don't have to compare different products and prices since they know they can get a low price no matter what. This helps to create brand loyalty and trust, as customers know they can rely on you for consistently low prices.

Benefits of Everyday Low Pricing

Everyday Low Pricing offers several benefits for businesses, including

1. Fewer marketing costs

One of the biggest benefits of EDLP is that it eliminates the need for promotions or discounts. This means you can save money on marketing costs, as there's no need to create special campaigns to attract customers or offer discounts.

2. Improved customer loyalty and trust

Consistently low prices help build customer loyalty and trust because customers know they can rely on you for great deals. This also creates a predictable pricing environment which makes it easier for customers to plan their purchases.

3. Improved customer experience

With EDLP, customers don't have to compare different products or prices. This saves customers time and effort and creates a better shopping experience. In addition, customers may be more likely to make impulse purchases because the price is always low.

4. Regular business profits

By offering consistent prices, businesses can ensure regular profits since they don't have to worry about fluctuating demand due to changing prices. This helps create more consistent revenue streams and keeps your business profitable in the long run.

Conclusion

Everyday Low Pricing is a great way for businesses to keep their customers coming back. With EDLP, businesses can provide consistent prices to their customers while also increasing customer loyalty and trust. This strategy is easy to implement, requires minimal marketing costs, and helps ensure regular profits for businesses.

Article Source Here: Everyday Low Pricing: Definition, What It Is, Examples, Strategy, Advantages

Construction Work in Progress: Definition, Accounting Treatment, Journal Entry, Example

Some companies take up construction projects for internal use. These may include building a fixed asset for future use. Sometimes, this work may not be complete when a company prepares its accounts. Therefore, the company must perform specific accounting treatments to present this work. The process is not complex but requires an understanding of the concept first.

What is Construction in Progress?

Construction in progress (or construction work in progress (CWIP))is an account in the balance sheet that includes costs incurred during the construction phase of long-term assets. It may consist of work on a fixed asset such as a building, factory, or power plant. Usually, construction work in progress consists of materials, labour, equipment rental, borrowing costs, and other indirect expenses.

Accounting standards require companies to show uncompleted work separately from other assets. In the balance sheet, it appears as construction work in progress. Primarily, companies use this treatment as the asset is not yet complete and is considered a work in progress. Therefore, it is not readily generating income for the company. Once the work gets completed, the company can transfer the amounts from this account to the relevant fixed asset account.

What is the accounting for Construction in Progress?

The accounting for construction in progress occurs through several accounting periods. Firstly, when a company starts construction work on an asset, it records it in a separate account. As mentioned above, these costs include material, labour, borrowing, equipment costs, etc. Over time, the amount in this account builds up until the construction work is complete.

Once the company stops working on an asset and that asset is available for use, it must remove the amount from the account. Usually, all the amount from the construction-in-progress account gets transferred to the relevant fixed asset account. From this point onwards, the accounting for the amounts falls under the applicable accounting standards.

What is the journal entry for Construction in Progress?

As mentioned above, the accounting for construction in progress includes various stages. It starts when a company begins construction work on an asset. At this point, the company must capitalize all relevant expenses pertinent to the construction to a separate account. In most cases, this account is known as the construction work-in-progress account.

The journal entry to record expenses incurred for construction work at this stage is as follows.

Dr	Construction work in progress
Cr	Cash or bank or accounts payable

Once the work on the asset under construction is complete, the company can transfer the amount to the assets account. At this stage, the journal entry is as follows.

Dr	Fixed asset
Cr	Construction work in progress

Example

A company, Blue Co., begins constructing a building for future office space. The company spends $100,000 in materials for the construction work. Similarly, the labour charges are $150,000. Other expenses related to the building amount to $50,000. Overall, the company records these amounts in the construction work-in-progress account. Blue Co. pays all these expenses through its bank account.

The collective journal entry for these is as below.

Dr	Construction work in progress	$300,000
Cr	Bank	$300,000

After the work on the building is complete, Blue Co. transfers these costs to the relevant account. The journal entry for this transfer is as below.

Dr	Building	$300,000
Cr	Construction work in progress	$300,000

Conclusion

Construction in progress refers to costs that a company incurs for construction work on incomplete assets. Once the construction gets completed, the company transfers these costs to the relevant fixed asset account. Accounting for construction in progress occurs in two stages, as stated above.

Post Source Here: Construction Work in Progress: Definition, Accounting Treatment, Journal Entry, Example

An Option Pricing Model Based on Market Factors

In option pricing theory, the risk-neutral measure is a measure that allows for the valuation of financial instruments such as options. The risk-neutral measure is obtained by assuming that investors are indifferent to the risk and that the expected rate of return on all assets is equal to the risk-free rate of return.

Under the risk-neutral measure, the price of an option is its expected future payoff discounted to the present using the risk-free rate. The risk-neutral measure is widely used in financial mathematics and allows for the valuation of a wide range of financial derivatives, including options, futures, and other complex financial instruments. It is important to note, however, that the risk-neutral measure is a theoretical concept and does not necessarily reflect the actual risk preferences of market participants.

Reference [1] developed a market factor-based option pricing model using the business-cycle CAPM. It allows for the evaluation of options traversing between the risky and risk-neutral probability measures. The authors pointed out,

The business-cycle CAPM transforms the measure of the risky output variable to the risk-neutral predicted values. Therefore, it accomplishes option pricing through rational expectations and martingale. Martingale suggests the possibility of an arbitrage-free hedging strategy. The option pricing process demonstrates the stochastic discount factor pricing model straddling between factor and stochastic expectation pricing models. The business-cycle CAPM assumes liquidity and credit risks due to asymmetric information. The volatility of the risk-neutral predicted values shows jumps. Therefore, we are dealing with options data of market incompleteness. Consistent with the risk-neutral probability of the predicted values, we develop the underlying stock distribution around the market stock price using its market information of volatility and kurtosis. For LinearReg, the risk-neutral regression finds the hedging parameters of the delta-hedge stock-money portfolio with the regression mean equal to the market option price.

This is another interesting article that attempts to go beyond risk-neutral pricing.

Let us know what you think in the comments below or in the discussion forum.

References

[1]  Tse, Wai Man, Factor-Based Option Pricing with Perfect Dynamic Delta Hedge (2023). https://ssrn.com/abstract=4149481

Article Source Here: An Option Pricing Model Based on Market Factors

Horizontal Integration: Definition, Examples, Who Used, Meaning, vs Vertical

Running a business in a comparative market can be difficult. Businesses need to maintain their competitive edge to stay in business. They need to find ways to increase their market power while minimizing losses.

One way businesses can achieve these goals is through horizontal integration. It is a simple yet effective strategy in which business entities operating within the same industry join forces to increase their production of goods and services.

What is Horizontal Integration?

Horizontal integration is a strategy employed by businesses to acquire or merge with companies that are operating at the same level of the value chain in the same industry.

This strategy can create economies of scale and reduce costs, as well as increase market power and customer base. Horizontal integration can also provide access to new technologies and resources that would otherwise be unavailable to the business.

In simple words, a business entity expands its operations by taking over competing firms in the same industry. The purpose of horizontal integration is to increase market power, gain access to new sources of revenue, reduce costs, and improve operational efficiency.

How Horizontal Integration Works

Horizontal integration is the process of purchasing, merging, or acquiring companies that are at the same stage in the production chain and within the same industry. The idea behind horizontal integration is to increase control over a specific market or area of production.

For example, if a company manufactures chocolate products, it might merge with another chocolate-manufacturing company to increase production and market share. As a result, it would have more control over raw materials and production costs, as well as access to new markets.

Horizontal integration also allows businesses to gain access to new resources, technologies, and customers. By merging with or acquiring another firm in the same industry, a company can expand its operations and reduce the cost of production.

Benefits of Horizontal Integration

Horizontal integration brings several benefits to businesses, here are some of the main ones

1. Larger market share

One of the main benefits of horizontal integration is that it allows businesses to increase their market share.

By merging or acquiring competitors, businesses can increase their customer base and access new markets. This can lead to an increased bottom line for the business.

2. Access to a larger customer base

Since merging or acquiring other businesses in the same industry will increase a business’s customer base, it can also lead to increased revenue. This is because the business can now access more customers and generate greater sales.

3. Access to necessary resources at a lower cost

By merging with or acquiring other businesses in the same industry, a business can gain access to resources such as raw materials and production methods at a lower cost.

This gives the business an edge over its competitors as it will be able to produce goods and services more efficiently, leading to increased profits.

4. Increased revenue

More customers mean more revenue - and horizontal integration can help businesses achieve this goal. This makes sense as a larger customer base means more potential customers and more sales opportunities.

By merging with other businesses, a business can also increase its bargaining power, allowing it to negotiate better deals and better pricing for its products and services.

5. Increased efficiency in production

It only makes sense that a business that is operating in the same industry as another will be able to produce goods and services more efficiently. By pooling resources, businesses can also reduce duplication of efforts and waste of resources.

This improved efficiency in production leads to cost savings and increased profits for the business.

Drawbacks of Horizontal Integration

Despite its many potential benefits, there are also some drawbacks to horizontal integration.

• Increased competition
• Reduced flexibility
• Difficult to manage
• High costs

Conclusion

Despite the drawbacks, horizontal integration is still a viable business strategy for those looking to expand their operations and gain a competitive edge in the marketplace. By carefully considering all the pros and cons of such a move, businesses can profit from the increased market share and efficiency that horizontal integration can provide.

Originally Published Here: Horizontal Integration: Definition, Examples, Who Used, Meaning, vs Vertical

Impairment of Assets: Definition, What It Is, Journal Entry, Examples, Meaning, Accounting Treatment

Assets are the essence of a company’s operations. Every company has fixed assets that help them generate revenues. Unlike other resources, companies cannot charge the cost of these assets to one fiscal period. Instead, accounting standards require them to spread over several periods. This process occurs through depreciation. This expense represents the fall in the asset's value over time.

Sometimes, assets may also lose value for other reasons. Accounting standards require companies to record those costs separately as impairment.

What is the Impairment of Assets?

In accounting, impairment of assets refers to a decrease in an asset's value for several reasons. This situation occurs when a company's balance sheet does not reflect that asset’s actual value. Usually, the impairment of assets occurs due to external factors. However, internal ones also decrease the asset's value beyond its book value on the balance sheet.

Impairment of assets is crucial in presenting assets for their actual value. Accounting standards require companies to record an impairment when an asset’s recoverable amount is lower than its book value. However, companies must consider two amounts when calculating the former. These include the asset's fair value minus the cost to sell and its value in use.

What is the accounting for the Impairment of Assets?

Impairment of assets relates to the conservatism principle in accounting. It requires companies to record losses as soon as they occur. Therefore, when an asset’s recoverable amount drops below its book amount, it falls under a loss. The company must treat the difference between the two amounts as an impairment on that asset.

The recoverable amount of an asset is the higher of two values, its fair value minus costs to sell and its value and use. Usually, this amount is the same as the book value or higher than it. If it is higher, there is no negative impairment charged. If the recoverable amount is lower, the company must create an impairment expense.

What is the journal entry for Impairment of Assets?

The journal entry for the impairment of assets involves two accounts. The first is an expense account, which decreases profits in the income statement. The other side relates to the asset for which the company charges the impairment. In this case, the amount also decreases the book value of that asset in the balance sheet.

Overall, the journal entry for impairment of assets is as follows.

Dr	Impairment on asset
Cr	Asset

The credit side goes to the specific asset account which has suffered an impairment loss.

Example

A company, Red Co., owns a vehicle that has a book value of $10,000 in its books. The asset's fair value is $11,000, with a selling cost of $2,000. On the other hand, its value in use is $8,000. Based on these figures, the recoverable amount is the higher of these two values, which is $9,000 ($11,000 fair value - $2,000 selling cost).

Based on the above figures, the recoverable amount for the vehicle is $1,000 lower than its book value of $10,000. Therefore, Red Co. must charge impairment on the asset. The company uses the following journal entry to do so.

Dr	Impairment expense	$1,000
Cr	Vehicle	$1,000

Conclusion

Assets may suffer impairment for external or internal reasons. Companies must create an expense in their books to reflect this decrease in the asset's value, known as impairment. In accounting, if the recoverable amount of a resource is lower than its book value, it is considered impaired. Companies must create an impairment charge on assets to comply with the conservatism principle.

Post Source Here: Impairment of Assets: Definition, What It Is, Journal Entry, Examples, Meaning, Accounting Treatment

Treasury Stock and Cash Flow Statement

If a company has a cash surplus, it can invest the money in various projects or activities. In most cases, the goal is to increase the returns shareholders get from these projects. Sometimes, though, companies may also invest that money in their own shares. Treasury stock is a common concept in accounting.

Treasury stock can be a part of various financial statements, including cash flow statements. Before discussing its impacts on the report, it is crucial to understand what treasury stock is.

What is Treasury Stock?

Treasury stock refers to the shares a company buys back from its shareholders. These shares become a part of the company’s internal reserves. Sometimes, they may also fall into the “retired” category and are no longer available for trading. Companies may also use other names to present these shares. For example, repurchased, reacquired, retired, buyback stock, etc., are common names for treasury stock.

A company buys back its stock to reduce the number of its outstanding shares. This process can increase the company’s earnings per share (EPS) and improve financial performance. By doing so, the company can increase its share price in the market, allowing shareholders to make capital gains. However, companies may also buy back their shares for other reasons.

What is the accounting for Treasury Stock?

Treasury stock is a contra-equity account. Essentially, it means that it appears in the equity section of the balance sheet but has a negative effect. It does not increase equity, unlike other components that go under that heading. However, accounting standards require companies to present this stock separately on the balance sheet. This accounting treatment for treasury stock applies if the company intends to keep it for a future issue.

The above method for accounting for treasury stock also causes a profit or loss when reissuing the shares. These amounts become a part of the income statement. Companies may also retire these shares, meaning they are no longer available for issuing. In this case, companies use the constructive retirement method for accounting. Essentially, it involves reversing the journal entries for these shares.

What is the relationship between Treasury Stock and the Cash Flow Statement?

The above accounting treatment for treasury stock only discussed the impact on the balance sheet and income statement. However, the repurchase of stock also impacts the cash flow statement. The link between the two is obvious. When a company repays to reacquire treasury stock, it must happen through cash. This payment to shareholders for the repurchases impacts the cash flow statement.

Under the cash flow statement, the repurchase of shares may appear as a financing or investing activity. In most cases, it is the former. This transaction is an outflow of cash resources. Therefore, it reduces the net cash flows from those activities. In the cash flow statement, treasury stock appears as follows.

Cash flow from financing activities
Repurchase of shares	(000)
Net cash flows from financing activities	(000)

If a company treats it as an investing activity, it can use the same presentation above under that section.

Conclusion

Treasury stocks are shares reacquired by a company from its shareholders. There are several reasons why companies reinvest in their own shares. Usually, this transaction impacts the balance sheet, the income statement, and the cash flow statement. With the cash flow statement, the repurchase of shares is a cash outflow that may appear under financing or investing activities.

Article Source Here: Treasury Stock and Cash Flow Statement

Series E, F, and G Fundings: Definition, Meaning, Examples, Requirements

Fundraising is one of the most important aspects of running a successful business. In the startup world, series E, F and G fundings are the most sought-after investment rounds that help companies grow and scale their operations.

Understanding how series E, F, and G fundings work is vital to help entrepreneurs raise capital and scale their businesses.

It can be confusing to know the difference between each type of funding. Series E, F, and G are all equity investments that provide capital for a company’s growth and expansion.

Definition for each type of funding

Here is how each type of funding works
Series E
Series E is the final round of venture capital financing - this type of funding is usually done by established investors who provide a large sum of money for a company’s growth and expansion.

This type of financing allows companies to scale their operations and have access to larger sums of money than would otherwise be available in earlier funding rounds.

Series E usually takes place right after or right before the company’s IPO - this means the investors are confident in the company’s future.

This makes investors willing to take greater risks with their money and invest larger amounts, in exchange for a percentage of the company’s equity.
Series F
Most companies go IPO right after series E - but some companies choose to do a series F instead.

Series F is a later stage of venture capital funding that allows companies to raise even more money than series E. The trade-off for this is that the company gives up a larger percentage of the equity to the investors.

This type of funding is usually done by venture capital firms that are looking to invest in companies with a proven track record of success. Also, this type of funding often comes with additional perks such as advisory services, access to networks, and resources.

After this round, the company is usually taken public on a stock exchange or they can go even further and do a series G.
Series G
Series G is the final round of venture capital funding, and it’s typically done by major investors who have an interest in the company’s success.

This type of funding allows companies to raise large amounts of money to scale their operations and growth even further. Most start-ups don’t have the opportunity to do a series G, but if they are successful enough to reach this stage, it can be extremely beneficial for the company.

The trade-off is that investors usually require an even larger percentage of equity in exchange for their investment. At this point, the company has typically gone public and the investors are taking on a larger risk in exchange for their investment.

Conclusion

Overall, each type of funding is important and can help companies grow and scale their operations. By understanding how series E, F, and G fundings work, entrepreneurs can raise capital efficiently and strategically to achieve success.

Article Source Here: Series E, F, and G Fundings: Definition, Meaning, Examples, Requirements

Fictitious Assets: Definition, Characteristics, Examples, vs Intangible Assets

Most assets have a physical existence and help companies in their operations. These fall under tangible assets and are the most common elements of the balance sheet. However, some assets may also be intangible and not have a physical existence. Nonetheless, they are still resources that companies can use for their operations or have gained through those operations.

Sometimes, companies may also record fictitious assets, similar to intangible assets. However, some characteristics set them apart. Therefore, it is crucial to define and understand fictitious assets in detail.

What are Fictitious Assets?

Fictitious assets are intangible assets that do not have a physical existence. However, unlike intangible assets, these assets also don’t come with a realizable value. In accounting, it is the value that a company gets from selling its assets. Therefore, companies cannot sell fictitious assets. Usually, these include expenses companies want to spread over a specific period.

Although accounting standards classify them as such, fictitious assets are expenses or losses. Unlike other items of the same kind, these assets do not reduce profits in the income statement. Instead, they appear in the balance sheet as an asset. Most companies classify them as intangible assets due to their non-physical nature. However, their non-realizable value sets them apart from other resources in that category.

What are the characteristics of Fictitious Assets?

Fictitious assets have specific characteristics that separate them from intangible and other assets. These characteristics are as below.

• Fictitious assets are intangible and have no physical presence. It is one of the most prominent characteristics of these assets.
• Fictitious assets have no realizable value, which sets them apart from other assets, specifically intangible ones.
• These assets are not the typical ones reported in the balance sheet and may include losses and expenses.
• These assets impact the financial statements over several periods.
• Fictitious assets get amortized under the same rules as other intangible assets.
• These assets come into existence during normal business activities.

While all characteristics define fictitious assets, the first two are more critical than others. The first feature is what sets these assets from other intangible ones. The second further separates fictitious and other intangible assets.

What are examples of Fictitious Assets?

As stated above, fictitious assets usually include expenses and losses that companies spread over several periods. Some of these include the following.

Discount on the issue of shares

A discount on the issue of shares is a reduction in the price at which shares get issued to investors. Companies also offer these to existing shareholders as a reward for their loyalty.

Preliminary expenses

Preliminary expenses are expenses incurred by a company before commencing operations. These expenses are also known as pre-operating expenses or start-up costs.

Marketing expenses

Marketing expenditure helps promote a company’s products or services. It includes costs associated with advertising, public relations, market research, sales promotions, and other similar activities.

Underwriting commission

An underwriting commission is a fee paid to an underwriter for the services provided for issuing securities. The commission is a percentage of securities issued and depends on market conditions.

Conclusion

Fictitious assets are expenses or losses that companies treat as an asset on the balance sheet. Since the impact of these items spreads over several periods, accounting standards require this treatment. Usually, fictitious assets fall under intangible assets, although both differ in various aspects. Examples of these assets include the ones listed above.

Originally Published Here: Fictitious Assets: Definition, Characteristics, Examples, vs Intangible Assets

Repair and Maintenance Expenses: Definition, Example, Journal Entry, Accounting Treatment

Most assets depreciate as they near the end of their useful life. While companies account for it using depreciation, they have other costs associated with them as well. Specifically, the more a company uses an asset, the more it becomes prone to wear and tear. However, that does not imply the end of the asset's life.

Companies can still benefit from their existing assets by performing regular maintenance. On top of that, it may also be crucial to repair them sometimes in case of a breakdown. These expenses fall under repair and maintenance.

What is Repair and Maintenance Expense?

As the name suggests, this expense includes two prominent aspects, repairs, and maintenance. However, there is no standard definition of what this expense is. Repair and maintenance expense refers to the cost incurred by a company to repair, maintain or improve its assets. As stated above, almost every long-term tangible resource requires these costs at some point.

Companies incur repair and maintenance expenses for several reasons. Some of these include the following.

• Maintain assets in good working condition
• Restore the functionality or capacity of the assets
• Restore the asset’s useful life

Some examples of repair and maintenance expenses are as follows.

• Repairs to equipment or machinery
• Regular maintenance on vehicles
• Painting or remodeling of a building
• Landscaping or upkeep of a property

What is the accounting for Repair and Maintenance Expenses?

The accounting for repair and maintenance expenses involves recording the cost in the financial statements in the same period. Usually, these expenses get recorded in the income statement as an operating expense. For most companies, it appears under a line item, "Repair and maintenance expense". However, companies may also reclassify them if needed.

Repair and maintenance expense is different from capital expenditures. Those include expenses incurred to acquire or improve long-term assets. Accounting standards require capitalizing capital expenditures and recording them in the balance sheet. However, repair and maintenance expense is a revenue expenditure. Therefore, it gets recorded as an expense in the same period the company incurs it.

What is the journal entry for Repair and Maintenance Expense?

The journal entry for repair and maintenance expenses is straightforward. It requires a debit to the repair and maintenance account. However, the credit side may include some accounts based on how the company chooses to settle them. For most companies, repair and maintenance expenses are common and get paid through cash.

Nonetheless, a typical journal entry for repair and maintenance expenses looks as follows.

Dr	Repair and maintenance expense
Cr	Bank or Cash or Accounts payable

Companies may also have specific accounts for each repair or maintenance activity. However, they get presented under the same line item in the income statement.

Example

A company, Green Co., performs regular maintenance for its vehicles after three months. After each period, the company incurs $3,000 for this expense, which it pays in cash. Green Co. records the transaction as follows.

Dr	Repair and maintenance expense	$3,000
Cr	Cash	$3,000

Conclusion

Repair and maintenance expense is a revenue expenditure that companies incur regularly. It includes the cost of repairing, maintaining, or improving assets. However, companies must ensure any expenses classified as repair and maintenance do not fall under capital expenditure. The accounting for these expenses is straightforward, as stated above.

Originally Published Here: Repair and Maintenance Expenses: Definition, Example, Journal Entry, Accounting Treatment

Series A, B, C, and D Fundings: Definition, Meaning, Examples, Requirements

Raising capital for a business venture can be a daunting task, but with the right strategy and resources, it can be made much easier.

There are certain stages of funding that a business typically goes through before going IPO (Initial Public Offering). These stages are known as Series A, B, C, and D Fundings.

Understanding the differences between Series A, B, C, and D Funding is important for any business looking to raise capital. Each stage of funding brings its risks and rewards, so it’s crucial to know what they are before pursuing investment.

Definition of each type of funding

Here are the definitions of each type of funding

Series A Funding

Typically, Series A fundings raise between $2 million and $15 million based on industry valuations. To ensure long-term success and profitability, it is essential to create a clear business plan for this stage of growth.

In Series A funding, investors are looking for companies that not only have great ideas but also have a strong plan to turn those ideas into a successful and profitable business.

Series B Funding

Series B funding is designed to help businesses take the next step and expand their reach beyond the development stage. By investing in startups, investors can help them achieve this goal.

Companies that went through Series A funding are not only equipped with sizable user bases but also have demonstrated to their investors their capability of growth and prosperity.

In simple words, series B fundings are usually for businesses that have reached a level of significant growth and are now looking for more capital to expand their operations.

Series C Funding

Series C funding is for businesses that have already established in their respective markets and are looking for additional capital to take their business to the next level.

This could be anything from creating new products, entering new markets, or acquiring smaller companies. It’s also a good option if you need more capital to invest in research and development.

Most investors in this stage are looking for companies with a proven track record and sustainable growth.

Series D Funding

Series D funding is typically used to take a company public or to help it expand into new markets. Investors in this stage are usually interested in companies that have a strong foothold in their industry and are looking for ways to grow even larger.

This type of funding is often used to finance a company’s expansion plans, such as opening new locations or increasing production. It can also be used to help a company go public through an IPO.

IPOs can be a risky proposition, so it’s important to have a clear understanding of the business and the market before pursuing this option.

Conclusion

Series A, B, C, and D Funding are essential for any business looking to raise capital. Each stage of funding comes with its risks and rewards, so it’s important to understand the differences between them before pursuing any type of investment. It is also important to have a clear business plan in place that demonstrates long-term viability and profitability.

Post Source Here: Series A, B, C, and D Fundings: Definition, Meaning, Examples, Requirements

Purchase Returns: Definition, Accounting Treatment, Journal Entry, Example, Meaning

Companies use various techniques to retain their customers. Usually, it involves offering them the best quality products for a reasonable amount. Sometimes, though, customers may not like the items sold to them by their suppliers. Companies also offer purchase returns as a part of their policies to ensure customer retention in the future.

The accounting for purchase returns is straightforward. However, it is not as easy as reversing the original purchase journal entry. On top of that, the process may also require additional disclosures in the financial statements. Before discussing those, it is crucial to understand what purchase returns are.

What are Purchase Returns?

Purchase returns refer to the process of returning goods to a supplier for a refund or credit. This process is a crucial aspect of a company’s operations. Usually, companies offer purchase returns to ensure customer satisfaction and maintain a positive relationship with suppliers. However, they may come with specific terms, for example, coverage period, delivery charges, etc.

There are several reasons why customers may return goods, some of which include the following:

• The customer received damaged goods
• The supplier shipped the wrong items
• Customer changed their mind about a purchase
• Supplier offers free returns within a specific period

Usually, companies that accept returns issue a credit note in exchange for the goods received. This credit note acts as the supporting document for the accounting for this process.

What is the accounting for Purchase Returns?

The accounting for purchase returns involves making adjustments to the accounts related to the original purchase transaction. It implies debiting the supplier account to whom a company owes money for credit purchases. However, companies can only do so when they receive a credit note from the supplier, as mentioned above.

When a company returns goods to a supplier, it must also record the transaction as a purchase return. It is a separate account that falls under a contra-expense account. At the end of every financial period, companies report their purchases and decrease the value of returns from them. Usually, this account only impacts the income statement.

What is the journal entry for Purchase Returns?

The journal entry for purchase returns involves debiting the supplier account while crediting purchase returns. This entry looks as follows.

Dr	Supplier account (Accounts payable)
Cr	Purchase returns

However, the above journal entry is for when companies still haven't paid the original payable amount. If a company has settled the transaction, it must record a receivable from the supplier. Once again, the supporting document for this journal entry will be the credit note. The accounting entry to record it is as follows.

Dr	Supplier account (Accounts receivable)
Cr	Purchase returns

Example

A company, Red Co., purchased goods worth $10,000 from its supplier Blue Co. The company received an invoice for this transaction and recorded it as follows.

Dr	Purchases	$10,000
Cr	Blue Co. (Accounts payable)	$10,000

A few days later, Red Co. inspected some goods received for that order and found damages. The company returned $3,000 worth of goods to Blue Co., for which it also received a credit note. Red Co. recorded the transaction as follows.

Dr	Blue Co. (Accounts payable)	$3,000
Cr	Purchase returns	$3,000

Conclusion

Purchase returns occur when a company returns goods received from a supplier. However, they must also get a credit note from the supplier to record it. This step is crucial in accounting for purchase returns. Companies may return goods to their suppliers for several reasons. However, the contract between both parties must allow it.

Article Source Here: Purchase Returns: Definition, Accounting Treatment, Journal Entry, Example, Meaning

Temporarily Restricted Net Assets

Companies and organizations use assets to meet their objectives. In most cases, the company and its management control how they use those assets. However, it may not be the case every time. Some organizations may also have restrictions exposed to their funds from various sources. Usually, it is more common for nonprofit organizations to receive restricted funds.

Usually, these funds fall under temporarily restricted net assets. It is a common practice among nonprofits to receive and account for these funds. Therefore, it is crucial to understand what temporarily restricted net assets are.

What are Temporarily Restricted Net Assets?

Temporarily restricted net assets include funds that an organization sets aside for a specific purpose. Usually, donors impose stipulations on how the organization uses these assets. These funds can only get used for the purpose outlined by those stipulations. Therefore, the organization cannot use them for other purposes without the donors’ consent.

An example of temporarily restricted net assets is donations to a nonprofit organization for a particular program. Usually, these donations fall under restricted funds. The organization must use these funds to support that specific program. It cannot use them for any other purpose unless donors approve of the usage. Sometimes, organizations may record pledges for future donations as temporarily restricted net assets.

How do Temporarily Restricted Net Assets work?

Organizations receive donations for various purposes. When donors specify a specific use for these donations, the funds get recorded as temporarily restricted net assets. The organization must track these funds separately and use them only for the intended purpose. Once the specific objective is met, the funds get reclassified as unrestricted net assets. They appear separately on the financial statements as well.

Being unrestricted means the organization can use the funds for any purpose. This reclassification process helps ensure that the organization is using the funds by the donor's wishes. It also helps promote transparency and accountability. However, organizations should have clear policies and procedures to manage these funds effectively.

Why are Temporarily Restricted Net Assets important?

Temporarily restricted net assets are crucial to an organization's financial management. These assets ensure that donations get used for the specific purpose for which they were intended. It also helps to demonstrate accountability and transparency to donors, as specified above. Furthermore, it helps build trust between the organization and its donors. It also helps with more donations in the future.

Temporarily restricted net assets also help match funds from other sources, such as grants. For example, a foundation may donate to an organization with the stipulation that the organization must raise matching funds from other sources. These matching funds get recorded as temporarily restricted net assets and can only be used to fund the objective.

Conclusion

Temporarily restricted net assets are crucial to ensure that donations get used for a specific purpose. As stated above, this purpose comes from donors. Temporarily restricted net assets also help demonstrate accountability and transparency to donors. However, it requires organizations to have policies that support the use of these funds.

Article Source Here: Temporarily Restricted Net Assets

Free Float Shares: Definition, Meaning, Calculation, Formula, vs Outstanding Shares

Free float is an important concept for investors to understand, as it can have a significant impact on the price of a stock.

Free float refers to the number of shares that are available to be bought and sold in the public markets without restriction or limitations.

It is the main force behind any company's market capitalization, which is the total market value of all outstanding shares.

Free float is an important indicator of a company's potential for growth. Companies with large free float tend to have higher share prices because more people are trading the stock, leading to increased market demand.

What is Free Float

Every company that is publicly traded has a certain amount of shares available in the public market.

These are known as free float or public float, and they represent the number of shares that can be bought and sold by the general public.

Free float is an important factor for investors who want to know how much liquidity there is in stock, as well as what potential price movements the company may experience.

The more free float that a company has, the easier it is to buy and sell shares of its stock. It also means that price movements for the stock could be more substantial than if there were fewer free-float shares available.

Therefore, understanding the free float is an important part of making informed investment decisions and researching potential investments.

It can provide insight into the trading activity and potential price movements for a given stock.

How Free Float Works

As described earlier, the free float of a company is the number of shares that are available to the public for trading in the secondary market.

This number can change depending on factors such as insider trading, share buybacks, and other corporate activities.

When it comes to analyzing free float, investors need to consider both the total number of shares and the percentage of those shares that are publicly available for trading.

The higher the percentage of free float, the more influence it has on the trading activity and price movements of a given stock.

To better understand how free float works, investors should consider both the total number of shares and the percentage of those shares that are publicly available for trading.

This will help them make informed decisions about potential investments.

Additionally, an understanding of free float can provide insight into the trading activity and price movements of a given stock, which can be beneficial in making informed investing decisions.

How to Calculate Free Float

The formula for calculating free float is

Outstanding Shares - Restricted Shares - Closely Held Shares = Free Float

Outstanding Shares: Outstanding shares are the total number of shares outstanding.

Restricted Shares: The number of shares that are not available for trading due to insider ownership or other corporate activities.

Closely Held Shares: The percentage of shares held by shareholders who have a large stake in the company and may not be willing to trade them.

By subtracting the restricted shares and closely held shares from the outstanding shares, investors can calculate the free float of a company.

This number can then be used to evaluate the trading activity and potential price movements for a given stock.

Conclusion

Free float is an important metric that investors should consider when researching potential investments. It provides insight into the amount of liquidity in the stock, as well as potential price movements. By understanding how free float works investors can make more informed decisions about their investments.

Post Source Here: Free Float Shares: Definition, Meaning, Calculation, Formula, vs Outstanding Shares

Relative Strength Index Indicator for Trading Cryptocurrencies

Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or index. They are used to help traders and investors analyze the behavior of securities in order to make informed investment decisions. Technical indicators are commonly used in technical analysis, which is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.

There are many different technical indicators, each with its own specific calculation and interpretation. Relative Strength Index (RSI) is a technical indicator that measures whether a security is overbought or oversold by comparing the magnitude of its recent gains to the magnitude of its recent losses.

Reference [1] examined the use of the RSI indicator for trading cryptocurrencies. It pointed out,

The authors examined the strategies designed by the creator of the indicator, J. Welles Wilder, and the well-known RSI interpreter Andrew Cardwell. Automated trading systems were built for each of the applications. The research results allowed for the selection of an RSI-based strategy that was characterized by good results for all the examined indexes. The study indicated the rather low effectiveness of the basic, popular applications of RSI.

The authors developed a new strategy, which is a modification of Cardwell’s strategy. The strategy was developed on the basis of the available literature and research conducted in the article. The selected sub-optimal application of the RSI indicator allowed the achievement of above-average results, including in the time after the end of the study. The developed strategy can compete with the most effective strategies widely used on the market.

In short, the fast, frequently used RSI indicator was ineffective in trading cryptocurrencies. This is due to the loss caused by the short signals. The slower RSI indicator was more effective. However, it still lost money last year due to changing market conditions.

This article highlights the importance of performing statistical analysis instead of relying on common, but untested knowledge, and developing a robust trading system that can adapt itself to changing market conditions.

Let us know what you think in the comments below or in the discussion forum.

References

[1]  Marek Zatwarnicki, Krzysztof Zatwarnicki, and Piotr Stolarski, Effectiveness of the Relative Strength Index Signals in Timing the Cryptocurrency Market, Sensors 2023, 23, 1664

Originally Published Here: Relative Strength Index Indicator for Trading Cryptocurrencies

Inflation Swap: Definition, Explanation, Accounting and Tax Treatment

Inflation is the increase in the price of goods or services in a country. Usually, governments or economists measure it as a rate of change in specific items over time. This rate is increasing steadily, causing many investors to suffer a loss on their investments. Investors can still manage or mitigate this risk through instruments.

One of the instruments used in this regard is an inflation swap. It has specific tax and accounting treatments. Before discussing those, it is crucial to understand what an inflation swap is.

What is an Inflation Swap?

An inflation swap is a type of derivative instrument that allows parties to hedge against changes in the rate of inflation. It can also serve as a speculation tool against the same rate. Usually, investors, companies, and other organizations use it as a tool to manage inflation risk. Essentially, an inflation swap is similar to other swap derivatives. However, it depends on an inflation index.

In an inflation swap, one party agrees to pay a fixed rate of return to the other. In contrast, the other party pays a rate tied to an inflation index. The most common among them is the Consumer Price Index (CPI). The payment made by the fixed rate payer is usually a part of the contract, agreed upon by both parties. However, the obligation of the inflation rate payer comes based on the inflation index at the end of the contract.

What is the accounting treatment for Inflation Swap?

The accounting treatment for an inflation swap depends on the terms of the contract. Usually, accounting standards require companies to treat inflation swaps as derivatives. Based on this accounting treatment, these instruments are subject to mark-to-market accounting. It means that the value of the contract gets evaluated at the end of each reporting period to reflect changes in the market value of the underlying inflation index.

Companies must record inflation swaps on the balance sheet at their fair value. At the end of each accounting period, they must evaluate this value. Any fluctuations to this value go into the profit or loss statement. On top of that, any income or expense associated with the underlying contract also becomes a part of the income statement as income or expense.

What is the tax treatment for Inflation Swap?

A notional principal contract (NPC) is any financial instrument where one party pays the other an amount based on a specified index. These payments occur after regular intervals. Based on this definition, an inflation swap falls under a notional principal contract. This contract has two types, periodic and non-periodic, simplifying the tax treatment for inflation swaps.

With periodic payment NPCs, the payments occur at an interval of one year or less. With these contracts, the accounting for the derivative is irrelevant. The taxpayer must recognize the ratable daily portion of the periodic payment for the tax year. If these payments are non-periodic, the rules are the same. However, the taxpayer recognizes the non-periodic payment section on a ratable daily basis.

Conclusion

An inflation swap is a derivative that investors use to manage inflation risk. The payments in this swap occur based on an inflation index. When accounting for inflation swaps, companies must recognize them at fair value and evaluate that value each year. The tax treatment for inflation swap falls under the definition of a notional principal contract.

Article Source Here: Inflation Swap: Definition, Explanation, Accounting and Tax Treatment

Dumping: Definition, Meaning in Economics, Business and International Trade,Types, Examples, Pros and Cons

In the world economy dumping plays a major role, it is the act of selling a product in an importing country at a lower price than that charged for the same product in the exporter's domestic market.

Most countries and businesses all over the world use dumping as a competitive strategy. It can be used to increase market share, undercut the foreign competition, and drive out local competitors, leading to monopolies in the export market.

It might seem like a profitable solution for the exporter, but it can destroy local markets, reduce the wages of local workers, and can lead to social instability as a result of dumping.

What is Dumping

Most countries and businesses around the world engage in international trade. WTO (The World Trade Organization) defines dumping as “the sale of a product on the export market at a price lower than the domestic market or below its production cost”.

In simple words, when a country or business buys something at a lower price from abroad and sells it for a higher price in its market, this practice is known as Dumping.

Dumping has both positives and negatives depending on the perspective. On one hand, it can help to reduce the price of goods in domestic markets and increase competition.

On the other hand, by lowering prices, domestic producers are put at a disadvantage which can be damaging to their businesses.

Types of Dumping

There are four primary types of Dumping:

1. Predatory Dumping

Predatory dumping is when a company from another country sells its products for less than it costs to make them. They do this to try to get rid of the companies that sell the same thing in the country where they are trying to sell their products.

The company that is doing the predatory dumping has to keep selling at a loss until all of the other companies go out of business. Then that company will be the only one selling that product and they can charge any price they want.

2. Sporadic Dumping

Companies often dump unsold excess inventories to protect their business, either by destroying the supplies or exporting them overseas. This allows them to dodge price wars in their market and maintain a competitive edge.

This means the goods are priced below the cost of production, so the company isn't making a profit.

3. Persistent Dumping

When a nation continually offers its products at a cheaper rate abroad in comparison to domestic prices, it is called persistent dumping and generally occurs when the demand for said product persists in foreign markets.

In simple words, if the products of a nation remain in demand in foreign markets, that nation may keep selling them at lower prices than domestic ones to maximize its profits.

4. Reverse Dumping

Reverse dumping occurs when a product is less elastic in the foreign market and more elastic in the domestic market. This means that the demand for the product is not affected by price changes in the foreign market.

So companies can sell at a higher price in the foreign market and low price in the domestic market to maximize profits.

Advantages and Disadvantages of Dumping

Dumping can have both positive and negative effects on an economy.

Positives

Dumping can lead to an increase in international trade and more competition, which can often result in lower prices for consumers. It also allows countries to make use of their surplus production, which reduces the cost of storage and wastage.

Negatives

The biggest disadvantage of dumping is that it puts domestic producers at a disadvantage as they are competing with foreign goods that are sold at a lower price.

This can lead to job losses and a decline in economic growth for the country as well as putting strain on public finances if subsidies have to be offered to domestic producers.

Dumping also has implications for environmental sustainability, as goods may be produced in factories abroad with little or no environmental regulation. This can lead to pollution and damage to ecosystems in the importing country.

Conclusion

In conclusion, governments need to be aware of the potential implications that dumping can have on their economies and take steps to protect domestic producers from any adverse effects. It is also important to ensure that goods produced abroad are done so in a sustainable way.

Originally Published Here: Dumping: Definition, Meaning in Economics, Business and International Trade,Types, Examples, Pros and Cons

Distribution Costs: Definition, Examples, Accounting, Journal Entry, Importance

Most companies focus on the cost of their products or services. Usually, these include direct and indirect production costs, including material, labor, and overheads. These determine a product's profitability after deducting those costs from the sale price. However, they do not show how profitable the company is because other expenses may also play a role.

Companies must deduct various other costs from their gross profits to determine their earnings for a period. One of these includes distribution cost, which occurs after a company incurs its production costs. Therefore, it is crucial to know what these costs are.

What are Distribution Costs?

Distribution costs refer to expenses a company incurs to sell or market its products. Sometimes, they are crucial to delivering the final product to the customer. Some customers may also require companies to pay delivery charges. However, distribution costs don't include freight or delivery expenses. They also contain other selling and marketing costs incurred in helping the company market its products or services.

Generally, any expenses a company incurs in helping make goods and services available for a customer to reach falls under distribution costs. However, these costs vary from one company to another and between various industries. In some sectors, distribution costs may be significantly high to help companies deliver goods to customers. In others, these costs may be nil or minimal.

How to account for Distribution Costs?

The accounting for distribution costs is straightforward. It involves recording the expenses when they incur. On the other hand, it also entails recognizing a liability or decrease in assets for the settlement side. However, it is the presentation of distribution costs that may be complex. More specifically, companies must understand how to present these costs on the income statement.

Usually, distribution costs appear as a separate line item on the income statement. However, companies must decide the subheadings to include within this head based on the definition of distribution costs. On top of that, it is also crucial to deduct distribution costs from gross profits. Although these may include expenses necessary to make finished goods available to customers, they don't constitute product costs.

What is the journal entry for Distribution Costs?

The journal entry for distribution costs is straightforward. As stated above, it requires recording the expense in the relevant account. On the other hand, the journal entry must also include the other aspect of those expenses. Overall, a typical distribution cost journal entry will look as follows.

Dr	Distribution cost
Cr	Cash or Bank or Accounts payable

Why are Distribution Costs important?

Distribution costs are expenses that companies must keep to a minimum. However, that does not imply that they are unnecessary. On the contrary, distribution costs are sometimes linked to higher sales. Customers are more likely to buy from a supplier that delivers goods and markets them than ones that don't.

On top of that, distribution costs help companies reach more customers. These costs are crucial in making the products or services more presentable and in demand. On top of that, distribution costs also help satisfy and retain existing customers. However, companies must ensure that these costs do not exceed a specific limit.

Conclusion

Distribution costs include expenses necessary to market and sell a product. These costs are crucial in helping companies sell more and reach more customers. In accounting, these costs are similar to other expenses. However, they appear under a different line item in the income statement. Although they are costs, distribution costs are essential for some companies in the long run.

Post Source Here: Distribution Costs: Definition, Examples, Accounting, Journal Entry, Importance

Historical Cost Principle

When recording an asset in the financial statements, companies must have a value for it. However, it may not be as straightforward as there are several techniques to derive this cost. Most accounting principles rely on historical costs when recognizing various elements. However, some may also allow other methods, such as fair value or replacement cost.

However, companies cannot use all these valuation methods when acquiring an asset. It is of the requirements set forth under the historical cost principle. However, it is crucial to understand what the historical cost is first.

What is the Historical Cost?

Historical cost refers to the purchase price of an asset. It includes the acquisition, transport, installation, and other expenses in accounting. Essentially, any costs a company incurs in bringing a resource to its current and working condition will be a part of the historical cost. This cost does not change regardless of the asset's fair or market value.

One of the primary reasons accounting standards rely on historical cost is that it is easy to derive. With the other costing methods for assets, determining the current value may be complex. On top of that, it can also lead to inaccurate information and over- or underestimating the cost. Therefore, historical cost provides more accurate and reliable information.

What is the Historical Cost Principle?

The historical cost principle requires companies to record an asset at its historical cost when initially recording it. This principle applies regardless of the accounting method used for assets. For example, some companies use the revaluation model of costing for assets. Under this method, a company evaluates an asset after regular intervals and records its fair value in the books.

However, the same does not apply when initially recording it. At the acquisition stage, the asset's market value does not play a role in its value in the accounts. Companies must use an asset's historical cost only when initially recognizing it. Usually, this value comes on the same time or date a company purchases or assumes ownership of the asset.

What is the importance of the Historical Cost Principle?

The importance of this principle links with the concept of historical cost. Essentially, historical cost provides a more reliable, verifiable, and accurate measure of an asset's value. More specifically, it allows companies to gauge that value without complications. For any company, assets are one of the crucial elements of business and financial statements. Therefore, having a reliable measure for them is also critical.

The historical cost principle also allows users to evaluate a company reliably. On top of that, it also allows owners and shareholders to measure the current value of their business. Similarly, tax rules and regulations also rely on historical costs as they are more accurate than the fair value. Therefore, the historical cost principle helps companies and their stakeholders in various ways.

Conclusion

Historical cost refers to an asset's initial purchase price plus any adjustments required by accounting standards. The historical cost principle requires companies to use this cost when initially recording an asset. Although other methods exist to evaluate assets, they only apply to a later stage. The historical cost principle helps bring accuracy to the balance sheet.

Article Source Here: Historical Cost Principle

Elasticity: Definition, What It Is in Economics, Example, Formula, Meaning

When it comes to businesses and economies, almost everything is subject to the laws of elasticity. Price elasticity is a measure of how sensitively demand or supply reacts when the price changes.

It's an important concept because it allows business owners to determine how much prices can be increased or decreased without negatively impacting sales, production, and profits.

Every service or product is different, so businesses must analyze the market and use their data to determine the elasticity of their goods and services.

What is Elasticity

Elasticity is an economic way to measure how drastically one factor will be affected by changes in another.

Most of the time the factors are price and demand. When an item's demand shifts in response to price changes, the goods are said to be elastic.

Almost every business and economic decision is based on the concept of elasticity.

Understanding how prices and demand interact can help businesses achieve maximum profits, as well as help consumers identify which goods are worth their money.

Even though elasticity is most commonly used to measure the demand for goods, it can also be used to measure other kinds of relationships in economics.

Price elasticity of supply measures how the quantity supplied will change when prices change.

It’s important to note that elasticity is different from price sensitivity, which refers to how much a consumer values an item at a certain price.

It’s also different from the sensitivity of demand, which measures how much more or less of an item is purchased when its price changes.

How Elasticity Works

Businesses that operate in highly competitive markets need to pay close attention to their pricing strategies. If they fail to do so, they risk losing customers to competitors who offer similar products at lower prices.

On the other hand, businesses that operate in less competitive markets will be more successful if they set higher prices for their goods and services.

That’s because these businesses are better positioned to capture higher profits from their customers.

The concept of elasticity is key when it comes to understanding how prices and demand interact in the market.

Businesses can use this information to set the right price for their goods and services, so they can maximize their profits without losing customers.

Elasticity is an essential economic indicator for sellers, as it reveals how many goods or services customers will buy when the cost goes up or down.

Understanding this metric gives sellers a better understanding of their customer's response to price fluctuations and can aid them in setting prices that optimize profitability.

Example of Elasticity

Numerous examples can be found in modern business and economics. For example, in the airline industry - let's say one airline decided to increase the price of their tickets.

The airline would expect their demand to decrease in response. People will choose other airlines that offer cheaper prices. This is an example of elasticity at work - when prices increase, demand decreases.

Now there are also opposite situations where elasticity works in the other direction (also known as inelastic).

For example, in the oil industry - no matter how much the price of oil increases, consumers will still need to purchase it due to its necessity.

In this case, when prices increase, demand does not decrease drastically - making it an example of inelasticity.

Conclusion

Elasticity is an important concept in business and economics, as it allows businesses to better understand their customers’ responses to price changes. By understanding elasticity, businesses can set prices that maximize their profitability while still attracting customers.

Article Source Here: Elasticity: Definition, What It Is in Economics, Example, Formula, Meaning

What is a Headhunter and What Do They Do?

A headhunter is a professional recruiter who specializes in the placement of employees in the financial services industry. They work with clients and candidates to identify opportunities and match the best candidates with the right jobs. Headhunters can be an invaluable resource for both job seekers and employers in the financial services industry. In this blog post, we will discuss what headhunters do and how they can help you find your next great opportunity.

What is a headhunter?

A headhunter is a recruiter who specializes in finding talent for the financial services industry. Headhunters typically have established contacts with employers, job boards, and/or other recruiting firms. They use their networks to find the best candidates for open positions. Headhunters will often interview candidates and assess their qualifications for the job. They may also provide career counseling and advice to potential applicants.

How do they work?

Headhunters typically work with employers, job boards, and/or other recruiting firms to find the best candidates for open positions. Once a headhunter has identified an appropriate candidate, they will typically conduct a thorough background check and then present them to the employer. In some cases, headhunters will also negotiate salary packages for the candidate.

What do headhunters look for in a candidate?

Headhunters are looking for candidates with the technical and interpersonal skills needed to succeed in the financial services industry. They also consider a candidate's relevant experience and education, as well as their personality fit with the company. Headhunters are also looking for candidates who have the ability to think strategically and work collaboratively in order to achieve results.

What are the benefits of working with a headhunter?

Headhunters can provide employers and job seekers with valuable insight into the financial services industry. They have access to a wide range of contacts and can provide job seekers with detailed advice on how to best secure the position. They can also provide employers with access to a greater pool of potential candidates. Working with a headhunter can also help to reduce the time and expense associated with the recruitment process, making it easier for employers to find the right candidate.

What are the drawbacks of working with a headhunter?

One of the biggest drawbacks of working with a headhunter is that they may charge a fee for their services. This can increase the overall cost associated with the recruitment process and can add to an employer's budget. Additionally, since headhunters often specialize in the financial services industry, they may not be familiar with the needs of other industries. As a result, job seekers may not be able to find suitable positions through headhunters. Finally, headhunters may not always have the most up-to-date industry information, making it difficult for employers to find the best candidates.

By understanding the role of a headhunter and how it can benefit both employers and job seekers, you can ensure that you take advantage of this valuable resource when searching for a new job or looking to fill an open position. With their expertise and connections, headhunters can help make the process of finding the right candidate much easier and more efficient.

FAQs

Is a headhunter the same as a recruiter?

No, a headhunter is different from a recruiter. Recruiters typically operate within the same industry and assist companies in finding candidates for their open positions. Headhunters, on the other hand, specialize in the industry and focus on finding talent for this sector.

Who pays for a headhunter?

Typically, employers are the ones who pay for a headhunter’s services. In some cases, however, job seekers may also be asked to pay a fee.

Do headhunters guarantee job placement?

No, headhunters do not guarantee job placement. Their role is to provide employers and job seekers with access to potential opportunities and the information needed to secure a position. However, they cannot guarantee that any of these opportunities will result in a job offer.

How do I find a headhunter?

You can typically find headhunters by searching online or asking for referrals from people in the industry. You can also check out job boards to see if any headhunters are advertising positions they are looking to fill. Additionally, networking events and industry conferences can be great places to meet potential headhunters.

Can I use a headhunter to find a job?

Yes, headhunters can be a valuable resource for job seekers. By using their connections and expertise, they can help you find the right position and provide you with valuable advice on how to best secure it. You should, however, bear in mind that although headhunters can make the job search easier, they cannot guarantee you a job.

What qualifications does a headhunter need?

Headhunters generally need to have an in-depth knowledge of the industry in which they specialize. This can include understanding market trends and having an extensive network of contacts. Additionally, headhunters should possess excellent communication, negotiation, and interpersonal skills in order to be successful.

Can a headhunter help me if I’m unemployed?

Yes, headhunters can be of great help to job seekers who are unemployed. They can provide access to potential opportunities and advice on how to make the most of them. Headhunters can also help connect job seekers to potential employers and provide valuable industry insights that can help increase their chances of securing a job.

Do I have to use a headhunter?

No, you do not have to use a headhunter if you are searching for a job. You can conduct your own job search by utilizing online resources such as job boards and networking events. However, using a headhunter can be beneficial as they have access to exclusive job openings and possess industry expertise that can help you find the right position.

Can a headhunter guarantee me the best salary?

No, headhunters cannot guarantee you the best salary. They can, however, provide you with valuable advice on salary negotiations and compensation packages. Additionally, headhunters can help you understand the current market trends and ensure that you are getting the best possible salary for your skills and experience.

Can a headhunter help me prepare for interviews?

Yes, headhunters can be extremely helpful when it comes to preparing for interviews. They have an in-depth understanding of the industry and can provide you with insights and advice on how to best present yourself. Additionally, they can help you hone your skills and provide valuable feedback that can give you an edge in the interviewing process.

Can a headhunter provide career advice?

Yes, headhunters can provide you with valuable career advice. They can help you identify potential opportunities, provide advice on how to make the most of them, and even offer guidance on how you can develop your career over time. Additionally, headhunters can also provide insights into the industry and help you stay up to date on the latest market trends.

Closing thoughts

Headhunters can be a valuable resource for both employers and job seekers in the financial services industry. They can help to identify the right candidates for the job and reduce the time and expense associated with the recruitment process. If you are looking for a job in the financial services industry, it may be worthwhile to reach out to a headhunter for assistance.

Post Source Here: What is a Headhunter and What Do They Do?