By following the matching principle all of the costs associated with a particular product, not just its wholesale price, is expensed when the item is sold. Requirement 2 - A Generally, the lower of cost or market method is used to value inventory in order to “avoid reporting inventory at an amount greater than the benefits it can provide” (Spiceland, Sepe, & Nelson, 2013, p. 476). According to Spiceland, Sepe, and Nelson (2013) the “change in replacement cost usually is a good indicator of the direction of change in selling price” (p. 477). When the change in replacement cost is negative the LCM method allows companies to apply the conservatism principle. The conservatism principle involves “recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received” (The conservatism principle).
Total revenue equals price time’s quantity. It reflects total receipts obtained from selling a certain output or quantity of goods. Total costs is different it’s equal to fixed costs and variable costs. Fixed costs include building and equipment costs, regulatory fees and salaried personnel and remain stable, especially in the short term, but may vary with a longer time horizon. As the time horizon increases, variable costs rely less on existing factors and restrictions and therefore will begin behaving differently which will in turn affect the cost of production (Wright, 2007).
A cash flow statement will show not only the cash that is left at the end of the day, but also the amount that entered and left the business. This allows the company to see whether the cash in the business is increasing or decreasing. It is important to know this before the cash in the business gets too low. The business might have many active jobs but lagging receivables can be a problem when it comes to covering unexpected expenses. A cash flow forecast is also prepared which gives an estimate of the amount of cash the company expects to flow in and out and also includes all the projected income and expenses.
Variations in business cycles are able to be seen as short-term and long-term progression developments and they could shift. Cycles are calculated using the real gross domestic product of a country. Not like the more organized phases of economics, business cycles do not follow a foreseeable or mechanical form. However, they should be factored into considering an economy.
Governments may choose to increase minimum wage on an arbitrary basis, making it difficult for companies to hire individuals at a consistent market rate. Government price controls distort the economic theory of supply and demand. Supply and demand is a significant underlying feature of free-market economies. This theory allows individuals and businesses to make decisions based on self-interest. Businesses often pay individuals a wage based on current market standards.
Solvency ratios this is one of many ratios used to measure a company’s ability to meet long-term obligations. The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the company’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Users who may be interested in each type of ratio? Liquidity ratios are used by suppliers and other trade creditors.
"Working Capital Management" Please respond to the following: Examine the key reasons why a business may not want to hold too much or too little working capital. Provide two (2) examples that illustrate the consequences of either situation. The right level of working capital depends on the industry and the particular circumstances of the business. For example, businesses that only sell services, and do not need to pay cash for inventory need a lower level of working capital. Businesses that take a substantial amount of time to make of sell a product will need a higher level of working capital.
The contracting of the entire department or even a single task to an outside vendor translates to the turning over the management and control of the function to another company. Another reason to not outsource, is to avoid the additional possible security issues that comes with turning your information over to an outside vendor (Bucki, 2012). Risks Associated With Outsourcing When outsourcing to another company there are various risks that come with this process. One risk can come in the form of quality issues. The vendor will be function in effort to make a profit as is with all businesses.
M4–Analyse the reasons why costs need to be controlled to budget In this assignment I will analyse the reasons why costs need to be controlled to budge. If costs are not measured by Debenhams then their profits will be badly affected therefore budgeting is one process to regulate costs as it gives the organisation an approximation or a target on what their cost and revenue should be. A business has to budget and control expenditure in order to see what has been received and paid out, otherwise unrestrained spending could occur and decline could happen. One of the difficulties that could occur if costs are not controlled to budget is: high fixed cost per item which decreases businesses profit and ability to compete. Debenhams are very effective at controlling its costs to budget as the results were good for sales revenue throughout 2013.
It is also possible that managers do not adopt maximising behaviour at all, perhaps “satisficing” in response to shareholder discipline or that the policy of the firm is the result of complex interactions between various stakeholders. An For a firm to profit maximise, it would be the case that it sets output where marginal cost is equal to marginal revenue. If an additional unit of output were to be produced beyond this, it would add more to the firm’s costs of production than its revenue, thus reducing profit. The diagram below shows profit maximising output and the corresponding price, read from the demand curve. It also shows some other possible objectives for the firm.