Cost allocation is the process of identifying and assigning the costs of services necessary for the operation of a business or other type of entity. Unlike a cost rating, the allocation is less concerned with the actual amount of the cost, and more concerned with allocating or assigning the cost to the correct unit within the organization. From this perspective, cost allocation can be seen as a tool that helps track all costs associated with the ongoing operation more efficiently, since each cost is associated with specific departments or groups of departments within the organization. A simple example of cost allocation would be the wages or salary of an employee assigned to work in a specific department. In a hospital, a nurse is normally assigned to a specific wing or floor, with the costs allocated to the general operation of that unit. As long as the nurse continues to workContinue reading
Financial Management Concepts
Exit Value Accounting
Exit value accounting is a form of current cost accounting which is based on valuing assets at their net selling prices (exit prices) at the balance sheet date and on the basis of orderly sales. An exit value is the maximum price a currently held asset could be sold for in the market less the transactions costs of the sale (the net realizable value for the asset). This normative accounting theory was developed by Raymond Chambers and labeled as Continuously Contemporary Accounting (CoCoA). The theory relies on assessments of the exit or selling price of an entity’s liabilities and assets. The exit value accounting theory was developed under the following key assumptions. Firstly, firms exist to increase the owners’ wealth. Secondly, the organization’s ability to adapt to changing circumstances is the basis of successful operations and Finally, the capacity to adapt will be best reflected by the monetary value ofContinue reading
Concept of Accountability in Financial Management
“Accountability breeds responsibility” – This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analysed. Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes in making the realization of the image an individual perceives about it. ThisContinue reading
Asset Securitization – Meaning, Process, Parties Involved and Benefits
Asset securitization is way of financing for lenders to obtain funds in the capital markets for the origination of consumer and business loans. It is different from the traditional way of financing, where lenders finance loan origination’s with deposits. Started in 1970, the asset securitization market had a remarkable history of growth and development. By 2000, it became the largest sector of the U.S fixed income securities market. In matured capital market, asset securitization has proven to be an efficient way of financing in that it reduces the ultimate funding cost for the borrower, improves the financial operation for the lender and provides diversified investment products for the investor. The Process of Asset Securitization In today’s world, asset securitization means a process by which one entity pools its interest in a series of identifiable future cash flows and then transfers the claims on those future cash flows to another entityContinue reading
Fixed Assets Accounting
Unless internal controls over plant and equipment are carefully designed many units of equipment are likely to be broken, discarded or stolen without any entry being made in the accounting records for their disposal. The assets accounts will then be overstated and depreciation programs for such missing unites of equipment will presumably continue. Consequently net income will be misstated because of the omission of losses on retirement of plant assets and because of erroneous depreciation charges. One important control devise which guards against failure to record the retirement of assets is the use of controlling accounts and subsidiary ledgers for plant and equipment. The general ledger ordinarily contains a serpent assets account and related depreciation accounts for each major classification of plant assets, such as land, buildings, office equipment and deal very equipment. For example the general ledger will contain the account office equipment and also the related accounts depreciationContinue reading
Qualitative Characteristics of Financial Information
Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information 1. Relevance Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating theContinue reading