Accounting

Accounting — No Comments
28
Jul 11

Current Ratio Analysis

If you are into finance then you know the meaning of Current ratio, which is calculated as Current Assets/Current Liabilities. But many people do not know how to analyze the current ratio because it is easier to calculate the current ratio but is very difficult to interpret or analyze the current ratio.

Current ratio is a tool to measure the liquidity position of the company and ideal current ratio is 2:1, which implies that for every 1 dollar of Liability a company should have 2 dollar of assets. However a 2:1 current ratio does not mean that liquidity position of the company is sound because if a company has too much inventory in its balance sheet than also current ratio will be higher but that does not necessary implies that liquidity position of the company is good because inventory takes times to get converted into cash.

Hence before giving judgment on the liquidity position of the company on the basis of current ratio an individual should take care to see composition of current assets and current liabilities and also look at other ratios like liquid ratio, inventory turnover ratio and other such ratios.

Accounting — No Comments
20
Jun 11

Advantages and Disadvantages of Just in Time

Just in time is an inventory management strategy which is used by the manufacturing companies so that these companies can reduce their cost of production. Under this strategy company does not hold inventories rather they produce as the demand for product arises. Just in time strategy has both advantages and disadvantages let’s look at both of them –

Advantages of Just in Time

  1. Just in time makes possible for the companies to use the cash for other productive purpose which would have been otherwise tied in the inventory.
  2. Since company buys the raw materials when there is need for it, company can have the advantage of buying the raw materials at lower price if the prices have reduced and also there is no risk of wastage of raw materials leading to cost saving for the company.
  3. Under this strategy company has more space as there is no inventory and therefore there is no requirement for storage and that vacant space can be used by the company for other productive purpose.

Disadvantages of Just in Time

  1. This strategy may lead to embarrassment for the company since if the company is not able to produce the product on time, it can have far reaching consequences on the goodwill of the company.
  2. Company is more dependent on the supplier of raw materials under this strategy and therefore chances of supplier exploiting the company increases when there is urgent need for raw material.
Accounting — No Comments
6
Jun 11

Cash Equivalents

Cash is one thing which every company would love to have in its balance sheet because having excess cash helps the company in making profitable investments and avoiding any embarrassment related to nonpayment of dues to its creditors. However companies would be also happy if they do not have cash but have cash equivalents.

Cash equivalents are those short term investments of the company which are highly liquid and can converted into cash in short period of time usually within 3 to 15 days. Some examples of cash equivalents are the treasury bills. Commercial paper, money in the saving account, investments of the company in money market mutual funds etc….

Cash equivalents apart from helping the company whenever the need for cash arises, they also provide returns in terms of interest received to the company as they are interest giving securities. Cash equivalents have virtually no risk because these investments are into government securities or those corporate securities which are of highest rating and therefore companies tend to have cash equivalents in their balance sheet because cash equivalents are as good as having cash.

Accounting — No Comments
17
May 11

Advantages and Disadvantages of Job Costing

Job costing refers to a costing method under which the various costs such as material and labor cost related to production of a good or services are allocated to a product or service and then the price of that product or service is quoted to a customer. Given below are some of the advantages and disadvantages of job costing –

Advantages of Job Costing

  1. Job order costing offers a detailed analysis in the form of the costs of materials, labor and overheads and therefore it helps the company in allocating overheads at a predetermined rate.
  2. Bit helps the company in determining the profitability of a job, which in turn will help the company in deciding whether to take a particular job or not.
  3. Job order costing facilitates the estimation of the cost of a similar job and therefore it helps the company in avoiding duplication of work because if company has to quote price for a similar job than it can quote it on the basis of previous job costing method.

Disadvantages of Job Costing

  1. Job order costing needs a great deal of clerical work in recording of transactions related to it and therefore many companies tend to avoid this method of costing.
  2. Since overheads are allocated on estimation this method may not yield 100 percent accurate result and may lead to errors while quoting the price for a product or service.
Accounting — No Comments
27
Apr 11

Perpetual Inventory System

A perpetual inventory system is an inventory system where the company keeps updating the quantity of the inventory available with the company on a constant basis. In simple words perpetual inventory system is like price of stock, just as the price of stock rise or fall with rise or fall in profit of the company in the same way perpetual inventory system works.  Hence if company makes any purchase of inventory than it will be added immediately to the inventory of the company and if the company sells from inventory to third parties it is deducted immediately from the available inventory.

The biggest advantage of perpetual inventory system is that it eradicates the task of estimating inventory on a monthly basis; another advantage of this method is that company knows the exact level of inventory available with the company at any given point of time and therefore company can give orders for purchase of inventory before the inventory is finished and therefore avoid the embarrassment arising out of non availability of inventory with the company when the customers come.

Perpetual inventory system is very difficult to carry out because it needs constant monitoring and it can be impossible in case of inventory turnout is very high which is the case with companies which are large, another disadvantage of perpetual inventory system is that it requires use of technology which is very costly and therefore small companies cannot afford to have perpetual inventory system.

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