Understanding the Sinking Fund or Depreciation Fund
Introduction A sinking fund, also referred to as a depreciation fund, is a financial strategy used by companies to systematically set aside funds over a period of time. These funds are earmarked for specific long-term purposes such as replacing fixed assets at the end of their useful lives or for the gradual repayment of long-term…
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What are annuities and how to calculate annuities?
Annuity is a fixed sum of money paid to the investor or insurer to a series of annual sums for specific length of time or the rest of their life. In the case of reverse mortgage loan provided to senior citizen against security of their home is another example where loan amount is used to…
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Understanding Bonds, Coupons and Yield to Maturity
(This post explicates the difference between coupon rate and yield to maturity) Bonds: A bond is a debt instrument issued by a company or the Government to raise capital by way of borrowing from the investors. The investors in the bonds are debt holders (lenders/creditors). The issuer of bonds is obliged to pay bondholders the…
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Difference Between Marginal Costing and Absorption Costing in Income Measurement
The primary distinction between marginal costing and absorption costing lies in their treatment of fixed production costs. Marginal costing considers fixed production costs as period costs, expensing them in the period incurred. In contrast, absorption costing treats fixed production costs as product costs, allocating them to the units produced. Additionally, absorption costing emphasizes overhead recovery,…
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Absorption Costing: A System for Profit Reporting and Stock Valuation
Absorption costing, also known as full costing, is an accounting method used for inventory valuation. It incorporates all manufacturing costs, including direct materials, direct labor, and both variable and fixed manufacturing overhead, into the cost of a product. This approach is crucial for inventory valuation and profit reporting. Key Features of Absorption Costing Comprehensive Cost…
Cost-Volume-Profit (CVP) Analysis: A Comprehensive Overview
Definition of Cost-Volume-Profit (CVP) Analysis Cost-Volume-Profit (CVP) analysis is a fundamental cost accounting technique used to assess the relationship between cost, volume, and profit. It enables businesses to determine how changes in variable and fixed costs impact overall profitability. Organizations utilize CVP analysis to calculate the number of units required to achieve a break-even point…
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