Is there a downside to having a high liquidity ratio?

July 7, 2024 No Comments

A: In terms of corporate financing, liquidity ratios describe the ability of a firm to pay off short-term debt obligations with cash on hand or short-term assets. Common liquidity ratios include the current ratio and the acid test ratio, also known as the quick ratio.

Is there an easy way to do financial forecasting in Excel?

July 7, 2024 No Comments

A: There is no easy way to conduct financial forecasting. All forecasting involves the technically impossible act of predicting the future. Nonetheless, forecasting is essential for equity valuation and internal budgeting. The best financial forecasts are educated quantitative guesses founded on a very nuanced understanding

How much working capital does a small business need?

July 7, 2024 No Comments

A: The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating cycle and the business owners’ goals for future growth. However, while very large businesses can get by with negative working capital because of

How should a change in accounting principle be recorded and reported?

July 7, 2024 No Comments

A: A change in accounting principle is the term used when a business selects between different generally accepted accounting principles or changes the method with which a principle is applied. Changes can occur within accounting frameworks for either generally accepted accounting principles, or GAAP, or

How is deferred revenue treated under accrual accounting?

July 7, 2024 No Comments

A: In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds that a firm receives for products it has not yet provided. U.S. generally accepted accounting principles (GAAP) require certain conditions to be met before a company

How is implied volatility used in the Black-Scholes formula?

July 7, 2024 No Comments

A: Implied volatility is derived from the Black-Scholes formula and is an important element for how the value of options are determined. Implied volatility is a measure of the estimation of the future variability for the asset underlying the option contract. The Black-Scholes model is

How is it possible for a company to have a negative enterprise value?

July 7, 2024 No Comments

A: Enterprise value is the measure of a company’s total value, including its outstanding equity value, outstanding debt, and cash or cash equivalents. When calculating enterprise value, cash and cash equivalents are subtracted from the market capitalization plus debt, so it is possible for a

How is market to market accounting different than historical cost accounting?

July 7, 2024 No Comments

A: Historical cost accounting and mark-to-market, or fair value, accounting are two methods used to record the price or value of an asset. Historical cost measures the value of the original cost of an asset, whereas mark to market measures the current market value of

How is salvage value used in depreciation calculations?

July 7, 2024 No Comments

A: When calculating depreciation, an asset’s salvage value is subtracted from its initial cost to determine total depreciation over the asset’s useful life. From there, accountants have several options to calculate each year’s depreciation. Depreciation measures an asset’s gradual loss of value over its useful

How is the economic order quantity model used in inventory management?

July 7, 2024 No Comments

A: The economic order quantity model is used in inventory management by calculating the number of units a company should add to its inventory with each batch order to reduce the total costs of its inventory. The costs of its inventory comprise holding costs and

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