Why is deferred revenue listed as a liability on the balance sheet?

June 30, 2024 No Comments

A: Deferred revenue, which is also referred to as unearned revenue, is listed as a liability on the balance sheet, because under accrual accounting, the revenue recognition process has not been completed, and the company’s product or service is still due to the buyer. When

Which is better for capital budgeting – IRR or NPV?

June 30, 2024 No Comments

A: In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages. All other things being equal, using internal rate of return (IRR) and net present value

Which is better: A high or low equity multiplier?

June 30, 2024 No Comments

A: An equity multiplier measures a company’s financial leverage by using a ratio of the company’s total assets to its stockholders’ equity. Generally, a lower equity multiplier indicates a company has lower financial leverage. It is better to have a low equity multiplier, because a

Which metric should I pay more attention to, EV/EBITDA or P/E?

June 30, 2024 No Comments

A: The price-to-earnings (P/E) ratio is one of the most popular and widely used financial metrics, but it has a number of inherent flaws for which the enterprise value to EBITDA (EV/EBITDA) ratio compensates. The EV/EBITDA ratio is a financial metric that measures the return

When are expenses and revenues counted in accrual accounting?

June 30, 2024 No Comments

A: Under the accrual basis of accounting, revenues and expenses are counted when they are earned. This is different from the cash basis of accounting, where they are reported whenever cash actually flows in and out of the business. Most accountants consider the accrual accounting

When can you trade the stocks in the Dow Jones Industrial Average (DJIA)?

June 30, 2024 No Comments

A: The Dow Jones Industrial Average is an index that shows the average price of 30 large, publicly traded U.S. companies across many sectors. The index represents the performance of its constituents and is often used by investors and the media to portray an overall

When do you use installment sales method vs. the cost recovery method?

June 30, 2024 No Comments

A: There are four primary methods that accountants use to recognize business sales revenue: percentage of completion, completed contract, cost recovery and installment sales. In some circumstances, complications in a transaction make it uncertain as to how much revenue from a particular sale is collectible

When evaluating terminal value, should I use the perpetuity growth model or the exit approach?

June 30, 2024 No Comments

A: In discounted cash flow (DCF) analysis, neither the perpetuity growth model nor the exit multiple approach is likely to render a perfectly accurate estimate of terminal value. The choice of which method of calculating terminal value to use depends partly on whether an investor

When is a call option considered to be “in the money”?

June 30, 2024 No Comments

A: A call option gives the buyer or holder the right, but not the obligation, to buy the underlying security at a predetermined strike price on or before the expiration date. “In the money” describes the moneyness of an option. Moneyness describes the relationship of

When is accrual accounting more useful than cash accounting?

June 30, 2024 No Comments

A: The accrual accounting method is more useful than the cash accounting method when a person or company is trying to understand the performance of a business over a specified time period. Under the accrual accounting method, all revenue and expenses are matched together. All

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