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Comparison of the sales prices for Mug’s grass seed with what MAG had to pay for it showed a 20 percent decline in gross profit margin (sales – cost of goods sold = gross margin). The solution was to dock sales commissions for the amount under the company’s list price. Profits miraculously rebounded. Was the language the accounting system used to describe these two problems foreign? No. Was the solution a great mystery? Again, no. For TDO, the answer was simply to collect receivables faster. The accounting system identified the delinquent customers. For MAG, the answer was to raise prices. Once again, the accounting system showed which products and salespeople weren’t following company policy.
Having the same person draft the checks and reconcile the checking account is a good example of how not to assign accounting duties. We’ll talk extensively about internal control later. However, for now, small businesses often can’t afford the number of people needed for an adequate separation of duties. The internal control structure that we’ll install in your new accounting system helps mitigate that risk through mechanics and procedures rather than expensive people.
There may also be intangible assets owned by your company. Patents, the exclusive right to use a trademark, and goodwill from the acquisition of another company are such intangible assets. Their value can be somewhat hazy. Generally, the value of intangible assets is whatever both parties agree to when the assets are created. In the case of a patent, the value is often linked to its development costs. Goodwill is often the difference between the purchase price of a company and the value of the assets acquired (net of accumulated depreciation).
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The formula for calculating the amortization on an intangible asset is similar to the one used for calculating straight-line depreciation. You divide the initial cost of the intangible asset by the estimated useful life of the intangible asset. For example, if it costs $10,000 to acquire a patent, and it has an estimated useful life of ten years, the amortized amount per annum equals $1,000. The amount of amortization accumulated since the asset was acquired appears on the balance sheet as a deduction under the amortized asset.
Inventory accounting may sound like a huge undertaking but in reality, it is quite straightforward and easy to understand. You start with the inventory you have been on hand. No matter when you sell a product, the value of your inventory will remain constant based on accepted and rational methods of inventory accounting. Those methods include weighted average, first in/first out, and last in/first out.
Management accountants—also called cost, managerial, industrial, corporate, or private accountants—record and analyze the financial information of the companies for which they work. Among their other responsibilities are budgeting, performance evaluation, cost management, and asset management. Usually, management accountants are part of executive teams involved in strategic planning or the development of new products. They analyze and interpret the financial information that corporate executives need in order to make sound business decisions. They also prepare financial reports for other groups, including stockholders, creditors, regulatory agencies, and tax authorities. Within accounting departments, management accountants may work in various areas, including financial analysis, planning and budgeting, and cost accounting.
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