Some Important Aspect About Supply Chain: Switch Bill of Lading and their types

A complete manual and word of advice as per below details:

What it means?
Dubai Tours & Activities: Tours 15% off
A switch Bill of Lading refers to a second set of Bill of Lading issued by the carrier (or its agent) to substitute the original bills of lading issued at the time of shipment.
Even though it technically deals with the same cargo, the information on the switch B/Ls, for various reasons put forth below, is intentionally edited and is not meant to be identical to the original B/L it replaces.
Just like the original, the switch B/L serves as:
  • A receipt for goods (for the destination agent)
  • Evidence of contract of carriage (contract between shipper and the carrier)
  • Document of title to the goods (consignee will need at least one original to receive the goods)
In most cases, a switch B/L is used in order to edit the shipper information, i.e. replacing the actual factory details with the trading agent’s. That said, there may be various other motives for requesting a switch B/L.

Reasons to issue a switch Bill of Lading

Switch B/Ls are only issued against the surrender of the original set and may be required by any of the three parties with direct involvement in the purchase/sale of the cargo: the cargo owner/seller (or an authorized representative), the trading agent, and the end buyer.
The reasons for requiring a switch B/L include:
  • The seller (who could be a trading agent) wants to hide the name of the actual exporter from the consignee to prevent the consignee from striking a deal with the exporter directly.
  • The seller does not want the buyer to know the actual country of origin of the cargo.
  • The original B/L may be held up in the country of shipment, or the ship may arrive at the discharge port prior to the original B/Ls.
  • The trading agent prefers to ease his cash flow by first receiving payment from the end receiver before paying the shipper.
  • Goods may have been resold en route as a high sea sale and the discharge port must now be changed to another port.
  • Customs at destination or consignee request for the cargo description to be edited. Eg. “tools” instead of “gardening tools”.
  • The goods were originally shipped in small parcels on separate B/Ls and the buyer prefers to have only one B/L covering all the parcels to facilitate his on-sale. Or vice versa - one B/L was issued for a bulk shipment which the buyer prefers to split into multiple B/Ls covering smaller parcels.

Switch Bill of Lading procedure

The Switch B/L can only be officially requested by the cargo owner or principal. In other words, since the Bill of Lading represents ownership, only the company holding the full set of documents can request for a switch B/L.
Advice: the request should only be made if the company has all three original B/Ls in hand, except in the case of a Telex Release.
After the request has been made, the switch bill must be approved by the carrier and the freight forwarder, who needs to very meticulously compare the differences between the original B/L and the new and proposed Switch B/L to make sure everything that needs to match, matches.
Note: only the carrier or freight forwarder is allowed to sign a Bill of Lading.
Once the switch B/L has been approved for issuance, the carrier and/or freight forwarder must make sure that the original set of B/Ls is taken out of circulation and cancelled before the switch B/L can be released. This is important as it ensures that there is only one set of documents in force to prevent problems.

Switch Bill of Lading example

When requesting for a switch B/L standard procedure must always be followed to ensure a smooth process. Here’s an example of how a switch B/L may be requested and processed.
Consider these three parties:
  • Party A: factory producing the goods
  • Party B: trading agent selling the goods
  • Party C: final buyer/consignee
The first and original set of B/L will have been issued with A as the shipper and B as the consignee. The cargo owner may later request for a switch B/L listing B as the shipper and C as the consignee.
Other changes to the shipment description may be made, but only under the cargo owner’s written authority and only to certain information such as to the condition of the cargo, payment terms, place and date of loading, Incoterms, etc.
Any inconsistencies on the switch bill will result in the carrier and his agent (if the agent has issued the switch bills) facing risks of claims from parties who have suffered a loss as a result of these misrepresentations.
Switch bills of Lading do not contain any information that indicates that they are not the initial and original B/Ls. However, the consignee or end buyer is at liberty to ask the shipping line whether the bills were switched. Shipping lines are not legally obliged to divulge this information. But it’s common practice for them to do so without disclosing any further details.

Changes must be reflected across other documents

When a switch bill is issued, a new invoice and packing list must also be issued to reflect the new changes accordingly and accurately.
As per our example, this means showing company B as the supplier and company C as the buyer/consignee. This not only avoids exposing the supplier’s identity but also maintains consistency with the new set of Bill of Lading.

Possible risks for a shipping agent or freight forwarder

In recent years, there’ve been multiple cases of fraud under switch bills, which have caught the attention of shipping lines. This highlights increased risks for cargo agents such as:
  • A letter of indemnity (written authorization) issued by the requestor could potentially be legally unenforceable.
  • Differences in the description of the cargo may cause conflict as to the validity of the Bills of Lading as receipts of the cargo shipped
  • One set of Bill of Ladings might incorporate a different voyage charter with a different jurisdiction clause.
  • The original set of Bill of Ladings may have been marked freight payable only for the switch bills to be marked as freight prepaid, thereby affecting owners’ right to lien.
  • Inaccurate statements such as the shipment date, shipper or consignee name, quantity/condition of cargo, etc constitute misrepresentations.
  • Sometimes a different charter party with different freight/demurrage rates is incorporated, which defrauds the receiver.
  • Switch Bills of Lading may be used to draw fraudulently on a letter of credit or to defraud a seller/buyer.
  • In the event several versions of the Bills of Lading are circulating at the same time, the carrier risks delivery to the wrong party and then having to compensate the holders of the true ‘original’ bills.
For further reference, there are various case studies available online showing how different courts arrive at different verdicts based on the misinterpretations and misuse of the Switch Bill of Lading.

Tips on how to deal with a switch Bill of Lading

  1. Freight forwarders should verify the reliability of the principal party authorizing the issuance of the second set. Obtain their authority in writing and a signed letter of indemnity (and countersigned by a bank if deemed necessary by the agent) indemnifying the cargo agent for all consequences of issuing the second set of Bills of Lading.
  2. Freight forwarders should also consider whether it is also necessary to obtain written authority from the other parties who may be affected by his action (eg. the ship owner or the shipper or a bank). If a freight forwarder is authorized by a charterer to issue a switch Bill of Lading on behalf of the carrier, written authority by the ship owner must be obtained. Failure to do so will result in the ship owner having a valid claim against the agent for losses resulting from the issuance of the second set without authority.
  3. If the agent has been asked by the principal party to issue the switch bill based on an indemnity from the customer, the agent should get the proper wording from the principal and get the completed indemnity approved by the principal party before issuing it.
  4. It is also advisable to ensure that the cargo agent is covered by their own insurance for the issuance of switch bills. They should provide their insurance company with the exact reason for the issuance of the switch bill of lading.
Cyber Weekend Savings! This weekend only, use code CYBER19 at Reservations.com and get the service f Source: icontainers.com
Posted in Export & Import Guide | Tagged , , , , , | Leave a comment

VAT(Identification of Designated Zones)

VAT treatment of Free Zones


VAT is a general consumption tax imposed on most supplies of goods and services in the UAE. By default, it is chargeable on supplies of goods and services throughout the territorial area of the UAE. This territorial area will also include those areas currently defined as both fenced and non-fenced Free Zones. For VAT purposes, both fenced and unfenced Free Zones are considered to be within the territorial scope of the UAE – and therefore subject to the normal UAE VAT rules – unless they fulfil the criteria to be treated as a Designated Zone as defined by the Federal Decree-Law on VAT1 and Executive Regulations2. Those Free Zones which are Designated Zones are treated as being outside of the territory of the UAE for VAT purposes for specific supplies of goods. In addition, there are special VAT rules in respect of VAT treatment of certain supplies made within Designated Zones. The effect of these rules is that certain supplies of goods made within Designated Zones are not be subject to UAE VAT. In contrast, supplies of services made within Designated Zones are treated in the same way as supplies of services in the rest of the UAE. Important: Free Zones meeting the criteria have been specifically identified by way of a Cabinet Decision as Designated Zones. Where a Free Zone is not a Designated Zone, it is treated like any other part of the UAE.

Identification of a Designated Zone A Designated Zone is an area specified by a Cabinet Decision as being a “Designated Zone” 3. Free Zones listed by the Cabinet Decision as being a Designated Zone can be found under the Legislation tab on the FTA website (www.tax.gov.ae). Although an area might be identified as a Designated Zone, it is not automatically treated as being outside the UAE for VAT purposes. There are several main criteria4

which must be met in order for a Designated Zone to be treated as outside the UAE for VAT purposes. These are as follows: 1. The Designated Zone must be a specific fenced geographic area. 2. The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone. 3. The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone. 4. The operator of the Designated Zone must comply with the procedures set out by the FTA. This means that where a Designated Zone has areas that meet the above requirements, and areas that do not meet the requirements, it will be treated as being outside the UAE only to the extent that the requirements are met. In addition, should a Designated Zone change the manner of its operation or no longer meet any of the conditions imposed on it which led to it being specified as a Designated Zone by way of the Cabinet Decision, it shall be treated as though it is located within the territory of the UAE5. Important: Only where a Designated Zone meets all the above tests it can be treated as outside the UAE for VAT purposes.

Entities within a Designated Zone Those businesses which are established, registered or which have a place of residence within the Designated Zone are deemed to have a place of residence in the UAE for VAT purposes6. The effect of this is that where a business is operating in a Designated Zone, it itself will be onshore for VAT purposes, even though some of its supplies of goods may be outside the scope of UAE VAT.

VAT registration Any person carrying on a business activity in the UAE and making taxable supplies in excess of the mandatory VAT registration threshold (i.e. a taxable person) must apply to be registered for VAT purposes.

Any other person that is making taxable supplies or incurring expenses (which are subject to VAT), in excess of the voluntary VAT registration threshold may apply to register for VAT purposes. Important: Designated Zone businesses are considered to be established ‘onshore’ in the UAE for VAT purposes. This means that they have the same obligations as non-Designated Zone businesses and have to register, report and account for VAT under the normal rules. It also means they can join a tax group (VAT group) provided they meet the required conditions.

Cyber Monday  -------------------------------------------------------------------------------------------------------------------------
1 Federal Decree-Law No. (8) of 2017 on Value Added Tax, hereafter ‘the Law’. 2 Cabinet Decision No. (52) on the Executive Regulations of Federal Decree-Law No.(8) of 2017 on Value Added Tax, hereafter the ‘Executive Regulations’. 3 Article 1, Executive Regulations: any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law. 4 Article 51(1), Executive Regulation.

Source: tax.gov.ae
Posted in Uncategorized | Tagged , , , , | Leave a comment

Easiest way to learn Income Statement & Balance Sheet

(adsbygoogle = window.adsbygoogle || []).push({});






Posted in Uncategorized | Tagged , , , , , , , , | Leave a comment

SFAS 78 With Summary


SUMMARY OF STATEMENT NO. 78
CLASSIFICATION OF OBLIGATIONS THAT ARE CALLABLE BY THE CREDITOR—AN AMENDMENT OF ARB NO. 43, CHAPTER 3A (ISSUED 12/83)
Summary
This Statement amends ARB No. 43, Chapter 3A, "Current Assets and Current Liabilities," to specify the balance sheet classification of obligations that, by their terms, are or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date. It also specifies the classification of long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Such callable obligations are to be classified as current liabilities unless one of the following conditions is met:
The creditor has waived or subsequently lost the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date.
For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable.
Short-term obligations expected to be refinanced on a long-term basis, including those callable obligations discussed herein, continue to be classified in accordance with FASB Statement No. 6, Classification of Short-Term Obligations Expected to Be Refinanced. This Statement is effective for financial statements for fiscal years beginning after December 15, 1983 and for interim periods within those fiscal years.
(adsbygoogle = window.adsbygoogle || []).push({});
Source: FASB
Posted in Uncategorized | Tagged , , , , | Leave a comment

How does a magnetic stripe on the back of a credit card work?

The ­stripe on the back of a credit card is a magnetic stripe, often called a mags-tripe. The mags-tripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a very tiny bar magnet about 20 millionths of an inch long.
Your card also has a mags-tripe on the back and a place for your all-important signature.
The mags-tripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The mags-tripe on the back of the card is very similar to a piece of cassette tape fastened to the back of a card.
Instead of motors moving the tape so it can be read, your hand provides the motion as you "swipe" a credit card through a reader or insert it in a reader at the gas station pump.
On the next page, see how information is stored in the mag stripe and read by different types of machines.(Source -how stuff works)
(adsbygoogle = window.adsbygoogle || []).push({});
Posted in Uncategorized | Tagged , , | Leave a comment

Transfer Pricing

What is Transfer Pricing?
Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.
 How transfer pricing playing role in tax planning?
Transfer pricing is in the cross hairs of tax policy as it relates to the competing objectives of three parties: the revenue-maximizing objective of the domestic tax authority, the revenue-maximizing objective of the foreign tax authority, and the tax-minimizing objective of the taxpayer. Because of the inherent differences in judgment and interpretation of facts when analyzing a company’s transfer pricing, together with the clashing revenue objectives of multiple tax authorities and taxpayers, the risk of adjustments to taxable income, double taxation, and potential for penalties is nontrivial, even for multinationals that make good-faith efforts to comply with Sec. 482.
Disputes between tax authorities and taxpayers may arise in many areas, including:
  • Tax authorities may question the choice of the economic method.
  • Tax authorities may disagree with the taxpayer’s characterization of the value chain within the group.
 Example - As an example of the last type of dispute, in 2006 the IRS and GlaxoSmithKline Holdings (Americas) Inc. (GSK U.S.) settled a transfer-pricing dispute covering 1989 through 2005 for $3.4 billion, the largest settlement ever obtained by the IRS. At issue was the price charged GSK U.S. by its U.K.-based parent, GlaxoSmithKline PLC, through its worldwide operating group (Glaxo Group) for cost of goods sold, royalties, and other expenses, related in part to manufacturing and distributing Zantac and other prescription drugs. The position of GSK U.S. was that the drugs were developed outside the United States, as was the marketing strategy it used to sell them. As such, GSK U.S. was performing routine distribution and was charged prices and royalties based on the “resale price method,” which determines the appropriate arm’s-length range by the markups received by comparable distributors in uncontrolled, arm’s-length transactions. Based on the same facts, however, the IRS considered the marketing functions performed by GSK U.S. to have had a substantial role in creating demand for the drugs, and therefore, GSK U.S. deserved a much higher gross profit margin. The IRS applied the residual-profit-split method, which allocated Glaxo Group profit first between “routine” functions performed by GSK U.S. and GSK Group, then split the remaining profit according to where the largest part of the value was created.
Posted in Uncategorized | Tagged , , , , , , | Leave a comment

Brief Overview of IFRS & How it’s different from US GAAP

“What’s the fuss over IFRS?” providing a brief overview of the transition to adoption of IFRS and convergence with US GAAP. While we realize that IFRS will become a future reality, the question lingered regarding the differences between the two accounting standards. I thought it would be useful to assess the areas of major differences. In this short blog post, it will not be impossible to address all the components of IFRS but we’ll try and capture primary differences.                   
IFRS standards are broader and more principles-based than U.S. GAAP. This represents a hurdle for many U.S. CPA's because we have been used to narrow “bright line” rules and guidelines on how to apply GAAP. IFRS tends to leave implementation of the principles up to preparation of financial statements and auditors. The regulatory and legal environment in the United States has been primarily responsible for narrower prescriptive interpretation of accounting rules. Adoption of IFRS will require a paradigm shift by accountants in the United States.
Financial statement presentation represents an area where differences exist. For example International Accounting Standards does not provide a standard layout as prescribed by the SEC. One of the big differences is that IFRS requires debt associated with a covenant violation to be presented as a current liability unless there a lender agreement was reached prior to the balance sheet date. US GAAP allows the debt to be presented as non-current if an agreement was reached prior to issuing the financial statements. Another difference in financial statement presentation deals with income statement classification of expenses. The SEC requires presentation of expenses based on function whereas IFRS allows expenses to be presented by either function or nature of expenses. Additional differences exist with presentation of significant items. Variations emerge with disclosure of performance measures such as operating profit. IFRS does not define such items so there can be significant diversity in the items, headlines, and subtotals of the income statement between US GAAP and IFRS.
A big area of divergence is with negative goodwill and research and development. IFRS requires that a reassessment of purchase price allocation be recognized as income while US GAAP allows negative goodwill to be allocated on a pro rata basis and can recognize the excess of the carrying amount of certain assets as an extraordinary gain. US GAAP requires research and development to be expensed immediately in contrast to IFRS which allows it to be capitalized as a finite-lived intangible asset. IFRS allows revaluation to the fair value of intangible assets other than goodwill whereas US GAAP does not permit revaluation.
There are both similarities and differences in the treatment of inventory. US GAAP allows LIFO as an acceptable costing method in contrast to IFRS which prohibits the use of LIFO. There are also some differences in measurement of inventory value. US GAAP states that inventory should be carried at the lower of cost or market. Market is defined as current replacement cost as long as market does not exceed net realizable value. IFRS allows inventory to be carried at the lower of cost or net realizable value which is the best estimate of the amounts which inventories are expected to realize and may or may not be equal to fair value.
While there are differences, the two standards boards are working to bring the two standards closer together. This should make the shift to IFRS easier when it comes time to change. One of the most significant areas where differences are being converged is revenue recognition. Currently US GAAP is more prescriptive than IFRS, especially for application to specific industry situations such as the sale of software and real estate. It will take time and effort to bring the two standards on to the same page. I looked at the two standards with the objective of understanding the key differences. The journey to convergence and adoption of IFRS will be interesting, challenging, and educational to say the least.
The IFRS: History and Purpose
The IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.
The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.
Framework
The Conceptual Framework for Financial Reporting states the basic principles for IFRS. The IASB and FASB frameworks are in the process of being updated and converged. The Joint Conceptual Framework project intends to update and refine the existing concepts to reflect the changes in markets and business practices. The project also intends consider the changes in the economic environment that have occurred in the two or more decades since the concepts were first developed.
IFRS Defined Objective of Financial Statements
A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.
Posted in Uncategorized | Tagged , , , , , , , , | Leave a comment

IFRS Standard & Interpretation Updates

Financial statement considerations in adopting new and revised pronouncements
Where new and revised pronouncements are applied for the first time, there can be consequential impacts on annual financial statements, including:
  • Updates to accounting policies. The terminology and substance of disclosed accounting policies may need to be updated to reflect new recognition, measurement and other requirements, e.g. IAS 19 Employee Benefits may impact the measurement of certain employee benefits.
  • Impact of transitional provisionsIAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains a general requirement that changes in accounting policies are retrospectively applied, but this does not apply to the extent an individual pronouncement has specific transitional provisions.
  • Disclosures about changes in accounting policies. Where an entity changes its accounting policy as a result of the initial application of an IFRS and it has an effect on the current period or any prior period, IAS 8 requires the disclosure of a number of matters, e.g. the title of the IFRS, the nature of the change in accounting policy, a description of the transitional provisions, and the amount of the adjustment for each financial statement line item affected
  • Third statement of financial positionIAS 1 Presentation of Financial Statements requires the presentation of a third statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statements in a number of situations, including if an entity applies an accounting policy retrospectively and the retrospective application has a material effect on the information in the statement of financial position at the beginning of the preceding period
  • Earnings per share (EPS). Where applicable to the entity, IAS 33 Earnings Per Share requires basic and diluted EPS to be adjusted for the impacts of adjustments result from changes in accounting policies accounted for retrospectively and IAS 8requires the disclosure of the amount of any such adjustments.
Whilst disclosures associated with changes in accounting policies resulting from the initial application of new and revised pronouncements are less in interim financial reports under IAS 34 Interim Financial Reporting, some disclosures are required, e.g. description of the nature and effect of any change in accounting policies and methods of computation.
IFRS 9 Financial Instruments (2014) {Effective for annual periods beginning on or after 1 January 2018}
A finalised version of IFRS 9 which contains accounting requirements for financial instruments, replacing IAS 39 Financial Instruments: Recognition and Measurement. The standard contains requirements in the following areas:
Posted in Uncategorized | Tagged , , , , , , | Leave a comment

Learn and understand how to easily perform a break even analysis

The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal. There is no net loss or gain, and one has "broken even," though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.

The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero. It is only possible for a firm to Break-even, if the dollar value of sales is higher than the variable cost per unit. This means that the selling price of the good must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable costs). Once they surpass the break-even price, the company can start making a profit.
The break-even point is one of the most commonly used concepts of financial analysis, and is not only limited to economic use, but can also be used by entrepreneurs, accountants, financial planners, managers and even marketers. Break-even points can be useful to all avenues of a business, as it allows employees to identify required outputs and work towards meeting these.
The Breakeven value is not a generic value and will vary dependent on the individual business. Some businesses may have a higher or lower breakeven point, however it is important that each business develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs. Each sale will also make a contribution to the payment of fixed costs as well.
For example, a business that sells tables needs to make annual sales of 200 tables to break-even. At present the company is selling less than 200 tables and is therefore operating at a loss. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs.
If the business does not think that they can sell the required amount of units, they could consider the following options:
1. Reduce the fixed costs. This could be done through a number or negotiations, such as reductions in rent, or through better management of bills or other costs.
2. Reduce variable costs by, for example, finding a new supplier that sells tables for less.
3. Increase the quantity of tables they sell.

Any of these options can reduce the break-even point so the business need not sell as many tables as before, and could still pay fixed costs.

The main purpose of break-even analysis is to determine the minimum output that must be exceeded for a business to profit. It also is a rough indicator of the earnings impact of a marketing activity. A firm can analyze ideal output levels to be knowledgeable on the amount of sales and revenue that would meet and surpass the break-even point. If a business doesn't meet this level, it often becomes difficult to continue operation.
The break-even point is one of the simplest, yet least-used analytical tools. Identifying a break-even point helps provide a dynamic view of the relationships between sales, costs, and profits. For example, expressing break-even sales as a percentage of actual sales can help managers understand when to expect to break even (by linking the percent to when in the week or month this percent of sales might occur).
The break-even point is a special case of Target Income Sales, where Target Income is 0 (breaking even). This is very important for financial analysis. Any sales made past the breakeven point can be considered profit (after all initial costs have been paid)
Break-even analysis can also provide data that can be useful to the marketing department of a business as well, as it provides financial goals that the business can pass on to marketers so they can try to increase sales.

Break-even analysis can also help businesses see where they could re-structure or cut costs for optimum results. This may help the business become more effective and achieve higher returns. In many cases, if an entrepreneurial venture is seeking to get off of the ground and enter into a market it is advised that they formulate a break-even analysis to suggest to potential financial backers that the business has the potential to be viable and at what points.

Break-even analysis

By inserting different prices into the formula, you will obtain a number of break-even points, one for each possible price charged. If the firm changes the selling price for its product, from $2 to $2.30, in the example above, then it would have to sell only 1000/(2.3 - 0.6)= 589 units to break even, rather than 715.
Breakeven small.png
To make the results clearer, they can be graphed. To do this, draw the total cost curve (TC in the diagram), which shows the total cost associated with each possible level of output, the fixed cost curve (FC) which shows the costs that do not vary with output level, and finally the various total revenue lines (R1, R2, and R3), which show the total amount of revenue received at each output level, given the price you will be charging.
The break-even points (A,B,C) are the points of intersection between the total cost curve (TC) and a total revenue curve (R1, R2, or R3). The break-even quantity at each selling price can be read off the horizontal axis and the break-even price at each selling price can be read off the vertical axis. The total cost, total revenue, and fixed cost curves can each be constructed with simple formula. For example, the total revenue curve is simply the product of selling price times quantity for each output quantity. The data used in these formula come either from accounting records or from various estimation techniques such as regression analysis.
(adsbygoogle = window.adsbygoogle || []).push({});


Limitations

  • Break-even analysis is only a supply-side (i.e., costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
  • It assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.
  • It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e., linearity).
  • It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).
  • In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

Posted in Uncategorized | Tagged , , , , , , | Leave a comment

Introduction to the Accounting Equation

From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a company's financial position. The financial position of a company is measured by the following items:
  1. Assets (what it owns)
  2. Liabilities (what it owes to others)
  3. Owner's Equity (the difference between assets and liabilities)
The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is:
14x-simple-table-01a
The accounting equation for a corporation is:
14x-simple-table-01b
Assets are a company's resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner's (or stockholders') equity.
Liabilities are a company's obligations—amounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways:
(1) as claims by creditors against the company's assets, and
(2) a source—along with owner or stockholder equity—of the company's assets.
Owner's equity or stockholders' equity is the amount left over after liabilities are deducted from assets:
Assets - Liabilities = Owner's (or Stockholders') Equity.
Owner's or stockholders' equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.
If a company keeps accurate records, the accounting equation will always be "in balance," meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a company's accounts. For example, when a company borrows money from a bank, the company's assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double-entry accounting.
A company keeps track of all of its transactions by recording them in accounts in the company's general ledger.Each account in the general ledger is designated as to its type: asset, liability, owner's equity, revenue, expense, gain, or loss account.
We created a visual tutorial to demonstrate how a variety of transactions will affect the accounting equation and the financial statements. It is available in AccountingCoach PRO along with test questions that pertain to the accounting equation.

(adsbygoogle = window.adsbygoogle || []).push({});

Balance Sheet and Income Statement

The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a company's assets, liabilities, and owner's (or stockholders') equity at a specific point in time. Like the accounting equation, it shows that a company's total amount of assets equals the total amount of liabilities plus owner's (or stockholders') equity.
The income statement is the financial statement that reports a company's revenues and expenses and the resulting net income. While the balance sheet is concerned with one point in time, the income statement covers a time interval or period of time. The income statement will explain part of the change in the owner's or stockholders' equity during the time interval between two balance sheets.

Introduction to the Accounting Equation  From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a company's financial position. The financial position of a company is measured by the following items:      Assets (what it owns)     Liabilities (what it owes to others)     Owner's Equity (the difference between assets and liabilities)  The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is: 14x-simple-table-01a  The accounting equation for a corporation is: 14x-simple-table-01b  Assets are a company's resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner's (or stockholders') equity.  Liabilities are a company's obligations—amounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways:  (1) as claims by creditors against the company's assets, and (2) a source—along with owner or stockholder equity—of the company's assets.  Owner's equity or stockholders' equity is the amount left over after liabilities are deducted from assets:      Assets - Liabilities = Owner's (or Stockholders') Equity.  Owner's or stockholders' equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.  If a company keeps accurate records, the accounting equation will always be
Posted in Uncategorized | Tagged , , , , | Leave a comment