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Accounting 433 articles
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Annuity Payment

An annuity is a series of equal cash flows that occur after equal interval of time. If we know the interest rate and number of time periods, we can work out the annuity cash flow that corresponds to a specific present value and/or future value.

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Time Value of Uneven Cash Flows

When a cash flow stream is uneven, the present value (PV) and/or future value (FV) of the stream are calculated by finding the PV or FV of each individual cash flow and adding them up.

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Types of Interest Rates

An interest rate is a percentage which represents the cost of money as a percentage of initial principal. Interest rates differ depending on whether they are nominal or real, quoted or effective, annual or periodic and so on.

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Nominal Interest Rate

Nominal interest rate is the interest rate which includes the effect of inflation. It approximately equals the sum of real interest rate and inflation rate.

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Real Interest Rate

Real interest rate is the interest rate adjusted for the effect of inflation on maturity value of a loan or investment. It approximately equals nominal interest rate minus inflation rate.

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Quoted vs Periodic Interest

Quoted interest rate (also called nominal interest rate or annual percentage rate) is the non-compounded interest rate for a period of one year. It can be converted to periodic interest rate by dividing it with the number of compounding periods per year.

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Time Periods in TVM

In case of simple interest, number of time periods t equals total interest divided by product of PV and interest rate and in case of compound interest, number of periods can be calculated using NPER function or using a logarithm-based formula

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Tax Shield

Depreciation tax shield represents reduction in tax outflows when tax laws allow deduction of depreciation expense from taxable income. Interest tax shield refers to the tax-saving advantage of debt form of capital.

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Pro Forma Financial Statements

Proforma financial statements are financial statements which provide information about a company’s expected financial performance and financial position in future.

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Primary & Secondary Market

A primary market is a market in which corporations sell their securities to investors for the first time. On the other hand, a secondary market is a market in which investors trade the securities already issued with each other.

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Break-even Analysis

In management accounting, break-even analysis is a technique aimed at finding the level of sales (in units or dollars) at which a company is neither making a profit nor incurring a loss.

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Differential Analysis

Differential analysis (also called incremental analysis) is a management accounting technique in which we examine only the changes in revenues, costs and profits that result from a business decision instead of creating complete income statements for each alternative.

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Segment Margin

Segment margin is the amount contributed by a segment towards common fixed costs and profit of a business. It equals the contribution margin of a segment minus traceable fixed costs i.e. fixed costs which can be traced to it.

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Contribution Margin per Unit

Contribution margin per unit is the net amount that each additional unit sold contributes towards a company’s fixed costs and profit. It equals the difference between the product’s sales price and variable cost per unit.

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Derivation of DOL Formula

Degree of operating leverage (DOL) is defined as percentage change in operating income that occurs in response to a percentage change in sales. In this article we use this definition to derive different formulas for DOL.

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Histogram Equalization

Histogram equalization is an image processing technique which transforms an image in a way that the histogram of the resultant image is equally distributed, which in result enhances the contrast of the image. An equalized histogram means that probabilities of all gray levels are equal. In other words, histogram equalization makes an image use all colors in equal proportion.

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Manufacturing Overhead Costs

Manufacturing overheads costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.

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Variable Costs

In management accounting, variable costs are cost items whose total cost varies proportionately with some underlying activity level such as total units, labor hours, machine hours, etc.

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Mixed Costs

Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components. The fixed element doesn’t change with change in activity level at all and the variable component changes proportionately with activity.

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Trial Balance

Trial balance is a draft report used by accountants that simply lists all the ledger account balances extracted from the accounting system of a business at a given date.

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Fixed Costs

Fixed costs are costs which do not change with change in output as long as the production is within the relevant range. It is the cost which is incurred even when output is zero.

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Variable Cost Ratio

Variable cost ratio is the ratio of variable costs to sales. It equals total variable costs divided by total sales or variable cost per unit divided by price per unit or 1 minus contribution margin ratio.

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Break-even Chart

A break-even chart is a graph which plots total sales and total cost curves of a company and shows that the firm’s break-even point lies where these two curves intersect.

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Average Total Cost

In economics, average total cost (ATC) equals total fixed and variable costs divided by total units produced. Average total cost curve is typically U-shaped i.e. it decreases, bottoms out and then rises.

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Game Theory

In economics, game theory is the study of interaction between different participants in a market. The objective of game theory is to identify the optimal strategy for each participant.

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Prisoners' Dilemma

A prisoners’ dilemma refers to a type of economic game in which the Nash equilibrium is such that both players are worse off even though they both select their optimal strategies.

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Nash Equilibrium

Nash equilibrium is an outcome of a game such that no player can gain by unilaterally changing its strategy. It is achieved when each player adopts the optimal strategy given the strategy of the other player.

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Dominated Strategy

A dominated strategy is a strategy which doesn’t result in the optimal outcome in any case. A strategy is dominated if there always exist a course of action which results in higher payoff no matter what the opponent does.

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Dominant Strategy

In game theory, a dominant strategy is the course of action that results in the highest payoff for a player regardless of what the other player does.

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Payoff Matrix

In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the cells show payoffs to each player such that the payoff of the row player is listed first.

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Kinked Demand Curve Model

The kinked-demand curve model (also called Sweezy model) posits that price rigidity exists in an oligopoly because an oligopolistic firm faces a kinked demand curve, a demand curve in which the segment above the market price is relatively more elastic than the segment below it.

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Monopolistic Competition

Monopolistic competition is a type of imperfect competition market structure in which a large number of firms produce differentiated products and there are no barriers to entry.

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Concentration Ratio

Concentration ratio (also called n-firm concentration ratio) measures the market share of top n firms in an industry. Four-firm concentration ratio which is the sum of market share of top four firms, is the most common concentration ratio. It is close to 0 in case of perfect competition and close to 1 in monopoly or oligopoly.

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Oligopoly Models

An oligopoly is a market structure characterized by significant interdependence. Common models that explain oligopoly output and pricing decisions include cartel model, Cournot model, Stackelberg model, Bertrand model and contestable market theory.

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Cournot Model

Cournot model is an oligopoly model in which firms producing identical products compete by setting their output under the assumption that its competitors do not change their output in response.

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Oligopoly

An oligopoly is a market structure in which a few firms have each such a large market share that any change in output by one firm changes market price and profit of other firms. A member of an oligopoly is called an oligopolist.

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