Variance analysis is an analytical tool that managers can use to compare actual operations to budgeted estimates. In other words, after a period is over, managers look at the actual cost and sales figures and compare them to what was budgeted. Some budgets will be met and some will not.
Explanation :
Most companies create budgets to track financial goals and improve efficiencies in both production and operations. Budgets help management establish benchmarks to measure future improvement. Most budgets start with estimated cost and sales figures. Management can set these estimates aggressively for goals for the company. For instance, management might set a cost budget of 10 percent less than last quarter. The goal is to meet this budget, but some goals are not always met. Managers can track the process of these goals with variance analysis.
In a nutshell :
- Analysis of variance, or ANOVA, is a statistical method that separates observed variance data into different components to use for additional tests.
- A one-way ANOVA is used for three or more groups of data, to gain information about the relationship between the dependent and independent variables.
- If no true variance exists between the groups, the ANOVA’s F-ratio should equal close to 1.
Variable costs are production costs that change in proportion to the amount of goods that are produced. In other words, for every good that is produced, variable costs increase by the same amount.
In any production process, manufacturers incur a variety of costs. Cost accountants and managers usually split these costs into two main categories: variable costs and fixed costs.
Explanation :
Fixed costs, on the other hand, do not fluctuate with the production levels. Fixed costs are always the same. A good example of a fixed cost is rent. It doesn’t matter whether the piano manufacturer makes 10 pianos or 100 pianos, the rent expense will always be the same.
Notice that the piano company producing fewer pianos can decrease variable costs, but lower levels of production cannot decrease fixed costs. This means that variable costs could be decreased to zero or completely eliminated if production ceased. Fixed costs, however, would still remain the same even at a production level of zero.
In a nutshell :
- A variable cost is an expense that changes in proportion to production output or sales.
- When production or sales increase, variable costs increase; when production or sales decrease, variable costs decrease.
- Variable costs stand in contrast to fixed costs, which do not change in proportion to production or sales volume.
Value investing is an investment philosophy that focuses on the fundamentals of a company in an effort to pick stocks that are trading for less than inherent value. In other words, it’s a strategy of looking at characteristics of a company like cash flow, operational efficiency, and market competition rather than looking at its current market price and market history.
Explanation :
This strategy began primarily with Benjamin Graham, a professor and professional investor in the early 20th century. He created a thorough guide that focused on the company’s cash flows, ability to pay debt, future prospects, and other factors in order to arrive at a valuation of the company.
The idea is that the market might either misunderstand a company or undervalue its true earning potential. By looking at the business fundamentals, a savvy investor can estimate what a company is actually worth regardless of where the market sets its price. Once you find a company that is being undervalued based on its operations, you can invest at the low market price. When the market figures out how much it is actually worth, the stock price will increase. Furthermore, value investing is usually conducted with a discounted cash flow analysis, that attempts to value the present value of all future cash flows of a business, based on a variety of operating and efficiency factors. It is heavily based on one’s view and assumptions about the company and is used today by a host of successful hedge funds, institutions, banks, and individual investors.
In a nutshell :
- Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
- Value investors actively ferret out stocks they think the stock market is underestimating.
- Value investors use financial analysis, don’t follow the herd, and are long-term investors of quality companies.
The value chain is the series of processes in a manufacturing system that adds value to an end product. In other words, the value chain consists of production processes that improve the function or usefulness of a product.
Explanation :
In a manufacturing process, companies take many different steps to make their products. These steps usually fall into three main activities: material activities, production activities, and sales activities. All three of these steps make up the value chain.
Material activities deal with raw materials. Companies purchase the raw materials and begin prepping them for the manufacturing processes. Production activities include all the steps of actually producing or manufacturing the products. This could include machining and testing products. Sales activities happen after all the products are fully manufactured. In other words, sales activities only deal with finished goods. These activities can include marketing and promotion activities.
In a nutshell :
- A value chain is a step-by-step business model for transforming a product or service from idea to reality.
- Value chains help increase a business’s efficiency so the business can deliver the most value for the least possible cost.
- The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
- The value-chain theory analyzes a firm’s five primary activities and four support activities.
Withdrawals or owner withdrawals are payments from an owner’s share in a company. In other words, the money the owner took out of the company to use for personal expenses. Partnerships and sole proprietorships traditionally these transactions withdrawals whereas S corporations usually refer to them as distributions.
Explanation :
When an owner withdraws money from a company for personal use, the company takes this out of his share of capital. This makes sense because the owner is essentially cashing out his share in the company. He is receiving cash in exchange the company is buying back some of his capital.
The company would record a journal entry for an owner withdrawal by debiting owner’s withdrawal and crediting cash. Owner’s withdrawal is a temporary capital or equity account that is closed to the general owner’s capital account at the end of the year.
In a nutshell :
- A withdrawal involves removing funds from a bank account, savings plan, pension or trust.
- Some accounts don’t function like simple bank accounts and carry fees for the early withdrawal of funds.
- Both certificates of deposit and individual retirement accounts deal with withdrawal penalties if the accounts are withdrawn before the stipulated time.
A white-collar worker is an employee who is not required to do physical labor such as an office worker. White-collar worker is usually an upper level employee, like managers, executives, and professionals, who is paid on a monthly salary and does not receive an hourly wage.
Explanation :
The term white-collar comes from the stereotypical upper level employee of the 20th century. Most upper level employees wore white dress shirts with white collars whereas the lower level employees doing manual labor on the factory floor often had to wear traditionally blue uniforms. That’s where the white-collar, blue-collar terms came from.
In a nutshell :
- White-collar workers are suit-and-tie workers who work at a desk and, stereotypically, eschew physical labor.
- White-collar jobs typically are higher-paid, higher-skilled jobs that require more education and training than low-skilled or manual work.
- Examples may include managerial roles or professions like doctors or lawyers.
- White-collar workers and jobs are often portrayed in contrast to blue-collar work, insinuating a stratification of the working class.
The weighted average method is an inventory costing method that assigns average costs to each piece of inventory when it is sold during the year.
Explanation :
Retailers and other businesses that keep and sell inventory must keep track of the cost of inventory on hand as well as the cost of inventory that was sold. In theory this sounds simple, but it can be a lot more complex when large companies deal with thousands or even tens of thousands of inventory sku numbers. There are three different types of inventory costing methods: FIFO (First-in, First-out), LIFO (Last-in, Last-out), and Weighted Average.
In a nutshell :
- The weighted average takes into account the relative importance or frequency of some factors in a data set.
- A weighted average is sometimes more accurate than a simple average.
- Stock investors use a weighted average to track the cost basis of shares bought at varying times.
A warranty is a seller’s obligation to fix or replace a product that breaks or stops working properly in an agreed amount of time. In other words, a warranty is a contract or agreement between the seller and the buyer that requires the seller to replace defective products sold to the buyer.
Explanation:
Almost all retailers and manufacturers sell extended warranties. I’m sure you have been asked if you wanted to purchase one at some point in the recent past. Accounting for warranties requires estimation and experience because not all products break. Retailers don’t have to fix or replace 100% of the products they sell warranties for. If they did, they might stop selling warranties because it would be too costly. When a retailer sells a product with a warranty to a customer, the retailer records the income from the sale and the cash received. It also records an estimate of the warranty expense.
In a nutshell :
- Warranties often have conditions limiting the warranty.
- The buyer must fulfill certain duties for the warranty to be honored by the manufacturer.
- Some of the most common warranties are expressed, implied, extended, and special warranty deeds.
- The Magnuson-Moss Warranty Act was created to protect consumers from fraud and misrepresentations.
- A guarantee is a promise from a seller that their product will meet certain quality and performance standards.
The yield spread, also known as the credit spread, is the difference between the yields of two investments in terms of credit quality and the risk of investing in one debt instrument instead of another instrument.
Explanation :
The yield spread is measured in basis points (bps) and enables bond investors to compare the yield, maturity, liquidity and solvency of two debt instruments. For instance, the yield of a municipal bond is 7.50%, and the yield of a corporate bond is 8.50%.
The difference between the two yields is: 8.50% – 7.50% = 1% or 100 basis points (one basis point = 0.01%). However, a corporate bond is riskier and has a shorter maturity than a municipal bond. All these factors are taken into consideration when comparing one security over another using the yield spread.
In a nutshell :
- A yield spread is a difference between the quoted rate of return on different debt instruments which often have varying maturities, credit ratings, and risk.
- The spread is straightforward to calculate since you subtract the yield of one from that of the other in terms of percentage or basis points.
- Yield spreads are often quoted in terms of a yield versus U.S. Treasuries, or a yield versus AAA-rated corporate bonds.
- When yield spreads expand or contract, it can signal changes in the underlying economy or financial markets.
The Yellow Book is the annual publication by the GAO of the Generally Accepted Government Auditing Standards. Every year the GAO publishes a book that contains all of its updated rules and standards for conducting audits in the public sector. This book has always featured a bright yellow cover. Rather than calling it the GAO book of GAGAS, people started calling it the Yellow Book. The name has stuck ever since.
Explanation :
The Yellow Book is used by CPAs and governmental auditors who audit the Federal government, state governments, and even local governments. The Yellow Book includes audit standards and guidance for both financial and performance audits. The main audit standards addressed in the Yellow Book relate to:
- Independence
- Due Care
- Continuing Professional Education (CPE)
- Supervision
- Quality Control
In a nutshell :
- Yellow sheets are bulletins that inform traders about corporate bonds that are available from brokerages as over-the-counter trades.
- Pink sheets are the equivalent for stocks that trade over the counter.
- Yellow sheets and pink sheets are now electronic services published by OTC Markets Group.
- Both list securities issued by companies that are not listed on the major public exchanges.
