Assets are resources that companies own or control and result in future economic inflows. These are expenses that companies and businesses must bear for long-term success. Unlike other expenses, companies cannot charge an asset’s total cost to a single accounting period. It is because the matching principle in accounting requires …

What is the Profitability Index? Profitability Index (PI) is a measure of the ratio between the discounted cash flows and the initial investments for a given project. Another name for the profitability index is the Profit Investment Ratio (PIR) or Value Investment Ratio (VIR). Profitability index is prevalent in capital …

What is the Accounting Rate of Return? The Accounting Rate of Return (ARR) represents the average net income that a company expects to generate from an asset from its capital cost. In other words, it is the return that a company expects on an investment in relation to the initial …

When companies are performing capital budgeting, they must consider various costs related to the projects. Mostly, these include costs directly associated with the project, such as material and labour. However, it may also consist of some other costs, which may not be as clear. These usually include opportunity and sunk …

Companies have several financial statements that report various aspects of their business. Among these, the balance sheet presents the assets and liabilities balances that companies own or owe. However, these do not contain all of those assets or liabilities. It is because some of these items may remain off the …

What is an Off-Balance Sheet? Off-balance sheet items include assets or liabilities that do not appear on a company’s balance sheet. However, that does not mean that these items may not exist. These are the actual assets and liabilities that companies own. However, there are some technical aspects that prevent …

A special-purpose entity (SPE) is a subsidiary company created by a parent company to isolate financial risk. This entity is legally separate from the parent company. It aims to absorb risks that the parent company faces. In some cases, SPEs can hold assets if the parent company enters bankruptcy. Another …

What is Goodwill? Goodwill is a concept that is often prevalent in accounting. It is an intangible asset that companies acquire when they purchase another company. Usually, goodwill represents the difference between the purchase price and the net fair value of a company’s net assets. When the sum that companies …

Assets are a crucial part of any company or business. These are financial resources that companies own or control and can result in future economic inflows. In accounting, companies cannot charge an asset’s total costs to a specific period. Instead, they must distribute the cost using depreciation. However, assets may …

What is a Financial Contagion? A financial contagion represents the spread of a financial crisis from one entity or market to another. Financial contagions can occur within a single economy or can go beyond international borders. These usually include issues with currency exchange rates, stock prices, capital flows, etc. Financial …