First In, First Out (FIFO) Inventory Costing

The First In First Out (FIFO) is a method for asset management that ensures assets we produce or acquire first are the ones we use or sell first. Under FIFO, we include the oldest assets’ cost in the Cost of Goods Sold (COGS) line item on the Income Statement. How does FIFO work? FIFO supports […]

How to Perform Net Realizable Value (NRV) Analysis

Accounting standards (IRFS and US GAAP) require that we apply a conservatism principle when we assess the value of assets and transactions. The Net Realizable Value (NRV) is the amount we can realize from an asset, less the disposal costs. The most often use of the method is when we evaluate inventory and accounts receivable […]

Obsolete Inventory and How to Deal With It

Most companies in the manufacturing and retail industries have Inventory. Slow-moving and obsolete Inventory can have a severe adverse effect on the profitability of the business. When we can’t realize our goods on hand, they lose value and may become useless for the company. To account for this decrease in value, we write down or […]

Quick Ratio in Financial Analysis and Modeling

Introduction We perform a liquidity ratio analysis to evaluate the ability of the company to settle its obligations on time. The most common use case is when lenders and creditors want to gain a better understanding of the financial health of a borrower or customer. Analysts use the gained insights to set credit terms and […]

Cash Conversion Cycle Analysis

What is the Cash Conversion Cycle The Cash Conversion Cycle is a metric that tells us how long it takes the company to convert capital invested in inventory back to cash. Here’s a cool-looking process diagram to illustrate the cash conversion cycle: Elements of the Cash Conversion Cycle The Cash Conversion Cycle is a combination […]

The Absorption Costing Method

Today we take a look at the Absorption Costing Method and how it is used to allocate cost to produced goods. Do not forget to download the Excel working file at the end of the article. What is Absorption Costing? Absorption Costing is a management accounting method for accumulating all costs associated with production in […]