Austin Community College

ExamplesExamples

Financial accounting math concepts

Actual Accounting Examples

Some of the concepts may be new you.

Don’t worry – you will cover these in detail.

For now – let’s focus on the math concepts.

Tools

Use your calculator

Print the narrative

DepreciationDepreciation

• Applies to assets:used in businessexpected to benefit the business for more

than one year • Represents the allocation of cost over the life of the

asset $ $ $ $$

Units of Output Method

Allocate cost based on output

machine hours

copies made

miles driven

Units of Output Method

Facts:Cost of Photocopier: $60,000Estimated total copies: 2,000,000

Computation

CostEstimated Copies

$60,0002,000,000

Depreciation per copy

3 cents or$0.03 per copy

$0.03 per copy -- Uses

• Allocate the cost of the photocopier–Based on actual copies made

• Determine the cost of making one copy– External – setting the selling price– Internal – developing a budget and

recording depreciation

Current RatioCurrent Ratio

• Measure of liquidity–How quickly can a company pay its current

debt• Amounts due within one year

Current

Classified Balance Sheet provides data

Current AssetsCashAccounts ReceivableMerchandise Inventory

Current LiabilitiesAccounts PayableSalaries PayableRent Payable

Current Ratio

Current Assets$500,000

Current Liabilities$250,000

= 2

Interpretation: For every $1 of current liabilities, the company has $2 of current assets.

Gross Profit

Net Sales (Cost of Goods Sold)Gross Profit

• Amount of each net sales dollar–Available to cover operating costs–Provide for net income

Gross Profit Margin

Net Sales (Cost of Goods Sold)Gross Profit

• The relationship of Gross Profit to Net Sales–Decimal–Percentage

Gross Profit Margin

Net Sales

Less: Cost of Goods Sold

Gross Profit

100%$200,000

125,000

$ 75,000 37.5%

75,000/200,000 = .375

.375 X 100 = 37.5 %

Sales TaxSales Tax

• Sales Tax Rate: 8.25%• Gross Taxable Sales: $96,000What is the total amount due from customers?

Sales TaxSales Tax

8.25 % = .0825

96,000 X 8.25 % = 7,920

96,000 X .0825 = 7,920

OR

$96,000 + $7,920 = $103,920

One Step ComputationOne Step Computation

96,000 X 108.25 % = 103,920

96,000 X 1.0825 = 103,920

OR

What IfWhat If

• Sales Tax Rate: 8.25%• Amount Collected: $103,920What is the total amount of taxable sales?

What IfWhat If

Taxable Sales

Amount Collected

1 +Sales Tax Rate

? X 1.0825 = 103,920

? X 1.0825 = 103,920 1.0825 1.0825

Taxable Sales = 96,000

Employer Payroll TaxEmployer Payroll Tax

• Taxes are withheld from employees’ wages• Employers also have to pay taxes• One common employer payroll tax• FUTA – .8% of the first $7,000

• You will cover additional taxes later.

Federal Unemployment Tax (FUTA)Federal Unemployment Tax (FUTA)

Jones Inc - First Quarter 2008Total payroll: $15,400FUTA: .8% of the first $7,000 of wages

Compute the FUTA liability

Federal Unemployment Tax (FUTA)Federal Unemployment Tax (FUTA)

.8% is less than 1 %

To convert .8% to a decimal:

Move the decimal two places to the left

.8% .008

Federal Unemployment Tax (FUTA)Federal Unemployment Tax (FUTA)

7,000 X .008 = 56

1% is .017,000 X .01 = 70Thus we know the answer must be less than 70.

70 X 80% = 56

Purchase Price AllocationPurchase Price Allocation

• A corporation purchases land and building for $850,000.

• Tax Appraisal – Land $ 270,000 Building $ 650,000

Determine the amounts to be allocated to the land and building

Purchase Price AllocationPurchase Price Allocation

Item Appraised Value

% (rounded to 1 decimal place)

LandBuildingTotal

$ 270,000

$ 650,000100 %

70.7 %29.3 %

$920,000

270/920 X 100 = 29.3478260869565

650/920 X 100 = 70.6521739130435

Allocation of Purchase PriceAllocation of Purchase Price

Item AllocatedAmount

LandBuilding

Total

850,000 X .293

850,000 X .707

249,050 + 600,950

$ 249,050

600,950

$ 850,000

SummarySummary

• Proper Tools– Calculator, Excel, Pencil and Paper

• Reasonable answer• Practice• Help– Instructor/Tutor– Classmates, friends, family