The term reserves describe resources kept or retained for future use. Usually, these resources are not available for immediate utilization. However, they can help in the future if required. This term has various meanings in every field. In accounting, it covers several areas. These include a portion of shareholders' equity, a liability for estimated claims, or a contra asset for bad debts. The term reserves may also relate to equity reserves, which is prevalent in accounting. What are Equity Reserves?Equity reserves are a part of shareholders’ capital in accounting. Usually, these reserves are a part of the financial statements and kept apart for specific purposes. Equity reserves are balances created from shareholders’ contributions. For most companies, they are inaccessible balances unless for defined purposes. Usually, these purposes relate to accounting treatments or regulatory requirements. In some instances, equity reserves may also refer to a type of bank capital. These reserves represent funds set aside for contingencies, for example, legal action against the bank, losses on assets, etc. On top of that, it also provides a reserve for dividends that a company expects to pay to shareholders. However, they do not include declared dividends. Therefore, there is no liability for a company to make those payments. Companies may also use these equity reserves as a sinking fund. Usually, these provide finance to retire stock or debt capital instruments in the future. Overall, the definition of equity reserves may differ based on the area to which these reserves relate. In most circumstances, the former accounting definition will apply unless specified otherwise. What do Equity Reserves include?As mentioned above, equity reserves primarily include contributions from the shareholders. The two primary types of equity reserves consist of share premium and legal reserve funds. An explanation of what each of these involves is as below. Share premiumShare premium refers to an account in the balance sheet, a part of a company's equity reserves. This reserve account records the amount received for new share issues above the par value. Usually, share premium relates to the share capital account. Any finance received for shares issued at par will become a part of the share capital account. The excess funds will end up on the share premium account. Legal reserve fundsLegal reserve funds include balances required by legal legislation. Usually, this account balance is a percentage of the share capital balance. Like the share premium account, any reserves in the legal reserve funds account are also inaccessible. Another name used for it includes legal reserve funds from profits. Translation reservesTranslation reserves is a type of equity reserve that only comes from the consolidation process. Usually, parent and subsidiary companies that operate in different currencies must translate their operations when consolidating. In some cases, it may create a reserve, which ends up in the translation reserves account. Remuneration reservesCompanies may also promise their employees or management performance-based incentives or bonuses. For these bonuses, they may create an equity reserves account. This account will include the expected amount that a company expects to pay employees as incentives. Hedging reservesHedging reserves is an account that includes equity reserves generated during the hedging process. This account consists of funds generated when a company takes steps to mitigate volatility in some input costs. Usually, it relates to the hedge accounting process. ConclusionThe term equity reserves can have different meetings. In accounting, it refers to balances created from shareholders’ contributions. However, it may also represent a type of bank capital. There are several types of equity reserves that companies may have. These include share premium, legal reserve funds, translation reserves, remuneration reserves, and hedging reserves. Post Source Here: Equity Reserves
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Profitability and growth are two essential factors for companies. Several factors determine whether they will achieve this. Usually, the decisions that management makes can impact those factors significantly. The decision-making process must ensure that the company benefits from the underlying choice. During this process, real options can be crucial. What are Real Options?The real options approach is a technique used in decision-making. This approach uses the financial options theory for tangible assets. In essence, real options provide managers with the right to select between various choices. However, it does not oblige them to do so. With real options, managers focus on maximizing opportunities for profitability and growth. Real options can be a critical part of investment appraisals. These options help managers decide the best outcomes for a company. Unlike financial options, which include financial instruments, real options involve tangible assets. Therefore, they apply to most business asset investment opportunities. A critical part of these options is the real option valuation. What is Real Options Valuation?Real options valuation involves applying option valuation techniques to investment appraisals. As mentioned, real options include the right to make business decisions. Usually, these decisions consist of expanding, contracting, staging, abandoning, or deferring projects. Real options valuation can help companies make decisions with different outcomes and uncertainty. Another name used for real option valuation is real option analysis. It involves a technique that prioritizes adaption interventions. Furthermore, it also considers the possibility to adjust them in the future. This process can help companies make decisions while mitigating the risks involved. Companies utilize various techniques within this valuation to achieve optimal results. How does Real Options Valuation work?Real options valuation can be significantly beneficial in high-risk decisions. Traditional investment appraisal techniques take a quantitative approach towards valuation. However, real options analysis also focuses on qualitative methods. Similarly, companies can use this approach to evaluate the risks associated with investing in tangible assets. Companies can achieve real options valuation in several ways. One method to real options valuation is the dynamic programming approach. This approach is similar to the decision-tree analysis. However, it is more complex. With this process, companies can compare the real option valuation to the normal economic calculations. Usually, companies use a cost-benefit analysis within those calculations. The real option valuation approach can produce two types of results. First, it determines whether it is more beneficial to delay investments to wait for new information. This result only occurs if a project passes a deterministic analysis. The second result involves establishing whether loss-making projects can be profitable in the future. What are the advantages and disadvantages of Real Options Valuation?Real options valuation can have several advantages. Firstly, it allows companies to analyze the value of flexibility and learning through quantitative analysis. It also provides a structured approach to visualize the concept of adaptive management. Similarly, it can guide the timing of adaption interventions. Real options valuation also allows companies to use qualitative information in decision-making. However, real option valuation can also have some disadvantages. Implementing this analysis involves costs. For some companies, these costs may exceed the benefits associated with the process. Similarly, real option valuation requires significant volumes of data and resources. This process also leads to subjective valuations, which may not be ideal. ConclusionReal options involve the application of financial options theory to tangible assets. Real options valuation uses option valuation techniques for investment appraisals. In most cases, this approach can be crucial in evaluating high-risk decisions. There are several advantages of real options valuation, some of which are mentioned above. Originally Published Here: Real Option Valuation The accounting for goods sold to customers is straightforward. When a company delivers goods, it records an expense while reducing inventory. Similarly, it accounts for the revenues generated from those goods. For services, however, the process may differ, which falls under services rendered. Before understanding its accounting, though, it is crucial to understand what it is. What are Services Rendered?Services rendered is a term used to describe the conclusion of a service contract between a renderer and the client. In some cases, the process of providing services may involve a continuous or long period. Similarly, service providers may also receive payments in advance for those services. Therefore, it is crucial to separate those collections from any work delivered to the client. In essence, the term services rendered refers to the act of providing a service to a client. This definition also applies to accounting and how to record those services. Usually, when companies complete the provision of service, they send an invoice to the client. This invoice serves as a base in the accounting for those services rendered. What is the accounting for Services Rendered?Like the delivery of goods or products, services rendered has two accounting aspects. The first relates to the recognition of the expenses incurred for those services. Usually, companies account for these as they occur, which is in line with the accruals concept in accounting. The process involves identifying each expenditure and allocating it to the relevant account. In the case of goods and products, those expenses become a part of the cost of goods sold. For services, however, they contribute to the cost of services. Overall, when companies incur expenses for services rendered, the journal entries will be as follows. Dr Service expense (Cost of services rendered) Cr Accounts payable or Cash/Bank The other aspect involves recognizing revenues for those services rendered. Usually, companies obtain these amounts from the contract with the client. In some cases, companies may also use a fixed rate for every unit of services rendered. Once established, they will send an invoice to the client requesting a payment. Using this invoice, companies can record the services rendered revenues as below. Dr Accounts receivable Cr Service revenues In some cases, the client may also have paid for the services in advance. Companies record those payments as prepayments or advances. Similarly, some clients may pay for those services at the same time as they get rendered. In either of these cases, the essential journal entries for services rendered will remain the same. However, the relevant accounts will differ. ExampleA company, Green Co., provides accounting services to a client. The contract between both parties dictates the client must pay an annual fee of $50,000 for those services. For Green Co., the services rendered expense is $30,000. At each year-end, the company sends an invoice to the client requesting the contractual payments. For the services rendered expenses, Green Co. records the following journal entries. Dr Service expense $30,000 Cr Accounts payable $30,000 Similarly, the company records the revenues for the services rendered as follows. Dr Accounts receivable $50,000 Cr Service revenues $50,000 ConclusionThe term services rendered describes the conclusion of a service from a provider to a client. The accounting for services rendered involves two aspects. Firstly, it records the expenses related to those services. The second aspect includes accounting for the revenues from services rendered. Usually, these figures come from the contract between both parties. Originally Published Here: Services Rendered: Definition, Meaning, Accounting, Examples Trading is a difficult endeavor, and the main reason most traders fail is that they don’t have an edge. The expectation value of most trading strategies is zero before commissions and slippage. Taking commissions and slippage into account, trading is a negative-sum game. Even with a positive expectancy trading system, the random nature of the market will likely make traders abandon their good system. Let’s say, for example, you have a good trading system with a winning rate of 60% and an overall positive expectancy. This means that 40% of your trades will be losers. Suppose that you start trading this system, and your first 4 trades turn out to be losers. Human psychological bias will make you conclude that the system is bad, and therefore you stop trading it. In behavioral finance, this psychological bias is called recency bias. It affects us more often than most of us can imagine. Let’s go through a concrete example of a fictional trader called John.
Does this story sound familiar? As we can see, recency bias affects our trading in a negative way. The key to profitable trading is to develop a robust, positive expectancy system, have confidence in it, and stick with it, especially through bad times. Originally Published Here: Recency Bias: How It Affects Your Trading Decision-making is crucial to the long-term success of companies and businesses. Usually, these decisions fall under the responsibility and authority of managers. Through the right choices, companies can grow significantly. However, a wrong decision can also hinder progress substantially. The concept of real options also applies to the decision-making process. Therefore, it is crucial to understand what they are. What is a Real Option?A real option is the right to make a business decision. However, it does not constitute an obligation to choose that decision. It also represents the decision alternative available for a tangible asset. Through these options, companies can evaluate various choices. Based on that evaluation, they can choose the right one. This way, companies can ensure future growth and expansion. With the real options concept, companies can examine a range of possibilities. Once they do so, they can make a choice that is the most beneficial. Similarly, these options allow managers to analyze and evaluate business opportunities. Doing so is crucial for long-term profitability. The real options concept applies to investments and projects. Therefore, they are critical in investment appraisal. Real options get their name from their application to tangible assets. These options do not apply to financial instruments. In essence, real options are an extension of the financial options concept to real assets. These options extrapolate the definition of financial options to non-financial assets. However, real options differ from financial options contracts since they don't involve exchangeable securities. How do Real Options work?Real options allow managers to make decisions in several areas. Through these options, managers can choose between various investment opportunities. However, real options do not oblige them to make a choice. Similarly, it provides them with the opportunity to invest at once or wait for better conditions in the future. Real options are also a part of real options value analysis (ROV). Real options value analysis involves estimating the opportunity costs of various decisions. With this analysis, managers can evaluate whether to continue a project or abandon it. A real options analysis begins with managers reviewing the risks related to a project. Based on that, they develop models for these risks. A real options analysis allows managers to be more precise with their decisions. They must evaluate several options and choose an outcome that helps with growth and profitability. Usually, the choices within real options may consist of several scenarios. For example, these may include a decision to expand, abandon, contract, wait, etc. ExampleA company, Red Co., considers a project that will provide a positive NPV of $1 million. However, it can expand its operations through those funds. The expansion process would require more time as well. On top of that, it would also require additional funds to finance the project. Red Co. can choose between the project or expanding its operations. Within real options, Red Co. can evaluate the choices it has. This process involves assessing both projects and how they will impact their operations. Ultimately, the decision will lie with the company's management. In most cases, it will choose the option with the best outcome. ConclusionReal options provide companies with the right to make a business decision. These options apply to tangible assets rather than financial instruments. With these options, companies can evaluate various choices. Based on that evaluation, they can select the option with the most beneficial outcomes. Real options also involve real options valuation. Originally Published Here: Real Option: Definition, Example Companies maintain accounts that help prepare financial statements. Usually, these accounts use the books of prime entry to track transactions. These may include various books, each of which has a specific purpose. The information from those books enables companies to record transactions in their general ledgers. One of the books of prime entry includes the general journal. What is the General Journal in Accounting?The general journal is a book of prime entry which helps record transactions that don't relate to the other books. These transactions do not qualify for accounting in specialty journals, for example, purchase, sales, or cash journals. Excluding these transactions, the general journal includes only selected types of entries. For example, it may consist of depreciation, amortization, and accrual journal entries. The general journal involves adjustment entries in most cases. For example, these may relate to year-end updates or modifications. Like the other books, the general journal is essential in the preparation process of financial statements. The information from this book, along with others, helps constitute the entries for the general ledgers. Another name used to describe it is the books of original entry. Overall, the general journal is a part of a company's accounting records and its financial systems. Most companies maintain specialty journals, including sales, cash, returns, and purchases journals. In some cases, companies may even have more of these journals. The general journal covers any transactions that do not fall into those journals. How does a General Journal work?The general journal consists of journal entries that do not fall under any of the specialty journals. In accounting, the term journal entry refers to a record of financial transactions. These entries have two sides, a debit, and a credit. When a transaction occurs, companies record it into their accounting system using journal entries. The general journal also consists of various journal entries. Usually, it covers financial transactions such as opening balances, year-end adjustments, non-cash items, etc. When these transactions occur, they do not relate to any of the other books of prime entry. However, companies must still record them to include them in the accounting system. This process occurs through the general journal. In the past, companies maintained a separate book to record these transactions. However, modern accounting systems organize all these books together. Any transactions that occur in these books also enter the general ledger. From there, this information ends up on the trial balance and, ultimately, the financial statements. What is the format of General Journal?There is no specific format or standard that companies must use to maintain the general journal. These records are a part of a company's internal accounting systems. Despite that, the general journal must include essential information about financial transactions. This information must cover the following areas.
The above information should cover the fundamental requirements for further processing. However, companies may cover more areas if they choose to do so. In practice, nonetheless, most general journals use a minimal format. ConclusionCompanies maintain books of prime entry that record financial transactions. Usually, these books include specialty journals and a general journal. All financial transactions enter those journals. In most cases, the specialty journals may cover financial transactions. Any remaining items end up in the general journal. Usually, it includes transactions, such as depreciation, balance adjustments, year-end adjustments, non-cash entries, etc. Originally Published Here: General Journal in Accounting Inflation is an important indicator of an economy's health, as it indicates how the costs of goods and services are rising. While consumers often look at the prices of individual products as a gauge of their affordability, they have a broader need for a wide range of commodities. These include food grains, metal, fuel, utilities, transportation, entertainment, and labor. Rising prices of commodities are often the main cause of inflation, and they must continue to rise in order to maintain economic growth. While inflation may be good for the economy, it can pose a threat to investors. Inflation can impact not only your spending but also your savings and investments. Rising inflation can hurt your savings and investments in many different ways:
Article Source Here: How Rising Inflation Affects Your Investments In a company, firm, or organization, there's a high need for professionals to manage different departments. The management of an organization's investment portfolio should be handled by efficient professionals to ensure proficiency. One of such important positions is the Chief Investment Officer (CIO). This position is critical because the performance of an organization's investment portfolio largely depends on the efficiency of the CIO. So, In this article, you will get a comprehensive understanding of who a CIO is, their responsibilities, and how they differ from a Chief Financial Officer. Who is a Chief Investment OfficerA Chief Investment Officer is a director in a company who is in charge of managing its investment portfolio. They take up the responsibility of setting up the company's investment style and strategy. They work together with a body of team members in the company to develop its long-term and short-term investment plans. Hence, whether or not a company's investment turns out profitable is a direct responsibility of the CIO and his team. Different kinds of organizations including investment companies, insurance firms, banks, or non-profit organizations with endowments can have a CIO. Who Qualifies To Be a CIO?When you’re looking out for personnel to be in charge of this position, ensure to consider these qualities:
Duties And Responsibilities of a Chief Investment OfficerThe responsibilities of a CIO in an organization include but are not limited to: #1. Organization of Team MembersA CIO should possess good leadership skills to be able to select, organize and build a strong team. To achieve this, the CIO will conduct interviews to identify potential candidates with the required skills and expertise or at least the potential to acquire them. #2. Assets AllocationThe CIO analyzes and decides the kind of assets the organization invests in based on the company's investment goals and strategy. They decide on the amount of money to invest in each asset in line with the investment plan. #3. Recommend And Create Investment ProcessesThe CIO is responsible for assessing potential investment opportunities. They usually set up an investment assessment system that helps ascertain whether an opportunity is aligned to their strategy and will be profitable or not. Who is a Chief Financial Officer?A Chief Financial Officer (CFO) is an executive in an organization, firm, or company that's in charge of managing its financial operations. The CFO is also responsible for planning, analyzing the company's finances, and recommending corrective actions. CIO vs CFO: Similarities and DifferencesThe CFO and the CIO are both associated with the finances and investment decisions of an organization. So, they are closely related offices and can easily overlap in their responsibilities. In fact, in some organizations, the CFO takes the responsibilities of the CIO. But there are some other organizations where investment is a key part of their operations. In such places, the CIO is usually a distinct office, and sometimes, they report to the CFO who is in charge of all finance-related matters. The notable difference between the CFO and the CIO is that while the CFO oversees the general finance of an organization, the CIO is streamlined to the investment portfolio. ConclusionInvestment management is a crucial part of the success of any organization. Therefore, understanding the role of the Chief Investment Officer and how it relates to the CFO and other vital operations of an organization is very important. Originally Published Here: Chief Investment Officer: Job Description, Career Path, vs Chief Financial Officer Companies use various costing methods to establish the unit cost of manufacturing a product. Determining these costs is highly crucial in understanding how a company’s production process works. On top of that, it provides a base for measuring the price to charge for the underlying product. One of the methods that can help in this regard is absorption costing. What is Absorption Costing?Absorption costing is a costing method that companies use to determine the cost of a product. This method falls under managerial accounting, which includes establishing those costs. However, absorption costing doesn't only apply to managerial accounting. It is also crucial in establishing costs under financial accounting under different accounting standards. Absorption costing involves absorbing a company's variable and fixed manufacturing overheads into a product's cost. This approach differs from other methods that only consider variable material and labour costs. Another name for absorption costing is full costing since it includes all the costs associated with manufacturing a product. Overall, the absorption costing method involves accumulating all costs associated with a production process. Later, it apportions those costs to individual products. These costs then help establish the value of inventory that companies keep. Furthermore, it also allows companies to estimate the cost of goods sold during an accounting period. What are the components of Absorption Costing?Absorption costing considers various components when establishing a product’s cost. Some of these include the following. Direct materialDirect material includes any raw materials that contribute directly to a product. However, it does not involve any items that do not form a part of the finished product. For example, for companies that manufacture furniture, direct material will consist of wood. Direct labourDirect labour includes any costs paid to workers in exchange for working on a product. These costs must contribute directly to the finished goods. For example, salaries and wages paid to production line workers form direct labour costs. Variable manufacturing overheadsApart from direct labour and direct material, companies may also incur other variable manufacturing overheads. These overheads include expenses necessary to operate a production facility and relate to production volume. Like direct material and labour, these costs also vary with volume. Fixed manufacturing overheadsApart from variable manufacturing overheads, absorption costing also considers fixed overheads. These are similar to the above as it includes expenses to run a manufacturing facility. However, these costs do not change with production levels. What are the advantages and disadvantages of Absorption Costing?Absorption costing can provide several advantages. One of the most prominent of these includes being compliant with most accounting standards. Similarly, absorption costing considers all production-related costs when evaluating inventory. This way, it allows companies to value their stock more accurately. Absorption costing can also provide better results for smaller companies and dynamic environments. However, absorption costing can have some disadvantages. Some companies may prefer other methods such as marginal costing since it helps in better decision-making. Similarly, absorption costing can also impact the accurate presentation of profits. Some companies may use this method to manipulate profits and overstate inventory. ConclusionAbsorption costing is a product costing technique that considers all production-related costs. This method can help in evaluating inventory and establishing the cost of goods sold. Similarly, it is also compatible with accounting standards. Absorption costing requires four components to calculate product costs. This method can have several advantages and disadvantages, as mentioned above. Originally Published Here: Absorption Costing Momentum trading is often divided into 2 categories: time-series momentum and cross-sectional momentum. Time-series based trading strategies generate trading signals based on the asset’s past returns. A typical time-series trading strategy usually involves buying assets with positive trend signals and selling those with negative trend signals. In contrast, cross-sectional trading strategies generate trading signals based on the relative performance of assets. A typical cross-sectional trading strategy involves buying assets with the highest-ranked trend signals and selling those with the lowest-ranked trend signals. So basically this is a relative value strategy. Reference [1] examined trend trading in the commodity market from the cross-sectional momentum perspective. The authors conducted a study on a portfolio of 35 commodity futures. They pointed out, In this paper, we provide a trend factor that exploits the short-, intermediate-, and long-run moving averages of settlement prices in commodity futures markets. It outperforms the momentum benchmark significantly. During our sample period January 2004–December 2020, the trend factor generates statistically and economically large returns while the average return of the momentum factor is insignificant. The trend factor also has less downside risk than the momentum factor. The returns of the trend factor cannot be explained by existing multifactor models. The trend factor also generates a significant and positive risk premium. In short, cross-sectional momentum exists in the commodity market and it is possible to construct a profitable trend trading strategy. The authors went on to identify the underlying risk/PnL driver of the thus developed trading strategy, …the trend factor is correlated with funding liquidity measured by the TED spread. Overall, our results indicate that past prices contain important information on the expected returns in commodity futures markets. In other words, the underlying PnL driver is the TED spread which represents the funding liquidity. References [1] Han, Yufeng and Kong, Lingfei, A Trend Factor in Commodity Futures Markets: Any Economic Gains From Using Information Over Investment Horizons? (October 31, 2021). Available at SSRN: https://ssrn.com/abstract=3953845 Article Source Here: Cross-Sectional Momentum in the Commodity Market |
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