Financing is an essential component of any business’s operations. It helps to fund new investments, provide capital for expansion and support day-to-day operations.
Hybrid financing is an increasingly popular financial instrument that combines the characteristics of both debt and equity.
By understanding how hybrid financing works, businesses can gain access to additional funding without taking on traditional debt or diluting existing equity.
This makes hybrid financing an attractive option for businesses in need of capital but with limited access to other forms of finance.
What is Hybrid Financing?
As the name suggests, hybrid financing is a financial instrument that combines features of both debt and equity.
Hybrid financing typically involves the combination of bond and stock offerings, or other forms of debt such as convertible bonds. It is also possible to combine traditional loans with features like warrants or options.
Unlike other forms of finance, hybrid instruments can be tailored to meet the specific needs of the business. This makes them an ideal option for businesses that have specific capital requirements but lack access to traditional funding options.
How Hybrid Financing Works
At its core, hybrid financing is a debt instrument that has features of both debt and equity.
Debt instruments provide fixed payments over the life of the loan. Equity instruments, on the other hand, provide ownership in exchange for capital.
Hybrid financing combines these two elements by providing both a fixed payment structure as well as ownership in exchange for capital.
For example, a business might issue a hybrid instrument that pays out fixed payments over the life of the loan while also providing equity to the investor. In this case, the investor would have both debt and equity exposure to the business.
Benefits of Hybrid Financing
Here are some of the key benefits of hybrid financing:
Overall, hybrid financing is an attractive option for businesses in need of capital but with limited access to other forms of finance. By understanding how hybrid financing works and leveraging its benefits, businesses can gain access to additional financing while also minimizing their risk and increasing cash flow.
Post Source Here: Hybrid Financing: Definition, Instruments, Examples, What It Is, Advantages
Depreciation is technique companies use to depreciate assets over their useful life. Usually, it consists of the straight-line method that divides the asset’s cost over that life. However, other depreciation methods also allow companies to comply with the accounting standards’ requirements. They are not as common as the straight-line method for depreciating assets.
One of the uncommon depreciation methods used by companies is activity-based depreciation. It follows a similar base to depreciating assets as activity-based costing in managerial accounting. In this case, though, the objective is different.
What is the Activity-Based Depreciation Method?
Activity-Based Depreciation (ABD) is a method of calculating the depreciation of an asset based on its usage or activity. This method evaluates how much an asset is used in its life rather than just the passage of time. Unlike the straight-line method, it does not consider the asset’s useful life. Instead, it bases depreciation on the asset’s activity, which can be more accurate in some cases.
With activity-based depreciation, companies can depreciate assets more consistently. It also results in a more accurate depreciation for assets that wear down with more usage. However, it may require more work to determine an asset’s usage over time. The calculation for this method also differs from other methods. However, it is not as common as the others used in accounting.
How is the Activity-Based Depreciation Method different from others?
Activity-based depreciation takes into account the usage or activity of an asset rather than just time or the passage of time. Given below are some of the differences between this method and the others.
The straight-line depreciation method calculates depreciation as a fixed percentage of the asset's original cost over the asset's useful life. This method assumes that the asset depreciates evenly over time, regardless of the usage.
Double-Declining Balance Depreciation
The double-declining balance depreciation method calculates depreciation as a fixed percentage of the remaining book value of the asset each year. This method assumes that the asset depreciates more heavily in the early years and less in later years.
The sum-of-the-years'-digits depreciation method calculates depreciation as a variable percentage of the asset's original cost over its useful life. It results in heavier weighting in the earlier years.
How to calculate depreciation under the Activity-Based Depreciation Method?
Companies can use the formula for activity-based depreciation method to depreciate an asset. It may require some estimation initially. On top of that, it also entails determining the actual usage for that asset after every period. Nonetheless, the activity-based depreciation method formula is as below.
Depreciation cost = (Asset’s cost - Salvage value) / Estimated output for the asset x Units produced during the period
For example, Blue Co. purchases an asset with an estimated output over a lifetime of 100,000 units. Its cost minus salvage value is $300,000. During this period, Blue Co. used the asset to produce 20,000 items. Under the activity-based depreciation method, the depreciation cost for that asset would be as follows.
Depreciation cost = (Asset’s cost - Salvage value) / Estimated output for the asset x Units produced during the period
Depreciation cost = $300,000 / 100,000 x 20,000
Depreciation cost = $60,000
The activity-based depreciation method calculates an asset’s depreciation cost based on its activity or usage. It differs from other depreciation methods that result in linear or inconsistent depreciation. However, it may require a company to estimate the asset’s lifetime expected output. The activity-based depreciation method is not as common as the others mentioned above.
Article Source Here: Activity-Based Depreciation Method: Definition, Formula, Calculation, Example
Reliability Principle in Accounting: Definition What It Is Importance Examples Meaning
Accounting principles are guidelines and concepts that form the foundation of accounting practices and financial reporting. Regardless of the accounting standards used, accounting principles play a crucial role in the underlying fundamentals of financial reports. Primarily, accounting principles ensure consistency, accuracy, and transparency in financial statements.
One of the accounting principles focusing on the consistency of financial statements is the reliability principle. It forms the base of these reports. Before discussing its importance, it is crucial to understand what this principle is.
What is the Reliability Principle in Accounting?
The reliability principle is a fundamental accounting principle that requires companies to report reliable and verifiable financial information. This principle entails companies using accounting information that is accurate, unbiased, and supported by evidence. Essentially, it enhances the trust and confidence that users can put in the financial statements and items reported in them.
Practically, the reliability principle means that companies must use reliable and objective methods for recording financial transactions. Similarly, they should be able to demonstrate that their records are accurate and complete. It can apply to various areas within accounting and financial reporting. For example, it may include using accounting standards, applying accounting policies consistently, and using supporting documentation.
How does the Reliability Principle in Accounting work?
Companies use accounting principles and standards to report financial information. The more consistent they are in applying those elements, the better stakeholders can compare and understand financial reports. However, it is not a general rule but a principle in accounting falling under the name reliability. Other names for this principle include the objectivity or consistency principle.
The reliability principle in accounting works by requiring financial information to be reliable and verifiable. It means financial information should be accurate, unbiased, and supported by evidence, and companies must use accounting methods consistently. Overall, this principle is essential to maintaining the integrity of financial reporting and ensuring that stakeholders can trust the information provided in financial statements.
Why is the Reliability Principle in Accounting important?
Financial statements are the primary source of information for a company’s stakeholders about its operations. However, they must be able to put an amount of trust in the information presented in these statements by the company. If this information is unreliable, stakeholders may make inaccurate or incomplete decisions. It can lead to negative consequences for the company and its stakeholders.
Similarly, the reliability principle helps companies avoid accounting errors, reduce the risk of fraud, and make better financial decisions based on more accurate financial information. It also helps companies comply with statutory and regulatory requirements better. The primary objective of this principle is to help the company and its stakeholders with the quality of financial information.
Accounting principles are guidelines that help companies apply more consistent practices. One of these principles that focuses on consistency and accuracy is the reliability principle. As stated above, this principle focuses on presenting reliable and verifiable information. It plays a crucial role throughout the accounting and helps companies and their stakeholders.
Post Source Here: Reliability Principle in Accounting: Definition, What It Is, Importance, Examples, Meaning
Budgeted cost is an important metric used by businesses and organizations to set financial goals, manage expenses, and ensure that resources are allocated efficiently.
It's also a key element in project planning as it helps to identify potential risks or areas of overspending before committing funds.
Businesses can use budgeted costs to create a realistic financial plan and compare actual costs against expected expenditures. This can help to identify areas where savings can be made or additional resources allocated.
What is Budget Cost?
A budgeted cost is a predetermined expense that the company anticipates it will have to pay in the future. This is a prediction of the expected expenditure for a particular time, based on historical trends and current market conditions.
It can also include future salary increases, new equipment purchases, marketing campaigns, or other costs that are anticipated but not yet confirmed.
In simple words, a budgeted cost is the estimated amount of money a business expects to spend on certain activities or projects during a specified period. It’s not an actual expense, but it helps businesses plan for the future and efficiently allocate resources.
How Budgeted Costs Work
Budgeted costs are based on careful research and analysis. Businesses need to understand their current market, financial position, and operational structure before setting a budget.
The budget should define the expected expenses for each business activity that is planned for the upcoming period. It’s important to consider any changes in market conditions, financial performance, and other external factors that may affect expenses.
Once a budget has been established, the business should track actual costs against expected expenditures. This will help to ensure that spending stays within expectations and that resources are allocated efficiently.
Example of Budgeted Cost
For example, a business may set a budget for its upcoming marketing campaign. They would plan out the expected costs of creating and distributing materials, as well as advertising expenses.
The budgeted cost for the campaign would be the total amount that the business anticipates spending on the project before it begins. This helps to ensure that resources are allocated effectively and that the campaign stays within budget.
Budgeted costs can also be used in other areas of a business, such as employee salaries, equipment purchases, and overhead expenses. By setting realistic expectations for spending in advance, businesses can stay on track with their financial goals.
The key to using budgeted costs effectively is to be realistic. Businesses should anticipate potential risks or areas of overspending, and account for them in the budget. This will help ensure that resources are allocated efficiently and that financial goals are met.
Benefits of Budgeted Cost
The use of budgeted costs has many benefits. By creating a realistic financial plan and tracking actual spending against expected expenditures, businesses can identify areas where savings can be made or additional resources allocated.
It also helps to ensure that projects stay within their budgets, which reduces the risk of overspending and prevents financial mismanagement. Finally, it can improve overall financial planning by providing a clear picture of expected costs and potential risks.
In addition, budgeted costs can help businesses to plan for the future. By understanding the expected expenses and potential risks, they can be better prepared to manage their resources and achieve their financial goals.
Overall, budgeted costs are an important part of any business’s financial planning process. By setting realistic expectations and tracking actual spending against expected expenditures, businesses can ensure that their resources are allocated efficiently and that their financial goals are met. By understanding the expected expenses and potential risks, they can be better prepared to manage their resources and achieve their financial goals in the future.
Post Source Here: Budgeted Cost: Definition, Formula, Example, Estimate
Accounting standards require companies to prepare and report financial statements. Usually, these are part of a company's annual reports. For most companies, it includes the balance sheet, the income statement, and the statement of cash flows. In accounting, these are the mandatory financial statements that every company must prepare and report.
Sometimes, companies may also prepare and report additional statements, although they are not mandatory. Companies do so to enhance the quality of financial information reported to stakeholders. One such report is the statement of sources and uses of funds.
What is the Statement of Sources and Uses of Funds?
The statement of sources and uses of funds provides a detailed breakdown of a company's cash inflows and outflows during a specific period. However, it is not the same as the cash flow statement. This statement shows how the company obtained its funds and used them for different purposes. As the name suggests, this statement focuses on two areas for funds, sources, and uses.
The statement of sources and uses of funds provides stakeholders with an understanding of how a company generates and uses its cash. It can help assess the company’s financial health and ability to fund future operations or investments. Similarly, it can help identify trends in the company's cash flow over time and provide insights into its strategy and priorities.
How does the Statement of Sources and Uses of Funds work?
The statement of sources and uses of funds contains two sections. For most companies, the latter part includes the uses of funds in more detail. This section gets broken down into the three categories of operating, investing, and financing activities. For example, a company may use its funds to purchase new equipment, pay off debt, or pay dividends to shareholders. The statement of sources and uses of funds reports these as an outflow.
The sources of funds section also includes three categories, operating activities, investing activities, and financing activities. The definition for each area is the same as that in a cash flow statement. In this section, companies report the sources of funds and how they acquired them. Unlike the cash flow statement, this statement takes a direct approach to reporting these activities.
What is the difference between the Statement of Sources and Uses of Funds and the Statement of Cash Flows?
The primary difference between the statement of sources and uses of funds and the statement of cash flows is the requirement. The former is an optional report that companies may prepare to enhance the quality of financial information presented to stakeholders. On the other hand, the cash flow statement is a mandatory financial statement under accounting standards.
The statement of sources and uses of funds also provides a more detailed breakdown of cash inflows and outflows. On the other hand, the cash flow statement provides a high-level summary of these areas. Similarly, the statement of sources and uses of funds shows information on a company's cash flow trends, financial health, and priorities. In contrast, the cash flow statement helps stakeholders assess whether the company can generate cash in the future.
The statement of sources and uses of funds is a non-mandatory financial statement. It includes two sections, as the name suggests. Firstly, the sources of funds section show where the company gets its cash. On the other hand, the uses of funds section reports on items that result in fund outflows. This statement is similar to the cash flow statement but has some differences, as listed above.
Originally Published Here: Statement of Sources and Uses of Funds
Office Supplies: Assets Liabilities or Expenses What They Are Examples Journal Entry
Companies use assets to generate revenues. Sometimes, these assets can be long-term, which requires spreading the cost over various accounting periods. In contrast, some can also be short-term, spanning less than 12 months. In this case, the items may not require the same treatment. These assets can also fall into several categories.
One category of assets that often confuses people is office supplies. The primary issue, in this case, is their value and whether companies can capitalize on them. Before discussing that aspect, it is crucial to understand what these assets include.
What are Office Supplies?
In accounting, office supplies are a type of expense companies incur to support their day-to-day operations. These may include various items, such as pens, paper, staples, printer ink, and other materials employees use in the office. Essentially, these are items that the company may use for administrative purposes. In most cases, these are minimal expenses.
Sometimes, companies purchase office supplies for immediate use. In these cases, the items get consumed as soon as the company acquires them. However, companies may also purchase office supplies for future use. These items remain in inventory until the company uses or consumes them. In these cases, the accounting for office supplies may differ.
Office Supplies: Assets, Liabilities, or Expenses?
The accounting for supplies is not straightforward due to complications. In most cases, they include assets that require minimal expenses. The accounting treatment may become more complex if companies hold office supplies before consuming them. In most cases, these assets fall under expenses since they require minimal costs and get consumed immediately.
However, if the company does not consume office supplies immediately, they may not become an expense. In this case, the company must record these supplies as an asset. For most companies, it is a current asset since it gets consumed within the next 12 months. The liability treatment for office supplies depends on how the company obtains them from the supplier.
What is the journal entry for Office Supplies?
The journal entry for office supplies depends on the accounting treatment. In most cases, office supplies are an expense and recorded the same. Therefore, the journal entry becomes as follows.
if the company keeps the office supplies for some time before consuming them, the treatment will differ. In this case, these supplies will become inventory or assets. The journal entry, in this case, will become as follows.
Once the supplies get consumed, the company must convert them into an expense. The journal entry to do so is as below.
A company, Blue Co., purchases $1,000 of office supplies for cash during the period. The company consumes $400 worth of these supplies and keeps the remaining for future use. Blue Co. records the transaction as follows.
Office supplies are items used in a company for administrative or office use. The accounting treatment for these supplies is usually the same as expenses. However, if companies don't consume those supplies, they must record them as assets. Therefore, office supplies may be an expense or asset based on their usage. The liability treatment depends on the compensation to the supplier.
Post Source Here: Office Supplies: Assets, Liabilities, or Expenses, What They Are, Examples, Journal Entry
Combination Leases: Definition Advantages and Disadvantages What It Is Agreement
Leasing is a common way of financing the purchase of an asset - such as a car, piece of equipment, or property - in which the lessee pays for the use of the asset over an agreed-upon time.
A combination lease is one of the most common types of leasing arrangements. It offers a combination of basic types of leasing, such as operating lease and capital lease to provide a unique solution for the customer’s needs.
What is a Combination Lease?
Combination leases combine features from capital and operating leasing. These customizable plans are perfect for any individual looking to maximize their financial options.
As an example, a capital lease that includes a cancellation clause is one type of combination lease—this feature normally isn't found in regular operating leases! With their versatility and convenience, combination leases make financing easy and affordable.
In simple words, a combination lease is a type of agreement that combines features from both capital and operating leases, allowing customers to customize their financial options for their individual needs.
This allows customers to benefit from the flexibility of an operating lease with the tax advantages of a capital lease—all in one convenient package.
How Combination Leases Work
Before signing a combination lease, it's important to understand how they work and what features are available. Combination leases are a combination of capital and operating lease, which means they include features from both.
Capital lease: This usually involves a long-term commitment, with the lessee owning the asset at the end of the lease.
Operating lease: A short-term agreement in which the lessor owns and is responsible for maintaining the asset during the lease period.
Now when it comes to combination leases, you can mix and match features from both leasing types. That means you can have a long-term commitment, but also include a cancellation clause as seen in operating leases.
This means the customer can get the benefits of both leasing types, such as tax advantages and flexibility.
Benefits of Combination Leases
Combination leases are becoming increasingly popular due to their flexibility and convenience, here are a few of the biggest benefits they offer
Downsides of Combination Leases
Although combination leases can be beneficial in many cases, there are also some potential downsides to consider
Overall, combination leases offer a great deal of flexibility and convenience—but it's important to understand the potential downsides before signing the agreement. By assessing both the benefits and drawbacks of a combination lease, customers can make an informed decision that's right for their individual needs.
Article Source Here: Combination Leases: Definition, Advantages and Disadvantages, What It Is, Agreement
Artificial Intelligence (AI) and Machine Learning (ML) are two rapidly growing fields that have revolutionized the way we process and analyze data. AI refers to the development of computer systems that can perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and natural language processing. ML, on the other hand, is a subset of AI that involves the use of algorithms and statistical models to enable computers to learn from data without being explicitly programmed.
In the financial industry, AI and ML have become essential tools for data analysis, risk management, fraud detection, and investment decision-making. AI and ML can be used to analyze market trends, optimize portfolio management, predict stock prices, and automate trading strategies. Furthermore, AI and ML can be used to improve customer experience by enabling personalized financial advice and automated customer service.
Although AI and ML have shown tremendous potential for transforming various industries, they are not without their challenges and limitations. Reference  discussed the issue of AI aging, i.e. temporal quality degradation in AI models. The authors pointed out,
As AI models continue to advance into many real-life applications, their ability to maintain reliable quality over time becomes increasingly important. The principal challenge in this task stems from the very nature of current machine learning models, dependent on the data as it was at the time of training. In this study, we present the first analysis of AI “aging”: the complex, multifaceted phenomenon of AI model quality degradation as more time passes since the last model training cycle. Using datasets from four different industries (healthcare operations, transportation, finance, and weather) and four standard machine learning models, we identify and describe the main temporal degradation patterns. We also demonstrate the principal differences between temporal model degradation and related concepts that have been explored previously, such as data concept drift and continuous learning. Finally, we indicate potential causes of temporal degradation, and suggest approaches to detecting aging and reducing its impact.
Although the paper demonstrated the existence of AI model degradation in various industries, we note that the problem of model degradation is well-known in finance for decades due to the non-stationary nature of financial time series and constantly changing market conditions.
The authors also highlighted the importance of model retraining in order to cope with degradation, specifically, we would need to
These problems are also well-known in finance and the solution is not trivial.
Let us know what you think in the comments below or in the discussion forum.
 Daniel Vela, Andrew Sharp, Richard Zhang, Trang Nguyen, An Hoang & Oleg S. Pianykh, Temporal quality degradation in AI models, Sci Rep 12, 11654 (2022). https://doi.org/10.1038/s41598-022-15245-z
Post Source Here: AI Aging: Model Quality Degradation
Financial statements are reports of a company’s financial position and performance. They provide an overview of a company’s operations over a specific period. Consequently, it allows stakeholders to analyze the company. However, these statements come as a part of a standard package stemming from accounting practices and principles. For some stakeholders, the primary financial statements may not provide sufficient information.
Therefore, stakeholders use alternative formats to the standard version. The primary objective is to help analyze the company and its operations better. One such format commonly used for analysis is the common-sized financial statements.
What are Common-Sized Financial Statements?
Common-size financial statements are a type of analysis report that standardizes financial information. It uses a percentage format based on a common base item, which may differ based on several factors. This format makes it easier to compare financial information across companies, periods, or company sizes. Similarly, it allows stakeholders to remove the effect of absolute size differences.
Common-sized financial statements may include the balance sheet, income statement, and cash flow statement. The basic premise of this format is to choose a base amount and use it to calculate the ratios for each line item in these statements. Usually, it also involves multiplying that ratio by 100 to get a percentage. Once stakeholders get this percentage, it is easier to compare it across various areas.
What is a Common-Sized Balance Sheet?
A common-sized balance sheet presents a company's balance sheet in a standardized format. As mentioned above, it uses a percentage-based format to present every line item as a ratio. In this case, the base is the total assets of a company. The objective of a common-sized balance sheet is to make it easier to compare a company’s financial position with other companies or with itself over several periods.
Common-sized balance sheets are helpful in financial statement analysis. They help compare the relative size of each line item across different companies or periods. Likewise, they provide a more detailed picture of a company's financial position. Common-sized balance sheets also show the relative proportion of each asset, liability, and equity item. For many stakeholders, this format can be significantly helpful.
What is the difference between Horizontal and Vertical Common-Sized Financial Statements?
Common-sized financial statements may come in two types, horizontal and vertical. Given below is an explanation of what each of these includes.
Horizontal common-sized financial statements help with yearly comparisons. Companies use this format for income statements, where tracking how income and expenses have changed is crucial. Usually, horizontal common-size analysis involves using the previous year's figures as the base for each item. It differs from the standard format, where one base is used for all figures.
Vertical common-sized financial statements are helpful when stakeholders compare several companies. This format helps compare figures based on a common base item. For example, stakeholders may use revenues as this base for the income statement. This format helps eliminate size differences between companies for better comparisons.
Common-sized financial statements refer to a different format used for analyzing companies. It converts a company's financial statements to a percentage-based format. Similarly, it might be vertical or horizontal based on the needs of stakeholders and the company. The common-sized financial statements use a standard format to facilitate better comparisons.
Originally Published Here: Common-Size Financial Statements and Balance Sheets
Most businesses around the world accept checks as a form of payment, but there is a limit to the length of time that it can be presented.
Checks can get stale after a certain amount of time, and if this happens, it can cause the check to be rejected by the bank when it is presented for payment.
A check is considered stale if it has been outstanding for more than 6 months (180 days). Banks typically do not accept checks with dates older than 6 months, as there is a risk that the check may have bounced or have been altered.
What is a Stale Check?
A stale check is a check that has gone beyond the original date of issue, typically six months or longer. When this happens, banks are unlikely to accept it and may even reject it.
The reason for this is that there is an increased risk of fraud or dishonesty with checks that have been outstanding for so long.
Anyone with a check that is more than 6 months old, may still be redeemable. However, you will need to contact the issuer of the check and ask for their approval before attempting to deposit or cash it.
If your check is not approved by the issuer, then it cannot be redeemed and will likely be returned to you as a stale check.
It is important to note that even if a stale check is not approved by the issuer, it does not necessarily mean that it will be rejected by your bank or other financial institution when you attempt to deposit it.
How Stale Checks work
To understand how stale checks work, it is important to note that the date a check is written is the date it was issued.
Once six months or 180 days have passed since the original issue date, the check officially becomes stale and may be rejected by banks if presented at a teller's window.
However, if a stale check is deposited through other means, such as an ATM or mobile banking app, it could potentially still be redeemed and the funds will be available.
It's very important to always keep financial records up-to-date, to ensure that checks are not allowed to become stale. This will help avoid any potential issues with redeeming checks in the future.
How to prevent Stale Checks
The best way to prevent a check from becoming stale is to always keep accurate financial records and not let the date of the check go beyond 180 days.
This includes keeping track of the date when each check was issued and promptly depositing any checks received. If you are unable to deposit a check immediately, be sure to contact the issuer for an updated version.
Additionally, it’s also a good idea to communicate with the issuer of the check as soon as possible if it has been outstanding for more than 6 months. This will help ensure that they are aware of the situation and can approve or reject any attempt to cash the stale check.
Stale checks are a common issue for businesses and individuals alike, but understanding how they work can make it easier to manage them. It is important to always keep accurate financial records to prevent stale checks from becoming an issue. Additionally, if a check does become stale, you should contact the issuer immediately to get their approval before attempting to deposit or cash it.
Post Source Here: Stale Check: Definition, Meaning, Sample, Example