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The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory. There are two commonly used average cost methods: Simple weighted-average cost method and perpetual weighted-average cost method. [2]
EVA = (r − c) × capital [the spread method, or excess return method] where r = rate of return, and c = cost of capital, or the weighted average cost of capital (WACC). NOPAT is profits derived from a company's operations after cash taxes but before financing costs and non-cash bookkeeping entries.
The weighted arithmetic mean is similar to an ordinary arithmetic mean (the most common type of average), except that instead of each of the data points contributing equally to the final average, some data points contribute more than others.
The Marshall-Edgeworth index, credited to Marshall (1887) and Edgeworth (1925), [11] is a weighted relative of current period to base period sets of prices. This index uses the arithmetic average of the current and based period quantities for weighting. It is considered a pseudo-superlative formula and is symmetric. [12]
The retail inventory method uses a cost to retail price ratio. The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory. The gross profit method uses the previous years average gross profit margin (i.e. sales minus cost of goods sold divided by ...
The overlap method uses prices collected for both items in both time periods, t and t+1. The price relative () + / is used. The direct comparison method assumes that the difference in the price of the two items is not due to quality change, so the entire price difference is used in the index.
When the valuation is based on free cash flow to firm then the formula becomes [+ ()], where the discount rate is correspondingly the weighted average cost of capital. These formulae are essentially the result of a geometric series which returns the value of a series of growing future cash flows;
For normally distributed random variables inverse-variance weighted averages can also be derived as the maximum likelihood estimate for the true value. Furthermore, from a Bayesian perspective the posterior distribution for the true value given normally distributed observations and a flat prior is a normal distribution with the inverse-variance weighted average as a mean and variance ().