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Special Features
For now, my expectation is that you will learn enough from this book to be able to contribute to internal discussions about accounting issues and questions, use some of the many good tips for making smarter decisions, and increase your value and productivity to the company or organization. If your company needs some accounting help and is publicly traded, you'll probably look to one of the Big Four accounting firms or a large regional firm.
Acknowledgments
Basi, Center for Financial, Legal and Tax Planning; Bill Morice, CPA, and Maria Riverso of Fiducial; and Andy Martin, CPA, and all the other sharp people in the Fiducial Tax Department.
About the Author
The Three Questions
How to Speak Accounting
Whatever your responsibilities in your business or organization, you need accounting skills to perform at your best. If you're in sales, learn the features of your product and how to show them to buyers.
Visualize to Understand
Regardless of your management level, you need to know accounting, because your decisions will often depend on "numbers". This is how managers record results and are evaluated. Liquidity The ability to meet current obligations with cash or other assets that can be quickly converted into cash. More cash, more liquidity. Less cash, less liquidity.
The Accounting System
To provide these two different views, your accounting system is split into two parts – financial accounting and management accounting. Here, the daily "gozinta" and "gozouta" become the accounts you present to your bank, your shareholders and investors and tax authorities.
Accounting from the Bottom Up
However, to get the answer to these questions, we need to understand several ideas. We'll start with the simplest and work our way up to the financial statements that will answer our questions.
Double Entry
That is, it is one of the accounts that shows how much money is in the company. Only you can't - the customer's check didn't have time to clear the bank.
Bookkeeping and Accounting
Ledger The record of all transactions in a particular account. Details generally include the date the transaction was made, the amount, whether it was a debit or credit, and a short memo, if necessary. 75 diesel and $675 for maintenance. The date, debited and credited accounts and memo are also recorded.
Financial Statements
Net income is gross income minus total expenses; that is, it is the amount of money we made after expenses. When we spend more than we are making, that money is a negative number, called a net loss.
Accounting Principles
The income and expense statement shows details and totals of income accounts and expense accounts. Asset and expense accounts are debit accounts, with normal entries increasing the account value on the right side of the T account.
The Fundamental Equations of Accounting
This table illustrates how the income equation balances if we enter our transactions correctly on the normal side of each account. This table illustrates how the balance sheet equation—that is, the basic accounting equation—balances correctly if we enter our transactions on the normal side of each account.
The Advantages of an Accounting System
A Few Important Details
Imagine seeing a $600 check for office supplies six months later and wondering, "What in the world did I spend all that money on?" You start digging. If you go below three layers, you've almost certainly gone too far, unless you work for a very, very large organization. You may want to have an account for Computers and then split it into Computers: Hardware and Computers: Software. There may even be a need to split the Software account into, for example, Accounting Software and Scheduling Software.
Manager’s Checklist for Chapter 1
The statement of revenues, also called the statement of income and expenditure, shows how much money has come in, where the money has gone and how much money remains over a certain period. The balance sheet shows how much money the company owes, how much it has, how much it owes, and how much it is worth.
Concepts and
The dual innovation of tracking the increase and decrease of each part of the accounting equation (assets = liabilities + equity) made recording business transactions more manageable. Over time, the accounting profession in the United States developed a series of standards that add uniformity to financial statements.
Principles, Checks and Balances
In setting these standards, accountants asked the question, "What are the objectives of financial accounting information in the US?" The answer was that accounting had to provide full disclosure to actual and potential investors and creditors. Islam forbids the charging of interest. The Swiss desire for secrecy and the lack of large numbers of individual investors has led to much less disclosure in their financial statements. The Japanese cultural trait for cooperation and the existence of interlocking directorships dictate the type and amount of information that must be disclosed or not disclosed to the general public.
Closing the GAAP
A large number of high-flying CEOs have been trapped by this supposed strategy. This practice violates the entity assumption. There are, as in many areas of accounting, gray areas where personal expenses can be considered if they are incurred in connection with a business. event, can be valid. On a cash basis, revenue and expenses are recognized only when cash or its equivalent changes hands. The disadvantage of the accrual basis is that the Internal Revenue Service (IRS) calculates the tax due on the reported net income. Thus, an accrual entity could pay cash taxes on income it has not yet received. What happens if the customer defaults?
Zen Accounting
Wise judgment has taken into account competing claims and resulted in the most accurate picture of the firm's financial position. Much depends on the volume and nature of the transaction and the industry practices with which they relate.
Checks and Balances
Poor internal controls – These are especially critical for reviewing and counting liquid assets such as cash in a timely manner. Ultimately, the main reason for internal controls is to reduce the risk to the integrity of the company's financial statements.
Audits
The control environment reflects the attitude, awareness and general actions of the board of directors, management, owners and others regarding the importance of control and its profile in the economic entity. Can he measure the value of the transactions in a way that enables their proper monetary value to be recorded in the financial statements.
Manager’s Checklist for Chapter 2
What you don't want is to find yourself in a situation where the auditor sees a discrepancy and brings it to your attention and you don't agree that it's a problem and refuse to do anything about it. If the auditors discover a few things, they might come back in a year or so to see how you're doing in implementing the recommended changes.
The Lemonade Stand
To help show creditors good faith, they can have outside auditors review accounts. This is an important question. The structure of Dick and Jane's lemonade stand makes only a small difference in the type of accounts they must prepare, but a big difference in their legal and tax position.
Load, Wash, Rinse, Spin, Dry
The process was to record the composite elements of the transaction in the general journal. A final balancing of the accounting equation confirms that we are ready to use the.
Past as Prologue
Those assets are paid for through the financing activities that generate the money and repay the money borrowed. As we review the financial statements, we can see where each activity category fits.
The Income Statement
There are direct manufacturing costs involved, and the company records expenses for the raw materials, the labor of the people who build the sets, and the overheads associated with manufacturing. This breakdown of the income statement is not a GAAP requirement, but it provides an idea of the strength and profitability of the core business operations.
Statement of Cash Flows
It is then adjusted for gains and losses on transactions reported in other sections of the cash flow statement. In the direct method, the net cash flow from operations is calculated directly as the net sum of the operating cash flows.
The Balance Sheet
Because it's a mix of many different assets and liabilities with different cost structures, it can be a bit confusing. Although not recommended, consider the GAAP cost-benefit quality of the information and the materiality limitation.
A Delicate Balance: The Adjusting Entries
The balance sheet consists of many accounts that are actually estimates that may or may not come true. At the beginning of the following year, the balance in the asset account must be transferred while the expense account is settled (Table 3-8).
Manager’s Checklist for Chapter 3
What Measures Performance?
Financial Ratios
Liquidity ratio Key figure that measures a company's ability to pay its short-term debts on time, its short-term financial solvency. They pay close attention to liquidity and debt ratios to determine a company's financial risk.
Liquidity Ratios
It is similar to the turnover of fixed assets, but includes all assets - current, fixed, other long-term assets. A standard offer is a 2% discount if the bill is paid within 10 days, instead of the usual 30 days. This appears on the bill as "2/10 net 30." Many companies will also charge and enforce interest penalties on late payments. A clear, well-managed collection policy encourages a low ACP.
Debt Ratios
Interest earned, also called the interest coverage ratio, measures a company's creditworthiness, the company's ability to service its debts. The higher the amount of interest earned, the more likely the company will be able to meet its obligations.
Profitability Ratios
Gross profit margin subtracts cost of goods sold as a measure of sales to give a first indication of how much profit is left to cover overhead and other cash items. The operating profit margin shows how effective a company is in managing the costs and expenses of its operations.
Putting It All Together
The higher the rate, the more the company has increased its shareholders' wealth. return on equity = net earnings stockholders' equity. Earnings per share measures the dollar return per share to a company's owners. earnings per share = total shares of earnings outstanding.
Manager’s Checklist for Chapter 4
Management Accounting
Management Accounting—for the Future
The field of cost accounting has the most analytical theories and approaches to cost behavior. Many of the cost accounting terms are vague and imprecise. You can find them defined differently in several sources.
Cost/Volume/Profit Analysis
In particular, costs can move in steps with increased volume. The production level can affect both the selling price and variable costs. This creates non-linear relationships, resulting in two or more breakeven points. In many situations, more sophisticated mathematical tools, which include calculus and linear programming, can be used to achieve similar results. The BE/CVP analyzes work best for companies, branches, or product lines with less than $8-10 million in revenue.
Manager’s Checklist for Chapter 5
For larger firms, CVP analysis can be valuable as a decision tool for the planning stages of new projects and ventures.
Cost Behavior, Inventory, and Overhead
Management Cost Accounting
Product costs Direct materials, direct labor and manufacturing costs. They appear as cost of goods in the income statement. Curvilinear costs cannot be represented by a straight line, but are represented by a curve that shows either increasing or decreasing marginal cost. Figuring these out is why people take calculus.
General Widget Company
Shrinkage is a cost manager they'll want to keep a close eye on. A 2002 National Retail Security Survey conducted by. Unfortunately, most of the reduction is now due to employee theft – 48%. Wise restaurant and bar owners do a daily closing inventory. The survey also reported that 15% of the decline was the result of administrative errors and 5% was due to vendor fraud.
Manager’s Checklist for Chapter 6
Conventional thinking would have you add up all the raw material and equipment you bought, all the wages and benefits you paid, and all the rent, interest, and other period costs you owe, and then call it that your total cost. You will then divide the total cost by the total production to arrive at a cost per unit.
Why the Fuss?
Cost Accounting in Action
Accounting for factory overhead costs is one of the most debated questions in cost accounting because the amount we report as the cost of our products can impact our business in so many ways. The trade-off between the need for information and the cost of generating it makes finding the most efficient cost accounting system an ongoing quest.
Job-Order and Process Costing Systems
As mentioned, job order costing is appropriate when there are many different products or services or products that are usually provided on a customized basis, while process costing is used when goods or services are relatively homogeneous. Job order costing systems are effective when each product or service consumes a different amount of direct materials, direct labor, and indirect costs.
As Complex as ABC
Value-added activities are those that cannot be stopped without negatively affecting the quality of output. Take that data and calculate the budgeted cost per unit of the cost driver for each activity.
Standard Costing
Because of the amount of information, time, and interdepartmental coordination involved, companies that use standard costing often create a separate department for this task. They believe that standard costing places too much emphasis on direct labor costs and efficiency, especially because labor costs tend to become fixed rather than variable.
Static and Flexible Budgeting
Many traditional companies are experimenting with phasing out aspects of standard costing in favor of other cost accounting techniques. Flexible budget shows what the income and expenses should have been at the actual activity level.
Manager’s Checklist for Chapter 7
Standard costing techniques allow managers to set budget targets and then manage deviations from the standard. Criticisms of standard costing point to an inadequate emphasis on direct labor costs and efficiency.
They Want It, but They Don’t Want It—Yet They Still Need It
In the 2003 Accounting Best Practices Survey, conducted jointly by Ernst & Young and the Institute of Management Accountants, 98% of the more than 2,000 senior financial executives who participated said their companies did not have accurate cost information.
Other Management Accounting
Systems
Management accounting got a big boost in the late 19th century with Andrew Carnegie, who was a demon for knowing and controlling the direct labor and materials costs of his steel mills. In the early 20th century, the development of ROI models, such as the Dupont model discussed earlier, led to a greater emphasis on financial performance.
Balanced Scorecard
Employees are often not offered training because of the expense and the fear that they would leave if they upgraded their skills. It also helps people at all levels of the organization understand business goals and strategies.
Hybrid Costing
The primary benefit of implementing a balanced scorecard is to align key performance measures with a clear strategy at all levels of the organization using a double feedback loop of internal and external data.
Just-in-Time Inventory
In one non-atypical installation, the company was able to reduce the number of suppliers by 67%. The restructured production process reduced rework and waste by 44%. Machine setup times dropped by 47%. The key was that the total inventory was cut almost in half, reduced by 46%.
Operation Costing Systems
When we look at operational cost in relation to other cost systems, we find that it fits on a continuum with job and process costs and can be used in combination with actual costs, normal costs, etc.
Environmental/Full Cost Accounting
Once the nature of the costs is understood, some environmental costs can be significantly reduced or eliminated as a result of business decisions. The biggest risk here is that some of the growing regulatory requirements will be overlooked.
Target Costing
If the company is responding to a request for proposal, the target price is based on a price-to-win analysis, taking into account affordability to the customer and competitive analysis. Balance target cost with requirements. Before the target cost is locked in, it must be weighed against the product requirements.
Transfer Pricing
Cost-based transfer prices can be set at variable cost or full product cost. In practice, most companies use full cost or market price when an intermediate market exists.
Manager’s Checklist for Chapter 8
Just-in-time inventory is a new hybrid costing system that applies new knowledge of cost control to the manufacturing process. Operation costing is another hybrid costing system that gives managers the flexibility to record costs under mixed production methods.
Taxation
Will the tax be progressive, like an income tax with gradual rates that rise with income, or regressive, like a sales tax, where everyone pays. Finally, there is a fine line between legal tax avoidance and criminal tax evasion. The difference is about five to ten years.
The Principal Taxes
For each employee, the employer therefore pays 6.2% up to the salary ceiling and 1.45% for the total salary. Another target for management attention, especially in larger businesses, is the difference between personal property actually employed and personal property charged on the tax rolls.
Corporate Income and Deduction Tax Issues
The IRS recommends the use of the modified accelerated cost recovery system (MACRS) in calculating depreciation for tax purposes. Erskine Corporation purchased and installed a machine with a MACRS payback period of five years. The cost was $50,000.
Alternative Minimum Tax (AMT)
Tax Credits
The Low Income Housing Credit is issued under a nationwide allocation program to qualified developments that rent units to low-income tenants. The renovation cost credit is a percentage of expenditures made to substantially renovate industrial and commercial buildings and certified historic structures.
Tax Practice
