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Accounting Basics
Accounting
The Entity
Cash and Accrual Accounting
Objectivity
Conservatism
Going Concern
Consistency
Materiality
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The Entity
Accounting
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Basis accounting
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accounting
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Accrual Accounting:
Allocations & Matching
Matching
Sales made in one period are matched with their related selling
costs or cost of goods sold (COGS) in the same accounting
period.
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Objectivity
Accountants
There
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Conservatism
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Caveat:
The
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Going Concern
Financial
statements describe
businesses as operating entities.
The
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Consistency
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Materiality
Important
caveat of financial
statements: they are not necessarily
exact to the peso (dollar).
They
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Financial Statements
The
The
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Shows
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Liquidity
An
Liquidity
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Working Capital
Refers
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Owners Equity
Owners are paid only after all other debt payments are made.
Also called Net Worth, as it is the net value after all other
obligations.
Increases in 2 ways:
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There
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control, or the pricing structure of the industry does not afford the
company a profit.
Operating Profit
Net Income
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The
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Operating Activities
Investing Activities
Financing Activities
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When
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Whatever
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FINANCIAL RATIOS
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Current Ratio
= Current Assets / Current Liabilities
2.
Financial Leverage
= (Total Liabilities + Owners Equity) / Owners Equity
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2.
This ratio tells the reader how actively the firm uses all if
its assets. The firm that can generate more sales with a
given set of assets is said to have managed its assets
efficiently.
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Inventory Turnover
= COGS / Average Inventory Held During the Period
Note: Average Inventory = (beginning + ending) / 2
2.
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3.
4.
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Financial Leverage
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Asset Turnover
Net Income
Sales
Return on Assets
Net Income .
Total Assets
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Sales
.
Total Assets
Return on Assets
=
Financial Leverage
Total Assets .
Owners Equity
Net Income .
Total Assets
Return on Equity
Net Income .
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The true value of ratios is seen when one firms ratios are
compared to those of another firm in the same industry, or to that
firms historical performance.
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Focuses on operations.
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The Sales Price Variance tells the manager how much of the
difference between budgeted sales revenue and actual sales
revenues is due to sales price changes.
= (Actual Sales Price Standard Sales Price) x Actual Quantity Sold
When you add together the Price and Volume variances, they equal
the total Monthly Sales Variance from budget.
= Sales Price Variance + Sales Volume Variance
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3.
5.
Underestimate bad-debt
allowances on sales made on
credit (result: higher profits)
7.
9.
11.
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3.
5.
7.
Manipulate measures of
performance that are tied to key
executive bonus compensation.
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Bonus:
Accounting Overview
1.
3.
5.
7.
9.
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Transfer Pricing
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Transfer Pricing
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Transfer Pricing
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Transfer Pricing
Transfer Price based on Cost Plus
1.
2.
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Transfer Pricing
1.
2.
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Investment Centers
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Investment Base
1.
2.
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3.
4.
With EVA, all business units have the same profit objective for
comparable investments
Decisions that increase a centers ROI may decrease its overall
profits (If EVA is used, investments that produce a profit in
excess of the cost of capital will increase EVA and are therefore
attractive)
Different interest rates may be used for different types of
assets.
EVA has a stronger positive correlation with changes in a
companys market value.
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Strategic Direction.
Acquisitions.
Operational Improvements.
Product Line Discontinuation.
Working Capital Focus.
Incentive Compensation.
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Performance Measurement
The Balanced Scorecard
Business units are assigned goals and then measured from the
following four perspectives:
1.
2.
3.
4.
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