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14
Basic Accounting and Finance
Donald N. Merino
Stevens Institute of Technology
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Engineering Management Handbook
14.1 Introduction
14.1.1 Importance of Accounting to Engineers
Why is accounting important to engineers? One reason was that engineers needed to know the cost and
profitability of the products they design. For example, look at the ever-changing technology of your PC.
What drives these changes? The continual increase in the cost performance of new chips, printed circuit
boards, disc drives, etc. all result in new and improved products being offered every year.
For companies and governments involved in research and engineering, Design for Cost (DFC) and
Cost as an Independent Variable (Systems Engineering, Concurrent Engineering) are the most recent con-
cepts that help define the synergy between economics and engineering. Knowledge of basic accounting
and finance are essential to understand this concept.
ing economics, but also give you insights and knowledge to help you read and interpret financial reports,
such as SEC filings and personal or corporate tax information.
Entities
Entities are the bounded systems whose financial records may be examined to determine their state of
financial health. There are two types of entities, for-profit and not-for-profit. A convenient classification
follows:
• For-profit (business) entities
• Sole proprietorships
• Partnerships
• Corporations
• Not-for-profit entities
• Private-sector organizations (usually charitable or religious)
• Public-sector organizations (government)
The above classification does not include you, the individual consumer, but when an accountant helps
you prepare your income tax return, you are an economic entity.
The capital selection process applies to both for-profit and not-for-profit entities. Business entities
are found in the private sector of the economy. However, there are public sector entities that compete and
function much like their private counterparts. Utility companies which are owned by national or local
governments are one of many examples. For these and other not-for-profit entities, the terms “profit” and
“loss” are replaced with “surplus” and “deficit” respectively.
For profit economic entities include sole proprietorships, which are owned by one individual; part-
nerships, which are owned by two or more individuals; and corporations, which are owned by a few or
many shareholders. The sole proprietorship is the most common form of business entity, but corporations
are dominant in terms of revenues and profits. Table 14.1 compares the three forms for the year 2000.
Ref: U.S. Bureau of the Census, Statistical Abstract of the United States, 2004
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Proprietorships and partnerships are not “legal entities” in the eyes of the law. That is, they do not
have an independent identity under the law. Therefore, their owners are fully responsible for their acts and
obligations, and creditors can, if necessary, go beyond the assets of the business to seek the personal assets
of the owners in order to satisfy their claims.
Corporations, on the other hand, are “legal entities.” Their shareholders have limited liability, which
means that corporations are responsible for their own acts and obligations. Creditors can rely only on
corporate assets for the satisfaction of their claims, not those of shareholders, employees or members of
the board of directors.
Proprietorships and partnerships are generally managed by their owners; corporations are not. The
shareholders elect a board of directors, which appoints executives to serve as managers. In short, owner-
ship and management are divorced (and, as a result, the interests of the managers may conflict with those
of the shareholders!).
Examples of not-for-profit entities in the private sector include universities, schools, hospitals, muse-
ums, and charitable organizations. Examples are also found in the public sector, but these function under
the aegis of federal, state, and local governments, which are economic entities, along with school districts,
water sanitary districts, public utility and transit authorities, and all other governmental bodies subject to
financial review.
Thus, economic entities can be as large as a global corporation or as small as the corner newsstand.
They can be an entire organization or one of its parts, and, as mentioned, they can also include you and
the author of this tutorial.
Next, our attention will be focused on corporations and governmental entities because these are the
major disbursers of money for capital outlays.
14.2.3 Transactions
A transaction is a piece of business—a sale, a purchase, a borrowing, the repayment of a loan, the pay-
ment for a service, the issuance of stock, the repurchase of stock, and so on. Transactions allow entities
to function. Transactions, when properly recorded, analyzed, and reported give us the financial condition
and the financial performance of economic entities.
Account
The “account” is the basic unit for recording information of a firm’s financial database. Accounts are
grouped into three basic types—assets, liabilities and owner’s equity. An account is a detailed record of
the transactions affecting one or more of these three types. Under the present, widely-used system, each
transaction affects at least two accounts, hence the name “double entry accounting system.”
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Asset
An asset is a resource that an entity owns or controls in order to achieve a future benefit (profit, share of
market, and competitive advantage). Some examples of assets are cash, inventory, accounts receivable,
equipment, furniture, land, and buildings.
• Cash: This account shows the amount of money that a company holds in currency or in its bank
account.
• Inventory: This account reflects the cost (and possibly the quantity) of goods, held for use or
intended for sale, that a company owns. Merchandise (goods intended for sale to customers) is
recorded as an asset when it is purchased or when it is produced. In addition, raw materials (in-
tended for use in production) are also considered to be inventory. The inventory account increases
when inventory is purchased or produced and, conversely, decreases when the goods are sold or the
materials are used.
• Accounts Receivable: This account shows the amount of credit sales the firm has made, that is deliv-
ery of goods or services to customers who then say “Charge it!” or “Bill me…I’ll pay you later.” It is
the amount of money that customers owe to the company and have promised to pay in the future for
goods and services that they have already received. When the customers do pay, accounts receivable
decreases and cash increases.
• Notes Receivable: A promissory note that says that the customer is going to pay an agreed upon
amount in the future.
• Equipment and Furniture: The original (historical) cost of each item of equipment and furniture
is entered (written into, keyed into) an asset account. This account, then, shows the original cost of
individual items and the total cost (investment) for all of the items.
• Land: This account records the cost of the land that is owned by a business.
• Buildings: This account records the initial cost of buildings owned by the business. Some examples
are factories, office buildings, distribution centers, etc.
Land and buildings deliberately purchased for resale are entered into a different account called an
“investment account.”
Liability
A liability is an obligation or debt that is payable to a creditor. Some examples of liabilities include ac-
counts payable and notes payable.
• Accounts Payable: This account is the opposite of accounts receivable; it is the amount that the busi-
ness owes to its suppliers as a result of credit purchases.
• Notes Payable: This account is the opposite of notes receivable. It is a promissory note stating that
the business will pay in the future for goods or services (previously) acquired on credit.
Owner’s Equity
Imagine that all of the assets of a firm were sold and the cash received was used to pay all of the firm’s
liabilities. The remaining cash (value) is called “owner’s equity.” Equity represents the value of the invest-
ment in a business by its owners. Following are accounts that affect owner’s equity:
• Revenues: For proprietorships, partnerships and corporations, revenue is the total of prices for goods
and services that customers agree to pay; revenue is earned through the sale of goods or services. Rev-
enues increase equity.
• Expenses: For proprietorships, partnerships and corporations, expenses are the cost of resources used
for producing and delivering goods or services to customers, e.g., rent, salaries, electricity, gas, etc.
Expenses decrease equity.
• Retained Earnings: For corporations the retained earnings account holds the value of the accumu-
lative profits and losses of the firm since its inception. These retained earnings (profits) are a major
source of the firm’s investment capital.
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• Capital: For proprietorships, partnerships and corporations, capital is the amount of the owner’s
investments over the lifetime of the business. Usually this investment takes the form of cash payments
for shares of the firm’s stock.
• Dividends and Withdrawals: For a proprietorship or partnership, cash amounts withdrawn (for-
mally) by the owner from the business to be used to pay personal expenses is called “withdrawals”
or “draw.” After making a withdrawal, the asset cash and the owner’s equity both decrease. For a
corporation, cash amounts paid to stockholders (not all corporations do this) is called “dividends.”
Interestingly, corporations cannot deduct dividends paid for income tax purposes. However, as with
withdrawals, dividends paid reduce both the cash account and equity.
If the accounting statements do not result in the above equation being in balance, an accounting error has
taken place (or a fraud in as occurred!). CPA firms catch errors like unbalanced balance sheets.
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Letting R stand for revenue, C for costs and expenses and ∆E for increase in equity over the period (be-
fore any distribution to owners) gives us
R-C=∆E
The above equation is the model for statements of income. A typical example is given in Table 14.2
For our example, the revenues for the period are $800,000 (1). The total expenses before taxes are $
710,000 (CoGS of $500,000 (2) + G&A of $200,000 (4) + interest of $10,000 (6)), and the earnings be-
fore taxes, often referred to as the net income before taxes, would be the difference, or $ 90,000 (7). The
“net earnings” or income after taxes would be $75,000 (9). The total expenses of $710,000 are broken
down into three categories: the cost of goods and services sold (CoGS), which total $500,000 (2); the
Operating Expenses (includes General and Administrative expenses (G&A)), which total $200,000 (4);
and the miscellaneous expenses, such as interest payments on borrowed funds which total $10,000 (6).
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XYZ Company
Income Statement for the Year Ending December 31, 200X
(1) Revenues $800,000
(2) Less cost of goods and services $500,000
(3) Gross profit $300,000
Less operating expenses
(4.1) Sales and marketing expenses $100,000
(4.2) General and administrative expenses $100,000
(4) Total operating expenses $200,000
(5) Income before taxes $100,000
(6) Less: Miscellaneous revenue and expenses (interest) $10,000
(7) Net income before income taxes (NIBT) $90,000
(8) Less: Income taxes $15,000
(9) Net income after income taxes (NIAT) $75,000
Earnings Before (After) Income Taxes are synonymous with Net Income Before (After) Income
Taxes. There may be depreciation expenses included in either or both cost of goods sold (for production
facilities and equipment) and operating expenses (for administrative facilities and equipment).
In general, Income Statements cover a one-year period, with the period or “fiscal year” ending at a
specified date, often December 31 of the corresponding calendar year. Many firms for various reasons
operate on a fiscal year that ends at a time other than December 31. Annual reports for public firms must
be audited by a certified public accounting (CPA) firm, and, if approved, carry the certification of the
auditors as well as of the firm’s top managers.
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You can see and touch tangible assets. You can see and touch the pieces of paper that document
liabilities. However, you can’t touch equity, because it is nothing more than the difference that brings
balance sheets into balance. (That occurs when the two sides of the fundamental equation are, in fact,
equal.) Consider the house that you might have bought for $200,000 with a $175,000 mortgage. The
house is an asset; the mortgage is a liability. Your equity is the difference: $25,000. You can’t see, hear,
smell, or touch this difference, but you can see the house and you can touch the mortgage note in your
desk drawer.
Assets may be broken down into three categories, current, fixed and other. Current assets consist of
cash and items that can be quickly (usually within a year) converted into cash. Fixed assets (often called
“non-current” or “long term”) consist of land (property, which cannot be depreciated), plant (buildings)
and equipment (which are depreciable, if owned). Other assets include such intangibles as patents, copy-
rights and any other asset that is not classified as current or fixed. Sometimes these intangible assets are
considered long term because they have long expected useful lives.
Usually assets are listed beginning with the most liquid asset at the top and the least liquid at the
bottom. Therefore, current assets would precede fixed assets. Marketable securities such as U.S. Treasury
bills or certificates of deposit represent very liquid and short-term investments. Hence, they are frequently
viewed as a form of cash. Accounts receivable represent the total money owed to the firm by its customers.
Inventories include raw materials, work in process (partially finished goods), and finished goods held by
the firm. All of these would be considered to be current assets.
All assets are entered into the financial data base at their actual (“historical”) cost, which includes
transportation and installation costs, if applicable. The term “Net Fixed” means that the value displayed is
the difference between total fixed asset costs and the accumulated depreciation related to those assets. The
net value of fixed assets is called their “Book Value.”
Liabilities are broken down into two major categories, current and long-term (non-current). Current
liabilities are amounts due in one year or less. Long-term liabilities are due more than one year into the
future. Like assets, the liabilities and equity accounts are listed on the balance sheet from short-term to
long-term. Current liabilities include Accounts Payable (amounts owed for credit purchases by the firm),
Notes Payable, outstanding short-term loans (typically from commercial banks) and accruals, amounts
not yet paid, but owed for which a bill may not yet have been received. (Examples of accruals include tax-
es due to the government and wages due to employees.) Long-term debt represents that part of any debt
for which payment is not due in the next twelve months.
One important Balance Sheet term you should be familiar with is “Working Capital.” This is tech-
nically the difference between the values of the current assets and the current liabilities. Estimates of the
investment required for (the “infusion of ”) working capital enter into the capital project selection process.
A General Ledger is a summary of all of the organization’s accounts. An adjusted Trial Balance is pre-
pared from the General Ledger. It is used to organize the information from the general ledger to create the
Balance Sheet and Income Statement.
Equity is usually broken down into at least two major accounts. The first, paid-in capital (also called
Capital, Common Stock) is that portion of the difference between the assets and liabilities that was
contributed by owners both initially and whenever additional capital was needed. The second, retained
earnings, is that portion of the difference between assets and liabilities coming from Net Income, earned
from the production and sale of goods and services, that is, from earnings that were retained in the
business and not distributed as dividends to shareholders or as withdrawals to sole proprietors or partners.
Managers strive to make the difference between the assets and liabilities at the end of an account-
ing period larger than it was at the beginning of the accounting period by increasing retained earnings
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by earning profits for the firm. When achieved, this means that the value of the firm for the owners has
increased. We can formulate this objective very simply, as follows:
Let A1, L1 and E1 be the assets, liabilities, and equity at the beginning of the period and A2, L2 and
E2, the assets, liabilities and equity at the end of the period. By the balance sheet equation,
A1 –L1 = E1 and A2 – L2 = E2
If ∆ E is positive, management has succeeded in increasing the difference between assets and liabilities
over the time period under study.
The assets total $ 550,000 (9) and the liabilities $200,000(14). The difference of $350,000((9)-(14))
is the equity. As shown in Table 14.3, ASEM LLC had the following items on its December 31, 200X
balance sheet:
Dates 200X
Cash and equivalents $73,000 31-Dec
Notes payable $33,000 31-Dec
Long-term debt $175,000 31-Dec
Accounts receivable, net $55,600 31-Dec
Non-depreciable assets $196,000 31-Dec
Deferred income tax liability $19,500 31-Dec
Accumulated retained earnings $180,000 1-Jan
Income taxes payable $23,000 31-Dec
Inventories $24,000 31-Dec
Prepaid expenses $9,000 31-Dec
Accumulated Net Worth $35,600 1-Jan
Property, plant and equipment, at initial cost $418,000 31-Dec
Accounts payable $33,700 31-Dec
Goodwill, patents and trademarks $12,300 31-Dec
Short-term Debt $21,200 31-Dec
Accumulated depreciation $178,000 31-Dec
Retained Earnings $19,900 31-Dec
Additional paid-in capital $69,000 31-Dec
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Table 14.4 contains the Balance Sheet for ASEM LLC, as of Dec 31, 200X.
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Creditors can sue the entity if the amounts due to them are not paid. Owners (Equity Investors)
have only a residual claim; that is, if the entity is dissolved, they are entitled to whatever is left after the
liabilities have been paid. Therefore, liabilities are the primary claim against the assets and equity is the
secondary claim.
We can describe the right-hand side of the balance sheet in two distinct, but correct ways:
1. As the amount of funds supplied by creditors and owners
2. As the claims of these parties against the firm’s assets
The equity section is often labeled “Shareholder’s Equity” or “Owner’s Equity.” Equity consists of
capital obtained from sources that are not liabilities. Table 14.3 shows the two sources of equity capital:
1. $275,000, which is labeled “Paid-in Capital”; and
2. $75,000, which is labeled “Retained Earnings”
Assume that a company’s retained earnings in the fiscal year 200X + 1 is $100,000 (Paid-In Capital is
held constant). Then, the Stockholder’s equity for the following year is shown in Table 14.6:
Table 14.6. Stockholder’s Equity Based Upon Two Sources of Equity Capital
Retained Earnings for 200X + 1 = Retained Earnings for 200X + Net Income after Taxes (less dividends, if any)
for 200X + 1.
amount of Paid-In Capital reported on the Microsoft balance sheet is not affected by these changes. This
is consistent with the entity concept: that is, transactions between individual shareholders do not affect
the Balance Sheet of the entity (the economic entity “Microsoft” is distinct from the economic entities
“individual stockholders”).
Retained Earnings are additions to equity that have accumulated since the entity began, not those of a
single year. The amount of Retained Earnings shows the amount of capital generated by operating activi-
ties and retained in the entity. It is important to note that retained earnings are not cash. Cash is an asset.
Table 14.7. ASEM Corporations Stockholder’s Equity Statement on December 31, 200X
Dates 200X
Accumulated Retained Earnings $273,500 1-Jan
Retained Earnings ($29,600) Jan 1 - Dec 31
Accumulated Net Worth $320,000 1-Jan
Additional Paid-In Capital $71,000 31-Dec
Using the given data, prepare the Stockholder’s Equity Statement for ASEM Corp., as of December 31,
200X is shown in Table 14.8.
Table 14.8. Stockholders’ Equity Statement for ASEM Corp as of December 31, 200X
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The Cash Flow Statement essentially converts the accrual basis of accounting that is used to create the
Income Statement and Balance Sheet into a cash basis. Although the accrual style is helpful in analyzing
revenues and expenses, organizations also find it useful to have an understanding about the amount of
cash the organization has at its disposal.
XYZ Company
Statement of Cash Flows, 200X
Cash Flow from Operating Activities
Net Income………………………………………………………………$75,000
Adjustments:
Depreciation Expense… …………………$100,000
Changes in working capital accounts:
Decrease in accounts receivable……..…$20,000
Increase in Inventory……………………..$(40,000)*
Decrease in accounts payable…………..$(30,000)*
Increase in accrued wages………..…… $40,000
Change in working capital……………………..$(10,000)*
Total adjustments to net income……………................................$90,000
Note: Cash Flow statements can be prepared using two different methods, each of which determines the same, correct end-
ing balance of cash; the methods are the direct method and the indirect method. Differences in the two methods lie only in the
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Operating Activities section. The description below uses the indirect method to prepare the Cash Flow statement.
The first section of the cash flow statement (Table 9.4) reports how much cash was generated by the
operating activities of the period; that is, from the day-to-day activities that bring cash in from customers
and pay cash out to employees and suppliers. To do this, we must first convert net income—the bottom
line of the net income statement—from an accrual basis to a cash basis. “Cash flow from operating activ-
ities” is the difference between operating cash inflows and operating cash outflows.
The second part of the cash flow statement reports cash flows from investing activities: acquisition
of new fixed assets and cash inflows from sale of existing assets. The acquisition amount may not be an
immediate net decrease in cash because the payment of cash may have been partially or completely offset
by borrowing an equal amount (loans). Nevertheless, whatever amount of cash was paid is recorded as a
cash outflow, and the amount of the borrowing is recorded separately as a financing activity.
Companies may obtain cash by issuing debt securities, such as bonds or stock. These are called
financing activities. Cash flows from financing activities include cash receipts or disbursements from
one or all of the following: the sale of stock by a corporation to provide paid-in capital, entering into a
long-term loan, repaying the loan, and distributing dividends or drawings. However, Interest payments on
borrowed funds are not treated as financial activities but as operating activities.
In the selection process, we usually start with the assumption that the first cost and the working cap-
ital (the funds needed to “set up shop” before cash flows in from sales) for a new venture are supplied by
equity financing, that is, by investors rather than creditors. If the results are favorable, we then examine a
mixture of equity and creditor financing or even consider leasing to conserve cash.
The three groups of activities that affect cash flow—operating, financing, and investing—are all
involved in the cash flow patterns to help analyze capital investment opportunities. The above discussion
shows the cash flow statement for a company.
Dates 200X
Revenues $334,000 Jan 1 - Dec 31
Interest expense $14,600 Jan 1 - Dec 31
Cost of sales (Cost of Goods Sold) $197,400 Jan 1 - Dec 31
Administrative Salary Expense $23,400 Jan 1 - Dec 31
Insurance Expense $12,300 Jan 1 - Dec 31
Depreciation Expense $27,700 Jan 1 - Dec 31
Dividends paid $3,200 Jan 1 - Dec 31
Interest income $6,500 Jan 1 - Dec 31
Selling and administrative expenses $58,000 Jan 1 - Dec 31
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Using previously given information, Table 14.11 is the Cash Flow from the Income Statement.
14.7 Depreciation
14.7.1 Introduction
Depreciation is a methodology used by organizations to distribute the cost of a capital asset over a long
period of time. For example, if a company invests in an expensive super computer, the company is
required by tax law in the U.S. to allocate the cost of that computer over a span of a few years, using the
depreciation technique. If the company did not do this, the year in which the company bought the super-
computer would probably result in financial statements that are significantly worse than the year before. It
is important to note that depreciation is considered a non-cash expense.
Depreciation is often a difficult subject to grasp for students. You may need to review this tutorial
two or more times before you fully grasp the concept, or you can review the textbook.
14.7.2 Depreciation
Depreciation is the expense associated with allocating the cost of a capital asset (except land) over its
useful life. Land, being appreciable, is not depreciated. All other capital assets that a company buys are
depreciated. The portion of the first cost of an asset that is consumed through use over a period of time is
called depreciation (depreciation expense).
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Accumulated Depreciation
This account is used to show the cumulative sum of all depreciation expense for an asset from the date
on which the asset is acquired. The balance of this account increases over the life of the asset that is being
depreciated.
Book Value
It is the first cost of a depreciable asset, less its accumulated depreciation.
Depreciable Cost
Depreciable cost can be defined as:
Straight-Line Method
Straight Line Depreciation Per Year = First Cost - Salvage Value
Useful Life in Years
An equal amount of depreciation expense is assigned to each year of the asset’s useful life. The depre-
ciable cost is divided by the useful life in years to determine the annual depreciation expense.
SL Example: A computer is purchased for $2,200 on January 2001. The salvage value of the comput-
er is $200 and its useful life is four years.
Calculate, using Straight Line method,
• Depreciation expense
• Accumulated depreciation at end of each year
• Book value at the end of the year for each year of useful life of the asset
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Thus, Annual Depreciation Amount = Depreciation Rate X Depreciable Cost = (.25 X 2000) = $500 / yr
MACRS Example
Stevens acquired, for an installed cost of $40,000, a machine having a recovery period of five years. Using
the applicable MACRS rates, the depreciation expense each year is shown in Table 14.13.
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Example: (Gains and Losses)—The car bought for $30,000 is sold for a cash payment of $20,000 at
the end of two years, at which time its book value is $18,000 ($30,000 less two years of accumulated de-
preciation at $6,000 per year). Its market value on the day of sales is therefore $2,000 more than its book
value. The tax rate is 40%.
FMV-BV = Taxable
Capital Gains: $20,000 – $18,000 = $2,000
Taxes: $2,000 * 0.4 = $800
After Tax Cash Flow: $20,000 - $800 = $19,200
This completes our overview of accounting. The concepts presented here can be understood by one
more example given later in the tutorial. We hope you have found this discipline a more conceptual and
stimulating subject than its image as “bookkeeping” usually conveys.
The tax code is very complicated for individuals and corporation in the United States. You probably,
at some point in your life, have filled a tax return with the Internal Revenue Service (IRS). Organizations
have an even more daunting task with more complicated rules.
Operating cash flows can be determined from the Income Statement. Note that an operating cash
flow is Net Income after Tax plus depreciation. Remember that depreciation is a non-cash (accrual) ex-
pense. Operating cash flows are periodic over a number of years.
Capital Cash Flows can be determined from the Balance Sheet. There are a number of activities that
impact the Capital Cash Flows. Change in inventory levels, financing activities and capital expenditure
are some of these activities. For engineering economics we are interested in investments for depreciable
(plant, equipment, etc.) and non-depreciable (land) capital. For capital projects we are also interested in
loans (to finance capital) and the after tax sale/disposal of capital at the end of the project.
In the following sections we will provide the calculations and format for
• Net Cash Flow from Operating Activity
• Net Cash Flow from Capital Activity
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The process begins with the journal or daily record of transactions. We know that every transaction
must be recorded in at least two accounts; otherwise, balance sheets would not balance. One of these ac-
counts is debited (entered on the left or “debit” side of the T-account), and the other is credited (entered
on the right of “credit” side of the T-account).
The words debit and credit refer to the left and right side of the T-account respectively for the purpos-
es below. Their abbreviations are dr. (debit) and cr. (credit). Each “simple” journal entry (a simple entry is
one that affects just two accounts) is therefore recorded as shown in Table 14.15.
Debit Credit
Note that accounting requires that the sum of all the debits pertaining to a transaction must equal the
sum of all the credit for those same transactions. Not shown, but part of the journal record of the transac-
tion, are the date, the amounts to be “posted” in the affected accounts and, if needed, a brief description
of the transaction.
Table 14.16 shows how assets, liabilities, and equity should be recorded.
Units sold * Selling Price per Unit = Fixed Costs + (Variable Cost per Unit * Units Sold) + Profits
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Total Cost
Profit
Breakeven Sales
(In Units)
Variable Cost
Fixed Cost
Loss
Dollars
As you can see, the net income is zero at the breakeven point.
This equation can be rewritten in terms of the Contribution Margin if the equation is divided by
Sales on both sides.
Hence, Contribution
Margin Ratio = Fixed Costs + Profits
Sales
To calculate the breakeven sales, the profits are set at zero, and it gives us the following equation:
Selling Price per Unit * Units Sold = Fixed Costs + (Variable Cost per Unit*Units Sold) +
Target Net Profit
Units * (Selling price per unit - Variable Cost per Unit) = Fixed costs + Target Net Profit
Units * Unit Contribution Margin = Fixed Costs + Target Net Profit
Units to Earn Target Net Profit = (Fixed Costs + Target Net Profit) / Unit Contribution Margin
I. Basic Accounting—Fundamentals
A. Asset & Inventory: LIFO; FIFO
II. Basic Financial Accounting
A. Financial Ratios
B. Capital Structure of Firm
C. Stocks, Bonds and Financial Instruments
III. Advanced Cost Accounting—Fundamentals
G. Activity Based Costing (ABC)
H. Flexible & Master Budgets
I. Performance Assessments
J. Ethical Considerations—SoX
IV. Advanced Cost Estimation
A. Statistical Cost Estimation
B. Use of Cost Indices and Cost Factors
C. Design for Cost / Affordability / Target Costing
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14.12 Summary
One chapter can hardly cover the basics of accounting and finance other than a cursory presentation of
the subject matter. Yet, few subjects are more important in modern business than the understanding of
the finances of a corporation or an individual project. Engineering managers must understand the financ-
es of a business to provide value.
14.13 References
The following are two standard references in this field. The following table maps the topics in this chapter
to these references.
Merino, Donald N., Accounting for Engineers, Engineering Management Body of Knowledge, American
Society of Engineering Management, vol 1.1, Nov. 2007.
Riggs, Henry E., Financial and Cost Analysis for Engineering and Technology Management, John Wiley
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