Accounting

Accounting and Financial DecisionsEngineering Economics1Objective of the CompanyIncrease the market value of the companyMarket value stock price reflected in the financial marketMarket values of some of well known U.S. firms

CompanyStock PriceMarket Value (mil) 2010Market Value (mil) 2014Google$581.13$141.138$344,458.8Apple$102.64$295,886.3$560,337.4Microsoft$46.56$238,784.5$344,458.8Wal-Mart$75.60$200.68B$256,322.8Exxon Mobile$96.03$368,711.5$432,357.32Factors that Affect Market ValueHow is the company doing at a particular time?

What is happening to other stock prices, that is, how are the competitors doing?

How do investors expect the company to perform in the future Decisions to invest in various projects and the actual performance of these projects3A. Why Engineers need to understand the financial statements?

4Understanding Financial StatementsAccounting: The Basis of Decision-MakingFinancial Statements: Financial Status for BusinessesFinancial Ratios: Using Ratios to Make Business Decisions

5Accounting The Language of Business

6Methods of Reporting Income Income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.Cash Basis methodAccrual Basis methodTransactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid7Financial Status for Business

8B. Understanding the Balance SheetThe basic accounting equation and the definition of capital

How to instantly determine liquidity and too much debt

How the firm gets equity: only two ways9The Basic Accounting EquationFor the Balance Sheet Presentation

For the Financial AnalysisAssets - Liabilities = Owners EquityAssets = Liabilities + Owners Equity10The Balance Sheet Statement for RIM, Ltd.

11Using the Four Quadrants of the Balance Sheet and Why?ASSETSLIABILITIESCurrent AssetsLong-Term AssetsCurrent LiabilitiesLong-Term LiabilitiesEquity=Owner ContributionsRetained Earnings12How to Instantly Determine Liquidity and Too Much Debt?Liquidity

Too Much Debt?

13Debt To Equity RatioLiquidity Current RatioASSETSLIABILITIESCurrent AssetsLong-Term AssetsCurrent LiabilitiesLong-Term LiabilitiesEquityOwner ContributionsRetained Earnings14Too Much Debt? Debt to Equity RatioASSETSLIABILITIESCurrent AssetsLong-Term AssetsCurrent LiabilitiesLong-Term LiabilitiesEquityOwner ContributionsRetained EarningsDebtEquity15How the Firm Gets Equity: Only Two WaysOwners ContributionsBy issuing stocks through financial marketsRetained EarningsBy retaining operating profits instead of paying 16C. Using the Income Statement to Manage a BusinessHow to use profit check points

Why gross margin is the critical measure for engineers?

How does inventory production impact profit?17Basic Income Statement EquationRevenueExpenses Net Income (Loss)-18Why Gross Margin is a Critical Measure for Engineers?SalesCost of Goods SoldGross Margin19How Inventory Production Impacts ProfitCalculating the Cost of Goods Sold Beginning Inventory

+ Additions to Inventory

Ending Inventory

Cost of Goods Sold20How to Use Profit Check PointsABC Company, Inc.Statement of Operations (Year Ended December 31, 20xx)Sales$5,000,000100.0% Less: Cost of Goods Sold3,250,00065.0%Gross Profit (margin)1,750,00035.0% Less: Selling, G&A Expenses1,000,00020.0%Operating Profit (margin)750,00015.0% Less: Interest250,0005.0%Net Income Before Taxes (NIBT)500,00010.0% Less: Taxes175,0003.5%Net Income (margin)$325,0006.5%Bottom line21The Income Statement Research In Motion Ltd. 24.60%17.10%46.07%100.00%Gross marginOperating marginNet marginFY 2009

Revenue22Relationship Between Balance Sheets and Income StatementBalance Sheet (12/31/09)Income StatementBalance Sheet (12/31/10)(01/01/10 - 12/31/10)AssetsNet sales300,000Assets Current assets74,300Cost of Goods Sold208,000 Current assets76,400 Fixed assets95,000Gross Profit92,000 Fixed assets84,000 Total169,300O&M Expenses58,720 Total160,400Net Operating profit33,280Liabilities & EquitiesLiabilities & EquitiesNon-operating Profit5,200 Current liabilities44,500Taxable Income28,080 Current liabilities28,000 Other liabilities32,000Income Taxes8,424 Other liabilities30,000 Total76,500Net Income19,656 Total58,000 Preferred stock10,000Cash Dividends10,056 Preferred stock10,000 Common stock40,000 Common stock40,000 Capital surplus10,000Retained earnings9,600 Capital surplus10,000 Retained earnings32,800 Retained earnings42,400 Total169,300 Total160,40023D. Understanding the Statement of Cash FlowsThe business operating cycle: How a business earns its cashSources and Uses of CashThe engineers focus on the investing section: Capital Budgeting24Cash Flow Transactions within BusinessShareholdersFixed AssetsDebt holdersInventoryGovernmentCustomersCASHFrom cash salesTo pay taxesFrom creditsalesTo pay labor,materials, and overheadTo pay interestand principalFrom sale of debtTo purchaseFrom saleTo pay dividend, To purchase back sharesFrom saleof shares25The Cash Flow Business CycleInventoryProductionCashAccountsreceivableFixed assetsCashSalesCreditSalesCollection ofreceivableInvestmentDepreciation Changes in equity Changes in liabilities Pay taxes Pay interest Pay dividends Labor Materials Overhead26The Cash Flow Statement Research In Motion, Ltd.

27Sources and Uses of CashBalance SheetMarch 1, 2010FinancialpositionBalance SheetFeb. 28, 2009FinancialpositionSources andUses of FundsStatement ofChanges inFinancial PositionIncrease in equityDecrease in assetsIncrease in liabilitiesDecrease in equityIncrease in assetsDecrease in liabilitiesSourcesUses28The Engineers focus on the Investing Section: Capital BudgetingCash from Operations

Cash from Investments

Cash from FinancingCash from operations (profit)Cash spent on Property, Plant, Equip.Cash received from bonds and stocks29What is Capital Budgeting?Capital: fixed assets used in productionBudget: a plan which details projected cash flows during some future periodCapital Budgeting: a process of analyzing projects and deciding whether they should be included in the capital budget30Capital Budgeting Framework31Major Investment Decision32