Accounting For Business Managers

Financial accounting is concerned with the preparation of accounting information for the needs of users who are external to the business. Financial accounting is therefore part of financial reporting.

In order to manage your business effectively you need reports that tell you how your business is performing. For example, you may want to know the value of your assets like, Cash you have on hand, Cash in bank, and Inventory in stock.

The income statement, also called an earnings statement or a profit and loss statement, is an accounting statement that matches a company’s revenues with its expenses over a period of time, usually a quarter or a year.

The term multi-step means that four profit measures are designated on the statement:

• Gross profit,

• Operating profit (sometimes referred to as operating income, Earnings before Interest and Taxes, or EBIT),

• Profit before taxes (sometimes referred to as Earnings before Taxes or EBT), and

• Net income (also referred to simply as earnings).

Operating expenses - Operating expenses are expenses other than cost of goods sold that a company incurs in the normal course of business.

PBT (Profit before Tax) is arrived at by deducting the cost of debt capital (Interest Expense) from EBIT (Earnings Before Interest and Taxes).

EBITDA is a contraction of the term Earnings Before Interest, Taxes, Depreciation, and Amortization.

There are three factors to consider when you calculate depreciation, which are:

•        Cost of the asset.

•        Useful life.

•        Salvage value.

•        Depreciation method.

The Accumulated Depreciation account is a contra account, which means that it appears on the balance sheet as a deduction from the original purchase price of an asset.

A Balance Sheet is a statement of financial position of a business concern at a given date. The balance sheet represents assets or liabilities existing on a particular date. Excess of assets over liabilities represent the capital and is indicative of the financial soundness of a company.

There are three forms of inventories:

• raw materials;

• work in process; and

• finished goods

Liability accounts include:

• Notes Payable

• Accounts Payable

• Accrued Expenses

• Current Portion of Long-Term Debt

• Total Current Liabilities

• Long-Term Debt

• Preferred Stock

• Common Stock

• Retained Earnings

Total Liabilities and Equity

The sum of total liabilities and total stockholders’ equity equals total liabilities and equity which, by definition, must be equal to total assets - a balance sheet must balance.

In accounting and financial statement analysis, working capital is defined as the firm’s short-term or current assets and current liabilities. Net working capital represents the excess of current assets over current liabilities and is an indicator of the firm’s ability to meet its short-term financial obligations

Firms need both a long-term (or permanent) investment in working capital and a short-term or cyclical one. The permanent working capital investment provides an ongoing positive net working capital position, that is, a level of current assets that exceeds current liabilities.

Working capital financing comes in many forms, each of which has unique terms and offers certain advantages and disadvantages to the borrower.

There are a number of determinants of working capital; these are items that have a direct impact on the amount of investment that an organization must make in working capital. Consider the following determinants:

• Credit Policy

• Growth Rate

• Payables Payment Terms

• Production Process Flow

• Seasonality

Cash flow is the net amount of cash that an entity receives and disburses during a period of time.

The indirect method cash flows statement begins with net income or loss. Then all non-cash expense, decrease in current assets and increase in current liabilities are added

In the last decade, while firms have become more focused on value creation, they have remained suspicious of financial markets, market-based share price and compensation to managers based on market-based performance.

The cash flow return on investment (CFROI) for a firm is the internal rate of return on existing investments, based upon real cash flows.

The use of financial ratios is a time-tested method of analyzing a business.

An examination of the various users of accounting information indicates that they can be divided into two categories:

1. internal parties within the organization;

2. external parties such as shareholders, creditors and regulatory agencies, outside the organization.

Cost accounting is the process of collecting information about the costs incurred by a company's activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage.

Labor costs and materials costs are completely different entities, with two commonalities.

Process costing is used when there is mass production of similar products, where the costs associated with individual units of output cannot be differentiated from each other.

Job Costing as “the category of basic costing methods which is applicable where the work consists of separate contracts, jobs or batches each of which is authorised by specific order or contract. According to this method costs are collected and accumulated according to jobs, contracts, products or work orders.”

Activity-based costing (ABC) is a costing approach that assigns resource costs to cost objects such as products, services, or customers based on activities performed for the cost objects.

Developing an activity-based costing system entails three steps:

1. identifying resource costs and activities,

2. assigning resource costs to activities, and

3. assigning activity costs to cost objects.

Initially, many firms adopt activity-based costing to reduce distortions in product costs often found in their volume-based costing systems.

Standard Costing is a concept of accounting for determination of standards for each element of costs. These predetermined costs are compared with actual costs to find out the deviations known as "Variances." Identification and analysis of causes for such variances and remedial measures should be taken in order to overcome the reasons for Variances.

Variance analysis involves breaking down the total variance to explain:

1. How much of it is caused by the usage of resources differing from the standard

2. How much is caused by cost of resources differing from the standard

Sometimes variances may arise due to factors beyond the control of the relevant manager.Before holding anybody responsible for variances, the causes of the variances should be discovered.

Cost-volume-profit analysis is a powerful tool for managerial decision making.  Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations.

CVP analysis relies on forecasts of expected revenues and costs.

What is Inventory?

Manufacturing inventory is typically classified into raw materials, finished products, and work-in-process.

After determining the optimal order size, the next important decision is when to order, or to determine the reorder point. If the inventory level reaches the reorder point, new order should be placed.

Capital budgeting is the process that a business uses to determine which proposed fixed asset/investment proposal it should accept, and which one should be declined.

Accountancy assists users of financial statements to make better financial decisions. It is important however to realize the limitations of accounting and financial reporting when forming those decisions.

Following are the main limitations of accounting and financial reporting:

1. Different accounting policies and frameworks

2. Accounting estimates

3. Professional judgment

4. Verifiability

5. Use of historical cost

6. Measurability

7. Limited predictive value

8. Fraud and error

9. Cost benefit compromise

10. Non-consideration of time value of money

Intangible assets are assets that have no physical substance.

Goodwill is an intangible asset that arises at the time of business acquisition when the price paid for the business exceeds the fair value of the net identifiable assets.

The Australian Corporation Act 2001 requires all publicly listed companies and large proprietary companies get their annual financial statements audited by the independent auditor at the end of the year. This is called a statutory audit.

Internal audit is defined as an independent assurance and consulting activity designed to add value and improve the organisation’s objectives