Accounting

Richard J. MurdockManagement Certificate Program

Fisher College Of BusinessThe Ohio State University

(614) 292–1720murdock.3@osu.edu

TOPICS

Key Concepts of Accounting - Baron Coburg

Accounting Fundamentals Helpful Hints Accounting Information for

Decision Making

Baron Coburg

Measurement Allocations Disclosure Statements

Accounting Fundamentals Debits Credits Assets = Liabilities + Equity Balance sheet classifications

Current assets (will be used up in a year or one operating cycle)

Long-lived assets (will last longer than a year)

Accounting Fundamentals Current liabilities (must be paid within a

year) Long-term liabilities (not due within a year) Equity (residual claims of the owner: assets

– liabilities)

Revenues - amounts earned in operations

Expenses - costs incurred to earn revenues

Helpful Hints

Cash Management Get cash owed to you as soon as

possible How do you get customers/clients to pay

promptly?

Pay out cash owed at the last possible moment

Helpful Hints

You just received an invoice from one of your suppliers, Rand Company. The invoice contains the following payment terms, 2/15, n/30.

When should you pay? What is the implicit annual rate of

interest?

Helpful Hints

Balance sheet (Assets = Liabilities + Equity) is a picture at a point in time.

Ratio analysis is often used on balance sheets to assess a company’s financial health.

Helpful Hints Balance sheet (Assets = Liabilities +

Equity) is a picture at a point in time. Income statement (Revenues –

expenses) deals with a period of time.

Ratio analysis is often used on financial statements to assess a company’s financial health and operating effectiveness.

Fundamental Analysis - Leverage

Fundamental Analysis - Profitability

Fundamental Analysis - Efficiency

DuPont Model

DuPont Model

Fundamental Analysis McGraw-Hill

Selected Ratios

McGraw-Hill Industry

Profit Margin

Asset Turnover

Equity Multiplier

Return on Equity

Selected Ratios

Dun & Bradstreet Dun's financial profiles

Risk Management Association (formerly Robert Morris Associates – RMA) RMA annual statement studies

Fundamental Analysis - Liquidity

Liquidity - the company’s ability to pay its liabilities as they become due in the next operating cycle

Working Capital = Current assets – Current liabilities

Fundamental Analysis - Liquidity

Helpful Hints

Gerbill Company

Accounting & Decisions Cash flows are the lifeblood of any

company Inadequate cash flows lead to

bankruptcy The choice of projects is of

paramount importance. Variability and timing of cash flows

may be more important than the amount.

Accounting & Decisions

Offer document

Accounting & Decisions

Cost terms Direct cost – cost that can be traced

to an individual job or product Indirect cost – cost that is not

traceable to a job or product Fixed cost – cost that does not

change in total as volume changes

Accounting & Decisions

Cost terms Variable cost - cost that in total

changes as volume changes Relevant cost – cost that is helpful in

understanding or making a decision.

Cost-Volume-Profit (CVP)

To achieve a profit, you must sell enough merchandise to cover all costs variable and fixed.

The excess of selling price for a unit (USP) over the variable cost attributable to the unit (UVC) is the unit’s contribution towards covering total fixed costs (TFC) and profit.

Cost-Volume-Profit (CVP)

Unit Contribution = USP – UVC A project’s breakeven volume (BE)

is the sales volume necessary to cover all fixed costs.

BE = TFC/Unit Contribution

Cost-Volume-Profit (CVP)

The volume necessary to achieve a certain dollar amount of profit ($P) can be determined in a similar manner

(TFC + $P)/Unit Contribution

Cost-Volume-Profit (CVP)

Ice Cream Cone

Accounting & Decisions

Most smaller companies and many larger companies have too many underutilized assets.

Ownership is smart if utilization is high.

Leasing is an excellent alternative for many companies.

Lease vs. purchase

Conclusions

In Germany, everything is prohibited except what is permitted. In France, everything is permitted except what is prohibited. In Italy, everything is permitted especially what is prohibited. In Russia, everything is prohibited including what is permitted.

What does this say about the U.S.?