Finance management and Accounting courses

The London Stock Exchange is delighted to welcome Moneysupermarket.com Group plc to the Main Market.

2007-08-08T07:51:00.000-07:00

Moneysupermarket.com Group (MSC) operates two flagship websites, moneysupermarket.com, the UK’s leading finance price comparison website; and travelsupermarket.com, a leading UK travel price comparison website. Together they attracted 64 million visitors and 523 million page impressions last year.

MSC’s internet business was established in 1999 and currently operates across four verticals: money, insurance, travel and home services, covering 25 price comparison channels. The company’s websites were ranked by Hitwise as the number one finance price comparison website in the UK (based on estimated market share in April 2007 in the Banks and Financial Institutions category excluding non-price comparison websites).

In addition to its primary internet business, the group operates Mortgage 2000, an offline intermediary business providing mortgage sourcing and information systems and related services to financial intermediaries, and the leads distribution business paaleads.com.

08.08.2007 - Consumer credit in the USA rose by $13.1bln in June

2007-08-08T07:49:00.000-07:00

Consumer credit in the USA rose in June by $13.1bln, the Federal Reserve System reported. The economists estimated $4bln increase in June. May reading of consumer credit was revised from $12.9bln to $16.0bln. Total volume of consumer credit (hire-purchases, bank and credit card loans) was $2.447bln in May and $2.460bln in June. At the annual rate consumer credit rose by 6.5% in June, compared with 7.9% in the preceding month.

Dollar Threatened by Domestic Diversification

2007-08-08T07:44:00.000-07:00

Most Dollar bulls cringe when they hear the word “diversification.” Within the context of forex, diversification usually refers to the shift towards non-Dollar denominated assets among Central Banks. The thinking is that with the declining Dollar, it probably makes sense to hold reserves in non-US investments. However, analysts have begun to realize that this only represents a small segment of entities that could harm the Dollar by diversifying. The world’s Central Banks probably hold at most $5 Trillion of reserves, whereas US institutional investment funds probably have over $20 Trillion collectively invested in US assets. Thus, diversification in this segment probably poses a much greater threat to the long term health of the USD.

Management Accounting

2006-03-19T04:29:00.000-08:00

Chapter 16 introduces you to some of the basic managerial accounting concepts you will use for the remainder of the course. The introduction to management accounting begins with an overview of the design requirements of a managerial accounting system. The system must allocate decision-making authority over a company's resources. Second, it must furnish the information to support decision-making by managers. Finally, the system must generate the information needed to evaluate and reward performance.

Managers deal with the operations of the business, and with information that is internal to the business. We call this operating information. It involves things like product costing information, payroll information and other sensitive or confidential information. For this reason, operating information is not released to the public, but is used by managers to improve business performance, and ensure the objectives of the company.

Manufacturing costs are first classified into direct material, direct labor and manufacturing overhead. With these definitions established, we introduce the critical distinction between product and period costs. This discussion in turn lays the foundation for introducing the manufacturing inventory accounts: raw materials, work-in-process, and finished goods.

The flow of costs through the inventory accounts is explained with the help of an extended illustration. The example includes a detailed analysis of the process of applying overhead using a predetermined rate. The text explains both the mechanics and the rationale underlying overhead application at this point, and calls attention to the potential weaknesses of volume based applications that will be addressed in later chapters.

The chapter closes with the development of financial statements for a manufacturing company. The schedule of cost of goods manufactured is introduced as a supplement to the financial statements intended to assist managers in evaluating the overall costs of manufactured products.

Management Accounting
Management (or managerial) accounting is intended to fulfill a large number of requirements. Financial accounting is intended to meet the needs of outside users of financial information, and follows GAAP. Management accounting is intended to satisfy the various needs of a large group of decision-makers inside the business, and does not follow GAAP.

A single set of financial statements satisfies the requirements of GAAP, but management accounting reports can be tailored for any situation and user. The form and format can vary widely, depending on the type of decision being analyzed.

You first need to learn to use a few basic concepts. After that, those concepts can be modified in an almost infinite number of ways to analyze business information, and make operating decisions.

A company's audited financial statements look backwards in to the prior year or years. But managers have to make decisions today, that affect the present and the future. Financial statements that are a year or more old are not very useful for the daily decisions managers have to make. They are more interested in current operating information, and projections about the future. They are also concerned with setting goals, measuring progress and achievement, eliminating waste, complying with government regulations, and a much, much more.

Accounting cycles

An accounting system is often organized into accounting cycles. These cycles are connected and interrelated. Costs flow the product costing system as illustrated in your text, and as described below.

Separating the accounting process lets us assign different people to different tasks. Many companies have large Accounts Payable, Accounts Receivable and Payroll departments, not to mention huge Production departments and many sales people. Separating activities into accounting cycles helps us understand and apply managerial controls to these activities.

Accounting Cycles are connected and interrelated.

Manufacturing Costs
We study manufacturing environments because they are some of the most complex business environments. What we learn here can easily be transferred to other, less complex, situations. Management accounting is really much easier than financial accounting. We classify all costs as either manufacturing or non-manufacturing.

We separate manufacturing costs into three categories:
Manufacturing costs relate to making a product.

Direct Materials (DM) - raw materials and parts, directly traceable to the product. Materials must attach themselves to, and become part of, the finished product to be considered Direct Materials.

Direct Labor (DL) - wages and other payroll costs of the employees that directly work to convert Direct Materials into finished products. These costs are directly traceable to the product.

Manufacturing Overhead (OHD) - all the other costs related to producing products that don't qualify as Direct Materials or Direct Labor. Picture a manufacturing plant and all the costs of the plant. Now subtract DM and DL. Everything that's left is Overhead. These costs are indirectly traceable to the product.

Non-Manufacturing Costs
Some costs are specifically not manufacturing costs, and therefore not DM, DL or OHD. These are costs not related to the manufacturing plant or producing the product. The include the following two categories:

Selling Costs
The costs associated with selling the product are Selling Costs. These include sales salaries and commissions, advertising, stores and their related fixtures and equipment.

General and Administrative Costs
The costs associated with the central management and home office of a company, and general costs of being incorporated, are classified as General and Administrative (GA) costs. This includes buildings, offices, equipment, salaries, etc. that are part of the administrative arm of the business, provided these costs can't be traced directly or indirectly to the manufacturing function.

Period Costs
Some costs don't have any future value, and only relate to the current period. These include Selling costs and GA costs. Other period costs include income taxes and interest expense.

Inventories
There are three classifications of inventory.

Materials inventory - raw materials and parts used in producing goods

Work in process inventory (WIP)- all partially completed goods, not ready for sale

Finished goods inventory - all completed goods ready for sale

Cost Flow
We say that costs "flow" though a company. This means that we collect costs in the books in certain accounts, and transfer those costs to other accounts, in a way that resembles how those costs are actually incurred in the manufacturing process.

In general here is the way costs flow through an accounting system:

Direct Materials >
Direct Labor ==>
Mfg Overhead =>

Work in Process =>

Finished Goods=>

Cost of Goods Sold

These are the actual accounts that will be debited and credited in a way that approximates the way costs are actually incurred in the production process. These accounts are all debited to increase the account, and credited to decrease the account.

To move costs along we debit the account the cost is moving into, and credit the account the cost is moving from. Total cost increases as it moves along, just like a snowball gets bigger as you roll it around in the snow. As goods move through the manufacturing process they pick up all the related costs along the way. Materials and labor are added as the goods are worked on, and overhead is added along the way.

Let's look at how one unit of product picks up costs in its journey through the production process. Amalgamated Widget, Inc. produces a variety of widgets for home and commercial use. The production manager requisitions raw materials, from the Materials inventory. Materials inventory account is credited and the costs are transferred to the Work in Process inventory account.

Work is started in the shaping and forming department. Labor is added at this point by crediting Direct Labor and debiting Work in Process inventory. After the widgets are formed, they go to the finishing department. The appropriate finish is applied and the finished widget is sent to the packing department, where it is prepared for shipment. Additional Materials and Direct Labor costs are added to Work in Process in the finishing and packing departments.

Overhead is added to the product cost at each stage of the operation by debiting Work in Process inventory and crediting the Overhead account. We will discuss Overhead allocation more in a moment.

At this point the product is complete and ready for sale. The final cost is transferred to the Finished Goods inventory account. When the item is sold the cost will then be transferred to the Cost of Goods Sold account.

The total cost of producing a widget accumulates as the widget moves along though the production process.

Unit Product Costs
The word "unit" comes from the Latin unus, meaning one. The Spanish word uno comes from the same Latin root, and also means one. A Unit Cost is the cost of producing one unit of product. We might break that down into its component parts - labor, materials & overhead - perhaps in great detail.

Manufacturing companies usually make a large quantity of products at a time. Each batch of product may be thousands of units. In some cases production is done on an assembly line, and there is little distinction between departments, aside from those arbitrarily determined by management.

Ultimately the company must set a selling price for its goods. Since goods are sold one at a time, the company must determine the total cost of producing a single unit of goods. Unit costs are tracked throughout the production cycle in some accounting systems. In other cases, unit costs are determined at the end of production, after all costs of production have been accumulated and the finished units have been counted.

It is important that you clearly distinguish between unit costs and total costs, in your mind, at all times in this class.

Applying Overhead
Overhead consists of a large number of separate costs related to the manufacturing process. They are collected in a single account and allocated to the product cost using what is called an overhead application rate.

The overhead application rate is simply a way to divide the total overhead costs for a year, across all the units of goods produced that year. Here's the formula:

Total Annual Overhead Costs
Overhead Cost Driver

The overhead cost driver, is something related to production that can be used to help spread the total cost evenly to individual units of product. Sometimes that is simply the number of units of products produced in a given year. At other times that's not the best measure to use. For instance, hot dogs are produced by the tens-of-thousands per day, packed into boxes and sold by the palette load. The overhead cost applied to one hot dog would be a very small amount, and not very relevant to managers. They will apply overhead costs in a way relevant to the decisions they need to make.

Allocating overhead using labor hours
Labor hours are often used as a cost driver, to apply overhead. Total overhead costs are divided by total estimated labor hours to come up with a dollar rate per labor hour. Each time labor is recorded, a corresponding amount of overhead can also be allocated and recorded (transferred to WIP).

Advantages of using labor hours:
Tends to be a predictable & steady amount
Different pay rates among employees is irrelevant
Labor hours are closely related to production, so should be an accurate measure

Let's look at an example. The company estimates it will have 100,000 labor hours and spend $200,000 in overhead costs. The company records 8,300 labor hours this month. Their overhead allocation is:

$200,000 / 100,000 hours = $2 per labor hour x 8,300 hours = $16,600

The company would transfer $16,600 from the Overhead account to Work in Process for the month's production.

Allocating overhead using labor dollars
Some very large companies allocate overhead using labor dollars, because they have a large work force, and their total labor dollars tends to be a predictable amount. They may be operating under a labor contract. They may have a large and wide-spread work force.

Overhead costs are allocated in much the same manner as above, except that labor dollars would be used, instead of labor hours.

Other Overhead Allocation Methods
Some companies use other allocation methods for overhead. Whatever method is used should be a reliable and predictable method, where a cost driver or reasonable cause and effect relationship can be found between costs and production.

Overhead costs are allocated using journal entries, which means that these managerial accounting entries will also affect the audited financial statements released to outsiders. The allocation method will come under the scrutiny of the company's auditors, so it should be a reasonable method that complies with GAAP.

from :http://www.middlecity.com/

Retirement and Pensions

2006-03-19T04:23:00.000-08:00

TYPES OF PENSION PLANS

There are two types of Pension plans when we look at the basic attribute of who bears the risk of the size of the pension and for how long it will be paid after retirement. The defined benefit pension puts the risk on the employer and the defined contribution pension puts the risk on the employee

Defined Benefit Plan: The employer designs a set of rules that will state who is eligible for the plan and how much they will get once they retire. These plans usually include the following.
- Minimum number of years of service
- Minimum age to qualify for retirement
- Formula which calculates the annual retirement benefit as some function of salary and years of service
- Statement about fringe benefits such as medical coverage
- Formula for coverage of surviving spouse
- Maximum ages to force retirement are no longer legal in the USA

Defined Contribution Plan
- Minimum years of service or age to begin coverage
- Statement on vesting rights
- Statement on employer contribution which is generally a percentage of salary
- Statement on employee voluntary and matched contributions

DISCUSSION OF PLAN EFFECTS

SHIFTING PURCHASING POWER RISK

Defined benefit plans have some protection against inflation because the size of the retirement benefit is determined at the retirement age and is based on a salary that has probably kept up with inflation. In the best of plans the payments after retirement may also be indexed to the CPI but this is not common.

With the defined benefit plan the monies invested are under the control of the beneficiary and it is her responsibility to see that the value of the fund grows in a manner to keep up with the cost of living.

SHIFTING ACTUARIAL RISK

Under the defined benefit plan if you live longer than expected it is just tough luck for the employer. On the other hand, if you die young or before retirement the employer makes the gain. Under the defined contribution plan, if you live longer than you have planned for you will be broke, and old! If you die early you lose again, because you are dead and someone else spends your money! So the beneficiary really takes on a significant risk with the defined contribution plan. The only way to avoid this risk is to buy a retirement annuity from the insurance company that will guarantee payment until you and/or spouse dies.

SHIFTING THE INVESTMENT RISK

Under the defined benefit plan it is up to the employer to invest funds to make sure there is enough money available each year in the future to cover the expected cash obligations cause by the retirement promises. This is highly regulated, covered below and the subject of the ATLAS Pension Case. Under the defined contribution plan it is up to the beneficiary to manage his own portfolio both before and after retirement. Most people are not finance professionals and may make big mistakes here.

You should notice that the term spouse or surviving spouse is used frequently in this subject area. Such use is one of the central reasons for the controversy over legalizing gay marriages on both a federal a state basis.

Managing a Defined Benefit Pension Benefit Fund

Managing a defined benefit pension fund is both a common sense and regulated thing. In both cases the main aim is to ensure that the fund is able to meet the promised benefits for the foreseeable future. To simplify the process, we can think of setting up the plan from scratch with nobody getting any retirement payments yet. After the setup the plan must be reevaluated each year to make sure it remain adequately funded. The concept is simple. You just figure out how much the pension plan expects to pay out each year in the future and then invest the fund's money in assets that will provide a guarantee of the cash flow at the time it is needed.

Figuring out the annual outflow

Determine the date of birth of each person covered
Based on the date of birth and sex determine when the individual will die based on actuarial tables
Estimate when the individual will retire, the old mandatory retirement age made this easy
Estimate the retirement benefit and when the fund will start paying and stop paying
If there is coverage for a surviving spouse, work out all the above for that person too

Manage the fund. This task is the combination of the beginning balance on hand, the contribution rate and the assumed reinvestment rate.

If the fund has been around for a while there will be some balance available.
Generally the fund is built up each year by a contribution that is some percentage of the wages paid, say 10%
The funds assets are invested in securities like bonds and stocks. Bonds can give a steady return when held to maturity but stocks can give greater returns in the long run which is more attractive to the employer since the annual contributions can be lower.
The balance is estimated each year to make sure that it remains positive throughout the life of the plan.

The actual administration of these funds is constrained by the rules of the I.R.S. and the Department of Labor [ERISA]

http://academic.uofs.edu/

The Importance of Bond Calculations

2006-03-19T04:22:00.000-08:00

Although the vast majority of finance professionals do not deal with bonds on a daily basis, the principles involved with calculating bond values go to the very foundation of finance. If you do not have a good working knowledge of what sets bond values, you are incompetent! Any business student with a basic finance course under his/her belt ought to be able to immediately give the right answers when confronted by a Finance or Economics professor about bonds or the bond market.

All that it takes to master this subject is a firm grasp of present value principles, bond terminology definitions, and supply and demand relationships.

Present Value Principle--An amount to be received in the future is always worth less than the same amount today! The method used is compound interest in reverse.
Bond Terminology--You have to know it cold-memorize it!
- Face Value--printed on the bond, never changes, the amount you get at maturity.
- Maturity--printed on the bond, never changes , the date at which you get the face value paid
- Coupon rate--printed on the bond, never changes, the percentage of Face Value that is paid as interest each year [actually one half of the interest is paid every six months]
- Yield or market yield--not on the bond, changes every day, determined by supply and demand of bonds in the bond market
- Market value or price of the bond--not on the bond, changes every day, calculated by figuring the present value of the coupon payments and the present value of the face value at maturity at the discount rate set equal to the market yield.
Supply and Demand relationships--Funds flow into and out of the bond market and the level is not constant. Treasury actions to fund the deficit and monetary policy by the Federal Reserve profoundly affect the price [yield] in the market.

Examples

The following table show the present value calculations for a $1000 Face Value bond with a 9% coupon in both a 6% and a 13% market. Look through the table a see if you can explain where all of the numbers come from.

		Market=	Market=
Period	Cash Flow	0.06	0.13	Face Value	1000
1	45	43.69	42.25	Coupon Rate	0.09
2	45	42.42	39.67
3	45	41.18	37.25	Interest Payment	45
4	45	39.98	34.98	Life	5	years
5	45	38.82	32.84
6	45	37.69	30.84
7	45	36.59	28.96
8	45	35.52	27.19
9	45	34.49	25.53
10	1045	777.58	556.7
Total Present Value of Bond		1127.95	856.22

The chart below depicts the magnitude of the present values of the cash flow coming from interest and face value under the 6% and the 13% market conditions. Notice the magnitude of the present value of the face value compared to the present value of all the interest payments. The largest proportion of present value comes from the face value at maturity because the maturity is relatively near [ 5years]. Notice a 9% coupon bond is worth more than face value when rates decline to 6% and it is worth less than face value if rates go up to 13%!. Why? Because a market yield of 6% means that new bonds are coming into the market at that rate and this 9% bond is more attractive than them. So investors bid up the price of the 9% bond until it yields 6% also.

The next example show similar calculation for a 9% coupon with a twenty year life. This is a different bond from the one above because maturity dates are printed on the bond and never change!

		Market=	Market=
Period	Cash Flow	0.06	0.13	Face Value	1000
1	45	43.69	42.25	Coupon Rate	0.09
2	45	42.42	39.67
3	45	41.18	37.25	Interest Payment	45
4	45	39.98	34.98	Life	20	years
5	45	38.82	32.84
6	45	37.69	30.84
7	45	36.59	28.96
8	45	35.52	27.19
9	45	34.49	25.53
10	45	33.48	23.97
11	45	32.51	22.51
12	45	31.56	21.14
13	45	30.64	19.85
14	45	29.75	18.63
15	45	28.88	17.5
16	45	28.04	16.43
17	45	27.23	15.43
18	45	26.43	14.49
19	45	25.66	13.6
20	45	24.92	12.77
21	45	24.19	11.99
22	45	23.49	11.26
23	45	22.8	10.57
24	45	22.14	9.93
25	45	21.49	9.32
26	45	20.87	8.75
27	45	20.26	8.22
28	45	19.67	7.72
29	45	19.1	7.25
30	45	18.54	6.8
31	45	18	6.39
32	45	17.48	6
33	45	16.97	5.63
34	45	16.47	5.29
35	45	15.99	4.97
36	45	15.53	4.66
37	45	15.07	4.38
38	45	14.64	4.11
39	45	14.21	3.86
40	1045	320.35	84.17
Total Present Value of Bond		1346.72	717.09

Notice that the present value of the face value is now a much smaller proportion of the total value. It is the face value that provides the stability for a bond price when the maturity is nearby. In very long term bonds this stability is lost and they are very volatile as they react to daily yield changes.

http://academic.uofs.edu

Cash Budgets and Bank Financing

2006-03-19T04:20:00.000-08:00

This tutorial starts at the point where you have completed the AS3.WK4 assignment cash budget schedule. The assumptions and directions for preparing the cash budget are not repeated here!

The sample table shown below is for the first six months of the planning cycle. Look it over to orient yourself. You should be familiar with this work and what it took to get this much done.

	NOV	DEC	JAN	FEB	MAR	APR	MAY	JUN
Sales Forecast	108912	508912	118714	3665546	1883218	14359509	10794854	108912
cash sales	21782	101782	23743	733109	376644	2871902	2158971	21782
one month collection		54456	254456	59357	1832773	941609	7179754	5397427
two month collection			32673	152673	35614	1099664	564966	4307853
TOTAL COLLECTIONS			310820	945140	2245031	4913175	9903691	9727062
Purchases	305347	71229	2199327	1129931	8615705	6476913	65347	702172
Payments for purchases	305347	71229	2199327	1129931	8615705	6476913	65347	702172
Salaries	101560	101560	101560	101560	101560	101560	101560	101560
Wages	76337	17807	549832	282483	2153926	1619228	16337	175543
Taxes			50000			50000
Dividends				3300			33000
Other
TOTAL PAYMENTS			2900719	1546974	10871192	8247701	216244	979276
Net cash flow			-2589847	-601834	-8626161	-3334526	9687447	8747787
Beginning Balance			3000000	410153	-191681	-8817842	-11629025	-1941578
Ending Balance			410153	-191681	-8817842	-12152368	-1941578	6806208
Safety Margin			500000	500000	500000	500000	500000	500000
NET CASH POSITION---->			-89847	-691681	-9317842	-12652368	-2441578	6306208

The important number to study is the Net Cash Position for each month. This line indicates what the checking account balance would be if your cash flows worked out as planned and also includes the extra margin for safety. Another way to look at the net cash position is that it predicts your indebtedness to the bank if you borrow all the money you need from the bank to keep your checks from bouncing.

The chart of 12 months of the cash budget shows the behavior of the net cash position

Since net cash position increases and decreases the financial manager woould have to borrow and pay pack several times during the year.

Since net cash position gets above zero twice the firm will be able to completely get out of debt twice during the year.

The amount of borrowing or repayment is equal to the difference in the net cash position each month. Of course you would never pay back more than you borrowed.

EXAMPLE

Note the net cash position numbers do not match up exactly with the table above because this table was taken from another illustration of a similar problem.

The total loans outstanding are equal to the net cash position when it is negative and zero when it is positive and the amount of monthly borrowing is equal to the change in the loans outstanding.

	net cash position	DELTA	loans outstanding
JAN	-91491	91491	91491
FEB	-693703	602212	693703
MAR	-9325140	8631437	9325140
AP	-12661646	3336506	12661646
MAY	-2435532	-10226114	2435532
JUN	6317701	-8753233	0
JUL	-11245880	17563580	11245880
AUG	-35080822	23834943	35080822
SEP	-21933063	-13147760	21933063
OCT	-6299456	-15633607	6299456
NOV	15146656	-21446112	0
DEC	22760437	-7613781	0

from:http://academic.uofs.edu/

Cash Flow Cycle of the Firm

2006-03-19T04:18:00.000-08:00

Understanding the cash flow cycle of a business firm is critical to successful financial management. Since finance students often do not have any managerial business experience in the finance area, misunderstandings about how cash moves through a business can make all topics appear mysterious. This tutorial is provided to give this basic knowledge about the lifeblood flow in a business.

The term liquidity is often used to describe the ability to pay bills when they are due. Liquid assets include cash and a few other things that can be sold, [not inventory] to raise cash immediately. Fixed assets are buildings plant and equipment, short term assets are inventory and accounts receivable are routinely converted to cash as part of the cycle.

The diagram shown below is taken from [] and is the type often used to illustrate the cash flow cycle using the analogy of water.

Notice the central cash reservoir. This is the balance in the cash [checking account] that the financial manager must never let run out. If it runs out somebody is not going to be paid. A worst case scenario would be a default on a legal obligation followed by bankruptcy. Also notice that the main flow of cash is from the cash reservoir, through inventories, shipments to customers and accounts receivable and back to cash. Everything else in the system is there to support this flow.

Cash Flow Descriptions

Reservoir #4 share owners. The common stockholder that really own the company could be asked for more money. The way that this is done is through the issuance of additional stock to the public. This is not done very frequently, is expensive, and takes months to implement.
Reservoir #3 Borrowing capacity. Businesses use banks for short term loans to supplement the cash reservoir when needed, often several times per year. These loans are repaid whenever the cash reservoir goes above the planned level. The firm pays interest on the outstanding balance only. The capacity of this reservoir is called the line of credit. This line is negotiated with the bank before it is needed.This line of credit must be larger than the External Financing Needed as determined by the financial forecast. The bank tries to protect its position by making restrictions on borrowers. These restrictions are couched in terms of limits on certain financial ratios, especially the current ratio and the debt ratio.Violation of these limits is usually what provokes a liquidity crisis in a firm!
Reservoir #2 Marketable Securities. This is the Commercial Paper Market segment of the Money Market. It is an alternative for bank borrowing for only the largest firms with perfect credit ratings. It is unavailable to most ordinary sized businesses. Basically the firm writes IOU's for very large amounts payable at some future date and sells them at a discount in the Money Market, [over the telephone].
Interest. This is a one way drain. These payments must be made on time or a legal default will occur.
Plant and Equipment. This is also a one way drain of cash since most firms keep assets until they wear out rather than sell them. An alternative to this is leasing. The difficulty with this drain is that when it occurs it can be a really big one like flushing a toilet. Much planning is required. This is the subject of capital budgeting.
Inventories and manufacturing expenses. The main drain. There are two things to keep in mind. There is a constant flow through here. The flow is not constant and even. Inventories are built up to handle the unevenness of sales and to minimize costs of production. Higher levels of sales demand higher levels of inventories. Higher variability of sales demands higher inventories. Greater variety of product demands higher inventories. This is a major headache for the business and many crises develop because the production and inventory get out of whack.
Operating expenses. Another one way drain. This is the cash spent for expenses not directly related to production. Overhead is another word used.
Dividends. Most corporations that pay dividends to the stockholder pay them four times a year. Many stockholders depend of these dividends to live. Although they can be skipped without causing a default, stock prices will fall, stockholders will be unhappy and managers may be fired!
Income taxes. Corporations that make money pay income taxes. They must be estimated and paid quarterly. A corporation may get a refund when losses occur.
Accounts receivable. This is what we wait for! If everything goes as planned the flow into the cash reservoir from this source will be large enough to meet all the drains with some left over for growth. For many firms this inflow is very uneven and unpredictable. The greater the unpredictability the bigger the cash balance must be to avoid a crisis.

A financial manager must be able to look at any of the events that occur in a firm and be able to predict what and when the resultant cash flows will be. This is very difficult to do and is one of the reasons financial management can be a very stressful occupation.

from:http://academic.uofs.edu

Liquidity Crises Management

2006-03-19T04:17:00.000-08:00

What is a liquidity crisis?

A liquidity crisis occurs whenever a firm is unable to pay its bills on time or lacks sufficient cash to expand inventory and production or violates some term of an agreement by letting some of its financial ratios exceed limits. It is the financial manager's job to ensure that this never happens. But it happens and all interests involved start to scramble to protect their positions.

Consider the following example:

SITUATION This company has received a call from its bank informing it that the company has violated some terms of its loan agreement, specifically, that debt ratio exceeded 55% and that the current ratio has fallen below 2.0. These ratios are highlighted in the table of ratios below.

Technically the bank could call the loan for the complete amount outstanding . If the company cannot repay in ten days then it could be forced into bankruptcy. You are surprised at this turn of events since you were going to the bank tomorrow anyway to ask for for an additional $1,000,000 to meet a payment due to the construction company working on the expansion of your facilities.

You will have to calculate whether you would be able to repay the existing loans to the bank and the additional money you want to borrow within six months if you could get your average collection period in line with the industry average and also do the same with your inventory turnover. Assume that you will generate cash from operations and depreciation at the same rate that you did last year for one half year.

FOREST RESOURCES CORP. BALANCE SHEETS
amounts in thousands of dollars	1993	1994	1995
CASH	807	628	612
ACCOUNTS RECEIVABLE	2682	2896	4605
INVENTORY	2970	5181	7319
LAND BUILDINGS PLANT & EQUIP	2786	3153	3558
ACCUMULATED DEPRECIATION	470	730	1050

TOTAL ASSETS	8775	11128	15074

SHORT TERM LOANS	500	800	2860
ACCOUNTS PAYABLE	1061	1648	3137
ACCRUALS	540	800	1150
LONG TERM BANK LOAN	1000	1500	1500
MORTGAGE	450	408	367
COMMON STOCK[3.65 MILL.SHS]	3650	3650	3650
RETAINED EARNINGS	1574	2322	2410

TOTAL LIABILITIES AND CAP	8775	11128	15074
-	-	-	-
INCOME STATEMENTS
	1993	1994	1995
NET SALES	26820	28996	30703
COST OF GOODS SOLD	21216	23550	26140
GROSS PROFIT	5604	5416	4563
AMN AND SELLING EX	2006	2407	2648
DEPRECIATION	250	260	320
MISC EX	318	558	898

EBIT	3030	2191	697
INTEREST SHORT TERM	50	88	286
INTEREST LONG TERM	0	150	150
INTEREST MORTGAGE	41	37	33
NET INCOME BEFORE TAXES	2939	1916	228
TAXES	1411	919	110
NET INCOME AFTER TAXES	1528	997	118
DIVIDENDS	382	249	30
INCREASE IN RETAINED EARNINGS	1146	748	88
Ratio Analysis
	1993	1994	1995	INDUSTRY AVG
-	-	-	-	-
CURRENT RATIO	3.07	2.68	1.75	2.5
QUICK RATIO	1.66	1.08	0.73	1
DEBT RATIO %	0.4	0.46	0.6	50
TIMES INTEREST EARNED	16.79	3.63	0.25	7.7
INVENTORY TURNOVER[COST]	7.14	4.55	3.57	4.7
INVENTORY TURNOVER[SELLING]	9.03	5.6	4.19	7
FIXED ASSET TURNOVER	11.58	11.97	12.24	12
TOTAL ASSETS TURNOVER	3.06	2.61	2.04	3
AVERAGE COLLECTION PERIOD	36	36	54	25
PROFIT MARGIN %	5.7%	3.4%	0.4%	2.9
GROSS PROFIT MARGIN %	20.9%	18.7%	14.9%	18
RETURN ON TOTAL ASSETS %	17.4%	9%	0.8%	8.8
RETURN ON OWNERS EQUITY %	29.2%	16.7%	1.9%	17.5
DIVIDEND PAYOUT RATIO	25%	25%	25.4%	20%

Using Logic to Attack this problem

This situation is a problem for the company and the bank:

The company has a problem because it owes the bank more than the amount of cash available.
The bank has a problem because this company has become a problem loan and causes additional burden from bank regulators.

What are the alternatives?

Bank calls the loan.
Bank gives company more time but does not lend additional money needed.
Bank lends additional money and does not call the loan.

If the bank calls the loan the company has ten days to come up with the money. There is not enough cash so they might seek another bank to arrange financing. However with the lousy financial ratios they have at the present time, no sane banker would lend them the money. The company would default [not be able to pay], and bankruptcy would start. The bank may have to wait years and only recover a small percentage of what is owed.

If the bank does not call the loan the company will still be unable to meet the progress payment to the contractor who will then probably start the bankruptcy proceedings anyway. So alternative #2 really is not viable in this case.

If the bank lends the additional money, the crises will be averted for the moment, but how will the bank be able to protect its interest? And, is it really throwing good money after bad.

The bank is in the driver's seat and will have to make a quick determination if the company is better off dead or alive.

Method of Analysis

Facts

Poor Management of Accounts Receivable.Average Collection Period
Poor Management of Inventory.Inventory Turnover Ratio

What needs to be discovered

How much cash would be produced if the Accounts Receivable and the Inventory were lowered to a proportion consistent with the Industry Average?
How much cash will be gained or lost from operations while the Accounts Receivable and Inventory are reduced?
Is the total cash potential above greater than the total amount owed the bank and the contractor?

Actions

If the cash potential is greater than the need, force an change in management and make additional loan.
If the cash potential is less than the need, start bankruptcy proceedings immediately!

Calculating the Cash Potential

The important thing to realize is that the existing management is much worse than the industry average. If the company were managed at the industry average level there would be a lot less receivables and inventory. Inventory would be sold off and old account balances would be collected.

Amount of Cash Available from Receivables
Actual Accounts Receivable	[from the balance sheet]	4605
Ideal Accounts Receivable	[ind ACP times avg. daily sales	2132
Cash potential		2473

Amount of Cash Available from Inventory
Actual Inventory	[from the balance sheet]	7319
Ideal Inventory	[Sales divided by ind Inventory turnover	6533
Cash Potential		786

Amount of Cash Available from Operations
Estimated net income	[one half of last year's]	59
Depreciation	[one half of last year's]	160
Cash Potential		219

Decision Table
Total Cash Available	[sum of above three tables]	3478
Total Cash required	[sum of bank loans + amount due contractor]	3860
Decision		Bankruptcy

Implementation

If the decision is made to go with bankruptcy it is basically a legal process to protect the rights of all the creditors.

If the decision is made to continue in operation the bank must do something to insure that the old way of managing inventory and receivables stops

from:http://academic.uofs.edu

Financial Forecasting and Pro-Forma Statements

2006-03-19T04:15:00.000-08:00

Financial Forecasting and Pro-Forma Statements

These pages are designed for students in Intro to Finance and other elementary Finance courses.

These pages are not meant to replace your textbook. They are provided as an adjunct to help you with practical problems and assignments.

The format of the balance sheet and income statement can be used as a format for planning the next period. This form of planning is called Pro-Forma financial statements. It can be as simple or complex as the situation and time warrants. The simplest format is the best to start the analysis. More omplications can be added later to better simulate the real situation.

The Percent of sales method

This method simply takes the last available year and uses the balance sheet and income statement to forecast next year by assuming that most items on the statements will have to go up if sales go up.

Big assumption! The company is efficiently run and has just the ideal amount of assets and liabilities for the existing situation. This assumption will have to be faced later. Keep it in mind for now.

Some liability and equity accounts can be tapped by the financial manager for any external financing needed. This is called negotiated sources. It is the amount that you plug in somewhere to make the balancesheet balance. The accounts that will go up with sales are called spontaneous.

The % of sales column is calculated based on 1996 account proportions to sales. Multiply the Percentage by the forecasted 1997 sales.

The 1997 Sales = 1 + the sales growth rate times 1996 Sales.

External Financing Needed

External financing needed is equal to the amount of extra money needed because assets increase minus the money provided by increased liabilities and minus the amount of increase in retained earnings for 1997 minus less any dividends paid.

EFN= (SalesInc X Asset%) -( SalesInc X Liability%) -( Net Profit -Dividends)

EFN= (5011766 X .08) X .93)) - (5011766 X .08) X .17) - (5412707 X .02 X .5)= 252060

Using the values in the table below may differ a little because of rounding in the % of Sales shown.

Balance Sheet
	12-31-96	%of Sales	1997 Forecast
ASSETS
Cash	175500	4	189540
Accounts Receivable	1875250	37	2025270
Inventory	146890	29	1573441
Plant and Equipment	1155250	23	1247670
Total Assets	4662890		5035921
Liabilities & Capital
Accruals	275000	5	297000
Accounts Payable	560550	11	605394
Notes Payable [current]	800000	negotiated	1052060
Mortgage Bonds	1000000	negotiated	1000000
Preferred Stock	225000	negotiated	225000
Common Stock	300000	negotiated	300000
Retained Earnings	1502340	from income statement	1556467
Total Lia. & capital	4662890		5035921

Other Data for Planning
Net profit margin on sales	.02
Rate of growth in Sales	.08
Dividend Payout ratio	.50
1996 Sales	5011766
Assume all external financing needed is secured by new notes payable

Notice that the retained earnings go up by the amount of profit minus dividends and that the EFN was added to the Notes Payable ,plugged. The balance sheet balances !

If the Financial manager is unable to get this full amount of financing somewhere the company will run out of money or inventory and be unable to make the projected sales growth.

Once this simple method is used to forecast each balance sheet item the same process can be used for the income statement. More realistic estimates will probably have to be substituted for Plant and Equipment increases as they tend to be lumpy and not really just a percentage of sales. For example, if there is excess manufacturing capacity, no increase in Plant and Equipment may be necessary and this would substantially reduce the EFN requirement.

from:http://academic.uofs.edu

Financial Statement Analysis

2006-03-19T04:14:00.000-08:00

These pages are designed for students in Intro. to Finance and other elementary Finance courses.
Financial Statement analysis involves using the output of the standard business information system found in all businesses to judge the performance and riskiness at an instance or over time. A business may have other information systems for managers but all business must conform with generally accepted standards with their accounting statements.

There are several steps in the use of Financial Statement Analysis:

Understanding the basic statements
Inherent problems with the system
Use of ratio analysis
Interpreting the analysis
Using the analysis
Basic Financial Statements
Income Statement
INCOME STATEMENT
for the year ending
December 31, 1996

Sales 5,011,766
Cost of goods sold 3,758,825
Gross Profit 1,252,942
Expenses:
Selling 353,300
General and administrative 250,025
Depreciation 102,000
Miscellaneous 65,927

Net Profit 481,490

The Income Statement presents a picture of the activity of the firm for the last year and tries to give the reader an impression of whether or not there was an increase in wealth or the value of the firm. Since most of the values shown represent summaries of cash flows during the year there is much to be learned from this statement. Some expenses do not represent cash flows such as depreciation and some very large cash flows from financing and capital improvements are missing from the Income Statement. But it is a good place tostart analyzing the basic day to day operations of the firm. The statement of Cash flows described below is an attempt to provide the missing information.

Find the connection between the Income Statement and the balance sheet! Notice that the net income for the previous year explains the difference in retained earnings between years. Exceptions are shown in the Statement of Retained Earnings.

This connection clearly indicates that Retained Earnings is not a hoard of cash but really only a book entry reflecting cash reinvested in the business in other assets such as Accounts Receivable or Plant and Equipment.

Notice that there are two measure of profit shown, Gross Profit and Net Profit. Gross Profit gives an indication of the level of markup maintained. This can also be viewed as a measure of the amount of competition in the industry.

Balance Sheet
Balance Sheet
12-31-93 12-31-94 12-31-95 12-31-96
ASSETS
Cash 400000 250000 300000 175500
Accounts Receivable 1050000 1350000 1560500 1875250
Inventory 610000 789150 1060350 146890
Plant and Equipment 1240000 1260000 1100000 1155250
Total Assets 3300000 3649150 4020850 4662890
Liabilities & Capital
Accruals 150000 75000 250000 275000
Accounts Payable 250000 350000 425000 560550
Notes Payable [current] 760000 800000 800000 800000
Mortgage Bonds 1000000 1000000 1000000 1000000
Preferred Stock 225000 225000 225000 225000
Common Stock 300000 300000 300000 300000
Retained Earnings 615000 899150 1020850 1502340
Total Lia. & capital 3300000 3649150 4020850 4662890

The Balance Sheet presents a summation of the entries made in the accounting system of a business over a long period of time. The titles on the statement refer to the account name in the bookkeeping system and may not accurately reflect what we might think of as "real" value today. The more short-lived an asset is or the more often it turns over, the more likely the statement value will reflect real value. The bookkeeping value for Plant and Equipment is especially inaccurate for old companies as amounts are added for the cost of equipment purchases and amounts are deducted for deprecation according to arbitrary methods. The balances shown for Preferred Stock and Common Stock and Retained Earnings bear no relationship to reality and should be used with caution. Equity market values should be used instead.

Balance Sheets are shown for several consecutive years to give an impression of the direction of growth and progress. No attempt is made by the company to account for the generally decreasing purchasing power of the currency over time!

Financial Statement Analysis should concentrate on evaluating the current assets and liabilities in proportion to the level of sales and profits shown in the income statement. Analysis or ratios using book values for Plant and Equipment or Equity Capital items should be used with caution and viewed with suspicion!

Statement of Retained Earnings

STATEMENT OF RETAINED EARNINGS
for the year ending
December 31, 1996
Balance of retained earnings, December 31, 1995 1,050,000
Add: 1996 Net Income 350,000
Less Dividends to stockholders 120,000
Less Loss on Abandoned Operations 100,000
Balance of retained earnings December 31, 1996 1,280,000

The Statement of Retained Earnings is straightforward and simple and shows the reconcilement of the Retained Earnings account as the result of a year's activities. It purports to show how much the stockholder's equity increased or decreased as a result of the year's activities.

Statement of Cash Flows
Although it may seem strange at first, Financial managers are always more concerned about cash flows than they are about profit. Profit is important in the long run for survival and growth but cash flow problems can be aggravated by the very conditions that lead to enhanced profitability. Running out of cash can cause default and bankruptcy and is a major headache for financial managers. The financial statements can give a view of where the money came from and where the money went throughout the past year.

A two stage process is necessary to analyze cash flows:

Source and use of cash statement
Statement of cash flows for the period.
The source and use of cash statement is prepared by looking at consecutive year balance sheets and the last year's income statement.

Cash Sources and Uses During 1996
12/31/96 12/31/95 Sources Uses
Cash 20 40 20
Accounts Receivable 180 160 20
Inventory 270 200 70
Gross Plt & Equip 680 600 80
Accounts Payable 30 15 15
Accruals 60 55 5
Notes Payable 40 35 5
Long Term Bonds 297 255 42
Common Stock 130 130

Net Income 62 62
Depreciation 50 50
Dividends 29   29
Totals   199 199

Notice that when comparing balance sheet accounts, increases in liabilities and decreases in assets are sources of funds and increases in assets and decreases in liabilities are uses of funds. Don't go further until you understand why this works out!

Notice that from the income statement we only need net income and depreciation. Depreciation is a source of funds because income is a source and the accountant subtracted depreciation to get net income. Depreciation is a non-cash expense so the accountant made a mistake, in a financial sense.

Statement of Cash Flows
The statement of cash flows merely takes the information gathered above in the sources and uses statement and uses them to reconcile the change in the cash account from the beginning of the year to the end of the year. Further, this statement classifies the cash flows according to operating activities, long term investing activities, and financing activities. It is like a quick replay of all of the financial manager's cash activities for the year.

Statement of Cash Flows for the Period Ending December 31, 1995
Cash Flows from Operating Activities
Net Income 62
Depreciation 50
Increase in Accounts payable 15
Increase in accruals 5
Increase in Accounts receivable (20)
Increase in Inventory (70)
Net cash flow from operations 42
Cash flows from long term investingactivities
Purchase of fixed assets (80)
Cash flows from financing activities
Increase in notes payable 5
Increase in bonds 42
Dividend payment (29)
Net cash flow from financing 18
Net change in cash (20)
Cash at beginning of the year 40
Cash at the end of the year 20

You only really understand these Cash flow statements when you can look at each item in the cells and by observing whether it is positive or negative describe in words what must have happened in the business to cause it. If you cannot do this easily let me know and I will try to have your Accounting credits revoked!

Ratio Analysis
You may be able to discover facts and trends about the risk and profitability of a company and also something about the quality and efficiency of the management by examining the financial statements. This process is called ratio analysis and is not perfect nor does it give definitive answers but it can serve as an early warning or alarm system to alert owners, lenders and managers to general problems. It is very common in everyday use.

There are several steps to implementing and understanding ratio analysis:

Calculating Key ratios from the latest and earlier financial statements.
Gathering industry average ratios
Making the comparisons.
Making recommendations for action.

Calculating key financial ratios
There are four types of ratios:

Liquidity
Leverage
Efficiency
Profitability
Liquidity Ratios
These ratios are the most used. Both creditors and managers need to keep a close watch on the following measures. They predict the ability of the firm topay its bills on time.

Current Ratio

Quick or Acid test

Leverage Ratios
Debt ratio.

Debt to equity ratio

Efficiency Ratios
Average Collection period or number of days sales outstanding in receivables. 360 days is traditionally usedto measure average daily sales.

Inventory Turnover can be based on sales or cost of goods sold, both shown on the income statement. Industry average figures are often shown both ways.

Profitability Ratios
Owners Equity = Common stock = Preferred Stock + Retained Earnings. This number represents the rate of return earned on the book value of the owners investment.

The Price Earnings ratio is astock market oriented measure of profitability and stockholder's expectations.

Use of Financial Ratios
The use of financial ratios involves comparison of one company's values to that of a group of similar companies and the comparison of a company's ratios over time.

Commercial sources of industry data. Convenient printed forms of the data are available at the Weinberg Library Reference Desk. You will need to look upthe company's SIC [Standard Industrial Classification], also available at the same Reference Desk.

Dun @ Bradstreet
Robert Morris Associates
These industry averages are made by statistical surveys of companies. The data are stratified according to size of assets and sales in the RMA guide. Since the company you are studying will always have a value that is different from the industry average you will be faced with the question whether the deviation is significant. To help you answer this question the industry sources will also present upper and lower quartile values for each ratio. With this information you can judge whether you company is close to the average or really far away from it. It is not wrong to have an average that is different but it does indicate a need for an explanation.

Using the balance sheet data above and some industry averages:

RATIO ANALYSIS 1993 1994 1995 1996 IND LO IND AVG IND HI
Current Ratio 1.78 1.95 1.98 2.14 1.52 1.66 1.83
Quick Ratio 1.25 1.31 1.26 1.25 .98 1.30 1.61
Debt Ratio .65 .61 .62 .57 .33 .51 .61
InventoryTurnover 9.31 6.53 4.7 3.44 6.01 7.34 8.56
ACP 39 55 76 105 45 51 77

It should be quite clear from the above information that the company was close to the industry averages in 1993 but as time has passed it has clearly accumulated too much Inventory and Accounts receivable for the size of its business.

ttp://academic.uofs.edu

E-Commerce Tutorial — Lesson

2006-03-19T04:10:00.000-08:00

One of the most popular Internet myths claims that building an online store is easy: All the customer has to do is point, click, and buy! But in reality, successful e-commerce is far more complex and unlike any other website project you may have tackled in the past. Before that first cyberbuck finds its way into your bank account, you need to do considerable research and planning.

That's where this tutorial comes in. We'll help you jump-start your brain and get you thinking about all the issues that need addressing before you can put together a successful online business plan. You get all this in just five easy lessons!

Lesson 1: Getting Started and Making a Plan
When it comes to getting your e-commerce site started, don't just dive right into the deep end. Instead, get your feet wet with an advance plan.
Lesson 2: How to Sell, Sell, Sell!
To find out which online sales techniques best suit your business and products, look and learn from the different approaches employed by companies that have already taken the online business plunge.
Lesson 3: Transactions
Roll up your sleeves and get technical with the nitty-gritty of transactions, credit cards, tax, shipping, integration with fulfillment systems, and customer service.
Lesson 4: Build, Buy, or Rent?
There are lots of prepackaged e-commerce solutions out there. Before you decide which one makes the most sense for you, take a look at the technology issues related to doing business online.
Lesson 5: Building your Customer Base
Well, your site's built, but that doesn't mean your work's finished. Now you need to get paying customers to come in. Learn how to attract new customers by improving the effectiveness of your marketing programs and fine-tuning your site.

MBA Programs Worldwide

2006-03-10T16:36:00.000-08:00

The Master of Business Administration Degree (MBA) is the most popular business qualification in the world, and is fast becomming a prerequisite for management positions.

The MBA is by its nature a general management qualification. An MBA program usually consists of a core curriculum covering the functional areas of management, including information systems, finance and accounting, and human resources, to name a few. The second stage of the MBA course is usually made up of a choice of electives (optional courses), to allow the student to either continue with general studies or to specialise in a particular subject or area. All this is taught through a variety of means, for example, lectures, study groups and case studies.

This site aims to help you choose the right MBA program for you, whether by full time study or via an online MBA. The articles in the left hand navigation bar offer general advice by geographic region whilst our mba programs article index contains a range articles on more specific MBA courses and advice in general. Best of all we also offer a Free Application & Information Service.

The MBA qualification began in the US about 90 years ago. Today, well over 1000 business schools, universities and other institutions across the world offer MBA programs, and these can differ vastly according to tradition and background. There are also innumerable methods of study, for example, full-time, part-time, modular and distance learning. With this bewildering choice on offer, how can a potential student decide which is the best programme for them?

Cost Considerations
Undertaking an MBA course is a large commitment both in terms of time (full-time programmes run for one or two years) and money (good quality courses cost in the region of £15,000 to £20,000). Therefore, before selecting an MBA program, it is important to ask yourself why you are pursuing the qualification in the first place.

The main reasons quoted by students for choosing to embark upon this route of study are for an increase in salary; to open new career opportunities; to further a career and to extend personal networks. A good quality course will allow for all of these by developing participants' personal skills at the same time as extending their knowledge base in the general management disciplines in the context of global business. MBA programs are an educational course, and as such should challenge students' assumptions and attitudes. Furthermore, knowledge accrued on the course should be highly transferable to the world of work. The courses which achieve this most effectively bring together top quality faculty with students from a variety of backgrounds who possess a wealth of experience and ambition (at Cranfield, for example, students on the full-time programme have an average of nine years' business experience). This combination produces the best possible educational experience which broadens horizons and equips the individual to embrace challenge and change in the future.

Management information system

2006-03-05T10:17:00.000-08:00

Management information systems (MIS) are information systems, typically computer-based, that are used within an organization. WordNet describes an information system as "a system consisting of the network of all communication channels used within an organization". A management information system may also be defined as "a system that collects and processes data (information) and provides it to managers at all levels who use it for decision making, planning, program implementation, and control". An information system is comprised of all the components that collect, manipulate, and disseminate data or information. It usually includes hardware, software, people, communications systems such as telephone lines, and the data itself. The activities involved include inputting data, processing of data into information, storage of data and information, and the production of outputs such as management reports.
As an area of study it is commonly referred to as information technology management. The study of information systems is usually a commerce and business administration discipline, and frequently involves software engineering, but also distinguishes itself by concentrating on the integration of computer systems with the aims of the organization. The area of study should not be confused with computer science which is more theoretical in nature and deals mainly with software creation, or computer engineering, which focuses more on the design of computer hardware.
In business, information systems support business processes and operations, decision-making, and competitive strategies.

The functional support role

Business processes and operations support function is the most basic. It involves collecting, recording, storing, and basic processing of data. Information systems support business processes and operations by:

recording and storing sales data, purchase data, investment data, payroll data and other accounting records
processing these accounting records into income statements, balance sheets, ledgers, management reports, and other forms of financial information
recording and storing inventory data, work in process data, equipment repair and maintenance data, supply chain data, and other production/operations records
processing these operations records into production schedules, production controllers, inventory systems, and production monitoring systems
recording and storing personnel data, salary data, employment histories, and other human resources records
processing these human resources records into employee expense reports, and performance based reports
recording and storing market data, customer profiles, customer purchase histories, marketing research data, advertising data, and other marketing records
processing these marketing records into advertising elasticity reports, marketing plans, and sales activity reports
recording and storing business intelligence data, competitor analysis data, industry data, corporate objectives, and other strategic management records
processing these strategic management records into industry trends reports, market share reports, mission statements, and portfolio models
use of all the above to implement, control, and monitor plans, strategies, tactics, new products, new business models or new business ventures.

The decision support role

The business decision making support function goes one step further. It is an integral part of making decisions. It allows users to ask "What if…?" questions: What if we increase the price by 5%? What if we increase price by 10%? What if we decrease price by 5%? What if we increase price by 10% now, then decrease it by 5% in three months? It also allows users to deal with contingencies: If inflation increases by 5% (instead of 2% as we are assuming), then what do we do? What do we do if we are faced with a strike or a new competitive threat?

The most basic and most versatile business decision making tool is the spreadsheet, but spreadsheets are not user friendly. More sophisticated programs often seamlessly incorporate statistical decision making tools like sensitivity analysis, Monte Carlo analysis, risk analysis, break even analysis and Bayesian analysis. If, for example, you are using the information system to decide about a new product introduction, the program should incorporate tools like logit analysis, B.C.G. Analysis, conjoint analysis, contribution margin analysis, multi dimensional scaling, G.E. Multi Factoral analysis, factor analysis, cluster analysis, discriminant analysis, Quality Function Deployment, preference regressions, and preference-rank translations.

[edit]

The communication decision support system role

Information systems can support a company's competitive positioning. Here are three levels of analysis:

1. The supports for help in piloting the chain of internal value. They are the most recent and the most pragmatic systems within the reach of the manager. They are the solutions to reductions of costs and management of performance. They are typically named "Business Workflow Analysis" (BWA) or of "Business Management Systems p2p". Tool networks, they ensure control over piloting the set functions of a company. The real-time mastery in the costs of dysfunctions cause distances from accounts, evaluation and accounting that are presented in the evaluation and qualitative reports.

2. All successful companies have one (or two) business functions that they do better than the competition. These are called core competencies. If a company's core competency gives it a long term advantage in the marketplace, it is referred to as a sustainable competitive advantage. For a core competency to become a sustainable competitive advantage it must be difficult to mimic, unique, sustainable, superior to the competition, and applicable to multiple situations. For a small or medium business a nice alternative is a MSP or a Managed Service Provider such as Virtual IT Solution, LLC http://www.virtualitsolution.com .This is a cost effective solution compared to paying for a IT staff or local technicians. Other examples of company characteristics that could constitute a sustainable competitive advantage include: superior product quality, extensive distribution contracts, accumulated brand equity and positive company reputation, low cost production techniques, patents and copyrights, government protected monopoly, and superior employees and management team. The list of potential sustainable competitive advantage characteristics is very long. However, some experts hold that in today's changing and competitive world, no advantage can be sustained in the long run. They argue that the only truly sustainable competitive advantage is to build an organization that is so alert and so agile that it will always be able to find an advantage, no matter what changes occur.

3. Information systems often support and occasionally constitute these competitive advantages. The rapid change has made access to timely and current information critical in a competitive environment. Information systems, like business environmental scanning systems, support almost all sustainable competitive advantages. Occasionally, the information system itself is the competitive advantage. One example is Wal-Mart. They used an extranet to integrate their whole supply chain. This use of information systems gave Sam Walton a competitive advantage for two decades. Another example is Dell Computer. They used the internet to market custom assembled PC's. Michael Dell is still benefitting from this low-cost promotion and distribution technique. Other examples are eBay, Amazon.com, Federal Express, and Business Workflow Analysis Oberon-bwa.

The performance monitoring role

MIS are not just statistics and data analysis. They have to be used as an MBO (Management by Objectives) tool. They help:

to establish relevant and measurable objectives
to monitor results and performances (reach ratios)
to send alerts, in some cases daily, to managers at each level of the organisation, on all deviations between results and pre-established objectives and budgets.

from :http://en.wikipedia.org

Potential benefits of MIS investments

2006-03-05T10:16:00.000-08:00

Potential benefits of MIS investments

There are many ways that a company can benefit from investing in information systems.

Leverage IT investment that supports their core competency. Successful firms tend to have one or two core competencies that they can do better than their competitors. It may be anything from new product development to customer service. Information technology is often an important input into this core competency. This IT investment in a company's core competency can be a significant barrier to entry for other companies.
Leverage IT investment in supply chain networks. Firms that are a part of an integrated supply chain system have established relationships of trust with suppliers. This usually ensures quicker deliver times, problem-free delivery and an assured supply. It can also entail price discounts and other preferential treatment. The inability of new entrants to get onto a supply chain/inventory management system can be a major barrier to entry.
Leverage IT investment in distribution channel management. As with supplier networks, investment in distribution channel management systems can ensure quicker delivery times, problem free delivery, and preferential treatments. The investment in this technology, and the experience gained in learning how to use it, can be an important barrier to entry. When the distribution channel management system is exclusive, it may give you some control over access to the retailers involved.
Leverage IT investment in brand equity. Often firms have invested large sums of money in brand advertising. This is facilitated by investment in marketing information systems and customer relationship management system. An indomitable brand name is a formidable barrier to entry.
Leverage IT investment in production processes (1). Information systems have become a necessity in managing large production runs. Automated systems are the most cost efficient way of organizing large scale production processes. These firms can obtain economies of scale in promotion, purchasing, and production; economies of scope in distribution and promotion; reduced overhead allocation per unit; and shorter break-even times more easily. This absolute cost advantage can be an important barrier to entry.
Leverage IT investment in production processes (2). Investment in IT allows a company flexibility in their overall output level. Michael Porter claims that economies of scale are a barrier to entry, aside from the absolute cost advantages they provide. This is because, a company producing at a point on the long-run average cost curve where economies of scale exist has the potential to obtain cost savings in the future, and this potential is a barrier to entry.
Leverage learning curve advantages from experience with IT. As a company gains experience using IT systems, they become familiar with a set of best practices that are more or less known to other firms in the industry. Firms outside the industry are generally not familiar with the industry specific aspects of using these systems. New entrants will be at a disadvantage unless they can redefine the industries best practices and leap-frog existing firms.
Leverage IT investment in mass customization production processes. IT controlled production technology can facilitate collaborative, adaptive, transparent, or cosmetic customization. This flexibility can increase margins, increase customer satisfaction, and be a significant barrier to entry.
Leverage IT investment in computer aided design (1). CAD systems facilitate the speedy development and introduction of new products. This can create proprietary product differences. Product differentiation can be a barrier to entry.
Leverage IT investment in computer aided design (2). CAD systems facilitate the speedy development and introduction of new products. Proprietary product differences can be used to create incompatibilities between competing products (as every computer user knows). These incompatibilities increase consumers’ switching costs. High customer switching costs is a very valuable barrier to entry (Just ask Bill Gates.).
Leverage IT investment in E-commerce. Company web sites can be personalized to each customers interests, expectations, and commercial needs. They can also be used to create a sense of community. Both of these tend to increase customer loyalty. Customer loyalty is an important barrier to entry.
Leverage IT investment in stability. Technologically sophisticated firms with multiple electronic points of contact with customers, suppliers, and others appear to be more stable. This monumental appearance of stability can be a barrier to entry. This is particularly true in financial services.
The simple fact that IT investment requires funds make it a barrier to entry. Anything that increases capital requirements is a barrier to entry.

Historical development

The role of business information systems has changed and expanded over the last four decades.

In the incipient decade (1950s and '60s), “electronic data processing systems” could be afforded by only the largest organizations. They were used to record and store bookkeeping data such as journal entries, specialized journals, and ledger accounts. This was strictly an operations support role. By the 1960s “management information systems” were used to generate a limited range of predefined reports, including income statements (they were called P & L’s back then), balance sheets and sales reports. They were trying to perform a decision making support role, but they were not up to the task.

By the 1970s “decision support systems” were introduced. They were interactive in the sense that they allowed the user to choose between numerous options and configurations. Not only was the user allowed to customize outputs, they also could configure the programs to their specific needs. There was a cost though. As part of your mainframe leasing agreement, you typically had to pay to have an IBM system developer permanently on site.

The main development in the 1980s was the introduction of decentralized computing. Instead of having one large mainframe computer for the entire enterprise, numerous PC’s were spread around the organization. This meant that instead of submitting a job to the computer department for batch processing and waiting for the experts to perform the procedure, each user had their own computer that they could customize for their own purposes. Many poor souls fought with the vagaries of DOS protocols, BIOS functions, and DOS batch programming.

As people became comfortable with their new skills, they discovered all the things their system was capable of. Computers, instead of creating a paperless society, as was expected, produced mountains of paper, most of it valueless. Mounds of reports were generated just because it was possible to do so. This information overload was mitigated somewhat in the 1980s with the introduction of “executive information systems”. They streamlined the process, giving the executive exactly what they wanted, and only what they wanted.

The 1980s also saw the first commercial application of artificial intelligence techniques in the form of “expert systems”. These programs could give advice within a very limited subject area. The promise of decision making support, first attempted in management information systems back in the 1960s, had step-by-step, come to fruition.

The 1990s saw the introduction of “strategic information systems”. This was largely because of developments in the subject of strategic management by scholars like M. Porter, T Peters, J. Reise, C. Markides, and J. Barney in the 1980s. Competitive advantage became a hot management topic and software developers were happy to provide the tools.

The role of business information systems had now expanded to include strategic support. The latest step was the commercialization of the Internet, and the growth of intranets and extranets at the turn of the century. manager are mad to study all thesed drap

from :http://en.wikipedia.org

Academic programs in information systems

2006-03-05T10:14:00.000-08:00

Research Centers

European Research Center for Information Systems (ERCIS), Münster
ISRC at the University of Houston

Universities

Management Information Systems, University of Alabama
Department of Management Information Systems, University of Arizona
School of Information & Management Systems, University of California, Berkeley
Department of Computer Information Systems, California State Polytechnic University, Pomona
Management Information Systems, Brigham Young University
Master of Information Systems Management, Carnegie Mellon University
Department of Information Systems, Case Western Reserve University
School of Information Systems and Technology, Claremont Graduate University
Department of Management Information Systems, University College Dublin - National University of Ireland, Dublin
Department of Management Information Systems, University of Central Florida
Department of Management Information Systems & Operations Management, East Carolina University
Department of Decision and Information Sciences, Warrington College of Business Administration, University of Florida
College of Information, Florida State University
College of Management, Georgia Institute of Technology
Department of Management Information Systems, University of Georgia
Department of Computer Information Systems, Georgia State University
Department of Decision and Information Sciences, University of Houston
Information Systems Department, Kelley School of Business, Indiana University
Department of Management Information Systems, Indiana University of Pennsylvania
Department of Information Systems, London School of Economics
Systems & Accounting Graduate Programs, Kelley School of Business, Indiana University
Graduate School of Library and Information Sciences,University of Illinois at Urbana-Champaign
Department of Information and Decision Sciences, University of Illinois at Chicago
Department of Information Systems, University of Maryland Baltimore County
Department of Information Systems, University of Melbourne
School of Information, University of Michigan
Department of Information and Decision Sciences, Carlson School of Management, University of Minnesota-Twin Cities
Management Information Systems, University of Missouri - St. Louis
Department of Information Systems, Münster School of Business Administration and Economics, University of Münster
Master of Science in Information Systems, New York University
School of Information Sciences, University of Pittsburgh
Department of Information Systems, California Polytechnic State University, San Luis Obispo
[1], Department of Management Information Systems, The University of Southern Mississippi
Department of Information, Risk, and Operations Management, University of Texas at Austin
Management Science, University of Washington Business School, University of Washington, Seattle
Operational Research & Information Systems Group, Warwick Business School, University of Warwick
Department of Management Information Systems, University of Wisconsin - Eau Claire
[2], University of Wisconsin-Milwaukee
Department of Accounting and Information Systems, North Dakota State University

from:http://en.wikipedia.org

Morphological analysis

2006-03-05T10:09:00.000-08:00

Morphological analysis is a technique developed by Fritz Zwicky (1966, 1969) for exploring all the possible solutions to a multi-dimensional, non-quantified problem complex.

In linguistics it refers to identification of a word-stem from a full word-form. (See Morphemes).

As a problem structuring and problem solving technique, morphological analysis was designed for multi-dimensional, non-quantifiable problems where causal modeling and simulation do not function well or at all. Zwicky developed this approach to address seemingly non-reducible complexity. Using the technique of cross consistency assessment (CCA) (Ritchey, 2002), the system however does allow for reduction, not by reducing the number of variables involved, but by reducing the number of possible solutions through the elimination of the illogical solution combinations in a grid box.

References

Ritchey, T., General Morphological Analysis: A general method for non-quantified modeling (2002). Available at http://www.swemorph.com/ma.html
Zwicky, F., Discovery, Invention, Research - Through the Morphological Approach, Toronto: The Macmillian Company (1969).
Zwicky, F. & Wilson A. (eds.), New Methods of Thought and Procedure: Contributions to the Symposium on Methodologies. Berlin: Springer (1967). Available at http://www.swemorph.com/ma.html

from:http://en.wikipedia.org

Engineering management

2006-03-05T10:08:00.000-08:00

Engineering management is a field that bridges the gap between engineering and management.

Engineering Management involves the overall management of organizations with an orientation to manufacturing, engineering, technology or production. Programs are available that provide Bachelor's, Master's and Ph.D degrees. Undergraduate programs provide generalist degrees that enable engineers to better deal in the business environment. Master's Degrees in Engineering Management provide a technical-based alternative to traditional MBA programs. Industrial and professional associations such as engineers' societies also offer certification programs that validate Engineering Management knowledge and skills. Specialization areas in both degree and certification programs may include management of technology, product and process, quality, organizational management, operations management, program management, marketing and finance

Professional bodies

American Society of Mechanical Engineers (ASME)
American Institute of Chemical Engineers (AIChE)
American Society of Civil Engineers (ASCE)
American Institute of Mining, Metallurgical, and Petroleum Engineers (AIME)
American Society for Engineering Management
Canadian Society for Engineering Management

Professionl certification

Engineering Management Certification International

from:http://en.wikipedia.org

management:Benchmarking

2006-03-05T10:06:00.000-08:00

Benchmarking (also "best practice benchmarking" or "process benchmarking") is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This then allows organizations to develop plans on how to adopt such best practice, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to challenge their practices.

A process similar to benchmarking is also used in technical product testing and in land surveying. See the article benchmark for these applications.

Markets

Benchmarking may be performed in the public equity, private equity, public debt and private debt markets.

Public Equity

NAREIT, Wilshire, Morgan Stanley

Private Equity

NCREIF Family of Index Products

Public Debt

Lehman Brothers Indexes

Private Debt

Gilberto-Levy, Index of Whole Loan (Life Insurance Company’s) Returns

Benchmarking is very effictive, but there all problems with benchmarking in private equity as follows:

1. Smoothing – Not too serious of a problem because evaluation periods are long and in most cases, the returns are being compared to the NCREIF benchmark which are also smoothed.

2. Random Error (“noise”) – Need more than one observation to infer the quality of the manager. Maybe the manager just got lucky over the period in question.

Procedure

Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, reengineering analysis, process mapping, quality control variance reports, or financial ratio analysis.
Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

Cost of benchmarking

Benchmarking is a moderately expensive process, but most organisations find that it more than pays for itself. The three main types of costs are:

Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labour time.
Time costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
Benchmarking database costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

Competitive benchmarking

Some authors call benchmarking "best practices benchmarking" or "process benchmarking". This is to distinguish it from what they call "competitive benchmarking". Competitive benchmarking is used in competitor analysis. When researching your direct competitors you also research the best company in the industry (even if it serves a different location or market segment and is therefore not a direct competitor). This benchmark company is then used as a standard of comparison when assessing your direct competition and yourself.

Collaborative benchmarking

Benchmarking, originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (eg subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association VEWIN.

Advantages of Benchmarking

Benchmarking is a powerful management tool because it overcomes "paradigm blindness." Paradigm Blindness can be summed up as the mode of thinking, "The way we do it is the best because this is the way we've always done it." Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness. It helps crack through resistance to change by demonstrating other methods of solving problems than the one currently employed, and demonstrating that they work, because they are being used by others

from :http://en.wikipedia.org/

management : Balanced scorecard

2006-03-05T10:04:00.000-08:00

In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC), a method for measuring a company's activities in terms of its vision and strategies. It gives managers a comprehensive view of the performance of a business.

It is a strategic management system that forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, internal process, and learning & growth perspectives. The system consists of four processes: 1. Translating the vision into operational goals; 2. Communicate the vision and link it to individual performance; 3. Business planning; 4. Feedback and learning and adjusting the strategy accordingly.

A comprehensive view of business performance

The scorecard seeks to measure a business from the following perspectives:

Financial perspective - measures reflecting financial performance, for example number of debtors, cash flow or return on investment. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from two major drawbacks:
- They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance.
- It is common for the current market value of an organization to exceed the market value of its assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess value can be thought of as intangible assets. These figures are not measured by normal financial reporting.
Customer perspective - measures having a direct impact on customers, for example time taken to process a phone call, results of customer surveys, number of complaints or competitive rankings.
Business process perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.
Learning and growth perspective - measures describing the companies learning curve, for example number of employee suggestions or total hours spent on staff training.

The specific measures within each of the perspectives will be chosen to reflect the drivers of the particular business. The method can facilitate the separation of strategic policymaking from the implementation, so that organizational goals can be broken into task oriented objectives which can be managed by front-line staff. It can also help detect correlation between activities. For example, we might find that the internal business objective of implementing a new telephone system can help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business.

In many senses, the objectives chosen are leading indicators of future performance. Effort we make today is reflected in the future profits of the company. In this way, current expenditure can be viewed as investment in the future of the company.

Public sector Balanced Scorecard

Originally introduced as a tool intended for commercial organisations (which are focused on financial performance), the Balanced Scorecard has found considerable support and is widely used in the public sector. It is particularly popular as a public sector performance management tool in the USA, UK , Australia and Scandinavia.

Purpose of the balanced scorecard

Kaplan and Norton found that companies are using the scorecard to:

Clarify and update strategy
Communicate strategy throughout the company
Align unit and individual goals with strategy
Link strategic objectives to long term targets and annual budgets
Identify and align strategic initiatives
Conduct periodic performance reviews to learn about and improve strategy

Evolution of the Balanced Scorecard

In 1997 Kurtzman found that 64% of companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.

It is difficult to interpret the impressive survey based adoption statistics for the Balanced Scorecard, however, without being clear on how the term was both defined and understood by those participating in the survey. In practice, it appears, there are wide variations in understanding between organisations. In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon intended method of use within an organisation. They describe how Balanced Scorecard can be used to support two distinct management activities, management control and strategic control, and assert that due to differences in the performance data requirements of these applications, planned use should influence the type of Balanced Scorecard design adopted. They also describe characteristics of Balanced Scorecards appropriate for each purpose, and suggests a framework to help select between them.

Later that year the same authors reviewed the evolution of the Balanced Scorecard as a strategic management tool, recognising three distinct generations of Balanced Scorecard design. In their paper, they relate the empirically driven developments in Balanced Scorecard thinking with literature concerning strategic management within organisations. Cobbold and Lawrie argue that over the dozen years that have passed since its introduction significant changes have been made to the physical design, application and the design processes used to implement the tool within organisations. This Balanced Scorecard evolution can largely be attributed to empirical evidence of changes driven primarily by weaknesses in earlier design processes, rather than in the architecture of the original idea they write. They conclude that it is these changes, in what they refer to as 3rd Generation Balanced Scorecard that have enhanced the utility of Balanced Scorecard as a strategic management tool.

from: http://en.wikipedia.org/

Everyone has their ups and downs - know your left from your right.

2005-12-11T13:26:00.001-08:00

Assets = Liabilities + Owner's Equity

Debits = Credits

These two equations are absolute in accounting. But what are debits and credits you may ask?

They are something to memorize.

Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.

Businesses establish an account for anything they wish to keep track of separately.

Think of an account like a bucket. If you put water in, you are increasing the water in the bucket; if you pour water out, you are decreasing the water in the bucket. An account works the same way.

Let us assume that Luca Pacioli, the Franciscan monk who described the double-entry bookkeeping system over 500 years ago, said to himself:

I want everything in my system to look the same. Even though my basic equation that will rule everything that is done in the system is: Assets = Liabilities + Owner's Equity, I cannot be spending all my time worrying about that. I need to record the different transactions in one place and I need to keep the effects to the different assets, liabilities, capital, withdrawals, revenues and expenses separate. I need to show the increases and decreases to each account, but I want the accounts to look the same. How can I do that?
He decided that if he labelled the same columns in all accounts Increase and Decrease or if he labelled different columns in different kinds of accounts Increase and Decrease, he could not be sure that Assets = Liabilities + Owner's Equity without looking to make sure after each transaction was recorded nor could he list the transactions neatly in one place. It just was not possible to do both those things at the same time unless the accounts looked the same.

So, eventually along came the solution - use at least two columns in each account. Use one column for increases and one column for decreases. But, instead of using the same column for increases/decreases in every account, use one column for increases and the other column for decreases in asset accounts and use the opposite columns for increases and decreases in liability and owner's equity accounts. This allows you to list what you are going to do to each account (no matter what account) for each transaction in one place and the equation Assets = Liabilities + Owner's Equity takes care of itself without your having to worry about it.

The rules are arbitrary, but it was decided that increases to asset accounts would be shown in the left column and decreases to asset accounts would be shown in the right column. That means that increases to liability and owner's equity accounts are shown in the right column and decreases to liability and owner's equity accounts are shown in the left column. This accomplishes all of the goals. It works!

Wait a minute! What if there is an account like (Owner's Name), Withdrawals or an Expense? They decrease Capital. No Problemo! Use the left column to increase these kind of accounts because they decrease owner's equity. This just leaves one other thing to deal with.

Rather than say: put in the left column, say: Debit.

Rather than say: put in the right column, say: Credit.

Click here to contact Tutor. Click here to return to Table of Contents.
WOW!! There are no questions in this module, but there are several modules to follow that will hopefully help you to memorize debit and credit rules. Read this module again, give yourself a few minutes to relax, then try some of the following modules on debits and credits. You can also access these modules from the Table of Contents or from each successive module.

Go to:

Owner's Equity is not just another pretty phrase

2005-12-11T13:26:00.000-08:00

Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.

The names of accounts sometimes seem strange at first. This section is intended to help you learn or memorize owner's equity-type account names.

OWNER'S EQUITY, as a whole, is what the business owes the owner. It consists of different categories of accounts, each of which serve a special purpose. The business owes the owner for any monies they invest in the business. The business also owes the owner for any profit it makes. The owner must absorb any loss the business suffers. In order to know if and how the business makes profit or suffers losses, it is necessary to keep the different revenues and different expenses separate for a period of time. This helps the management of the business analyze the results of its operations. If the owner takes any assets out of the business, the business owes the owner that much less. It is good for the owner to know how much they have taken out over a period of time so this amount is kept separate for a period of time also.

(Owner's Name), Capital is the main owner's equity account. The amounts in all the other owner's equity accounts are eventually recorded in the Capital account. Any monies the owner invests in the business are entered directly into this account.

(Owner's Name), Withdrawals or Drawing account sums the assets (cash, inventory, etc.) that the owner takes out of the business for personal use. The amount in this account is eventually recorded in the Capital account and decreases the Capital account.

Revenue is what a business earns for what it is in business to do. For example, what a dry cleaning business charges for cleaning a suit is revenue. Revenue accounts can have many different names, but normally fall into one or two categories: service revenue or sales revenue. The amounts in revenue accounts are eventually put in the Capital account and these amounts increase the Capital account.

Expenses are the cost of generating revenues. In other words, expenses are the cost of doing business. There are many different kinds of expenses with many different names, but they normally fall into two or three different categories: cost of goods sold, selling expenses, general and administrative expenses. Almost all expense account names, with the exception of Cost of Goods Sold, end with "expense", such as, Wage Expense, Rent Expense, etc. The amounts in expense accounts are eventually put in the Capital account and these amounts decrease the Capital account

You owe me -- Big Time!

2005-12-11T13:25:00.000-08:00

Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.

The names of accounts sometimes seem strange at first. This section is intended to help you learn or memorize liability account names.

LIABILITIES are what the business owes outsiders. Following are some common liability accounts:

Accounts Payable is what the business owes to people or companies that it has purchased goods or services from on open account. This type of credit is normally referred to as trade credit.

Notes Payable are liabilities for which the business has issued (signed) a promissory note to pay the lender what they borrowed, plus interest. Normally, just the principal (what the business borrowed) is in the account. The interest is reported in a separate account (Interest Payable) that will be discussed later.

Accrued Expenses Payable is a category of accounts that summarize things the business has used but has not yet paid for. They are broken down into different accounts such as: Salaries and Wages Payable (for salaries and wages that have been earned by the employees but not yet paid); Interest Payable (for interest on notes payable, etc., that has accumulated on the note but has not been paid).

Unearned Revenue is used to record advance payments for goods or services that have not yet been delivered.

Customer Deposits is used to record deposits (such as rent deposits) that are made to secure payment or cover damages to

Assets are not small donkeys

2005-12-11T13:24:00.000-08:00

Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.

The names of accounts sometimes seem strange at first. This section is intended to help you learn or memorize asset account names.

ASSETS are what the business has or owns. Following are some common asset accounts:

Cash is money the business has on hand and in the bank.

Accounts Receivable is the amount of money customers owe the business for goods or services.

Inventory is the cost of goods a business buys to resell.

Prepaid Expenses is a category of accounts that summarize things that the business pays for in advance, to use in the near future. They are broken down into individual accounts such as: Supplies Inventory (for office supplies, etc.); Prepaid Insurance (businesses pay for insurance sometimes two or three years in advance); Prepaid Rent, Prepaid Interest, etc.

Land (Property), Buildings (Plant) and Equipment (all are sometimes called fixed assets) are purchased to operate the business. They are expected to last a long time. As the fixed assets are used, their cost is written off systematically - this is called depreciation. It is assumed that land cannot be used up; therefore, the cost of land is never written off in this manner. As the cost of the other fixed assets is written off, the amount is accumulated in an account that serves as an off-set against the cost of the asset.

Accumulated Depreciation is the account that is used to report the total amount that a fixed asset has been depreciated from the time it was acquired. The accounts are specific to each asset account (for example, Accumulated Depreciation - Buildings or Accumulated Depreciation - Equipment) and the balance in the accumulated depreciation account is deducted from the balance in the respective asset account to arrive at a net (undepreciated) cost for the asset. This amount is called the Book Value of the asset

What is the meaning of it all?

2005-12-11T13:23:00.000-08:00

Accounting is built around the equation: Assets = Liabilities + Owner's Equity. For the equation, and thus the accounting system to function properly, it is assumed that a business owes someone for everything it has. It is also assumed that the business is self-contained. What the business has (or owns) are called Assets and it either owes outsiders, called Liabilities, or owes the owner, called Owner's Equity, for them. The business owes the owner for any monies or other assets that the owner brings into the business (called investing). It also owes the owner for any profit it makes. The owner has to accept any loss the business suffers. In other words, profit increases what the business owes the owner and a loss decreases what the business owes the owner. Profit or Loss is a calculation of: Revenues - Expenses. If Revenues are more than Expenses, there is Profit. If Expenses are more than Revenues, there is Loss. Carried one step further, then, Revenues increase Owner's Equity and Expenses decrease Owner's Equity. Revenues are what the business earns for doing what it is in business to do. Expenses are the cost of assets the business uses to generate Revenues. The purpose of the accounting system is to keep a record of the changes in Assets, Liabilities and Owner's Equity (including Revenues and Expenses) and to report the effects of those changes. The reports are called financial statements and there are different financial statements to report different things. The Balance Sheet reports what Assets, Liabilities and Owner's Equity the business has as of a certain date. The Income Statement reports the total Revenues and Expenses and the difference (Profit of Loss) for a specific period of time (month, quarter, year, etc.). The Statement of Owner's Equity (sometimes called Statement of Changes in Owner's Equity or Capital Statement) reports why and how Owner's Equity changed for a specific period of time (month, quarter, year, etc.). The Statement of Cash Flows reports the sources and uses of Cash for a specific period of time (month, quarter, year, etc.).