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When reading an annual report, one should look at the independent accountant's statement (Table 3.13). The certificate will state that the auditing steps used in the verification of the figures meet the accounting world's approved standards of practice, and that the financial statements contained in the annual report were prepared in conformance with generally accepted accounting practices 5 .
The design engineer, by analyses of costs and profits, attempts to predict whether capital should be invested in a particular project. After the investment is made, records must be maintained to check on the actual financial results. These records are kept and interpreted by accountants. The design engineer, of course, hopes that the original predictions will agree with the facts reported by the accountant. There is little chance for agreement, however, if both parties do not consider the same cost factors, and comparison of the results is simplified if the same terminology is used by the engineer and the accountant. This chapter presents a survey of the accounting procedures usually encountered in industrial operations. Its purpose is to give an understanding of the terminology, basic methods, and manner of recording and presenting information as employed by industrial accountants.
Consider an example of a chartered accountant (CA) who is also a skilled house painter. Suppose the CA can paint her house in less time than the professional painter she is thinking of hiring. Also suppose the CA can earn 50 per hour doing her accounting and must pay the painter 15 per hour. Let's say that it will take the accountant 0 hours to paint her house the painter, 40 hours.
Costs and profits are also a source of confusion. The concept of profit to an economist differs from that of the accountant. Both consider it to be the difference between revenue and costs, but they regard costs differently. Normal profits are earned in economic analysis when total revenue equals total cost, because total costs are calculated to reflect the opportunity costs of all services provided, including that of the entrepreneur this is just enough to keep the firm in the industry (i.e., more profit cannot be earned elsewhere). Pure profit is that which arises from the excess of revenue over opportunity costs. Accounting profit has to be adjusted for owned Identifying the shape and nature of the cost function is important for many decisions. Economists view short-run cost curves as being U-shaped, while accountants see the relevant costs as being constant per unit. The two views are reconciled in the short run by proposing a bath-shaped cost curve (see Figure 8.4), with a...
The contrast between the accountant's definition-measure of cost and that of the neoclassical economist is standard fare. But this contrast when the full meaning of opportunity cost is incorporated takes on features that are even now outside the orthodox economist's kit of tools. This can be seen 22. R. H. Coase, ''Business Organization and the Accountant,'' The Accountant (October-December 1938). These articles are reprinted in David Solomons (ed.), Studies in Costing (London Sweet and Maxwell, 1952), pp. 105-58.
On cost to those of the accountant.24 Thirlby had fully incorporated the sub-jectivist economics of Wicksteed and the latter-day Austrians in his analysis, and his emphasis was on the subjectivity of costs. Citation at some length from this early paper seems warranted here
The relationship between capital and money has been a source of confusion throughout much of the history of economics. This confusion probably results from the importance of double-entry bookkeeping in the construction and revision of production plans. In order for entrepreneurs to make decisions, they have to be able to appraise in terms of money prices, including the money prices of capital goods. The accountant's balance sheet shows the value of capital in terms of a homogeneous money aggregate, even though the entrepreneur can only act on that aggregate by adjusting specific, heterogeneous capital goods. The next chapter will give a more full-blown treatment of the role of the banking system in a monetary economy, but it is worth clarifying here some of the issues relevant to the theory of capital.
Suppose Tax Advisors, Inc., has an office for processing tax returns in Scranton, Pennsylvania. Table 7.3 shows that if the office employs one certified public accountant (CPA), it can process 0.2 tax returns per hour. Adding a second CPA increases production to 1 return per hour with a third, output jumps to 2.4 returns processed per hour. In this production system, the marginal product for the second CPA is 0.8 returns per hour as compared with 0.2 for the first CPA employed. The marginal product for the third CPA is 1.4 returns per hour. MPcpa 2 0.8 seems to indicate that the second CPA is four times as productive as the first, and MPcpa 3 1.4 says that the third CPA is more productive still. In production analysis, however, it is assumed that each unit of an input factor is like all other units of that same factor, meaning that each CPA is equally competent and efficient. If individual differences do not account for this increasing productivity, what does
An economist thinks of cost differently from an accountant, who is concerned with the firm's financial statements. Accountants tend to take a retrospective look at a firm's finances because they have to keep track of assets and liabilities and evaluate past performance. Accounting cost includes depreciation expenses for capital equipment, which are determined on the basis of the allowable tax treatment by the Internal Revenue Service. For example, consider a firm that owns a building, and therefore pays no rent for office space. Does this mean that the cost of office space is zero Although an accountant would treat this cost as zero, an economist would note that the firm could have earned rent on the office space by leasing it to another company. This foregone rent is an opportunity cost of utilizing the office space and should be included as part of the cost of doing business. Accountants and economists both include actual outlays, called explicit costs, in their calculations....
The fact that a person who is an entrepreneur may also be a resource ownei obscures the nature of profit. An accountant defines enterprise profit is being i'inss receipts from sales minus total costs. Accounting profit is an ex post measurement of the performance of an enterprise. Suppose, as is often the case, that the person who assembles resources to grasp a hitherto unnntb oil profit opportunity also runs the enterprise and is its principal investor Sin h a person plays two separate roles - as a resource owner lie supplies labor and capital, and as an entrepreneur he envisions and initiates the undertaking The profit' that an accountant would calculate for this enterprise would be over stilted. To get true ex post profit two deductions would have to he made I it si, the entrepreneur must count as cost the highest amount he could earn else where by selling his managerial labor services to other enterprises. That is an nidinary factor (input) payment, a cost of production, not...
As we have already no tod, economists and accountants treat costs differently, and this is especially true in their treatment of the cost of capital. An economist views the 15 000 in interest income- that Caroline gives up every year as a cost of her business, even though iI is an implicit cost. Caroline's accountant, however, will not show this 15.0C0 as a cost because no money flows out of the business to pay for it- To furthe-r expkire the difference between economists and accountants, let's change the example slightly. Suppose now that Caroline did not have the entire 300,000 to buy the factory but, instead, used 100,000 of her own savings and borrowed 200,000 from a bank at an interest rate of 5 percent. Caroline's accountant, whoonly measures explicit costs, wOl now count t he 10,000 interest paid on the bank loan every year as a cost because this amount of money now flows out of
Now let's return to the firm's objective profit- Because economists and accountants measure costs differently, they also measure profit differently. An economist measures a firm's economic profit as the firm's total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services wild. An accountant measures the firm's accounting profit as the firm's total revenue minus only the firm's explicit costs. Figure 1 summarizes this difference. Notice that because the accountant ignores the implicit costs, accounting profit is usually larger than economic profit. For a business to be profitable from an economist's standpoint, total revenue must cover all the opportunity costs, both explicit and implk-it. QUICK QUIZ Farmer McDonald gives bar_o lessons for 20 an hour. One day. ho spends 10 hours planting 100 worth of seeds on h* farm. What opportunity cott has he Incurred What cost would his accountant measure If these seeds yield 200 worth of crops, does...
There are many other examples of the effects of the tax code on individual behavior. The author is involved with a family-owned company in Iowa. Though the company is small, it has a most elaborate corporate structure, designed for us by a tax accountant, which does indeed reduce our taxes. However, it is clearly less efficient than a simple corporate structure because resources are invested in meeting the tax provisions that might otherwise produce higher returns in another investment.
Notice that Table A2 gives the Prob-value for a one-tail test for a two-tail test the Prob-value should be doubled. Thus for the accountant, using the two-tail test, the significance level is 6.88 and this is the level at which the null hypothesis can be rejected. Alternatively we could say we reject the null with 93.12 confidence. This does not meet the standard 5 criterion (for the significance level) which is most often used, so would result in non-rejection of the null.
Formally, two-tail hypothesis tests and confidence intervals are equivalent. Any value which lies within the 95 confidence interval around the sample mean cannot be rejected as the 'true' value using the 5 significance level in a hypothesis test using the same sample data. For example, our by now familiar accountant could construct a confidence interval for the firm's sales. This yields the 95 confidence interval
For federal tax purposes, it's often best for a start-up company to be an S corporation rather than a regular corporation. This is so even though recent changes in tax rates have made the decision a bit more complex. Still, to make sure an S corporation is best for you, speak to a knowledgeable accountant or tax adviser. Also keep in mind that a limited liability company (LLC) may be an even better choice.
This distinction between explicit and implicit costs highlights an important difference between how economists and accountants analyze a business. Economists are interested in studying how firms make production and pricing decisions. Because these decisions are based on both explicit and implicit costs, economists include both when measuring a firm's costs. By contrast, accountants have the job of keeping track of the money that flows into and out of firms. As a result, they measure the explicit costs but often ignore the implicit costs. The difference between economists and accountants is easy to see in the case of Hungry Helen's Cookie Factory. When Helen gives up the opportunity to earn money as a computer programmer, her accountant will not count this as a cost of her cookie business. Because no money flows out of the business to pay for this cost, it never shows up on the accountant's financial statements. An economist, however, will count the forgone income as a cost because it...
When it is realized that in a market economy as well, the costs that a producer's accountant reports to him are to be seen as reflecting opportunity costs in a real sense, then the dependency of the supply of particular products upon costs of production becomes visible in its proper context. It is apparent, for example, that the reason why all the resources of an economy are not channeled into the production of a single product is that the costs are too high, in two senses that are ultimately equivalent to one another. First, after a point the price that must be paid for the necessary factors would become very high indeed, far higher than could be justified by the value of the product produced. Second, the channeling of all resources into a single product means the complete cessation of the supply of any other goods this sacrifice is too great. Both interpretations are ultimately equivalent in that the intolerable magnitude of the sacrifice of all other products manifests itself in...
The insights afforded by viewing production costs as sacrificed opportunities are of particular value in distinguishing sharply between the costs of production concerning which the accountant informs the entrepreneur after a process of production has been completed on the one hand, and those costs of production that are, on the other hand, involved in the entrepreneur's decision making before embarking on a production process. We are directly concerned only with the latter in the analysis of supply (although, of course, the entrepreneur's anticipations of future costs are built on his experiences in previously completed production ventures). 2 It will be remembered throughout the chapter that costs of production must, from the opportunity cost viewpoint, include not only the actual money expenditures that the producer makes to buy resources, but also those values of his own resources that he employs in production. The latter values are known as implicit costs and must be included in...
Obviously, then, economists use the term profit differently from the way accountants use it. To the accountant, profit is the firm's total revenue less its explicit costs (or accounting costs). To the economist, economic profit is total revenue less economic costs (explicit and implicit costs, the latter including a normal profit to the entrepreneur). So, when an economist says a certain firm is earning only enough revenue to cover its costs, this means it is meeting all explicit and implicit costs and the entrepreneur is receiving a payment just large enough to retain his or her talents in the present line of production.
Formulate The Linear Programming Problem That Dch Would Use To Minimize Its Total Labor Costs Per Month Showing Both
Creative Accountants, Ltd., is a small San Francisco-based accounting partnership specializing in the preparation of individual (I) and corporate (C) income tax returns. Prevailing prices in the local market are 125 for individual tax return preparation and 250 for corporate tax return preparation. Five accountants run the firm and are assisted by four bookkeepers and four secretaries, all of whom work a typical 40-hour workweek. The firm must decide how to target its pro motional efforts to best use its resources during the coming tax preparation season. Based on previous experience, the firm expects that an average of 1 hour of accountant time will be required for each individual return prepared. Corporate return preparation will require an average of 2 accountant-hours and 2 bookkeeper-hours. One hour of secretarial time will also be required for typing each individual or corporate return. In addition, variable computer and other processing costs are...
An accountant would not count the owner's opportunity cost of alternative employment as an accounting cost. An example is given in the text in which Helen runs a cookie business, but she could instead work as a computer programmer. Because she's working in her cookie factory, she gives up the opportunity to earn 100 per hour as a computer programmer. The accountant ignores this opportunity cost because money does not flow into or out of the firm. But the cost is relevant to Helen's decision to run the cookie factory.
Evans also found that S & H had not satisfied its duty to warn Mr. Lorenzen of the danger of delaying his retirement.36 Evans cited three factors which suggested that the language in the summary plan was not as clear as it appeared. First, S & H itself apparently did not understand its own retirement plan.37 Second, S & H's plan summary, its retirement plan, and ERISA's legal requirements contradicted each other, on some fairly important points. Therefore, even seemingly clear language in the plan summary is not necessarily clear, since the retirement plan and ERISA contradicted it. Third, S & H required Mr. Lorenzen to consult an accountant about the tax consequences of electing a lump sum, which suggests that it knew that a layman could not understand the consequences of the retirement plan. Therefore, Evans argues, S & H should have informed Mr. Lorenzen about the legal consequences of continuing to work past his original retirement date, since those legal consequences would also...
America's web of accounting rules, or generally accepted accounting principles (GAAP), date from the 1930s and are now produced by FASB, a private-sector body staffed by accountants. Elsewhere, accounting standards are set by private-sector groups or, in some cases, especially in Europe, directly by governments. Accounting rules outside America lean more towards principles, particularly in Britain, where the importance of providing a ''true and fair view of a company's performance overrides specific rules. But FASB's initiative would have created difficulties for companies that rely on such entities. Richard Causey, Enron's former chief accountant, wrote in to object. So did Philip Ameen, head of Financial Executives International, a corporate lobby group, and a top financial officer at GE, itself a heavy user of SPEs. In January 2001, nine months before Enron went bankrupt, FASB announced that it was putting the project on hold. In recent years, the most blatant political...
Now that we've seen that individuals typically pay to acquire their own general human capital, how is the decision made Let's take a specific example Suppose an accountant must decide on purely economic grounds whether to take a specialized course in how to handle the books of entertainment companies. It's a costly course 30,000 in tuition and another 25,000 in foregone income during the three months he is enrolled in the course. But the course will increase his income by 10,000 per year for each of the next eight years, after which he plans to retire. The principle of asset valuation plays a central role in the accountant's decision. That is, At an annual interest rate of 10 percent, the total present value of the stream of extra revenue would be 53,349. Since the course costs 55,000, it's not worth it The total present value of the additional income is less than the cost of the course. In purely economic terms, the accountant would be better off not taking the course.
The recording of the economic activities of firms and national economies. As early as 1494, double-entry bookkeeping, the basis of modern accounting, was explained in Pacioli's 'The Method of Venice', although civilizations as early as the Babylonian practised intricate accounting. In the nineteenth century, the development of joint stock companies and corporations necessitated auditing, greatly expanding the role of the accountant. Accounting has moved from financial accounting (the historical recording of past activities) to management accounting (the frequent presentation of information to managers to help them in current decision making). accounting cycle (M4) The period from the start to finish of an operational sequence. Accountants typically consider periods of a month, three months, six months or a year.
Costs are calculated in units of resource input. It usually costs'' means that a specific resource outlay is required, an outlay that can be estimated in advance with some accuracy and measured ex post either by the resource owner or by an external observer who doubles as cost accountant. The relative costs of producing are objectively quantifiable, and no valuation process is necessary. Given a standard for measurement, relative costs can be computed like the relative weights of apples or potatoes. In Smith's elementary and conjectural model, the standard for measurement is a unit of homogeneous labor time. There are no nonlabor inputs (no other negative goods''). The production functions for both deer and beaver are linear and homogeneous that is to say, deer and beaver are available in unlimited supply at prevailing relative cost ratios.
The terms gross income or gross revenue used by accountants refer to the total amount of capital received as a result of the sale of goods or service. Net income or net revenue is the total profit remaining after deducting all costs, including taxes. The role of interest on borrowed capital is clearly indicated in Fig. 5-3. Since the accountant considers interest as an expense arising from the particular method of financing, the cost due to interest is listed as a separate expense.
In an organization using the accrual method, an accountant records income and expenses when they happen, not when they are actually received or paid. In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. For example, a consultant completes a project in January but isn't paid for it at the time. The business that has been serviced recognizes all expenses in relation to that contract when they were incurred, even though the consultant has not been paid. Both the income and expenses are recorded for the current tax year, even if payment is received and bills are paid the following February.
There are other more complicated methods of fixed-asset depreciation that allow for accelerated depreciation on the front end, which is advantageous from a tax standpoint. You should seek the advice of a certified public accountant (CPA) before setting up depreciation schedules for fixed-asset purchases.
Ian Claymore is the accountant at Major Electric. He has just realized that he forgot to include in the balance sheet for November 30, 2010, a government loan of 10 000 to help in the purchase of a 25 000 test stand (which he also forgot to include). The loan is due to be repaid in two years. Ten he revises the statement, what changes should he make
We have seen in previous chapters that economists define profit narrowly. To accountants, profit is what remains of a firm's total revenue after it has paid individuals and other firms for the materials, capital, and labour they have supplied to the firm. To the economist, this definition overstates profit. The reason is that the accountant's view of profit considers only explicit costs payments made by the firm to outsiders. It ignores implicit costs the monetary income the firm sacrifices when it uses resources that it owns, rather than supplying those resources to the market. The economist considers implicit costs to be opportunity costs and hence to be real costs that must be accounted for in determining profit. Economic, or pure, profit is what remains after all costs both explicit and implicit costs, the latter including a normal profit have been subtracted from a firm's total revenue. Economic profit may be either positive or negative (a loss).
If an accountant no longer requires the ability of mental arithmetic, and can use a calculator instead, then the measure of the skill of an accountant may be reduced but the capability to perform the task of accounting remains undiminished. The chores of mental arithmetic can be replaced by electronic calculators, thus diminishing the skill of accounting, but not diminishing accounting capabilities. Similarly, much of the growth in the use of machines over the last two hundred years has been to substitute for human muscle and effort. There would thus be losses in physical strength, dexterity and stamina. In both cases some skills have declined will capabilities have been constant or enhanced.
Gantt charts are simply a visual look at the major activities involved in a project, arranged so that the viewer will see the time-based relationships of the component parts of the project. Figure 11.3 is a Gantt chart showing the activities involved in the purchase and implementation of a new accounting software system.
In this chapter we explore a concept and a practice that has grown in importance as organizations have become more complex and are continuously evolving and implementing new ideas, products, and services or seek to improve existing ones. An organization will create a project as a way to focus resources on an opportunity or issue and to serve as a way to effectively organize its efforts to achieve a specific goal or objective. In a small firm, practice, or business, a project may be the installation of a new accounting software system or the introduction of a new product or service. In large, complex organizations, several projects may be in play at the same time, with some midlevel managers whose only responsibility is the management of a stream of these short-term assignments. In the dynamic nature of today's organizational environment, project management is an important concept and tool to understand and effectively implement.
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