The engineer/technical

expert is
product/service
oriented. The
entrepreneur is profit-
oriented. These
motivations are
dramatically different.
 Business Issues for Facility Mangers
◦ Know your business
◦ Know the language of your business
◦ Understand, in details, how you affect your
company’s business
◦ Be able to use capital budget evaluation tools
◦ Institute good financial controls
◦ Implement cost reduction and containment
 To be successful Facility Manger should have
the ability to:
◦ Develop and execute facility business plan
◦ Develop, execute, and evaluate budgets
◦ Administrate charge back and allocations
◦ Understand depreciation
◦ Develop appropriate benchmarks and cost
comparators
◦ Calculate lifecycle cost
◦ Calculate cost justification and project prioritization
values
◦ Understand pertinent ratio analysis
 Operating and Capital Budgeting for the FM
 It’s a blue print for how an organization plans to operate
financially during some future period.
◦ Operating Budgets
 Methods
 Zero Based
 Incremental
◦ Negotiation
◦ Justification
 Capital Budgets
 Capital budgeting is concerned with decisions that
have significant future consequences.
 The company must determine whether it is in its best
interest to lease, build or make more efficient use of
existing space through renovation.
◦ Cost/Benefit Evaluation & Justification Methods
 Net Present Value (NPV)
 Return On Investment (ROI)
 Internal Rate of Return (IRR)
 Payback
 Profitability Index
 Capital Budgets
◦ Accept / Reject Process
◦ Time Value of Money
◦ Cash Flow Analysis
◦ Alternatives
 Life Cycle Cost Process
 Forecasting
 Assets, Liabilities & Equity
 Depreciation and Write offs
 Net Income
 Revenue
 Expenses
 Balance Sheet
 Income Statement
 Cash Flow Statement
 Ledger and Journals
 Metrics & Ratios
 Allocation / Charge Back Systems
 Tracking, Analysis and Evaluation of Cost
◦ Chart of Accounts
◦ Activity Based Costing
◦ Variance Analysis and Reporting
◦ Auditing to Control Expenses
 Reporting and Presentation
 Reporting and Presentation of Financial
Information
◦ Procurement Tools and Techniques
◦ POs and Contracts
◦ RFIs, RFQs, RFPs
◦ Evaluation and Negotiation
◦ Performance Management
 Delivering FM Services Aligned with the
Organization’s Financial Approach
◦ Investment Policies
◦ Efficiencies and Economies of Scale
◦ Planning, Programming, Budgeting, Enacting and
Evaluation Cycle
◦ Growth / Contraction; Reacting to Competition
British American
Annual General Meeting (AGM) Annual Stockholders Meeting
Articles of Association Bylaws
base rate prime rate
bonus or capitalisation issue stock dividend or stock split
cheque check
company corporation
creditors accounts payable
current account checking account
debtors accounts receivable
labour labor
Memorandum of Association Certificate of Incorporation
merchant bank investment bank
ordinary share common stock
overheads overhead
profit and loss account income statement
property real estate
quoted company listed company
retail price index (RPI) consumer price index (CPI)
share stock
share premium paid-in surplus
shareholder stockholder
shareholders' equity stockholders' equity
stock inventory
trade union labor union
unit trusts mutual funds
visible trade merchandise trade
 Time Value of Money
◦ Since money is a valuable asset, people are willing to
pay to have it available for their use.
◦ With money, the charge (rent) for its use is called
interest.
 Simple Interest is calculated only on the
principal, or on that portion of the principal
which remains unpaid.
 For example, imagine Jim borrows $23,000 to
buy a car, and simple interest is charged at a
rate of 6% per annum. After three years, and
assuming none of the loan has been paid off,
Jim owes: $27,140
PRINCIPAL $23000 I = P x ( i /100 ) x n
Interest accrued EOY1 1380 I is the amount of interest
Interest accrued EOY2 1380
Interest accrued EOY3 1380
P the principal
i the interest rate as a percentage
Total $271440 n the number of time periods
 Compound Interest is very similar to Simple
Interest, however, as time continues the
difference becomes considerably larger.
 The conceptual difference is that the principal
changes with every time period, as any interest
incurred over the period is added to the
principal.
 (F/P,i,n) is called discount factor
PRINCIPAL $23000
Interest accrued EOY1 1380 Find F Given P
New Principal with accrued Interest $24380
Interest accrued EOY2 1463 P(F/P,i,n)
New Principal with accrued Interest $25843 F is the Future Value
Interest accrued EOY3 1550 i the interest rate as a percentage
n the number of time periods
Total $27393
 Ratio Components
1. Current Ratio/Working Capital Ratio . Current Assets
Current Liabilities
2. Liquid Ratio/ Quick Assets Ratio/Acid Liquid (Quick) Assets
Test Ratio Quick Liabilities
3. Stock to Working Capital Ratio. Stock on Hand
Working Capital
4. Proprietary Ratio Proprietor’s Equity
Total Assets
5. Assets-Proprietorship Ratio Current Assets .
Proprietor’s Equity
Fixed Assets .
Proprietor’s Equity
6. Debt Equity Ratio/Liabilities- (a) External Liabilities
Proprietorship Ratio Proprietor’s Equity
(b) Current Liabilities
Proprietor’s Equity
(c) Long-term Liabilities
Proprietor’s Equity
 Economic cost analysis will be performed to
study
◦ The economic feasibility of the project.
◦ The feasibility of producing a product with in the
acceptable price range affordable by the buyer.
◦ Can pin point the alternative with the most favorable
cost aspect
 Opportunity Cost
 Sunk Cost
 Book Cost
 Incremental Cost
 In economics, opportunity cost, or economic cost, is the cost of
something in terms of an opportunity forgone (and the benefits
which could be received from that opportunity), or the most
valuable forgone alternative (or highest-valued option forgone),
i.e. the second best alternative.
 For e.g., In building the hospital in a vacant land, the city has
forgone the opportunity to build a sporting center on that land,
or a parking lot, or the ability to sell the land to reduce the city's
debt.
 Note that opportunity cost is not the sum of the available
alternatives, but rather of benefit of the best alternative of them.
The land cannot be used for more than one of purposes.
 In economics and in business decision-making,
sunk costs are costs that have already been
incurred and which cannot be recovered to any
significant degree.
 Future decisions should not be based on sunk
cost.
 For E.g., “if the owner can derive more value
from selling the car than not selling it, it should
be sold, regardless of the price paid (sunk cost)”
 Assets value are carried in the firm’s book at
original cost less any depreciation and it won’t
reflect the fair market value.
 In economic analysis decisions, focus must be
on incremental costs or those cost differences
between alternatives.
 If we need to compare between two equipments
with same annual maintenance fee, there is no
incremental difference. Therefore maintenance
fee can be excluded from the analysis
 But the one equipment annual maintenance is
USD 500 more than other equipment, then there
is an obvious incremental cost difference.
1. Inflation
2. Deflation
3. Escalation
4. Currency Variation
 The word “inflation” refers to a persistent rise in
the general price level, as measured against a
standard level of purchasing power.
 The driving force of inflation
◦ Money Supply
◦ Exchange Rates
◦ Demand-pull Inflation
◦ Cost-push Inflation
 Deflation is a decrease in the general price level
over a period of time. Deflation is the opposite
of inflation.
 The same driving force of Inflation will cause
deflation but in different direction.
 Due to price increase or decrease during the life
of the contract, estimators use escalation
technique.
 An escalation or de-escalation clause will be
written in the contract so that purchaser will
compensate the supplier in the event of price
change.
 Fixed Price Economical Price Adjustment Factor
is a type of contract where escalation technique
will be used.
 Due to the predominant Multi National
Companies who operates in different country
and trades are happening across the horizons,
currency variation plays a important role in
economic cost analysis.
 For e.g., Financial assets held in one country
can go down if the country central bank
devaluate the currency.
 Governmental policies and regulations can often
impact the cost of the firm.
 Taxes, Economic Sanctions, Embargo are some
examples of governmental cost impacts to a
firm
 To encourage company to invest on plants and
machinery, government allows firms to depreciate
their investment over time.
 Thus depreciation technique will allow company to
write-off a set proportion of investment ever year
until fully depreciated.
 Depreciation thus should be not confused a cash-
flow, but rather an non-cash expense that reduce
taxable income.
 However depreciation are allowed only based on
original investment cost, inflation & deflation or
other factors will not affect depreciation technique.
 Depletion is comparable to depreciation but it is
used for natural resources.
 Owners of natural resources like quarry, oil well,
or standing timber as examples can take
depletion allowances based on the percentage
of resources used up in a given period.
 Standard Methods
◦ Straight-line (SL) method
◦ Double-declining balance (DDB) method
◦ Sum-of-years digits (SOYD) method
◦ Modified accelerated cost recovery system (MACRS)
◦ Units of Production (UOP) method
 Simple Method
◦ Formula is: D=(C-S)/N
◦ D = Depreciation Charge
◦ C = Asset Cost
◦ S = Salvage Value, and
◦ N = Asset Depreciable Life
 Exercise: Find Depreciation Charge for an asset
original cost $10,000, 5-years life and $2900
residual salvage value.
 When depreciate is accurately based on units
rather than time UOP method will be used.
 A piece of construction equipment may be used:
◦ First Year 1200 Hrs
◦ Second Year 2400 Hrs
◦ Third Year 600 Hrs
 Depreciation will be calculated based on the
equipment wear and therefore is a accurate
barometer than years.
What’s our goal?
The goal is to choose the alternative with the highest return
What are the techniques?
 Net present worth
 Capitalized cost
 Annual cash flow analysis
 Rate of return analysis
 Benefit-cost ratio analysis, and
 Payback period
 The time value of money is the premise that an investor prefers to
receive a payment of a fixed amount of money today, rather than an
equal amount in the future, all else being equal.
 Common language terms
◦ P = Present Value or present worth
◦ F = Future Value or future worth
◦ A = Annual amount or annuity
◦ G = Uniform gradient amount
◦ n = number of compounding periods or asset life
◦ I = Interest value
◦ S = Salvage Value
 Rate of return (ROR) or return on investment
(ROI), or sometimes just return, is the ratio of
money gained or lost on an investment relative
to the amount of money invested.
 Companies sets hurdle rates which must be the
minimum acceptable rate to make any
investment. Rate of return must at least achieve
the hurdle rates
NPW Cost = NPW Benefit
 It’s a simple comparison between benefits and
costs of a proposed action.
For e.g.,
Project A Project B
NPW Benefit $1,500,000 $2,000,000
NPW Cost $1,200,000 $1,700,000
B/C 1.25 1.17
 Payback period in business and economics
refers to the period of time required for the
return on an investment to "repay" the sum of
the original investment.
 For example, a $1000 investment which
returned $500 per year would have a two year
payback period.
 A budget is a monetary or/and quantitative
expression of a business plan and policies to
be persuaded in the future period of time.
The term budgeting is used for preparing
budgets and other procedures for planning,
co-ordination and control of business
enterprise.
A budget is pre-determined statement of
management policy during a given period
which provides standard for comparison
with results to be actually achieved.
Budget is a financial forecast. It’s a blueprint
for how an organization plans to operate
financially during some future period.
 To ensure planning for future by setting up
various budgets. The requirements and
expected performance of enterprise are
anticipated.
 To co-ordinate the activities of different
departments.
 To operate various cost centres and
departments with efficiency and economy.
 Elimination of wastes and increase in
profitability.
 To anticipate capital expenditures for future.
 To centralize the control system.
 Correction of deviations from the established
standards.
 Fixation of responsibility of various
individuals in the organization.
 1. The use of budgetary control system
enables the management of a business
concern to conduct its business activities in
the efficient manner.
 2. It is a powerful instrument used by
business houses for the control of their
expenditure. It infact provides a yardstick
for measuring and evaluating the
performance of individuals and their
departments.
 3. It reveals the deviations to management,
from the budgeted figures after making a
comparison with actual figures.
 4. Effective utilisation of various resources
like—men, material, machinery and
money—is made possible, as the
production/service is planned after taking
them into account.
 5. It helps in the review of current trends
and framing of future policies.
 6. It creates suitable conditions for the
implementation of standard costing system
in a business organisation.
 7. It inculcates the feeling of cost
consciousness among workers
 The limitations of budgetary control system
are as follows :
 1. Budgets may or may not be true, as they
are based on estimates.
 2. Budgets are considered as rigid
document.
 3. Budgets cannot be executed
automatically.
 4. Staff co-operation is usually not
available during budgetary control exercise.
 5. Its implementation is quite expensive.
 1. Administrative Budget
2. Operational Budget
3. Capital Budget

1. Administrative Budget
In many organizations, the facility department
budget is part of the company’s administrative
budget

I. Personnel
II. Office Expenses
III. Depreciation of Capital Accounts
 1. Administrative Budget
2. Operational Budget
3. Capital Budget

2. Operational Budget
Operational budget covers the funds that the company
gives the facility manager to perform his mission

I. Utilities
II. Rentals
III. Planning and Design
IV. Maintenance and Repair
V. New Work
VI. Moving
1. Administrative Budget
2. Operational Budget
3. Capital Budget

3. Capital Budget
Multiyear presentation. What may be capitalized is
determined by tax law and company policy.
This technique was first used in America in 1962.
The former President of America, Jimmy Crater
used this technique when he was the governor of
Georgia for controlling state expenditure.

As the name suggest, it starts from a ‘scratch’.

The normal technique of budgeting is to use
previous year’s cost levels as a base for preparing
this year’s budget. This method carries previous
year’s inefficiencies to the present year because we
take last year as a guide and decide ‘what is to be
done this year when this much was the
performance of the last year’.
Purpose of Zero-Base Budgeting
The Objective of Zero Based Budgeting is to “reset
the clock” each year. The Traditional incremental
budgeting assumes that there is a guaranteed
budgetary base-the previous year’ level of
appropriations -and the only question is how much
of an increment will be given. Zero Based Budgeting
implies that managers need to build a budget from
the ground up, building a case for their spending as
if no baseline existed- to start at zero. Resources
are not necessarily allocated in accordance with
previous patterns and consequently each existing
item of expenditure has to be annually re-justified.
 Put differently, the purpose of ZBB is to
reevaluate and reexamine all programs and
expenditures for each budgeting cycle by
analyzing workload and efficiency measures
to determine priorities or alternative levels
of funding for each program or
expenditure. Through this system, each
program is justified in its entirety each time
a new budget is developed.
 Cost reduction may be defined as the
achievement of real and permanent reduction
in the unit cost of goods manufactured or
services rendered without impairing their
suitability for the use intended or diminution
in the quality of the product/service.
 Cost reduction results in profit improvement.
The more the profits, the more stable the
company becomes. It enhances the share
value, improves investment opportunities and
facilitates collection of capital.
 2.
3. Post
Journalize

1.Analyze
Transactions
4.
Unadjusted
trial balance

Start the
8.Close next cycle
5. Adjust

7. Prepare
finance 6. Adjusted
statements trial balance

1 92
Courtesy:
investopedia.com
 How to prepare three basic financial
statements

The Income Statement

The Statement of Retained Earnings
The Balance Sheet

The purpose of these statements is

to help users make better decisions.

1 94
 The first statement prepared is the
Income Statement.
 The Income Statement reports a
business’ performance for the period.

1 95
 A simple format for an income
statement is:

Revenues – Expenses = Net Income

1 96
 Revenues are earned for the sale of
goods or services. Note that revenues
occur when the sale is made. The
payment may or may not have been
received.

Examples of revenues include sales,

service revenue and interest revenue.

1 98
  Expenses are incurred when a business
receives goods and services. Like
revenues, payment may or may not have
been made.

Examples of expenses include salaries expense,

utility expense and interest expense.

1 99
 Most businesses require more
information from their businesses than
a simple income statement can provide.
Therefore, they use a multi-step income
statement format.
 A format for a multi-step income
statement is:

10
1 1
 Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income

10
1 2
 Cost of goods sold represents the
expense a business incurred to buy or
make a product / service for resale.

10
1 3
  Cost of goods sold represents the
expense a business incurred to buy or
make a product for resale.

Example - a book store buys a book for

$25 and then sells it for $32. The cost
of goods sold is $25.

10
1 4
 Operating expenses are the usual
expenses incurred in operating a
business.

10
1 5
  Operating expenses are the usual
expenses incurred in operating a
business.

Accounts such as salaries expense,

utility expense, and depreciation
expenses are all shown in this section.

10
1 6
 Non-operating items are revenue,
expenses, gains and losses that do not
relate to the company’s primary
operations.

10
1 7
  Non-operating items are revenue,
expenses, gains and losses that do not
relate to the company’s primary
operations.

Accounts include interest expense and

gains and losses of the sale of
equipment and investments.

10
1 8
 Income taxes are computed by
multiplying Income before taxes by the
income tax rate.

10
1 9
  Income taxes are computed by
multiplying Income before taxes by the
income tax rate.

Example – Income before taxes is

$50,000. The income tax rate is 30%.
Income taxes = $50,000 * 30% =
$15,000.

11
1 0
  The purpose of the balance sheet is to
report the financial position of an
accounting entity at a particular point in
time.

The basic format for the balance sheet is:

Assets = Liabilities + Equity
11
1 1
 Assets are economic resources owned
by a company.

11
1 2
  Assets are economic resources owned
by a company.

Examples include cash, accounts

receivable, supplies, buildings and
equipment.

11
1 3
 Liabilities are the company’s debt or
obligations.

11
1 4
  Liabilities are the company’s debt or
obligations.

Examples are accounts payable,

unearned revenues and bonds payable.

11
1 5
 Equity is the residual balance. Assets –
liabilities = equity. Equity is commonly
called stockholders’ equity if the
business is a corporation as it
represents the financing provided by the
stockholders along with the earnings
from the business not paid out as
dividends.

11
1 6
 There are two different types of assets
shown on a balance sheet. These are
current assets and non-current assets.

11
1 7
 There are two different types of assets
shown on a balance sheet. These are
current assets and non-current assets.

Current assets
+ Non-current assets
Total assets
11
1 8
 Current assets are assets that will be
used or turned into cash within one
year.

11
1 9
  Current assets are assets that will be
used or turned into cash within one
year.

Examples include cash, accounts

receivable, inventory, short-term
investments, supplies and prepaids.

12
1 0
 Non-current assets comprise the
remainder of the assets.

12
1 1
  Non-current assets comprise the
remainder of the assets.

These include accounts such as:

long-term investments, land, building,
equipment and patents.

12
1 2
 There are two different types of
liabilities shown on a balance sheet –
current liabilities and long-term
liabilities.

12
1 3
 There are two different types of
liabilities shown on a balance sheet –
current liabilities and long-term
liabilities.

Current liabilities
+ Long-term liabilities
Total liabilities

12
1 4
 Current liabilities are obligations that
will be paid in cash (or other services) or
satisfied by providing service within the
coming year.

12
1 5
 Current liabilities are obligations that
will be paid in cash (or other services) or
satisfied by providing service within the
coming year.

Examples include accounts payable,

short-term notes payable, and taxes
payable.

12
1 6
 Long-term liabilities are obligations that
will not be paid or satisfied within the
year.

12
1 7
  Long-term liabilities are obligations that
will not be paid or satisfied within the
year.

Examples include mortgage payable

and bonds payable.

12
1 8
 Stockholders’ Equity is divided into two
categories: contributed capital and
retained earnings.

Contributed capital
+ Retained earnings
Total stockholders’ equity

12
1 9
 Contributed capital is the amount of
cash (or other assets) provided by the
shareholders.

13
1 0
 Contributed capital is the amount of
cash (or other assets) provided by the
shareholders.

Common Stock and Additional

Paid in Capital are accounts in this
section.

13
1 1
 Retained earnings is the total earnings
that have not been distributed to owners
as dividends.

13
1 2
 Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity
 The Balance Sheet must be prepared
after the Statement of Retained Earnings
in order to have calculated the ending
balance of Retained Earnings.

13
1 4
 Order of Preparation

Income
Statement
Statement of Retained
Earnings Balance
Net income Beginning Retained Sheet
Earnings
+ Net income
– Dividends Ending Balance
Ending retained Retained
earnings Earnings

13
1 5
 Classify the accounts as assets,
liabilities, equity, revenue or expenses.

13
1 6
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

13
1 7
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

13
1 8
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

13
1 9
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

14
1 0
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

14
1 1
Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in 20,000

Capital
Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

14
1 2
 Prepare the Income Statement.

Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income 14
1 3
Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations
- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

14
1 4
Sales 100,000

- Cost of Goods Sold -58,000

Operating expenses
Gross Margin 42,000 include:
- Operating Expenses -27,000
Utility expense 8,000
Income from 15,000 Salaries expense 16,000
Operations
Supplies expense 3,000
- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

14
1 5
Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations Non-operating items include:
- Non-operating Items -5,000
Interest expense 5,000
Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

14
1 6
Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations
- Non-operating Items -5,000
Income taxes = Income
Income before Taxes 10,000
before taxes * Income tax
- Income Taxes -3,000 rate

Net Income 7,000 10,000 * 30% = 3,000

14
1 7
  Prepare the Statement of Retained
Earnings.
Beg. balance, retained earnings
+ Net income
- Dividends
End. balance, retained earnings

14
1 8
Beginning Balance, 5,000
Net Income is brought
Retained Earnings forward from the Income
+ Net Income +7,000
Statement.

- Dividends -0

Ending Balance, 12,000

Retained Earnings

14
1 9
 Prepare the Balance Sheet.

Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity 15
1 0
Current Assets: Current Liabilities:

Cash 5,000 Accounts Payable 12,000

Accounts Receivable 10,000 Long-term

liabilities:
Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’

Equity:
Non-Current Common Stock 45,000
Assets:
Buildings 65,000 Additional Paid in 20,000
Capital
Retained Earnings 12,000

Total Assets 129,000 Total Liabilities 129,000

and Equity
15
1 1
Current Current Liabilities:
Assets:
Cash 5,000 Accounts Payable 12,000

Accounts 10,000 Long-term

Receivable liabilities:
Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’

End. Bal. is
Equity: brought
Non- Common Stock 45,000 forward from
Current the Statement
Assets: of Retained
Buildings 65,000 Additional Paid in 20,000 Earnings
Capital
Retained Earnings 12,000

Total 129,000 Total Liabilities 129,000

Assets and Equity
15
1 2
 The Income Statement for Trimble &
Associates:
Sales $850
Cost of Goods Sold 550
Gross Profit on Sales $300
Operating Expenses:
Cost of Marketing Expenses 90
borrowing General & Admin Expenses 80
Income Depreciation 30
from Total Operating. Expenses $200
operating Operating Income 100
the
business Interest Expense 20
Earnings Before Tax 80
Income
after Income Tax (25%) 20
\paying Net Income 60
interest
Assets: Liabilities:
Current Assets Current Liabilities:
Cash $ 70 Accounts Payable $ 230

Accounts Receivable $ Short-term Notes $ 20

220
Inventories $ 310 Total Current Liabilities $
Total Current Assets 250
Long-term debt $ 800
$ 600 Total Debt
Fixed Assets
$1,050
Gross Fixed Assets Owners’ Equity:
$2,500
Accumulated Depreciation $ Common Stock $
300 900
Net Fixed Assets Retained Earnings $
$2,200
TOTAL ASSETS $ 850
Total Owners’ Equity
2,800 $1,750
TOTAL DEBT&EQUITY $
2,800
 Operating Activities
Operating income $ 100
Plus depreciation 30
Less income taxes (20) $ 110
Change in net working capital:
Less increases in A/R $ (5)
Change in net

Less increases in inventories (40)

Plus increases in A/P 5 (40)
working

Cash flows from operations $ 100

capital

Investment Activities
Less increase in gross fixed assets $ (100)
Financing Activities
Less interest expenses $ (20)
Less dividends paid (15)
Plus incr in short-term notes 20
Plus incr in long-term notes 50
Total Financing Activities $ 35
Increase (Decrease) in cash $ 5
Working capital management involves the relationship between a
firm's short-term assets and its short-term liabilities. The goal
of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational
expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and
cash.

Why Firms Hold Cash?

Speculation
Precaution
Transaction
Activity-Based Cost Management
Courtesy:
S&K from
AACEI
 In simple terms, Activity Based Costing (ABC)
is an accounting technique that allows an
organization to determine the actual cost
associated with each product and service
produced by the organization without regard
to the organizational structure.
 ABC provides this improved understanding by
first tracing resources (operating costs) to the
activities (work) performed within the
organization. Secondly, these activities are
traced to the products, services, or customers
for whom the activity is performed.
 In a business organization, Activity-based
costing (ABC) is a method of allocating costs to
products and services. It is generally used as a
tool for planning and control.
 Traditionally cost accountants had arbitrarily
added a broad percentage onto the direct costs
to allow for the indirect costs.
 However as the percentages of overhead costs
had risen, this technique became increasingly
inaccurate because the indirect costs were not
caused equally by all the products.
 More accurate cost management methodology
 Focuses on indirect costs (overhead)
 Traces rather than allocates each expense
category to the particular cost object
 Makes "indirect" expenses "direct"
 Cost objects consume activities
 Activities consume resources
 This consumption of resources is what drives
costs
 Understanding this relationship is critical to
successfully managing overhead
 Overhead is high - Costing of intra-company
services
 Products are diverse: complexity, volume,
amount of direct labor - Make or buy decisions
 Cost of errors are high
 Competition is stiff - Evaluation of product line
or customer wise profitability enhancement
 For example, one product might take more time
in one expensive machine than another
product, but since the amount of direct labor
and materials might be the same, the additional
cost for the use of the machine would not be
recognized when the same broad 'on-cost'
percentage is added to all products.
 Consequently, when multiple products share
common costs, there is a danger of one product
subsidizing another.
 Direct labor and materials are relatively easy to trace directly to
products, but it is more difficult to directly allocate indirect costs
to products.
 Where products use common resources differently, some sort of
weighting is needed in the cost allocation process. The measure
of the use of a shared activity by each of the products is known
as the cost driver.
 For example, the cost of the activity of bank tellers can be
ascribed to each product by measuring how long each product's
transactions takes at the counter and then by measuring the
number of each type of transaction.
 The typical costs and cost drivers are listed as follows:

Cost Cost Driver

Materials purchasing Number of purchase orders

Materials handling Number of materials requisitions

Personnel Number of employees

Equipment amortization Number of products produced or hours of use

Quality inspection Number of units inspected

Indirect labors in setting up Number of setups required

equipment
 Even in activity-based costing, some overhead
costs are difficult to assign to products and
customers, for example the chief executive's
salary.
 These costs are termed 'business sustaining'
and are not assigned to products and
customers because there is no meaningful
method.
 This lump of unallocated overhead costs must
nevertheless be met by contributions from each
of the products, but it is not as large as the
1. Identify activities
2. Determine cost for each activity
3. Determine cost drivers
4. Collect activity data
5. Calculate product cost
 Set-up
 Machining
 Receiving
 Packing
 Engineering
 Set-up $10,000
 Machining $40,000
 Receiving $10,000
 Packing $10,000
 Engineering $30,000
 Set-up: Number of Setups
 Machining Machining Hours
 Receiving Number of Receipts
 Packing Number of Deliveries
 Engineering Engineering Hours
 Activity Cost Product A $ Product B $

Setup 10,000 1 2,500 3 7,500

Machining 40,000 100 2,000 900 38,000

Receiving 10,000 1 2,500 3 7,500

Packing 10,000 1 2,500 3 7,500

Engineering 30,000 500 15,000 500 15,000

TOTAL 100,000 24,500 75,500

 Overhead for Product A:
◦ $24,500:100 = $245
 Overhead for Product B:
◦ $75,500:900 = $ 79.47
 TCM overhead for Product A&B:
◦ $100,000:1000 = $ 100
 Cost for Product A:
Overhead: TCA: $100.00 ABC: $245.00
Direct Cost $20.00 $20.00
Total $120.00 $265.00

 Cost for Product B: 145

Overhead: TCA: $100.00 ABC: $79.5
Direct Cost: $40.00 $40.00
Total $140.00 $119.5
.
20.5
 ABC is more accurate cost management system
than Traditional Cost Accounting
 Traditional Cost Accounting is unable to
calculate the "true" cost of a product
Each Activity Has Its Own Activity Driver

From: General Ledger To: ABC Data Base

Chart-of-Accounts View Chart-of-Accounts View Activity
Claims Processing Department Claims Processing Department Drivers
Favorable/
Actual Plan (unfavorable) Cost
Salaries 621,400 600,000 (21,400) Key/scan claims 31,500 # of
Analyze claims 121,000 # of

Products / Customers
Equipments 161,200 150,000 (11,200) Suspend claims 32,500 # of
Receive provider inquiries 101,500 # of
Travel Expense 58,000 60,000 2,000 Resolve member problems 83,400 # of
Process batches 45,000 # of
Supplies 43,900 40,000 (3,900) Determine eligibility 119,000 # of
Make copies 145,000 # of
Use and 30,000 30,000 - Write correspondence 77,100 # of
Occupancy Attend training 158,000 # of
Total 914,500 880,000 (34,500) Total 914,000

Fixed versus variable classifications get re-defined with

ABC/M