Other Concepts

Efficiency vs Effectiveness
Efficiency - using resources in such a way as to maximize the production of goods
and services (wikipedia)

Effectiveness - Degree to which objectives are achieved and the extent to which
targeted problems are resolved. In contrast to efficiency, effectiveness is determined
without reference to costs and, whereas efficiency means "doing the thing right,”
effectiveness means "doing the right thing.” (http://www.businessdictionary.com)

Patents/Copyrights/Trademarks

A patent is a set of exclusive rights granted by a state to an inventor or his assignee

for a limited period of time in exchange for a disclosure of an invention (wikipedia)

Copyright is a form of protection provided to the authors of "original works of

authorship" including literary, dramatic, musical, artistic, and certain other
intellectual works, both published and unpublished. (http://www.lawmart.com)

A trademark is a word, name, symbol or device which is used in trade with goods to
indicate the source of the goods and to distinguish them from the goods of others. A
service mark is the same as a trademark except that it identifies and distinguishes
the source of a service rather than a product. The terms "trademark" and "mark" are
commonly used to refer to both trademarks and service marks.
(http://www.lawmart.com)

Four Characteristics common to all organizations:

1. Hierarchy of Authority
2. Coordination of Effort
3. Division of Labor
4. Common Goal

Common Stock/Preferred Stock/Treasury Stock/Bond

Common stock is a security representing a legal claim to a percentage of a
company's earnings and assets. Holders of common stock have some input into
choosing company management, but do not generally have much say in the day to
day operations
Preferred stock usually carries no voting rights,[1][2] but may carry priority over
common stock in the payment of dividends and upon liquidation. Preferred stock may
carry a dividend that is paid out prior to any dividends being paid to common stock
holders.
A treasury stock or reacquired stock is stock which is bought back by the issuing
company, reducing the amount of outstanding stock on the open market. On balance
sheet, treasury cost is carried as cost and reflected as a deduction from the total of
contributed capital and earned capital. It is the same as unissued capital stock and
hence is not an asset. It is used for mergers and acquisitions, employee stock
options plan, and protection against unfriendly takeovers by corporate raiders.
In finance, a bond is a debt security, in which the authorized issuer owes the holders
a debt and, depending on the terms of the bond, is obliged to pay interest (the
coupon) and/or to repay the principal at a later date, termed maturity. It is a formal
contract to repay borrowed money with interest at fixed intervals.
Inventory Valuation Methods
There are 5 types of inventory valuation methods or cost flow assumptions:
1. Specific identification method, where the cost of the specific items sold are
included in the cost of goods sold, while the costs of the specific items on hand are
included in the inventory. It used for high-priced items
2. Average cost method, where the items in the inventory are priced on the basis of
average of all similar goods available during the period. It is simple to apply and it's
objective
3. FIFO method, where goods are used in the order in which they are purchased, the
first goods purchased are the first used. The inventory remaining must represent the
most recent purchase.
4. LIFO method, where it matches the costs of the last goods purchased against
revenue. The ending inventory would be priced at oldest unit cost.
5. NIFO method, which is not currently acceptable for purposes of inventory
valuation. NIFO uses replacement cost. When measuring current cost income, the
cost of goods sold should consist not of the most recently incurred costs but rather of
the cost that will be incurred to replace the goods that have been sold.

Schemas Used in Relational Database Management

In the ANSI four-schema architecture, the internal schema was the view of
data that involved data management technology. This was as opposed to the
external schema that reflected the view of each person in the organization, or the
conceptual schema that was the integration of a set of external schemas.
Subsequently the internal schema was recognized to have two parts:
The logical schema was the way data were represented to conform to the
constraints of a particular approach to database management. At that time the
choices were hierarchical and network. Describing the logical schema, however, still
did not describe how physically data would be stored on disk drives. That is the
domain of the physical schema. Now logical schemas describe data in terms of
relational tables and columns, object-oriented classes, and XML tags.
A single set of tables, for example can be implemented in dozens of different ways,
up to and including the architecture where some rows are on a computer in
Cleveland and others are on a computer in Warsaw.This is the physical schema

Assertions
An assertion is a multi-table statement in SQL that ensures a certain condition will
always exist in the database. Assertions are like column and table constraints, except
that they are specified separately from table definitions. An example of a column
constraint is NOT NULL, and an example of a table constraint is a compound foreign
key, which, because it's compound, cannot be declared with column constraints.
An example of an assertion is:
create assertion recent_licenses
check (
( select count(*)
from nurses
where license_renewal_date
< '2002-01-01' ) = 0
)
Assertions are checked only when UPDATE or INSERT actions are performed against
the table.
 Profit Maximization

Profit Maximization is the process by which a firm determines the price and output
level that returns the greatest profit. There are 2 approaches:
· Total revenue - total cost method relies on the fact that profit equals total
revenue (TR) minus total cost (TC)
· Marginal revenue - marginal cost method is based on the fact that total profit in a
perfectly competitive market reaches its maximum point where marginal revenue
(MR) equals marginal cost (MC).

Marginal Revenue (MR) is the extra revenue that an additional unit of product will
bring. It is the additional income from selling one more unit of a good.
Marginal Cost (MC) is the change in total cost that arises when the quantity
produced changes by one unit. It is the cost of producing one more unit of a good

The classical economic definition of the maximum profit

For each unit sold, marginal profit equals marginal revenue minus marginal cost.
Then, if marginal revenue is greater than marginal cost, marginal profit is positive,
and if marginal revenue is less than marginal cost, marginal profit is negative. When
marginal revenue equals marginal cost, marginal profit is zero. Since total profit
increases when marginal profit is positive and total profit decreases when marginal
profit is negative, it must reach a maximum where marginal profit is zero - or where
marginal cost equals marginal revenue.
 Depreciation, Amortization, Depletion

Depreciation is the portion of the cost of tangible plant assets (buildings,

equipment, furniture) deducted periodically as expense from revenue.
Amortization is the portion of the cost of intangible assets (patents, goodwill,
copyrights, secret formulas, franchises, trademarks, trade names, licenses) deducted
periodically as expense from revenue.
Depletion is the estimated cost of natural resources (oil, minerals, coal, timber) that
have been removed from their source and deducted periodically as expense from
revenue.

There are several methods for calculating depreciation, generally based on either the
passage of time or the level of activity (or use) of the asset.
Straight-line depreciation
Straight-line depreciation is the simplest and most-often-used technique, in which
the company estimates the salvage value of the asset at the end of the period during
which it will be used to generate revenues (useful life) and will expense a portion of
original cost in equal increments over that period. The salvage value is an estimate
of the value of the asset at the time it will be sold or disposed of; it may be zero or
even negative. Salvage value is scrap value, by another name.
For example, a vehicle that depreciates over 5 years, is purchased at a cost of
US$17,000, and will have a salvage value of US$2000, will depreciate at US$3,000
per year: ($17,000 - $2,000)/ 5 years = $3,000 annual straight-line depreciation
expense. In other words, it is the depreciable cost of the asset divided by the
number of years of its useful life.
Declining-Balance Method
Depreciation methods that provide for a higher depreciation charge in the first year
of an asset's life and gradually decreasing charges in subsequent years are called
accelerated depreciation methods. This may be a more realistic reflection of an
asset's actual expected benefit from the use of the asset: many assets are most
useful when they are new. One popular accelerated method is the declining-balance
method. Under this method the Book Value is multiplied by a fixed rate.
Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year

Double-declining-balance method
The most common rate used is double the straight-line rate. For this reason, this
technique is referred to as the double-declining-balance method. To illustrate,
suppose a business has an asset with $1,000 Original Cost, $100 Salvage Value, and
5 years useful life. First, calculate straight-line depreciation rate. Since the asset has
5 years useful life, the straight-line depreciation rate equals (100% / 5) 20% per
year. With double-declining-balance method, as the name suggests, double that
rate, or 40% depreciation rate is used.

Activity depreciation
Activity depreciation methods are not based on time, but on a level of activity. This
could be miles driven for a vehicle, or a cycle count for a machine. When the asset is
acquired, its life is estimated in terms of this level of activity. Assume the vehicle
above is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate
is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile.
Each year, the depreciation expense is then calculated by multiplying the rate by the
actual activity level.

Sum-of-Years' Digits Method

Sum-of-Years' Digits is a depreciation method that results in a more accelerated
write-off than straight line, but less than declining-balance method. Under this
method annual depreciation is determined by multiplying the Depreciable Cost by a
schedule of fractions. Example: If an asset has Original Cost $1000, a useful life of 5
years and a Salvage Value of $100, compute its depreciation schedule.
First, determine Years' digits. Since the asset has useful life of 5 years, the Years'
digits are: 5, 4, 3, 2, and 1.Next, calculate the sum of the digits. 5+4+3+2+1=15
Depreciation rates are as follows:
5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th
year, and 1/15 for the 5th year.
 Budgeting

The Budget Process is a planning exercise. Budgets are a necessary component of

financial decision making because they help provide an efficient allocation of
resources. A budget is a profit planning and resource controlling tool. It is a
quantitative expression of management's intentions and plans for the coming years
to meet their goals and objectives within the resource constraint. Budgets are
prepared at the beginning of each year. Five budgeting techniques are available:

1. In traditional incremental budgeting, departmental managers justify only

increases over the previous year budget and what has been already spent is
automatically sanctioned. No reference is made to the previous level of expenditure.
It operates on the principle of management by exception.
2. Flexible budgeting (variable or dynamic budgeting) is a budget that is adjusted
for changes in the unit level of the cost or revenue. It is based on knowledge of how
revenues and costs should behave over a range of activity.The master budget is not
adjusted after is developed, regardless of changes in volume, costs, or other
conditions during the budget period.
3. In zero-based budgeting, every department function is reviewed
comprehensively and all expenditures must be approved, rather than only increases
(like in incremental budgeting). Zero-based budgeting requires the budget request
be justified in complete detail by each division manager starting from the zero-base.
The zero-base is indifferent to whether the total budget is increasing or decreasing.
4. Planning, programming, and budgeting systems (PPBS) attempt to further
advance budgeting techniques, especially in the public sector, by presenting budget
choices more explicit in terms of public objectives. With PPBS budgets, the cost and
effectiveness of programs were to be evaluated in a multiyear framework and
alternate approaches were to be considered.
5. Performance budgeting, again focusing on the public sector, links performance
measures directly to agency missions and programs objectives. Under the
performance budgeting model, budgets would be developed based upon unit costs
and service expectation followed by analysis of actual work performed compared with
budget estimates.

Variance Analysis

In budgeting (or management accounting in general), a variance is the difference

between a budgeted, planned or standard amount and the actual amount
incurred/sold. Variances can be computed for both costs and revenues. The following
variance analysis needs to be performed:
1. Ensure that both favorable and unfavorable variations are investigated to obtain
insight and to assess their significance
2. Ensure that variation was not due to mathematical or procedural or clerical error,
that is, amounts charged to the wrong departments would negate the favorable
variance in one department with an unfavorable variance in another department
3. Ensure that variation was due to a specific managerial decision to effect an
outcome. It is then planned variation which is acceptable, and does not need further
investigation.
4. Ensure that all unknown causes, which are of primary concern, were investigated
and explained carefully since they require corrective actions. Unknown causes are
exceptions that were not planned or expected.

Capital budgeting (or investment appraisal) is the planning process used to

determine whether a firm's long term investments such as new machinery,
replacement machinery, new plants, new products, and research development
projects are worth pursuing. It is budget for major capital, or investment,
expenditures.
Many formal methods are used in capital budgeting, including the techniques such as

1. Net Present Value (NPV)

Each potential project's value should be estimated using a discounted cash flow
(DCF) valuation, to find its net present value (NPV). This valuation requires
estimating the size and timing of all of the incremental cash flows from the project.
These future cash flows are then discounted to determine their present value. These
present values are then summed, to get the NPV. The NPV decision rule is to accept
all positive NPV projects in an unconstrained environment, or if projects are mutually
exclusive, accept the one with the highest NPV. The NPV is greatly affected by the
discount rate, so selecting the proper rate - sometimes called the hurdle rate - is
critical to making the right decision. The hurdle rate is the minimum acceptable
return on an investment. It should reflect the riskiness of the investment, typically
measured by the volatility of cash flows, and must take into account the financing
mix.

2. The internal rate of return (IRR) is defined as the discount rate that gives a
net present value (NPV) of zero. It is a commonly used measure of investment
efficiency.
The IRR method will result in the same decision as the NPV method for (non-
mutually exclusive) projects in an unconstrained environment, in the usual cases
where a negative cash flow occurs at the start of the project, followed by all positive
cash flows. In most realistic cases, all independent projects that have an IRR higher
than the hurdle rate should be accepted. Nevertheless, for mutually exclusive
projects, the decision rule of taking the project with the highest IRR - which is often
used - may select a project with a lower NPV.

3. Modified Internal Rate of Return (MIRR) - A problem of the IRR is that it

assumes that interim positive cash flows are reinvested at the same rates of return
of the project that generated them. This is usually an unrealistic scenario and a more
likely situation is that the funds will be reinvested at a rate closer to the firm's cost
of capital. The IRR therefore often gives an unduly optimistic picture of the projects
under study.
A second problem of the IRR appears with projects that have irregular cash flows
alternating between positive and negative values several times. Numerous IRRs can
be identified for such projects potentially leading to confusion and the wrong
investment decisions being made

4. The Payback Method. The payback is the time it takes the cash inflows from a
capital investment project to equal the cash outflows, usually expressed in years.
When deciding between two or more competing projects, the usual decision is to
accept the one with the shortest payback. Payback is often used as a "first screening
method". By this, we mean that when a capital investment project is being
considered, the first question to ask is: 'How long will it take to pay back its cost?'
The company might have a target payback, and so it would reject a capital project
unless its payback period were less than a certain number of years. There are two
main problems with the payback period method:
- It ignores any benefits that occur after the payback period and, therefore, does not
measure profitability.
- It ignores the time value of money.
For these reasons discounted payback method is generally used instead where all
the future cash inflows are discounted.
 Linear Programming

Linear Programming is a management science approach to allocating scarce

resources. All LP problems have 3 basic properties:
Objectives: The maximization or minimization of some thing is the objective.
Examples: maximization of profits, minimization of costs or time.
Constraints: There are restrictions that limit the degree to which the objective can
be obtained.
Linearity: The objective function and all constraint functions are linear functions of
the decision variables.

Assumptions of linear programming:

Proportionality means that the contribution to the objective function and the
amount of resources used are proportional to the value of each decision variable.
Additivity Guarantees that the total cost is the sum of individual costs.
Divisibility Ensures that decision variables can be divided into fractions.
Certainty - the model assumes that the responses to the values of the variables are
exactly equal to the responses represented by the coefficients.
(https://www.courses.psu.edu/for/for466w_mem14/Ch11/HTML/Sec5/ch11sec5.htm
)

There are 2 methods of solving a Linear Programming Problem:

- Algebraic solution procedures
- Graphical solution procedures

The graphical solution procedure is suitable when the linear programming problems
involves only two decision variables. The graph lines show the constraints and the
objective function of the linear problem. An optimum solution is determined by first
using the graphical solution procedure to identify the optimal solution point and then
solving the two simultaneous constraints equations with this point.

Fundamental Theorem of Linear Programming

If there is a solution to a linear programming problem, then it will occur at a corner point,
or on a line segment between two corner points.
The Fundamental Theorem of Linear Programming is a great help. Instead of testing all
of the infinite number of points in the feasible region, you only have to test the corner
points. Whichever corner point yields the largest value for the objective function is the
maximum and whichever corner point yields the smallest value for the objective function
is the minimum.
(http://people.richland.edu/james/lecture/m116/systems/linear.html)

The simplex algorithm, created by the American mathematician George Dantzig in

1947, is a popular algorithm for numerical solution of the linear programming problem.
The journal Computing in Science and Engineering listed it as one of the top 10
algorithms of the century.
The method uses the concept of a simplex, which is a polytope of N + 1 vertices in N
dimensions: a line segment in one dimension, a triangle in two dimensions, a tetrahedron
in three-dimensional space and so forth.
(http://en.wikipedia.org/wiki/Simplex_algorithm)