ASSETS

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).[1] The balance sheet of a firm records the monetary[2] value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.[1] Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.[3] Current assets include inventory, while fixed assets include such items as buildings and equipment.[4] Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs,[4] and financial assets, including such items asaccounts receivable, bonds and stocks.

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Asset characteristics It should be noted that - other than software companies and the like employees are not considered as assets, like machinery is, even though they are capable of producing value. The probable present benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;  The entity can control access to the benefit;  The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.

In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset's benefit for qualifying a resource as being an asset, provided the entity can control its use by other means. It is important to understand that in an accounting sense an asset is not the same as ownership. Assets are equal to "equity" plus "liabilities." The accounting equation relates assets, liabilities, and owner's equity: Assets = Liabilities +Stockholder's Equity (Owner's Equity) The accounting equation is the mathematical structure of the balance sheet. Assets are listed on the balance sheet. Similarly, in economics an asset is any form in which wealth can be held. Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board .[6] The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise."[7] Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.[clarification needed] In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.[8]
[edit]Current

assets

Current asset Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:

Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts). 2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3. Receivables — usually reported as net of allowance for uncollectable accounts. 4. Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule. 5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.
1.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.
Long-term investments

Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of four types of investments: 1. Investments in securities such as bonds, common stock, or long-term notes. 2. Investments in fixed assets not used in operations (e.g., land held for sale). 3. Investments in special funds (e.g. sinking funds or pension funds). Different forms of insurance may also be treated as long term investments.
Fixed assets

Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings,machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. These are also called capital assets in management accounting.
Intangible assets

Main article: Intangible asset Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trad e names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under either tangible or intangible assets.
Tangible assets

Tangible assets are those that have a physical substance and can be touched, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals.

Bookkeeping

Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as

the Single-entry bookkeeping system and the Double-entry bookkeeping system. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process. A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the "daybooks." The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct day book, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper

Single-entry system
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking (cheque) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. These days, single entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations. Sample revenue and expense journal for single-entry bookkeeping[1

Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook's details must be entered formally into journals to enable posting to ledgers. Daybooks include:     Sales daybook, for recording all the sales invoices. Sales credits daybook, for recording all the sales credit notes. Purchases daybook, for recording all the purchase invoices. Purchases credits daybook, for recording all the purchase credit notes.

Cash daybook, usually known as the cash book, for recording all money received as well as

money paid out. It may be split into two daybooks: receipts daybook for money received in, and payments daybook for money paid out. ]Petty

cash book

A petty cash book is a record of small value purchases usually controlled by imprest system. Items such as coffee, tea, birthday cards for employees, a few dollars if you're short on postage, are listed down in the petty cash book. ]Journals A journal is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits. A company can maintain one journal for all transactions, or keep several journals based on similar activity (i.e. sales, cash receipts, revenue, etc.) making transactions easier to summarize and reference later. For every debit journal entry recorded there must be an equivalent credit journal entry to maintain a balanced accounting equation [2]. [edit]Ledgers A ledger is a record of accounts, these accounts are recorded separately showing their beginning/ending balance. Unlike the journal, which lists financial transactions in chronological order without showing their balance but showing how much is going to be charged in each account. The ledger takes each financial transactions from the journal and records them into the right account for every transaction listed. The ledger also sums up the total of every account which is transferred into the balance sheet and income statement. There are 3 different kinds of ledgers that deal with bookkeeping. Ledgers include:  Sales ledger, which deals mostly with the Accounts Receivable account. This ledger consists

of the financial transactions made by customers to the business.  Purchase ledger is a ledger that goes hand and hand with the Accounts Payable account.

This is the purchasing transaction a company does.  General ledger representing the original 5 main accounts: assets, liabilities, equity, income,

and expenses

Chart of accounts
A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger.

Computerized bookkeeping

Computerized bookkeeping removes many of the paper "books" that are used to record transactions and usually enforces double entry bookkeeping.

Online bookkeeping
Online bookkeeping, or remote bookkeeping, allows source documents and data to reside in webbased applications which allow remote access for bookkeepers and accountants. All entries made into the online software are recorded and stored in a remote location. The online software can be accessed from any location in the world and permit the bookkeeper or data entry person to work from any location with a suitable data communications link.

Cost of goods sold
Cost of goods sold (COGS) refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out (FIFO), or average cost. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of goods made by the business include material, labor, and allocated overhead. The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.

Overview
Many businesses sell goods that they have bought or made/produced. When the goods are bought or made, the costs associated with such goods are capitalized as part of inventory (or stock) of goods.
[1]

These costs are treated as an expense in the period the business recognizes income from sale of

the goods.[2] Determining costs requires keeping records of goods or materials purchased and any discounts on such purchase. In addition, if the goods are modified,[3] the business must determine the costs incurred in modifying the goods. Such modification costs include labor, supplies or additional material, supervision, quality control, use of equipment, and other overhead costs. Principles for determining costs may be easily stated, but application in practice is often difficult due to a variety of consideration in the allocation of costs.[4] Cost of goods sold may also reflect adjustments. Among the potential adjustments are decline in value of the goods (i.e., lower market value than cost), obsolescence, damage, etc. When multiple goods are bought or made, it may be necessary to identify which costs relate to which particular goods sold. This may be done using an identification convention, such as specific identification of the goods, first-in-first-out (FIFO), or average cost. Alternative systems may be used

in some countries, such as last-in-first-out (LIFO), gross profit method, retail method, or combinations of these. Cost of goods sold may be the same or different for accounting and tax purposes, depending on the rules of the particular jurisdiction.

Debits and credits
From Wikipedia, the free encyclopedia

This article uses terms related to the American system of accounting know as GAAP (Generally Accepted Accounting Principles). The article still applies when working with the European accounting system known as IFRS (International Financial Reporting Standards).
Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two sides of each individual transaction recorded in any accounting system. A debit transaction can be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance. To understand which accounts are debited or credited in order to either increase or decrease their amounts, there are five fundamental accounts in accounting. The following are the five fundamental elements of any financial statement namely: Assets, Liabilities, Equity, Income and Expenses. Debits and credits form the basis of the double-entry bookkeeping system (as opposed to the Single-entry bookkeeping system); for every debit transaction there must be a corresponding credit transaction and vice versa. Every debit and credit value is initially recorded in Journals and from these journals transferred to ledgers and finally from these ledgers financial reports can then be prepared.

Introduction Debits and credits are a system of notation used in bookkeeping to determine how and where to record any financial transaction. In bookkeeping, instead of using addition '+' and subtraction '-' symbols, a transaction uses the symbols "dr" (Debit) or "cr" (Credit). The words "debits" and "credits" do not necessarily represent decreases or increases in an account, as they have different functions depending on the five different financial statement elements. In double-entry bookkeeping debit is used for increases in asset and expense transactions and credit is used for increases in a liability, income (gain) or equity transaction.

For bank transactions, money received in is treated as a debit transaction and money paid out is treated as a credit transaction. Traditionally, transactions are recorded in two columns of numbers: debits in the left hand column and credits in the right hand column. Keeping the debits and credits in separate columns allows each to be recorded and totalled independently. Where the total of the debit value amounts is lower than the total of the credit value amounts, a balancing debit value is posted to that nominal ledger account. That nominal ledger account is now "balanced". An account can have either a credit value balance or a debit value balance but not both. A debit can also be used to reduce the balance on a liability, income (gain) and equity account. This has the effect of reducing a credit balance by the value of the debit transaction. The balance in a nominal that is normally expected to hold a debit balance may change from a debit balance to a credit balance. A credit can also be used to reduce the balance on an asset or expense account. This has the effect of reducing a debit balance by the value of the credit transaction. The balance in a nominal that is normally expected to hold a credit balance may change from a credit balance to a debit balance. In some cases such as fixed assets, all debit transactions will be recorded in one nominal account and all credit transactions will be recorded in a contra nominal account, with the exception when an asset is disposed of. The purchase of an asset will be recorded in a fixed asset account (debit transaction) and the depreciation of the fixed asset (credit transaction) will be recorded in a contra nominal ledger account, fixed asset depreciation. The term "debit and credit" in accounting According to dictionary debit means 1. "a written note on bank account or a other financial record of a sum of money owed or spent', 2. 'a sum of money taken from a bank account". On the other hand credit means "liability, money in bank and so on."

If you are a student of accounting this concept of general dictionary will, certainly, misguide you. Why? In the accounting term debit means "left side of account" and credit means " right side of account". This is the eternal definition of "debit and credit" in accounting. The five accounting elements and how they are affected The five accounting elements[2] are all affected in either a positive or negative way. Note: A credit transaction does not always dictate a positive value or increase in a transaction. An asset for example is usually a debit transaction, where, when an asset has been acquired in a business the transaction will affect the debit side of an asset account i.e. an asset will increase on the debit side. For example:
Asset

Debits (dr) Credits (cr)

X

Where "X" denotes the effect of a transaction on the asset account. Therefore with all of the indicated accounts (Assets, Liability, Equity, Income and Expenses), the accounts will all increase on the debit or credit side denoted by the "X". Therefore the reverse will be true for all the accounts if they are decreased i.e. to decrease an asset account, the asset account must be credited. Standard increasing attributes for the other four accounts are as follows:
Liability

Debits (dr) Credits (cr)

X

Income

Debits (dr) Credits (cr)

X

Expenses

Debits (dr) Credits (cr)

X

Equity

Debits (dr) Credits (cr)

X

Debit and Credit principle Each transaction consists of debits and credits, and for every transaction they must be equal. For Every Transaction: The Value of Debits = The Value of Credits The extended accounting equation must also balance: 'A + E = L + OE + R'

(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenue) So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)' Debits are on the left and increase a debit account and decrease a credit account. Credits are on the right and increase a credit account and decrease a debit account. In all accounting operations there is always an effect on the accounting formula: A=E+L When a transaction takes place, traditionally the transaction would be recorded in a ledger or "T" account. A "T" account represents any account that is opened e.g. "Bank" that can be effected with either a debit or credit transaction. In accounting a debit (dr) is recognized on the left side of the T-account and the Credit (cr) is recognized on the right-hand side. In accounting it is acceptable to draw-up a ledger account in the following manner for representation purposes:
Bank

Debits (dr) Credits (cr)

Examples of accounts pertaining to the five accounting elements:
  

Asset accounts: Bank, Receivables, Inventory etc... Liability accounts: Payables, Loans, Bank overdrafts etc... Equity accounts: Capital, Drawings etc...

Income accounts: Services rendered, interest income etc...  Expense accounts: Telephone, Electricity, Repairs, Salaries etc...

There are numerous accounts related to the five accounting elements which should be reviewed before understanding the following example: Worked example: Quick Services business purchases a computer for ₤500 for the receptionist, on credit, from ABC Computers. Recognize the following transaction for Quick Services in a ledger account (Taccount):
Equipment (Asset)

(dr)

(cr)

500

To balance the accounting equation the corresponding account is created:
Payables (Liability)

(dr)

(cr)

500

The above example can be written in journal form: Equipment 500 ABC Computers (Payable) 500 Note the indentation of "ABC Computers" to indicate that this is the credit transaction. It is accepted accounting practice to indent credit transactions recorded within a journal. In the accounting equation form: A=E+L 500 = 0 + 500 (The accounting equation is therefore balanced)
[edit]Further

Examples

A business pays rent with cash: you increase rent (expense) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction. 2. A business receives cash for a sale: you increase cash (asset) by recording a debit transaction, and increase sales (revenue) by recording a credit transaction. 3. A business buys equipment with cash: You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction. 4. A business borrows with a cash loan: You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction. 5. A business pays salaries with cash: you increase salary (expenses) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction. 6. The totals show the net effect on the accounting equation and the double-entry principle where, the transactions are balanced.
1.

Account Debit Credit

1 Rent .

100

Bank

100

2 Bank .

50

Sale

50

3 Equip. .

5200

Bank

5200

4 Bank .

11000

Loan

11000

5 Salary .

5000

Bank

5000

6 Total (Dr) 21350 .

Total (Cr) [edit]'T'

21350

Accounts

The process of using debits and credits creates a ledger format that resembles the letter 'T'.[3] The term 'T' account is commonly used when discussing bookkeeping. Debits are placed on the left and credits on the right.
Debits Credits

TYPE DEBIT CREDIT

Asset

+

Liability −

+

Income −

+

Expense +

Equity

+

Therefore, if an Asset account is debited, the Asset amount (value) is increased. Same with an Expense account. If a Liability or an Income account is debited, the numerical figure will

decrease, etc. If a particular account is credited, there must be a corresponding Debit in another account in order to balance the transaction. Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. These account names do not refer to the accounting terms: debts and credits.[4]

Double-entry bookkeeping system
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts. The name derives from the fact that financial information used to be recorded in books - hence "bookkeeping" (whereas now it's recorded mainly in computer systems) and that these books were called ledgers (hence nominal ledger, etc) - and that each transaction was recorded twice (hence "double-entry"), with the two transactions being called a "debit" and a "credit". It was first codified in the 15th century. In modern accounting this is done using debits and credits within the accounting equation: Equity = Assets -Liabilities. The accounting equation serves as an error detection system: if at any point the sum of debits does not equal the corresponding sum of credits, an error has occurred. It follows that the sum of debits and credits must be zero. Double-entry bookkeeping is not a guarantee that no errors have been made - for example, the wrong nominal ledger account may have been debited or credited.

Timeline
Century Development Stage

12th

Later there are traces of the double-entry system in the accounting of the Islamic world from at least the 12th century.[1]

13th

The earliest extant records that follow the modern double-entry form are those of Amatino Manucci, a Florentine merchant at the end of the 13th century.[2]

14th

Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century.

15th

By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca Pacioli, a monk and collaborator of Leonardo da Vinci, first codified the system in amathematics textbook of 1494.[3] Pacioli is often called the "father of accounting" because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.[4][5] There is however controversy among scholars lately that Benedikt Kotruljević wrote the first manual on a double-entry bookkeeping system in his 1458 treatise Della mercatura e del mercante perfetto.[6][7][8][9][10][11]

Significance

Double-entry bookkeeping has been considered a fundamental innovation and a cornerstone of Capitalism by such thinkers as Werner Sombart and Max Weber, Sombart writing in "Medieval and Modern Commercial Enterprise" that "The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts." Accounts An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial Transaction Flows encompass primarily inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets,liabilities, and equity.[13] Within these primary groups each distinctive asset, liability, income and expense is represented by its respective "account". An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent

only the inflows and outflows absorbed in the financial-position elements on completion of the time period. Account types (nature)
Type Represent Examples

Real

Tangibles - Plant and Machinery, Furniture Physically tangible things in the real and Fixtures, Computers and Information world and certain intangible things not Processing Equipment etc. Intangibles having any physical existence - Goodwill, Patents and Copyrights

Person Business and Legal Entities al

Individuals, Partnership Firms, Corporate entities, Non-Profit Organizations, any local orstatutory bodies including governments at country, state or local levels

Temporary Income and Expenditure Accounts for recognition of the Nomin implications of the financial Sales, Purchases, Electricity Charges al transactions during each fiscal year till finalisation of accounts at the end

Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account). Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.
[edit]Account

types (periodicity of flow)

The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction.

The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year. Income is immediate inflow during the fiscal year. Expense is the immediate outflow during the fiscal year. An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows. Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense. Alternatively, a liability could be valued at the present value of future outflows.
Type of accounts Long term inflows Long term outflows Short term inflows Short term outflows

Real accounts Assets

Personal accounts

Assets

Liability

Nominal accounts

Incomes

Expenses

Items in accounts are classified into five broad groups, also known as the elements of the accounts: [14] Asset, Liability, Equity, Revenue, Expense. The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.
[edit]Accounting

entries

The double-entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries.  Any accounting entry in the double-entry accounting system will result in the recording of equal debit and credit amounts; that is, debits must equal credits.  If the accounting entries are recorded without error, at any point in time the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances.  The double-entry bookkeeping system ensures that the financial transaction has equal and opposite effects in at least two different accounts.  Accounting entries use terms such as debit and credit to avoid confusion regarding the opposite effect of the accounting entry e.g. If an accounting entry debits a particular account, the opposite account will be credited and vice versa.  The rules for formulating accounting entries are known as "Golden Rules of Accounting".  The accounting entries are recorded in the "Books of Accounts".  Regardless of which accounts and how many are impacted by a given transaction, the fundamental accounting equation A = L + OE will hold.
 [edit]Books

of accounts

It does this by ensuring that each individual financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system. The two entries have equal amounts and opposite signs, so that when all entries in the accounts are summed, the total is exactly the same: the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit record" (Dr.) in one account, and a "credit record" (Cr.) entry in the other account. The debit entry will be recorded on the debit side (left-hand side) of a General ledger and the credit entry will be recorded on the credit side (right-hand side) of a General ledger account. A General ledger has a Debit (left) side and a Credit (right) side. If the total of the entries on the debit

side is greater than the total on the credit side of the nominal ledger account, that account is said to have a debit balance.. Double entry is used only in nominal ledgers. It is not used in daybooks, which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct). (The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system.) However as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance. The double entry system uses nominal ledger accounts. From these nominal ledger accounts a trial balance can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.
[edit]Bookkeeping

process

The bookkeeping process refers primarily to recording the financial effects of financial transactions only into accounts. The variation between manual and any electronic accounting system stems from the latency [disambiguation needed] between the recording of the financial transaction and its posting in the relevant account. This delay, absent in electronic accounting systems due to instantaneous posting into relevant accounts, is not replicated in manual systems, thus giving rise to primary books of accounts such as Sales Book, Cash Book,

Bank Book, Purchase Book for recording the immediate effect of the financial transaction. In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multicolumnjournals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach. After a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. For example the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money) and a credit entry might be made in the account for "Sale of Class 2 Widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account. As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree - this agreement is not by chance -

because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made either in the journals or during the posting process. The error must be located and rectified and the totals of debit column and credit column recalculated to check for agreement before any further processing can take place. Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule. For example, the "inventory" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called theadjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements. Finally financial statements are drawn from the trial balance, which may include: the income statement, also known as the statement of financial results, profit and loss account, or P&L  the balance sheet, also known as the statement of financial position  the cash flow statement  the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity
 ]Abbreviations       

used in bookkeeping

A/C - Account A/R - Accounts Receivable A/P - Accounts Payable B/S - Balance Sheet c/d - Carried down b/d - Brought down c/f - Carried forward

b/f - Brought forward  Dr - Debit record  Cr - Credit record  G/L - General Ledger; (or N/L - Nominal Ledger)  P&L - Profit & Loss; (or I/S - Income Statement)  PP&E - Property, Plant and Equipment  TB - Trial Balance  GST - Goods and Services Tax  VAT - Value Added Tax  CST - Central Sale Tax  TDS - Tax Deducted at Source  AMT - Alternate Minimum Tax  EBITDA - Earnings before Interest,Taxes, Depreciation and Amortisation.  EBDTA - Earnings before Depreciation, Taxes and Amortisation.  EBT - Earnings before Taxes.  EAT - Earnings after Tax.  PAT - Profit after tax  PBT - Profit before tax  Depr - Depreciation
 [edit]Debits

and credits

Main article: Debits and credits Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true: assets = liabilities + equity For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are

recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance. Debits and credits are then defined as follows: Debit: A debit is recorded on the left hand side of a T account. it can also be defined as increase in asset and expenses while decrease in liability, revenue and capital.  Credit: A credit balance is recorded on the right hand side of a 'T' account Credit can also be defined as increase in liability, revenue and capital and decrease in assets and expenses.  Debit accounts = Asset and Expenses (also debit money received into bank accounts)  Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)
 [edit]Double

entry example 1

In this example the following will be used: Books of prime entry (Books of original entry) Sales Invoice Daybook (records customer Invoice Daybook)  Bank Receipts Daybook (records customer & non customer receipts)  Purchase Invoice Daybook (records supplier Invoice Daybook)  Bank Payments Daybook (records supplier & non supplier payments)

The books of prime entry are where transactions are first recorded. They are not part of the Double-entry system.

Ledger Cards
     

Customer Ledger Cards Supplier Ledger Cards General Ledger (Nominal Ledger) Bank Account Ledger Trade Creditors Ledger Trade Debtors Ledger

[edit]Purchase invoice daybook
Purchase Invoice Daybook

Date

Supplier Name

Referen Electric Widge Amount ce ity ts

10 July 2006

Electricity Company

PI1

1000

1000

12 July 2006

Widget Company

PI2

1600

1600

-------

-------

-------

Total

2600

1000

1600

====

==== ====

Credit

Debit Debit

Trade

Electrici Widget ty s

Creditors

G/L

G/L

control a/c

a/c

a/c

Each individual line is posted as follows: The amount value is posted as a credit to the individual supplier's ledger a/c  The analysis amount is posted as a debit to the relevant general ledger a/c

From example above: Line 1 - Amount value 1000 is posted as a credit to the Supplier's ledger a/c ELE01-Electricity Company  Line 2 - Amount value 1600 is posted as a credit to the Supplier's ledger a/c WID01-Widget Company

The totals of each column are posted as follows: Amount total value 2600 posted as a credit to the Trade creditors control a/c  Electricity total value 1000 posted as a debit to the Electricity General Ledger a/c  Widget total value 1600 posted as a debit to the Widgets General Ledger a/c

Double-entry has been observed because Dr = 2600 and Cr = 2600.
[edit]Bank payments daybook

The payments book is not part of the double-entry system.
Bank Payments Daybook

Date

Supplier Name

Referen Amou Supplier Wages ce nt s

17 July 2006

Electricity Company

BP701

1000

1000

19 July 2006

Widget Company

BP702

900

900

28 July 2006

Owner's Wages

BP703

400

400

-------

-------

-------

Total

2300

1900

400

====

====

====

Credit

Debit

Debit

Bank

Trade

Wages

Accou control Creditors nt a/c

control a/c

Keys: PI = Purchase Invoice, BP = Bank Payment Each individual line is posted as follows: The amount value is posted as a debit to the individual supplier's ledger a/c.  The analysis amount is posted as a credit to the relevant general ledger a/c.

From example above: Line 1 - Amount value 1000 is posted as a debit to the Supplier's ledger a/c ELE01-Electricity Company.  Line 2 - Amount value 900 is posted as a debit to the Supplier's ledger a/c WID01-Widget Company.

The totals of each column are posted as follows:

Amount total value 2300 posted as a credit to the Bank Account.  Trade Creditors total value 1900 posted as a debit to the Trade creditors control a/c.  Other total value 400 posted as a debit to the Wages control a/c.

Double-entry has been observed because Dr = 2300 and Cr = 2300. The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
[edit]Supplier ledger cards
Supplier Ledger Cards

A/c Code: ELE01 - Electricity Company

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

17 July 2006

Bank Payments Daybook

BP701

1000

10 July 2006

Invoice

PI1

1000

31 July 2006

Balance c/d

0

-------

-------

1000

1000

====

====

1 August Balance 2006 b/d

0

A/c Code: WID01 - Widget Company

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

19 July 2006

Bank Payments Daybook

BP702

900

12 July 2006

Invoice

PI2

1600

31 July 2006

Balance c/d

700

-------

-------

1600

1600

====

====

1 August Balance 2006 b/d [edit]Sales/customers

700

[edit]Sales daybook
Sales Invoice Daybook

Date

Customer Name

Referen Part Servi Amount ce s ce

2 July 2006

JJ Manufacturin g

SI1

2500 2500

29 July 2006

JJ Manufacturin g

SI2

3200

3200

------- ------- -------

Total

5700 2500 3200

====

=== ==== =

Debit

Cred Credi it t

Trade

Sales Sales

debtors Parts

Servic e

control a/c

a/c

a/c

Each individual line is posted as follows: The amount value is posted as a debit to the individual customer's ledger a/c.  The analysis amount is posted as a credit to the relevant general ledger a/c.

From example above: Line 1 - Amount value 2500 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing.  Line 2 - Amount value 3200 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing.

The totals of each column are posted as follows: Amount total value 5700 posted as a debit to the Trade debtors control a/c.  Sales-parts total value 2500 posted as a credit to the Sales parts a/c.  Sales-service total value 3200 posted as a credit to the Sales service a/c.

Double-entry has been observed because Dr = 5700 and Cr = 5700.
[edit]Customer ledger cards

Customer Ledger cards are not part of the Double-entry system. They are for memorandum purposes only. They allow you to know the total amount an individual customer owes you.
CUSTOMER LEDGER CARDS

A/c Code: JJM01 - JJ Manufacturing

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

2 July 2006

Sales invoice daybook

SI1

2500

20 July 2006

Bank receipts daybook

BR1

2500

29 July 2006

Sales invoice daybook

SI2

3200

31 July 2006

balance c/d

3200

-------

-------

5700

5700

====

====

1 August 2006

Balance b/d

3200

[edit]General (nominal) ledger GENERAL (NOMINAL) LEDGER

Sales parts

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

31 July 2006

Balance

c/d

2500

2 July 2006

Sales invoice daybook

SDB

2500

-------

-------

2500

2500

====

====

1 August 2006

Balance

b/d

2500

Sales service

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

31 May 2006

Balance

c/d

3200

29 July 2006

Sales invoice daybook

SDB

3200

-------

-------

3200

3200

====

====

1 June 2010

Balance

b/d

3200

Electricity

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

10 May

Electricity Co.

PDB

1000

30 May

Balance

c/d

1000

2010

2010

-------

-------

1000

1000

====

====

1 June 2010

Balance

b/d

1000

Water

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

12 May 2010

water Co.

Pdb

1600

31 May 2010

Balance

c/d

1600

-------

-------

1600

1600

====

====

1 August 2010

Balance

b/d

1600

Other a/c

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

28 July 2006

Owner's Wages

BPDB

400

31 July 2006

Balance

c/d

400

-------

-------

400

400

====

====

1 August 2006

Balance

b/d

400

Bank Control A/c

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

31 July 2006

Bank receipts daybook

BRDB

2500

31 July 2006

Bank payments daybook

BPDB

2300

31 July 2006

Balance

c/d

200

-------

-------

2500

2500

====

====

1 August 2006

Balance

b/d

200

Trade Debtors Control A/c

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

1 July 2006

Balance

b/d

0

31 July 2006

Bank receipts daybook

BRDB

2500

31 July 2006

Sales Invoice Daybook

SDB

5700

31 July 2006

Balance

c/d

3200

-------

-------

5700

5700

====

====

1 August 2006

Balance

b/d

3200

Trade Creditors Control A/c

Date

Details

Referen Amou ce nt

Date

Details

Referen Amou ce nt

31 July 2006

Bank Payments Daybook

BPDB

1900

1 July 2006

Balance

b/d

0

31 July 2006

Balance

c/d

700

31 July 2006

Purchase Daybook

PDB

2600

-------

-------

2600

2600

====

====

1 August 2006

Balance

b/d

700

The customers ledger cards shows the breakdown of how the trade debtors control a/c is made up. The trade debtors control a/c is the total of outstanding debtors and the customer ledger cards shows the amount due for each individual customer. The total of each individual customer account added together should equal the total in the trade debtors control a/c. The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up. The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards shows the amount due for each individual supplier. The total of each individual supplier account added together should equal the total in the trade creditors control a/c. Each Bank a/c shows all the money in and out through a bank. If you have more than one bank account for your company you will have to maintain separate bank account ledger in order to complete bank reconciliation statements and be able to see how much is left in each account.
[edit]Bank account
Bank A/c

Date

Detail Referen Amou s ce nt

Date

Details

Referen Amou ce nt

1 July 2006

Balan ce

b/d

0

17 July 2006

Bank Payments Daybook

BP701

1000

28 July 2006

Bank Payments Daybook

BP703

400

31 July 2006

Balance

c/d

200

-------

-------

2500

2300

====

====

1 August 2006

Balan ce

b/d

200

[edit]Unadjusted trial balance
Trial balance as at 31 July 2006

A/c description

Debi Cred t it

Sales-parts

2500

Sales-service

3200

Widgets 1600

Electricity 1000

Other

400

Bank

200

Trade Debtors Control 3200 A/c

Trade Creditors Control A/c

700

------- -------

6400 6400

=== === == ==

Both sides must have the same overall total

Debits = Credits.

The individual customer accounts are not to be listed in the trial balance, as the Trade debtors control a/c is the summary of each individual customer a/c...... The individual supplier accounts are not to be listed in the trial balance, as the Trade creditors control a/c is the summary of each individual supplier a/c. Important note: this example is designed to show double entry. There are methods of creating a trial balance that significantly reduce the time it takes to record entries in the general ledger and trial balance.
[edit]Profit-and-loss statement and balance sheet
Profit and loss statement

for the month ending 31 July 2006

Dr

x

Sales

x

Sales-parts

2500

x

Sales-service

3200

x

-------

x

5700

x

Widgets

1600

x

-------

x

Gross Profit

4100

x

Less expenses

x

Electricity

1000

x

Other

400

x

-------

x

1400

x

-------

x

Net Profit

2700

x

====

Balance sheet

as at 31 July 2006

Dr

x

Current Assets

x

Bank A/c

200

x

Trade Debtors 3200

x

-------

x

3400

x

Current Liabilities

x

Trade Creditors

700

x

-------

x

700

x

-------

x Net Current Assets 2700

x

=== =

x

Capital & Reserves

x

Revenue Reserves a/c

270 0

x

-------

x

2700

x

=== =

[edit]Double

Entry Example 2

[edit]Transactions

XYZ Company is closing its books for the end of the month. Each of the daily journals has been summarized and the amounts are ready to be transferred to the general ledger. The amounts to be transferred are:
   

Purchase raw materials on trade credit: 500,000 Pay workers from cash in bank to make goods: 1,500,000 Pay sales force from cash in bank to sell goods: 1,000,000 Sell goods for cash: 3,500,000

To close the books for the month, we will adjust expenses and revenue to zero by appropriately crediting and debiting the income summary and then closing the income summary to retained earnings(part of equity). These items are entered in the ledger below; each matching credit and debit have been numbered to make finding them in the ledger easier.
[edit]Ledgers General Ledger (in 000s)

Transaction

Debi Cred Balan t it ce

Expenses

Balance forward

-

1 Raw materials

500

500

2 Labor

1500

2000

3 Sales costs

1000

3000

5 Income summary

3000

-

Total 3000 3000

Revenue

Balance forward

-

4 Revenue from sales

3500

3500

6 Income summary

3500

-

Total 3500 3500

Cash

Balance forward

11000

2 Labor

1500

9500

3 Sales costs

1000

8500

4 Revenue from sales

3500

12000

Total 3500 2500

Accounts Payable

Balance forward

1000

1 Raw materials

500

1500

Total

-

500

Income summary

Balance forward

-

5 Expense

3000

3000

6 Revenue

3500

500

7 Retained earnings

500

-

Total 3500 3500

Retained earnings

Balance forward

10000

7 Income summary

500 10500

Total

-

500

Total all accounts:

1350 1350 0 0

The amount in equity (in the form of retained earnings) has changed with a net credit of 500,000. Since equity has a normal balance of credit, this means there is now 500,000 more in equity than at the beginning of the month.

Mark-to-market accounting
From Wikipedia, the free encyclopedia

Accountancy
Key concepts

Accountant · Accounting period ·Bookkeeping · Cash and accrual basis ·Constant Item Purchasing Power Accounting ·Cost of goods sold · Debits and credits ·Doubleentry system · Fair value accounting · FIFO & LIFO · GAAP /International Financial Reporting Standards ·General ledger · Historical cost · Matching principle · Revenue recognition · Trial balance

Fields of accounting

Cost · Financial · Forensic · Fund ·Management · Tax

Financial statements

Statement of Financial Position · Statement of cash flows · Statement of changes in equity ·Statement of comprehensive income · Notes ·MD&A · XBRL

Auditing

Auditor's report · Financial audit · GAAS / ISA ·Internal audit · Sarbanes–Oxley Act

Accounting qualifications

CA · CCA · CGA · CMA · CPA · CGFM

This box: view · talk · edit

Mark-to-market accounting
Mark-to-market or fair value accounting refers to accounting for the value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value. Fair value accounting has been a part of the U.S. Generally Accepted Accounting Principles (GAAP) since the early 1990s, and has been used increasingly since then. Mark-to-market accounting can make values on the balance sheet change frequently, as market conditions change. In contrast, book value, based on the original cost/price of an asset or liability, is more stable but can become outdated and inaccurate. Mark-to-market accounting can also become inaccurate if market prices deviate from the "fundamental" values of assets and liabilities. Buyers and sellers may claim a number of specific instances when this is the case, including inability to accurately collectively value the future income from assets and expenses from liabilities, possibly due to incorrect information or overoptimistic and over-pessimistic expectations.

History and development The practice of mark to market as an accounting device first developed among traders on futures exchanges in the 20th century. It was not until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his

account. On the other hand, if the market price of his contract has declined, the exchange charges his account that holds the deposited margin. If the balance of this accounts falls below the deposit required to maintain the position, the trader must immediately pay additional margin into the account to maintain his position (a "margin call"). As an example, the Chicago Mercantile Exchange, taking the process one step further, marks positions to market twice a day, at 10:00 am and 2:00 pm.[1] Over-the-counter (OTC) derivatives on the other hand are formulabased financial contracts between buyers and sellers, and are not traded on exchanges, so their market prices are not established by any active, regulated market trading. Market values are, therefore, not objectively determined or readily available (purchasers of derivative contracts are customarily furnished computer programs which compute market values based upon data input from the active markets and the provided formulas). During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently. Deals were monitored on a quarterly or annual basis, when gains or losses would be acknowledged or payments exchanged. As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available or the asset value was derived from other traded commodities, such as crude oil futures), so assets were being 'marked to model' in a hypothetical or synthetic manner using estimated valuations derived from financial modeling, and sometimes marked in a manipulative way to achieve spurious valuations. See Enron and the Enron scandal. Internal Revenue Code Section 475 contains the mark to market accounting method rule for taxation. Section 475 provides that qualified securities dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any

commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions).
[edit]FAS

115

Accounting for Certain Investments in Debt and Equity Securities (Issued May 1993) This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-tomaturity securities and reported at amortized cost less impairment.

Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

Debt and equity securities not classified as either held-tomaturity securities or trading securities are classified as availablefor-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity (Other Comprehensive Income).
 [edit]FAS

157
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Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (July 2010)

Statements of Financial Accounting Standards No. 157, Fair Value Measurements, commonly known as "FAS 157", is an accounting standard issued in September 2006 by the Financial Accounting Standards Board (FASB) which became effective for entities with fiscal years beginning after November 15, 2007.[2][3] FAS Statement 157 includes the following:

Clarity on the definition of fair value;  A fair value hierarchy used to classify the source of information used in fair value measurements (i.e. market based or non-market based);  Expanded disclosure requirements for assets and liabilities measured at fair value; and  A modification of the long-standing accounting presumption that a measurement date-specific transaction price of an asset or liability equals its same measurement date-specific fair value.  Clarification that changes in credit risk (both that of the counterparty and the company's own credit rating) must be included in the valuation.

FAS 157 defines "fair value" as: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” FAS 157 only applies when another accounting rule requires or permits a fair value measure for that item. While FAS 157 does not introduce any new requirements mandating the use of fair value, the definition as outlined does introduce certain key differences. First, it is based on the exit price (for an asset, the price at which it would be sold (bid price)) rather than an entry price (for an asset, the price at which it would be bought (ask price)), regardless of whether the entity plans to hold the asset for investment or resell it later. Second, FAS 157 emphasizes that fair value is market-based rather than entity-specific. Thus, the optimism that often characterizes an asset acquirer must be replaced with the skepticism that typically characterizes a dispassionate, risk-averse buyer. FAS 157’s fair value hierarchy underpins the concepts of the standard. The hierarchy ranks the quality and reliability of information used to determine fair values, with level 1 inputs being the most reliable and level 3 inputs being the least reliable. Information based on direct observations of transactions (e.g., quoted prices) involving the same assets and liabilities, not assumptions, offers superior reliability; whereas, inputs based on unobservable data or a reporting entity’s own assumptions about the assumptions market participants would use are the least reliable. A typical example of the latter is

shares of a privately held company whose value is based on projected cash flows. Problems can arise when the market-based measurement does not accurately reflect the underlying asset's true value. This can occur when a company is forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as a financial crisis. For example, if the liquidity is low or investors are fearful, the current selling price of a bank's assets could be much lower than the value under normal liquidity conditions. The result would be a lowered shareholders' equity. This issue was seen during the financial crisis of 2008/09 where many securities held on banks' balance sheets could not be valued efficiently as the markets had disappeared from them. In April 2009, however, the Financial Accounting Standards Board (FASB) voted on and approved new guidelines that would allow for the valuation to be based on a price that would be received in an orderly market rather than a forced liquidation, starting in the first quarter of 2009. Although FAS 157 does not require fair value to be used on any new classes of assets, it does apply to assets and liabilities that are carried at fair value in accordance with other applicable rules. The accounting rules for which assets and liabilities are held at fair value are complex. Mutual funds and securities firms have carried their assets and some liabilities at fair value for decades in accordance with securities regulations and other accounting guidance. For commercial banks and other types of financial services firms, some asset classes are required to be carried at fair value, such as derivatives and marketable equity securities. For other types of assets, such as loan receivables and debt securities, it depends on whether the assets are held for trading (active buying and selling) or for investment. All trading assets are carried at fair value. Loans and debt securities that are held for investment or to maturity are carried at amortized cost, unless they are deemed to be impaired (in which case, a loss is recognized). However, if they are available for sale or held for sale, they are required to be carried at fair value or the lower of cost or fair value, respectively. (FAS 65 and FAS 114 cover the accounting for loans, and FAS 115 covers the accounting for securities.) Notwithstanding the above, companies are permitted to account for almost any financial instrument at fair value, which they might elect to

do in lieu of historical cost accounting (see FAS 159, "The Fair Value Option"). Thus, FAS 157 applies in the cases above where a company is required or elects to carry an asset or liability at fair value. The rule requires a mark to "market," rather than to some theoretical price calculated by a computer — a system often criticized as “mark to make-believe.” (Occasionally, for certain types of assets, the rule allows for using a model) Sometimes, there is a thin market for assets, which trade relatively infrequently - often during an economic crisis. In these periods, there are few, if any buyers for such products. This complicates the marking process. In the absence of market information, an entity is allowed to use its own assumptions, but the objective is still the same: what would be the current value in a sale to a willing buyer. In developing its own assumptions, the entity can not ignore any available market data, such as interest rates, default rates, prepayment speeds, etc. FAS 157 makes no distinction between non cash-generating assets, i.e., broken equipment, which can theoretically have zero value if nobody will buy them in the market – and cash-generating assets, like securities, which are still worth something for as long as they earn some income from their underlying assets. The latter cannot be marked down indefinitely, or at some point, can create incentives for company insiders to buy them out from the company at the undervalued prices. Insiders are in the best position to determine the creditworthiness of such securities going forward. In theory, this price pressure should balance market prices to accurately reflect the "fair value" of a particular asset. Purchasers of distressed assets should step in to buy undervalued securities, thus moving prices higher, allowing other Companies to consequently mark up their similar holdings. Also new in FAS 157 is the idea of nonperformance risk. FAS 157 requires that in valuing a liability, an entity should consider the nonperformance risk. If FAS 157 simply required that fair value be recorded as an exit price, then nonperformance risk would be extinguished upon exit. However, FAS 157 defines fair value as the price at which you would transfer a liability. In other words, the nonperformance that must be valued should incorporate the correct

discount rate for an ongoing contract. An example would be to apply higher discount rate to the future cash flows to account for the credit risk above the stated interest rate. The Basis for Conclusions section has an extensive explanation of what was intended by the original statement with regards to nonperformance risk (paragraphs C40C49). In response to the rapid developments of the financial crisis of 2007– 2008, the FASB is fast tracking the issuance of the proposed FAS 157-d, Determining the Fair Value of a Financial Asset in a Market That Is Not Active.[4]
[edit]Simple

example

Example: If an investor owns 10 shares of a stock purchased for $4 per share, and that stock now trades at $6, the "mark-to-market" value of the shares is equal to (10 shares * $6), or $60, whereas the book value might (depending on the accounting principles used) only equal $40. Similarly, if the stock falls to $3, the mark-to-market value is $30 and the investor has lost $10 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.
[edit]Marking-to-market

a derivatives position

In marking-to-market a derivatives position, at pre-determined periodic intervals, each counterparty exchanges the change in the market value of their position in cash. For OTC derivatives, when one counterparty defaults, the sequence of events that follows is governed by an ISDA contract. When using models to calculate the ongoing exposure, FAS 157 requires that the entity consider the default risk ("nonperformance risk") of the counterparty and make a necessary adjustment to its calculations. For exchange traded derivatives, if one of the counterparties defaults in this periodic exchange, that counterparty's position is immediately closed by the exchange and the clearing house is substituted for that counterparty's position. Marking-to-market virtually eliminates credit risk, but it requires the use of monitoring systems that usually only large institutions can afford.[5]

[edit]Use

by brokers

Stock brokers allow their clients to access credit via margin accounts. These accounts allow clients to borrow funds to buy securities. Therefore, the amount of funds available is more than the value of cash (or equivalents). The credit is provided by charging a rate of interest, in a similar way as banks provide loans. Even though the value of securities (stocks or other financial instruments such asoptions) fluctuates in the market, the value of accounts is not calculated in real time. Marking-to-market is performed typically at the end of the trading day, and if the account value falls below a given threshold, (typically a predefined ratio by the broker), the broker issues a margin call that requires the client to deposit more funds or liquidate his account.
[edit]Effect

on subprime crisis and Emergency Economic Stabilization Act of 2008 Former FDIC Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially the requirement for banks to mark their assets to market, particularly mortgage-backed securities.[6] Whether or not this is true has been the subject of ongoing debate.[7][8] The debate arises because this accounting rule requires companies to adjust the value of marketable securities (such as the mortgagebacked securities (MBS) at the center of the crisis) to their market value. The intent of the standard is to help investors understand the value of these assets at a point in time, rather than just their historical purchase price. Because the market for these assets is distressed, it is difficult to sell many MBS at other than prices which may (or may not) be reflective of market stresses, which may be below the value that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors, the typically lower sale value was used as the market value rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value.

For some institutions, this also triggered a margin call, where lenders that had provided the funds using the MBS as collateral had contractual rights to get their money back.[9] This resulted in further forced sales of MBS and emergency efforts to obtain cash (liquidity) to pay off the margin call. Markdowns may also reduce the value of bank regulatory capital, requiring additional capital raising and creating uncertainty regarding the health of the bank.[10] It is the combination of the extensive use of financial leverage (i.e., borrowing to invest, leaving limited room in the event of a downturn), margin calls and large reported losses that may have exacerbated the crisis.[11] If cash flow-derived value — which excludes market judgment as to default risk but may also more accurately reflect 'actual' value if the market is sufficiently distressed — is used (rather than sale value), the size of market-value adjustments under the accounting standard would typically be reduced. One might question why banks or GSEs (Fannie Mae and Freddie Mac) are allowed to use high-risk, difficult-to-value assets like MBS or deferred tax assets as part of their regulatory capital base. Whether a margin call is involved is not part of the accounting standard itself; it is part of the contracts negotiated between lender and borrower. Critics charge that claims that this had happened are akin to claiming "the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. If only the banks could pretend the assets were valuable, then the system would be safe."[12] On September 30, 2008, the SEC and the FASB issued a joint clarification regarding the implementation of fair value accounting in cases where a market is disorderly or inactive. This guidance clarifies that forced liquidations are not indicative of fair value, as this is not an "orderly" transaction. Further, it clarifies that estimates of fair value can be made using the expected cash flows from such instruments, provided that the estimates reflect adjustments that a willing buyer would make, such as adjustments for default and liquidity risks.[13] Section 132 of the Emergency Economic Stabilization Act of 2008, titled "Authority to Suspend Mark-to-Market Accounting" restates the Securities and Exchange Commission’s authority to suspend the

application of FAS 157 if the SEC determines that it is in the public interest and protects investors. Section 133 of the Act, titled "Study on Mark-to-Market Accounting," requires the SEC, in consultation with the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.
[14]

The Emergency Economic Stabilization Act of 2008 was passed and signed into law on October 3, 2008. On October 7, 2008, the SEC began to conduct a study on "mark-to-market" accounting, as authorized by Sec. 133 of the Emergency Economic Stabilization Act of 2008.[15] On October 10, 2008, the FASB issued further guidance to provide an example of how to estimate fair value in cases where the market for that asset is not active at a reporting date.[16] On December 30, 2008, the SEC issued its report under Sec. 133 and decided not to suspend mark-to-market accounting.[17] On March 9, 2009, In remarks made in the Council on Foreign Relations in Washington, Federal Reserve Chairman Ben Bernanke said, "We should review regulatory policies and accounting rules to ensure that they do not induce excessive (swings in the financial system and economy)". Although he doesn't support the full suspension of basic proposition of Mark to Market principles, he is open to improving it and provide "guidance" on reasonable ways to value assets to reduce their pro- cyclical effects.[18] On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under "mark-to-market" accounting, a move that could ease balance-sheet pressures many companies say they are feeling during the economic crisis. On April 2, 2009, after a 15-day public comment period, FASB eased the mark-to-market rules. Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive. To proponents of the rules, this

removes the unnecessary "positive feedback loop" that can result in a deeply weakened economy.[19] On April 9, 2009, FASB issued the official update to FAS 157[20] that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses.[21] The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities. Opponents argue that the implications for investors are that the valuation of assets underlying such securities will be increasingly difficult to analyze, not less so. An example would be determining a company's actual assets, equity and earnings, which will be overstated if the assets are not allowed to be marked down appropriately.[citation needed][22][23] In January 2010, Adair Turner, Chairman of the UK's Financial Services Authority, said that marking to market had been a cause of inflated bankers' bonuses. This is because it produces a selfreinforcing cycle during a rising market that feeds into banks' profit estimates. Imaginary Numbers Recipient of the 2002 Ig Nobel Prize in Economics "for adapting the mathematical concept of imaginary numbers for use in the business world" can be found at List_of_Ig_Nobel_Prize_winners#2002

Comparison of Cash Method and Accrual Method of accounting
The two primary accounting methods of the cash and the accruals basis (the difference being primarily one of timing) are used to calculate US public debt,[1] as well as taxable income for U.S. federal income taxes and other income taxes. According to the Internal Revenue Code, a taxpayer may compute taxable income by:

1. 2. 3.
4.

the cash receipts and disbursements method; an accrual method; any other method permitted by the chapter; or any combination of the foregoing methods permitted under regulations

prescribed by the Secretary.[2] As a general rule, a taxpayer must compute taxable income using the same accounting method he / she uses to compute income in keeping his / her books. [3] Also, the taxpayer must maintain a consistent method of accounting from year to year. Should he / she change from the cash basis to the accrual basis (or vice versa), he / she must notify and secure the consent of the Secretary.[4]

Cash basis
Cash basis tax payers include income when it is received, and claim deductions when expenses are paid.[5] A cash basis taxpayer can look to the doctrine of constructive receipt and the doctrine of cash equivalence to help determine when income is received. Most individuals start as cash basis taxpayers. There are four types of taxpayers that cannot use the cash basis: (1) corporations with over $5,000,000 in gross receipts; (2) partnerships with at least one C corporation partner; (3) tax shelters;[6] and (4) taxpayers required to keep inventory (retail, wholesale, manufacturer etc...)[7] Exceptions (1) Farming Businesses (2) Qualified PSC's (3) Entities with gross receipts of not more than $7,000,000 [8] Similar definition of cash basis accounting is true for financial accounting purposes.[9

Accrual basis Accrual basis taxpayers include items when they are earned and claim deductions when expenses are incurred.[10] An accrual basis taxpayer looks to the “all-events test” and “earlier-of test” to determine when income is earned.[11] Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred that fix the right to receive income and the amount of the income can be determined with reasonable accuracy."[12] Under the "earlier-of test", an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefore is due, or (3) payment therefore is made, whichever happens earliest.[13] Under the earlier of test outlined in Revenue Ruling 74-607, an accrual basis taxpayer may be treated, as

a cash basis taxpayer, when payment is received before the required performance and before the payment is actually due. An accrual basis taxpayer generally can claim a deduction “in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.”[14] Similar definition of accrual basis accounting is true for financial accounting purposes, except that revenue can't be recognized until it's earned even if a cash payment has already been received.[9] History Originally, federal law required all taxpayers to use the cash basis accounting.[15] However, many businesses used the accrual basis, as most generally accepted accounting principles ("GAAP") were based thereon, and objected to the new law.[16] Less than a year after the 1913 Revenue Act, the IRS allowed use of the accrual basis for deductions, then for income, and in 1916, Congress formally adopted the accrual basis accounting into U.S. tax law.[17]

FIFO and LIFO accounting
FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact newest physical object has been tracked and sold; this is just an inventory technique. LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in times of inflation. The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is

essentially the amount by which an entity's taxable income has been deferred by using the LIFO method. LIFO liquidation
Notwithstanding its deferred tax advantage, a LIFO inventory system can lead to LIFO liquidation, a situation where in the absence of new replacement inventory or a search for increased profits, older inventory is increasingly liquidated (or sold). If prices have been rising, for example through inflation, this older inventory will have a lower cost, and its liquidation leads to the recognition of higher net income and the payment of higher taxes, thus reversing the deferred tax advantage that initially encouraged the adoption of a LIFO system. Some companies who use LIFO have decades-old inventory recorded on their books at a very low cost. For these companies a LIFO liquidation results in an inflated net income (and higher tax payments). Companies can use liquidations to manage their earnings. Also mobile telecom operators either use FIFO or LIFO to allocate remaining call credit a customer did not fully use in a billing period. In telecom terms FIFO is good for the customers while LIFO is good for the telecom operator. With small amount of carry over duration, call credit is to be lost sooner with LIFO than with FIFO as a customer first uses his old call credit( that he had left from previous month) rather than first needing to use all the new credit before using the old call credit.

Inventory
the goods and materials themselves, especially those held available in stock by a business; and this has become the primary meaning of the term in North American English, equivalent to the term "stock" in British English. In accounting, inventory or stock is considered an asset. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.

Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs. See inventory proportionality.

Business inventory
[edit]The

reasons for keeping stock

There are three basic reasons for keeping an inventory: 1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product stage. Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. This stock is then used while that changeover is happening. This stock can be eliminated by tools like SMED.

These classifications apply along the whole Supply chain, not just within a facility or plant. Where these stocks contain the same or similar items, it is often the work practice to hold all these stocks mixed together before or after

the sub-process to which they relate. This 'reduces' costs. Because they are mixed up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock, which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes, which makes the situation even more acute.
[edit]Special 

terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. [1]  Stockout means running out of the inventory of an SKU.  "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.
[edit]Typology

1. Buffer/safety stock 2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock) 3. De-coupling (Buffer stock that is held by both the supplier and the user) 4. Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer) 5. Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet)
Inventory examples

While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory

tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into: Raw materials - materials and components scheduled for use in making a product.  Work in process, WIP - materials and components that have begun their transformation to finished goods.  Finished goods - goods ready for sale to customers.  Goods for resale - returned goods that are salable.

For example:
Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to

install a complex inventory system, but unless there is a good understanding of the role of inventory and its parameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation. Typical Inventory Management techniques include Pareto Curve ABC Classification[2] and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to create The K Curve Methodology.[3] A case study of k-curve[4] benefits to one company shows a successful implementation. Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean.[5] Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications.
[edit]Principle [edit]Purpose

of inventory proportionality

Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory," that is, inventory that would be left over of another product when the first product runs out. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management, replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first, while at the same time balancing out the inventory supply of all products to make their inventories more proportional, and thereby

closer to achieving the primary goal. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future; this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages, a much more accurate and optimal outcome. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a per-product basis.
[edit]Applications

The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today.[6]
Roots

The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time parts inventory management made famous by Toyota Motors in the 1980s.[3] High-level inventory management It seems that around 1880[7] there was a change in manufacturing practice from companies with relatively homogeneous lines of products to vertically integrated companies with unprecedented diversity in processes and products. Those companies (especially in metalworking) attempted to achieve success through economies of scope - the gains of jointly producing two or more products in one facility. The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. However, the burgeoning need for financial reporting after 1900 created unavoidable pressure for financial accounting of stock and the management need to cost manage products became overshadowed. In particular, it was the need for audited accounts that sealed the fate of managerial cost accounting. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory. Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period: Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available 2. Cost of goods available − cost of ending inventory at the end of the period = cost of goods sold
1.

The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure.

Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) and its inverse Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio This ratio estimates how many times the inventory turns over a year. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced. While these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include:
 Specific

Identification  Weighted Average Cost  Moving-Average Cost  FIFO and LIFO. Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold.

The ratio may not be able to reflect the usability of future production demand, as well as customer demand. Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory turns. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess. Accounting for inventory Each country has its own rules about accounting for inventory that fit with their financial-reporting rules. For example, organizations in the U.S. define inventory to suit their needs within US Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities and Exchange Commission (SEC) and other federal and state agencies. Other countries often have similar arrangements but with their own GAAP and national agencies instead. It is intentional that financial accounting uses standards that allow the public to compare firms' performance, cost accounting functions internally to an organization and potentially with much greater flexibility. A discussion of inventory from standard and Theory of Constraints-based (throughput) cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. The internal costing/valuation of inventory can be complex. Whereas in the past most enterprises ran simple, one-process factories, such enterprises are quite probably in the minority in the 21st century. Where 'one process' factories exist, there is a market for the goods created, which establishes an independent market value for the good. Today, with multistage-process companies, there is much inventory that would once have been finished goods which is now held as

'work in process' (WIP). This needs to be valued in the accounts, but the valuation is a management decision since there is no market for the partially finished product. This somewhat arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led to some unintended and undesirable results.
Financial accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other purposes and requires additional expense for its protection. Inventory may also cause significant tax expenses, depending on particular countries' laws regarding depreciation of inventory, as in Thor Power Tool Company v. Commissioner. Inventory appears as a current asset on an organization's balance sheet because the organization can, in principle, turn it into cash by selling it. Some organizations hold larger inventories than their operations require in order to inflate their apparent asset value and their perceived profitability. In addition to the money tied up by acquiring inventory, inventory also brings associated costs for warehouse space, for utilities, and for insurance to cover staff to handle and protect it from fire and other disasters, obsolescence, shrinkage (theft and errors), and others. Such holding costs can mount up: between a third and a half of its acquisition value per year. Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. The conflicting objectives of cost control and customer service often pit an organization's financial and operating managers against its sales and marketing departments. Salespeople, in particular, often receive sales-commission payments, so unavailable goods may reduce their potential personal income. This conflict can be minimised by reducing production time to being near or less than customers' expected delivery time. This effort, known as "Lean production" will significantly reduce working capital tied up in

inventory and reduce manufacturing costs (See the Toyota Production System).
Role of inventory accounting

By helping the organization to make better decisions, the accountants can help the public sector to change in a very positive way that delivers increased value for the taxpayer’s investment. It can also help to incentivise progress and to ensure that reforms are sustainable and effective in the long term, by ensuring that success is appropriately recognized in both the formal and informal reward systems of the organization. To say that they have a key role to play is an understatement. Finance is connected to most, if not all, of the key business processes within the organization. It should be steering the stewardship and accountability systems that ensure that the organization is conducting its business in an appropriate, ethical manner. It is critical that these foundations are firmly laid. So often they are the litmus test by which public confidence in the institution is either won or lost. Finance should also be providing the information, analysis and advice to enable the organizations’ service managers to operate effectively. This goes beyond the traditional preoccupation with budgets – how much have we spent so far, how much do we have left to spend? It is about helping the organization to better understand its own performance. That means making the connections and understanding the relationships between given inputs – the resources brought to bear – and the outputs and outcomes that they achieve. It is also about understanding and actively managing risks within the organization and its activities.
[edit]FIFO

vs. LIFO accounting

Main article: FIFO and LIFO accounting When a merchant buys goods from inventory, the value of the inventory account is reduced by the cost of goods sold (COGS). This is simple where the CoG has not varied across those held in stock; but where it has, then an agreed

method must be derived to evaluate it. For commodity items that one cannot track individually, accountants must choose a method that fits the nature of the sale. Two popular methods that normally exist are: FIFO and LIFO accounting (first in first out, last in - first out). FIFO regards the first unit that arrived in inventory as the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation. Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.
[edit]Standard

cost accounting

Standard cost accounting uses ratios called efficiencies that compare the labour and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. As long as similar actual and standard conditions obtain, few problems arise. Unfortunately, standard cost accounting methods developed about 100 years ago, when labor comprised the most important cost in manufactured goods. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases. Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing manager's performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When (not if) something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though s/he has no control over the production requirement or the problem. In adverse economic times, firms use the same efficiencies to downsize, rightsize, or otherwise reduce their labor force.

Workers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting. They have not, however, found a successor.
Theory of constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the cost-accounting problems in what he calls the "cost world." He offers a substitute, called throughput accounting, that uses throughput (money for goods sold to customers) in place of output (goods produced that may sell or may boost inventory) and considers labor as a fixed rather than as a variable cost. He defines inventory simply as everything the organization owns that it plans to sell, including buildings, machinery, and many other things in addition to the categories listed here. Throughput accounting recognizes only one class of variable costs: the truly variable costs, like materials and components, which vary directly with the quantity produced. Finished goods inventories remain balance-sheet assets, but labor-efficiency ratios no longer evaluate managers and workers. Instead of an incentive to reduce labor cost, throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses and changes in inventory on the other. Those relationships direct attention to the constraints or bottlenecks that prevent the system from producing more throughput, rather than to people - who have little or no control over their situations. National accounts Inventories also play an important role in national accounts and the analysis of the business cycle. Some shortterm macroeconomic fluctuations are attributed to the

]Distressed

inventory

Also known as distressed or expired stock, distressed inventory is inventory whose potential to be sold at a normal cost has passed or will soon pass. In certain industries it could also mean that the stock is or will soon be impossible to sell. Examples of distressed inventory include products that have reached their expiry date, or have reached a date in advance of expiry at which the planned market will no longer purchase them (e.g. 3 months left to expiry), clothing that is defective or out of fashion, and old newspapers or magazines. It also includes computer or consumer-electronic equipment that is obsolete or discontinued and whose manufacturer is unable to support it. One current example of distressed inventory is the VHS format.[8] In 2001, Cisco wrote off inventory worth US $2.25 billion due to duplicate orders.[9] This is one of the biggest inventory writeoffs in business history. Inventory credit Inventory credit refers to the use of stock, or inventory, as collateral to raise finance. Where banks may be reluctant to accept traditional collateral, for example in developing countries where land titlemay be lacking, inventory credit is a potentially important way of overcoming financing constraints. This is not a new concept; archaeological evidence suggests that it was practiced in Ancient Rome. Obtaining finance against stocks of a wide range of products held in a bonded warehouse is common in much of the world. It is, for example, used with Parmesan cheese in Italy.[10] Inventory credit on the basis of stored agricultural produce is widely used in Latin American countries and in some Asian countries.[11] A precondition for such credit is that banks must be confident that the stored product will be available if they need to call on the collateral; this implies the existence of a reliable network of certified warehouses. Banks also face problems in valuing the inventory. The possibility of sudden falls in commodity prices

means that they are usually reluctant to lend more than about 60% of the value of the inventory at the time of the loan.

Average cost method
Under the average cost method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period. The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory. There are two commonly used average cost methods: Simple Weighted-average cost method and moving-average cost method.

Weighted Average Cost Weighted Average Cost is a method of calculating Ending Inventory cost. It is also known as AVCO It takes Cost of Goods Available for Sale and divides it by the total amount of goods from Beginning Inventory and Purchases. This gives a Weighted Average Cost per Unit. A physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost. Moving-Average Cost Moving-Average (Unit) Cost is a method of calculating Ending Inventory cost. Assume that both Beginning Inventory and beginning inventory cost are known. From them the Cost per Unit of Beginning Inventory can be calculated. During the year, multiple purchases were made. Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory. Similarly, the number of units bought is added to beginning inventory to get Current Goods Available for Sale.

After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods. Also during the year, multiple sales happened. The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods. This deducted amount is added to Cost of Goods Sold. At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.

Cash conversion cycle
In management accounting, the Cash Conversion Cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable.

Definition
CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations. = Inventory conversion period Avg. Inventory COGS / 365 + Receivables conversion period – Payables conversion period Avg. Accounts Receivable Credit Sales / 365 Avg. Accounts Payable COGS / 365

=

+

Derivation

Cashflows insufficient. The term "cash conversion cycle" refers to the timespan between a firm's disbursing and collecting cash. However, the CCC cannot be directly observed in cashflows, because these are also influenced by investment and financing activities; it must be derived from Statement of Financial Position data associated with the firm's operations. Equation describes retailer. Although the term "cash conversion cycle" technically applies to a firm in any industry, the equation is

generically formulated to apply specifically to a retailer. Since a retailer's operations consist in buying and selling inventory, the equation models the time between (1) disbursing cash to satisfy the accounts payable created by sale of a unit of inventory, and (2) collecting cash to satisfy the accounts receivable generated by that sale. Equation describes a firm that buys & sells on account. Also, the equation is written to accommodate a firm that buys and sells on account. For a cash-only firm, the equation would only need data from sales operations (e.g. changes in inventory), because disbursing cash would be directly measurable as purchase of inventory, and collecting cash would be directly measurable as sale of inventory. However, no such 1:1 correspondence exists for a firm that buys and sells on account: Increases and decreases in inventory do not occasion cashflows but accounting vehicles (receivables and payables, respectively); increases and decreases in cash will remove these accounting vehicles (receivables and payables, respectively) from the books. Thus, the CCC must be calculated by tracing a change in cash through its effect upon receivables, inventory, payables, and finally back to cash—thus, the term cash conversion cycle, and the observation that these four accounts "articulate" with one another.
Label Transaction Accounting (use different accounting vehicles if the transactions occur in a different order) Operations (increasing

 Suppliers (agree to) deliver A inventory →Firm owes $X cash (debt) to suppliers B Customers (agree to) acquire that inventory →Firm is owed $Y

inventory by $X) →Create accounting vehicle (increasing accounts payable by $X)  Operations

(decreasing inventory by $X)

→Create accounting vehicles cash (credit) from customers (booking "COGS" expense of $X; accruing revenue and increasing accounts receivable of $Y)  Cashflo Firm disburse s $X C cash to supplier s →Firm removes its debts to its suppliers →Remove accounting vehicle (decreasing accounts payable by $X) Fir m col lec ts $Y cas h D fro m cus to me rs →Firm removes its credit from its customers. →Remove accounting vehicle (decreasing accounts receivable by $Y.)  as hfl ow s ( cre asi ng ca sh by $Y ) ws (decreasi ng cash by $X)

Taking these four transactions in pairs, analysts draw attention to five important intervals, referred to as conversion cycles (or conversion periods):
 the

Cash Conversion Cycle emerges as interval C→D (i.e. disbursing cash→collecting cash).

 the

payables conversion period (or "Days payables outstanding") emerges as interval A→C (i.e. owing cash→disbursing cash)  the operating cycle emerges as interval A→D (i.e. owing cash→collecting cash) the inventory conversion period or "Days inventory outstanding" emerges as interval A→B (i.e. owing cash→being owed cash)  the receivables conversion period (or "Days sales outstanding") emerges as interval B→D (i.e.being owed cash→collecting cash

Knowledge of any three of these conversion cycles permits derivation of the fourth (leaving aside the operating cycle, which is just the sum of the inventory conversion period and the receivables conversion period.) Hence,
interval {C → = D} CCC (in days) = interval {A → B} + interval {B → D} – interval {A → C} Payables conversion period Inventory conversion + period Receivables conversion – period

In calculating each of these three constituent Conversion Cycles, we use the equation TIME =LEVEL/RATE (since each interval roughly equals the TIME needed for its LEVEL to be achieved at its corresponding RATE). We estimate its LEVEL "during the period in question" as the average of its levels in the two balance-sheets that surround the period: (Lt1+Lt2)/2.  To estimate its RATE, we note that Accounts Receivable grows only when revenue is accrued; and Inventory shrinks and Accounts Payable grows by an amount equal to the COGS expense (in the long run, since COGS actually accrues sometime after the inventory delivery, when the customers acquire it).

Payables conversion period: Rate = [inventory increase + COGS], since these are the items for the period that can increase "trade accounts payables," i.e. the ones that grew its inventory.

NOTICE that we make an exception when calculating this interval: although we use a period average for the LEVEL of inventory, we also consider any increase in inventory as contributing to its RATE of change. This is because the purpose of the CCC is to measure the effects of inventory growth on cash outlays. If inventory grew during the period, we want to know about it. Inventory conversion period: Rate = COGS, since this is the item that (eventually) shrinks inventory.  Receivables conversion period: Rate = revenue, since this is the item that can grow receivables (sales).

Working capital
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

Working Capital = Current Assets Net Working Capital = Current Assets − Current Liabilities Equity Working Capital = Current Assets − Current Liabilities − Longterm Debt
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds 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

Calculation

Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:    accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit. An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to: Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances. Cash balance items often attract a one-for-one purchase price adjustment.

Working capital management Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm'sshort-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
Decision criteria

By definition, working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw

material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA).

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing thecurrent assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.  Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Progress (WIP) and similarly, theFinished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity(EOQ); Economic quantity  Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on

cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.  Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

Days sales outstanding
In accountancy, Days Sales Outstanding (also called Days Receivables) is a calculation used by a company to estimate their average collection period. A low number of days indicates that the company collects its outstanding receivables quickly. Typically, Days sales outstanding is calculated monthly. The days sales outstanding (DSO) figure is an index of the relationship between outstanding receivables and credit account sales achieved over a given period. The Days sales outstanding analysis provides general information about the number of days on average that customers take to pay invoices. Days sales outstanding is considered an important tool in measuring liquidity. Days sales outstanding tends to increase as a company becomes less risk averse. Higher Days sales outstanding can also be an indication of poor follow up on delinquencies, or higher DSO might be the result of inadequate analysis of applicants for open account credit terms. An increase in DSO can result in cash flow problems, and may result in a decision to increase the creditor company's bad debt reserve. Days Sales Outstanding, or DSO, is calculated as: Total Outstanding Receivables at the end of the period analyzed divided by Total Credit Sales for the period analyzed (typically 90 or 365 days), times the number of days in the period analyzed. That is, DSO = (Receivables/Sales) * Days in Period (can use average receivables as a more conservative estimate)

Days sales outstanding can vary from month to month, and over the course of a year with a company's seasonal business cycle. Of interest when analyzing the performance of a company is the trend in DSO. If DSO is getting longer, customers are taking longer to pay their bills, which may be a warning that customers are dissatisfied with the company's product or service, or that sales are being made to customers that are less credit-worthy, or that salespeople have to offer longer payment terms in order to generate sales. It could also mean that the company has an inefficient or overburdened credit and collections department. Many financial reports will state Receivables Turnover defined as Net Credit Account Sales / Trade Receivables; divide this value into the time period in Days to get DSO. However, Days sales outstanding is not the most accurate indication of the efficiency of accounts receivable department. Changes in sales volume influence the outcome of the days sales outstanding calculation. For example, even if the overdue balance stays the same, an increase of sales can result in a lower DSO. A better way to measure the performance of credit and collection function is by looking at the total overdue balance in proportion of the total accounts receivable balance (total AR = Current + Overdue), which is sometimes calculated using the Days Delinquent Sales Outstanding (DDSO) formula.

Days payable outstanding
From Wikipedia, the free encyclopedia

Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers. The formula for DPO is:

where ending A/P is the accounts payable balance at the end of the accounting period being considered and COGS/day is calculated by dividing the total cost of goods sold per year by 365 days

Days in inventory
From Wikipedia, the free encyclopedia

Days in inventory(DII) is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The formula for DII is:

where the average inventory is the average of inventory levels at the beginning and end of an accounting period, and COGS/day is calculated by dividing the total cost of goods sold per year by 365 days.[1]

Overtrading
Overtrading is a term in financial statement analysis. Overtrading often occurs when companies expand its own operations too quickly (aggressively) [1]. Overtraded companies enter a negative cycle, where increase in interest expenses negatively impact net profit leads to lesser working capital leads to increase borrowings leads to more interest expense and the cycles continues. Overtraded companies eventually face liquidity problems and/or running out of working capital.

Conditions
         

Rapid growth in business development and sales. Lesser net profit. The business running a business with limited knowledge. Cash flow problem or short of working capital. Bad cash budget or unrealistic. Having large amount of unpaid vendors. High amount of financial interest expenditure. High gearing ratio. Keen market competition. Overstock or slow movement of inventory.

Consignment stock
Consignment stock is stock legally owned by one party, but held by another.

Ownership Ownership of consignment stock is passed only when the stock is used (issued). Unused stock in a warehouse may be returned to the manufacturer. Accounting
As ownership of consignment stock is not transferred until use, invoicing is not immediate. To account for a replenishment of consignment stock at a customer site, a manufacturer must creditinventory and debit customer consignment stock. Only after a customer actually uses the consignment stock may an accounts payable be created

Manufacturing
From Wikipedia, the free encyclopedia

Part of a series of articles on

Industry

Manufacturing methods

Batch production • Job production Continuous production

Improvement methods
LM • TPM • QRM • VDM TOC • Six Sigma • RCM

Information & communication
ISA-88 • ISA-95 • ERP SAP • IEC 62264 • B2MML

Process control
PLC • DCS

Assembly of Section 41 of a Boeing 787 Dreamliner.

Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale. Such finished goods may be used for manufacturing other, more complex products, such as aircraft, household

appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users – the "consumers". Manufacturing takes turns under all types of economic systems. In a free market economy, manufacturing is usually directed toward themass production of products for sale to consumers at a profit. In a collectivist economy, manufacturing is more frequently directed by the state to supply a centrally planned economy. In free market economies, manufacturing occurs under some degree of governmentregulation. Modern manufacturing includes all intermediate processes required for the production and integration of a product's components. Some industries, such as semiconductor and steel manufacturers use the term fabrication instead. The manufacturing sector is closely connected with engineering and industrial design. Examples of major manufacturers in the North America include General Motors Corporation, General Electric, and Pfizer. Examples in Europe include Volkswagen Group, Siemens, andMichelin. Examples in Asia include Toyota, Samsung, and Bridgestone.

History and development In its earliest form, manufacturing was usually carried out by a single skilled artisan with assistants. Training was by apprenticeship. In much of the pre-industrial world the guild system protected the privileges and trade secrets of urban artisans.  Before the Industrial Revolution, most manufacturing occurred in rural areas, where household-based manufacturing served as a supplemental subsistence strategy to agriculture (and continues to do so in places). Entrepreneurs organized a number of manufacturing households into a single enterprise through the putting-out system.  Toil manufacturing is an arrangement whereby a first firm with specialized equipment processes raw materials or semi-finished goods for a second firm.
 [edit]Manufacturing    

systems: The changing methods of manufacturing

Craft or Guild system Putting-out system English system of manufacturing American system of manufacturing

            

Soviet collectivism in manufacturing Mass production Just In Time manufacturing Lean manufacturing Flexible manufacturing Mass customization Agile manufacturing Rapid manufacturing Prefabrication Packaging and labeling Ownership Fabrication Publication of manufacturing

[edit]Economics

According to some economists, manufacturing is a wealth-producing sector of an economy, whereas a service sector tends to be wealthconsuming.[1][2] Emerging technologies have provided some new growth in advanced manufacturing employment opportunities in the Manufacturing Belt in the United States. Manufacturing provides important material support for national infrastructure and fornational defense. On the other hand, most manufacturing may involve significant social and environmental costs. The clean-up costs of hazardous waste, for example, may outweigh the benefits of a product that creates it. Hazardous materials may expose workers to health risks. Developed countries regulate manufacturing activity with labor laws and environmental laws. In the U.S, manufacturers are subject to regulations by the Occupational Safety and Health Administration and the United States Environmental Protection Agency. In Europe, pollution taxes to offset environmental costs are another form of regulation on manufacturing activity. Labor Unions and craft guilds have played a historic role in the negotiation of worker rights and wages. Environment laws and labor protections that are available in developed nations may not be available in the third world. Tort law and product liability impose additional costs on manufacturing.

Manufacturing requires huge amounts of fossil fuels. The construction of a single car in the United States requires, on average, at least 20 barrels of oil.[3]
[edit]Manufacturing

and investment around the world

Surveys and analyses of trends and issues in manufacturing and investment around the world focus on such things as: the nature and sources of the considerable variations that occur cross-nationally in levels of manufacturing and wider industrialeconomic growth;
  

competitiveness; and attractiveness to foreign direct investors.

In addition to general overviews, researchers have examined the features and factors affecting particular key aspects of manufacturing development. They have compared production and investment in a range of Western and non-Western countries and presented case studies of growth and performance in important individual industries and market-economic sectors.[4][5] On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand.[6] A total of 3.2 million – one in six U.S. manufacturing jobs – have disappeared between 2000 and 2007.[7]
[edit]Taxonomy  

of manufacturing processes

Taxonomy of manufacturing processes Manufacturing Process Management categories

[edit]Manufacturing 

Chemical industry  Pharmaceutical Construction

 

   

Electronics  Semiconductor Engineering  Manufacturing engineering  Production engineering  Process Engineering  Industrial Engineering  Biotechnology  Emerging technologies  Nanotechnology  Synthetic biology, Bioengineering Energy industry Food and Beverage  Agribusiness  Brewing industry  Food processing Industrial design  Interchangeable parts Metalworking  Smith  Machinist  Machine tools  Cutting tools (metalworking)  Free machining  Tool and die maker  Global steel industry trends  Steel production Metalcasting Plastics Telecommunications Textile manufacturing  Clothing industry  Sailmaker  Tentmaking Transportation  Aerospace manufacturing

  

Automotive industry Bus manufacturing Tire manufacturing

[edit]Theories   

Taylorism Fordism Scientific management

[edit]Control 

Management  List of management topics  Total Quality Management Quality control  Six Sigma

Distribution (business)
Product distribution (or place) is one of the four elements of the marketing mix. An organization or set of organizations (go-betweens) involved in the process of making a product or service available for use or consumption by a consumer or business user. The other three parts of the marketing mix are product, pricing, and promotion.

The distribution channel
Distribution is also a very important component of Logistics & Supply chain management. Distribution in supply chain management refers to the distribution of a good from one business to another. It can be factory to supplier, supplier to retailer, or retailer to end customer. It is defined as a chain of intermediaries, each passing the product down the chain to the next organization, before it finally reaches the consumer or end-user. This process is known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will have their own specific needs, which the producer must take into account, along with those of the all-important end-user.

Channels

A number of alternate 'channels' of distribution may be available:

Distributor, who sells to retailers,

Retailer (also called dealer or reseller), who sells to end customers  Advertisement typically used for consumption goods

Distribution channels may not be restricted to physical products alice from producer to consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc. process of transfer the products or services from Producer to Customer or end user. There have also been some innovations in the distribution of services. For example, there has been an increase in franchising and in rental services - the latter offering anything from televisions through tools. There has also been some evidence of service integration, with services linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines, hotels and car rental services. In addition, there has been a significant increase in retail outlets for the service sector. Outlets such as estate agencies and building society offices are crowding out traditional grocers from major shopping areas.
[edit]Channel

decisions

Channel Sales is nothing but a chain for to market a product through different sources.
     

Channel strategy Gravity & Gravity Push and Pull strategy Product (or service) Cost Consumer location concerns

[edit]Managerial

The channel decision is very important. In theory at least, there is a form of trade-off: the cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their

consumers, except by mail order. Many suppliers seem to assume that once their product has been sold into the channel, into the beginning of the distribution chain, their job is finished. Yet that distribution chain is merely assuming a part of the supplier's responsibility; and, if they have any aspirations to be market-oriented, their job should really be extended to managing all the processes involved in that chain, until the product or service arrives with the enduser. This may involve a number of decisions on the part of the supplier:
  

Channel membership Channel motivation Monitoring and managing channels
of marketing channel

[edit]Type

Intensive distribution - Where the majority of resellers stock the 'product' (with convenience products, for example, and particularly the brand leaders in consumer goods markets) price competition may be evident. 2. Selective distribution - This is the normal pattern (in both consumer and industrial markets) where 'suitable' resellers stock the product. 3. Exclusive distribution - Only specially selected resellers or authorized dealers (typically only one per geographical area) are allowed to sell the 'product'.
1.
[edit]Channel

motivation

It is difficult enough to motivate direct employees to provide the necessary sales and service support. Motivating the owners and employees of the independent organizations in a distribution chain requires even greater effort. There are many devices for achieving such motivation. Perhaps the most usual is `incentive': the supplier offers a better margin, to tempt the owners in the channel to push the product rather than its competitors; or a compensation is offered to the distributors' sales personnel, so that they are tempted to push the product. Julian Dent defines this incentive as a Channel Value Proposition or business case, with which the supplier sells the

channel member on the commercial merits of doing business together. He describes this as selling business models not products.
Monitoring and managing channels

In much the same way that the organization's own sales and distribution activities need to be monitored and managed, so will those of the distribution chain. In practice, many organizations use a mix of different channels; in particular, they may complement a direct salesforce, calling on the larger accounts, with agents, covering the smaller customers and prospects. These channels show marketing strategies of an organization. Effective management of distribution channel requires making and implementing decision in these areas.

Marketing
Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.[1] It generates the strategy that underlies sales techniques, business communication, and business developments.[2] It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves.[2] Marketing is used to identify the customer, satisfy the customer, and keep the customer. With the customer as the focus of its activities, it can be concluded that marketing management is one of the major components of business management. Marketing evolved to meet the stasis in developing new markets caused by mature markets and overcapacities in the last 2-3 centuries.[citation needed]The adoption of marketing strategies requires businesses to shift their focus from production to the perceived needs and wants of their customers as the means of staying profitable.[citation needed] The term marketing concept holds that achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions.[3] It proposes that in order to satisfy its organizational objectives, an

organization should anticipate the needs and wants of consumers and satisfy these more effectively than competitors.[3]

Further definitions Marketing is further defined by the American Marketing Association (AMA) as "the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Marketing is a product or service selling related overall activities. [4] The term developed from an original meaning which referred literally to going to a market to buy or sell goods or services. Seen from a systems point of view, sales process engineering marketing is "a set of processes that are interconnected and interdependent with other functions, [5] whose methods can be improved using a variety of relatively new approaches." The Chartered Institute of Marketing defines marketing as "the management process responsible for identifying, anticipating and satisfying customer requirements profitably."[6] A different concept is the value-based marketing which states the role of marketing to contribute to increasing shareholder value.[7] In this context, marketing is defined as "the management process that seeks to maximise returns to shareholders by developing relationships with valued customers and creating a competitive advantage."[7] Marketing practice tended to be seen as a creative industry in the past, which included advertising, distribution and selling. However, because the academic study of marketing makes extensive use ofsocial sciences, psychology, sociology, mathematics, economics, anthropolo gy and neuroscience, the profession is now widely recognized as a science, allowing numerous universities to offer Master-of-Science (MSc) programmes. The overall process starts with marketing research and goes through market segmentation, business planning and execution, ending with pre- and post-sales promotional activities. It is also related to many of the creative arts. The marketing literature is also adept at re-inventing itself and its vocabulary according to the times and the culture.

[edit]Evolution

of marketing

Main article: History of marketing An orientation, in the marketing context, related to a perception or attitude a firm holds towards its product or service, essentially concerning consumers and end-users. Throughout history, marketing has changed considerably in conjunction with consumer tastes.[8]
[edit]Earlier

approaches

The marketing orientation evolved from earlier orientations, namely, the production orientation, the product orientation and the selling orientation.[8][9]
Western Europea n timefra me

Orientati on

Profit driver

Description

A firm focusing on a production orientation specializes in producing as much as possible of a given product or service. Thus, this signifies a firm exploiting economies Productio Production until the of scale until the minimum efficient scale is reached. A n[9] methods 1950s production orientation may be deployed when a high demand for a product or service exists, coupled with a good certainty that consumer tastes will not rapidly alter (similar to the sales orientation).

Product[9]

A firm employing a product orientation is chiefly concerned with the quality of its own product. A firm Quality of until the would also assume that as long as its product was of a the product 1960s high standard, people would buy and consume the product.

Selling[9]

Selling methods

1950s and 1960s

A firm using a sales orientation focuses primarily on the selling/promotion of a particular product, and not determining new consumer desires as such. Consequently, this entails simply selling an already existing product, and using promotion techniques to attain the highest sales possible. Such an orientation may suit scenarios in which a firm holds dead stock, or otherwise sells a product that is in high demand, with little

likelihood of changes in consumer tastes that would diminish demand. The 'marketing orientation' is perhaps the most common orientation used in contemporary marketing. It involves a firm essentially basing its marketing plans around the marketing concept, and thus supplying 1970 to products to suit new consumer tastes. As an example, present a firm would employ market research to gauge day consumer desires, use R&D to develop a product attuned to the revealed information, and then utilize promotion techniques to ensure persons know the product exists.

Marketin g[9]

Needs and wants of customers

[edit]Contemporary

approaches

Recent approaches in marketing include relationship marketing with focus on the customer, business marketing or industrial marketing with focus on an organization or institution and social marketingwith focus on benefits to society.[10] New forms of marketing also use the internet and are therefore called internet marketing or more generally e-marketing, online marketing, search engine marketing,desktop advertising or affiliate marketing. It attempts to perfect the segmentation strategy used in traditional marketing. It targets its audience more precisely, and is sometimes called personalized marketing or one-to-one marketing. Internet marketing is sometimes considered to be broad in scope, because it not only refers to marketing on the Internet, but also includes marketing done via e-mail and wireless media.
Western Europea n timefra me

Orientation

Profit driver

Description

Emphasis is placed on the whole Relationship Building and 1960s to relationship between suppliers and marketing /Relatio keeping good present customers. The aim is to provide the nship customer relations day best possible customer service and management[10] build customer loyalty.

Business marketing /Indust

Building and keeping

1980s to In this context, marketing takes place present between businesses or organizations.

rial marketing

relationships betweenorganizati ons

day

The product focus lies on industrial goods or capital goodsrather than consumer products or end products. Different forms of marketing activities, such as promotion, advertising and communication to the customer are used.

Social marketing[10]

Similar characteristics as marketing orientation but with the added proviso 1990s to that there will be a curtailment of any Benefit to society present harmful activities to society, in either day product, production, or selling methods.

Branding

Brand value

In this context, "branding" is the main 2000s to company philosophy and marketing is present considered an instrument of branding day philosophy.

[edit]Customer

orientation

Constructive criticism helps marketers adapt offerings to meet changing customer needs.

A firm in the market economy survives by producing goods that persons are willing and able to buy. Consequently, ascertaining consumer demand is vital for a firm's future viability and even existence as a going concern. Many companies today have a customer focus (or market orientation). This implies that the company focuses its activities and products on consumer demands. Generally, there are three ways of doing this: the customer-driven approach, the

market change identification approach and the product innovation approach. In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no reason to spend R&D funds developing products that people will not buy. History attests to many products that were commercial failures in spite of being technological breakthroughs.[11] A formal approach to this customer-focused marketing is known as SIVA[12] (Solution, Information, Value, Access). This system is basically the four Ps renamed and reworded to provide a customer focus. The SIVA Model provides a demand/customer-centric alternative to the well-known 4Ps supply side model (product, price, placement, promotion) of marketing management.
Product → Solution

Price

→ Value

Place

→ Access

Promotio Informati → n on

If any of the 4Ps were problematic or were not in the marketing factor of the business, the business could be in trouble and so other companies may appear in the surroundings of the company, so the consumer demand on its products will decrease.
[edit]Organizational

orientation

In this sense, a firm's marketing department is often seen as of prime importance within the functional level of an organization. Information from an organization's marketing department would be used to guide the actions of other departments within the firm. As an example, a marketing department could ascertain (via marketing research) that consumers desired a new type of product, or a new usage for an

existing product. With this in mind, the marketing department would inform the R&D department to create a prototype of a product/service based on consumers' new desires. The production department would then start to manufacture the product, while the marketing department would focus on the promotion, distribution, pricing, etc. of the product. Additionally, a firm's finance department would be consulted, with respect to securing appropriate funding for the development, production and promotion of the product. Inter-departmental conflicts may occur, should a firm adhere to the marketing orientation. Production may oppose the installation, support and servicing of new capital stock, which may be needed to manufacture a new product. Finance may oppose the required capital expenditure, since it could undermine a healthy cash flow for the organization.
[edit]Herd behavior

Herd behavior in marketing is used to explain the dependencies of customers' mutual behavior. The Economist reported a recent conference in Rome on the subject of the simulation of adaptive human behavior.[13] It shared mechanisms to increase impulse buying and get people "to buy more by playing on the herd instinct." The basic idea is that people will buy more of products that are seen to be popular, and several feedback mechanisms to get product popularity information to consumers are mentioned, including smart card technology and the use of Radio Frequency Identification Tagtechnology. A "swarm-moves" model was introduced by a Florida Institute of Technology researcher, which is appealing to supermarkets because it can "increase sales without the need to give people discounts." Other recent studies on the "power of social influence" include an "artificial music market in which some 19,000 people downloaded previously unknown songs" (Columbia University, New York); a Japanese chain of convenience stores which orders its products based on "sales data from department stores and research companies;" a Massachusetts company exploiting knowledge of social networking to improve sales; and online retailers who are increasingly informing consumers about "which products are popular with likeminded consumers" (e.g., Amazon, eBay).

[edit]Further orientations

An emerging area of study and practice concerns internal marketing, or how employees are trained and managed to deliver the brand in a way that positively impacts the acquisition and retention of customers, see also employer branding.  Diffusion of innovations research explores how and why people adopt new products, services, and ideas.  With consumers' eroding attention span and willingness to give time to advertising messages, marketers are turning to forms of permission marketing such as branded content, custom media andreality marketing.
 [edit]Marketing

research

Main article: Marketing research Marketing research involves conducting research to support marketing activities, and the statistical interpretation of data into information. This information is then used by managers to plan marketing activities, gauge the nature of a firm's marketing environment and attain information from suppliers. Marketing researchers use statistical methods such as quantitative research, qualitative research,hypothesis tests, Chi-squared tests, linear regression, correlations, frequency distributions, poisson distributions, binomial distributions, etc. to interpret their findings and convert data into information. The marketing research process spans a number of stages, including the definition of a problem, development of a research plan, collection and interpretation of data and disseminating information formally in the form of a report. The task of marketing research is to provide management with relevant, accurate, reliable, valid, and current information. A distinction should be made between marketing research and market research. Market research pertains to research in a given market. As an example, a firm may conduct research in a target market, after selecting a suitable market segment. In contrast, marketing research relates to all research conducted within marketing. Thus, market research is a subset of marketing research.
[edit]Marketing

environment

Main article: Marketing environment
[edit]Market

segmentation

Main article: Market segmentation Market segmentation pertains to the division of a market of consumers into persons with similar needs and wants. For instance, Kellogg's cereals, Frosties are marketed to children. Crunchy Nut Cornflakes are marketed to adults. Both goods denote two products which are marketed to two distinct groups of persons, both with similar needs, traits, and wants. Market segmentation allows for a better allocation of a firm's finite resources. A firm only possesses a certain amount of resources. Accordingly, it must make choices (and incur the related costs) in servicing specific groups of consumers. In this way, the diversified tastes of contemporary Western consumers can be served better. With growing diversity in the tastes of modern consumers, firms are taking note of the benefit of servicing a multiplicity of new markets. Market segmentation can be defined in terms of the STP acronym, meaning Segment, Target and Position.
[edit]Types

of marketing research

Marketing research, as a sub-set aspect of marketing activities, can be divided into the following parts: Primary research (also known as field research), which involves the conduction and compilation of research for a specific purpose.  Secondary research (also referred to as desk research), initially conducted for one purpose, but often used to support another purpose or end goal.

By these definitions, an example of primary research would be market research conducted into health foods, which is used solely to ascertain the needs/wants of the target market for health foods. Secondary research in this case would be research pertaining to health foods, but used by a firm wishing to develop an unrelated product. Primary research is often expensive to prepare, collect and interpret from data to information. Nevertheless, while secondary research is

relatively inexpensive, it often can become outdated and outmoded, given that it is used for a purpose other than the one for which it was intended. Primary research can also be broken down into quantitative research and qualitative research, which, as the terms suggest, pertain to numerical and non-numerical research methods and techniques, respectively. The appropriateness of each mode of research depends on whether data can be quantified (quantitative research), or whether subjective, non-numeric or abstract concepts are required to be studied (qualitative research). There also exist additional modes of marketing research, which are: Exploratory research, pertaining to research that investigates an assumption.  Descriptive research, which, as the term suggests, describes "what is".  Predictive research, meaning research conducted to predict a future occurrence.  Conclusive research, for the purpose of deriving a conclusion via a research process.
 [edit]Marketing

planning

This section may require cleanup to meet Wikipedia's quality standards. Please improve this section if you can. The talk page may contain suggestions. (October 2009)

Main article: Marketing plan The marketing planning process involves forging a plan for a firm's marketing activities. A marketing plan can also pertain to a specific product, as well as to an organization's overall marketing strategy. Generally speaking, an organization's marketing planning process is derived from its overall business strategy. Thus, when top management are devising the firm's strategic direction or mission, the intended marketing activities are incorporated into this plan. There are several levels of marketing objectives within an organization. The senior management of a firm would formulate a general business strategy for a firm. However, this general business strategy would be interpreted and implemented in different contexts throughout the firm.
[edit]Marketing

strategy

The field of marketing strategy encompasses the strategy involved in the management of a given product. A given firm may hold numerous products in the marketplace, spanning numerous and sometimes wholly unrelated industries. Accordingly, a plan is required in order to effectively manage such products. Evidently, a company needs to weigh up and ascertain how to utilize its finite resources. For example, a start-up car manufacturing firm would face little success should it attempt to rival Toyota, Ford, Nissan, Chevrolet, or any other large global car maker. Moreover, a product may be reaching the end of its life-cycle. Thus, the issue of divest, or a ceasing of production, may be made. Each scenario requires a unique marketing strategy. Listed below are some prominent marketing strategy models.
[edit]Marketing

specializations

With the rapidly emerging force of globalization, the distinction between marketing within a firm's home country and marketing within external markets is disappearing very quickly. With this in mind, firms need to reorient their marketing strategies to meet the challenges of the global marketplace, in addition to sustaining their competitiveness within home markets.[14]
[edit]Buying

behaviour

A marketing firm must ascertain the nature of customers' buying behavior if it is to market its product properly. In order to entice and persuade a consumer to buy a product, marketers try to determine the behavioral process of how a given product is purchased. Buying behavior is usually split into two prime strands, whether selling to the consumer, known as business-to-consumer (B2C), or to another business, known as business-to-business (B2B).
[edit]B2C

buying behaviour

This mode of behaviour concerns consumers and their purchase of a given product. For example, if one imagines a pair of sneakers, the desire for a pair of sneakers would be followed by an information search on available types/brands. This may include perusing media outlets, but most commonly consists of information gathered from family and friends. If the information search is insufficient, the consumer may search for alternative means to satisfy the need/want.

In this case, this may mean buying leather shoes, sandals, etc. The purchase decision is then made, in which the consumer actually buys the product. Following this stage, a post-purchase evaluation is often conducted, comprising an appraisal of the value/utility brought by the purchase of the sneakers. If the value/utility is high, then a repeat purchase may be made. This could then develop into consumer loyalty to the firm producing the sneakers.
[edit]B2B

buying behaviour

Relates to organizational/industrial buying behavior.[15] "B2B" stands for Business to Business. B2B marketing involves one business marketing a product or service to another business. B2C and B2B behavior are not precise terms, as similarities and differences exist, with some key differences listed below: In a straight re-buy, the fourth, fifth and sixth stages are omitted. In a modified re-buy scenario, the fifth and sixth stages are precluded. In a new buy, all stages are conducted.
[edit]Use

of technologies

Marketing management can also rely on various technologies within the scope of its marketing efforts. Computer-based information systems can be employed, aiding in better processing and storage of data. Marketing researchers can use such systems to devise better methods of converting data into information, and for the creation of enhanced data gathering methods. Information technology can aid in enhancing an MKIS' software and hardware components, and improve a company's marketing decision-making process. In recent years, the netbook personal computer has gained significant market share among laptops, largely due to its more user-friendly size and portability. Information technology typically progresses at a fast rate, leading to marketing managers being cognizant of the latest technological developments. Moreover, the launch of smartphones into the cellphone market is commonly derived from a demand among consumers for more technologically advanced products. A firm can lose out to competitors should it ignore technological innovations in its industry. Technological advancements can lessen barriers between countries and regions. Using the World Wide Web, firms can quickly dispatch

information from one country to another without much restriction. Prior to the mass usage of the Internet, such transfers of information would have taken longer to send, especially if done via snail mail, telex, etc.
[edit]Services

marketing

Services marketing relates to the marketing of services, as opposed to tangible products. A service (as opposed to a good) is typically defined as follows: The use of it is inseparable from its purchase (i.e., a service is used and consumed simultaneously)  It does not possess material form, and thus cannot be touched, seen, heard, tasted, or smelled.  The use of a service is inherently subjective, meaning that several persons experiencing a service would each experience it uniquely.

For example, a train ride can be deemed a service. If one buys a train ticket, the use of the train is typically experienced concurrently with the purchase of the ticket. Although the train is a physical object, one is not paying for the permanent ownership of the tangible components of the train. Services (compared with goods) can also be viewed as a spectrum. Not all products are pure goods, nor are all pure services. An example would be a restaurant, where a waiter's service is intangible, but the food is tangible.

Advertising
Advertising is a form of communication intended to persuade an audience (viewers, readers or listeners) to purchase or take some action upon products, ideas, or services. It includes the name of a product or service and how that product or service could benefit the consumer, to persuade a target market to purchase or to consume that particular brand. These messages are usually paid for by sponsors and viewed via various media. Advertising

can also serve to communicate an idea to a large number of people in an attempt to convince them to take a certain action. Commercial advertisers often seek to generate increased consumption of their products or services through branding, which involves the repetition of an image or product name in an effort to associate related qualities with the brand in the minds of consumers. Non-commercial advertisers who spend money to advertise items other than a consumer product or service include political parties, interest groups, religious organizations and governmental agencies.Nonprofit organizations may rely on free modes of persuasion, such as a public service announcement. Modern advertising developed with the rise of mass production in the late 19th and early 20th centuries. Mass media can be defined as any media meant to reach a mass amount of people. Different types of media can be used to deliver these messages, including traditional media such as newspapers, magazines, television, radio, outdoor or direct mail; or new media such as websites and text messages. In 2010, spending on advertising was estimated at more than $300 billion in the United States[1] and $500 billion worldwide[citation needed]. Internationally, the largest ("big four") advertising conglomerates are Interpublic, Omnicom, Publicis, and WPP. Popular definitions of the term Advertisement-- 1.The non-personal communication of information usually paid for & usually persuasive in nature, about products (goods & services) or ideas by identified sponsor through various media.(Arenes (1996) 2.Any paid form of non-personal communication about an organisation, product ,service, or idea from an identified sponsor. ( Blech & Blech (1998) 3.Paid non -personal communication from an identified sponsor using mass media to persuade influence an audience. (Wells , burnett, & Moriaty (1998) 4. The element of the marketing communication mix that is non personal paid for an identified sponsor, & disseminated through mass channels of communication to promote the adoption of oods, services, person or ideas.( bearden, Ingram, & Laforge (1998) 5.An informative or persuasive message carried by a non personal medium & paid for by an identified sponsor whose organisation or product is identified in some way. ( Zikmund & d'amico (1999) 6. Impersonal , one way communication about a product or organisation that is paid by marketer. ( Lamb, Hair & Mc. Daniel (2000)

History

Egyptians used papyrus to make sales messages and wall posters. Commercial messages and political campaign displays have been found in the ruins ofPompeii and ancient Arabia. Lost and found advertising on papyrus was common in Ancient Greece and Ancient Rome. Wall or rock painting for commercial advertising is another manifestation of an ancient advertising form, which is present to this day in many parts of Asia, Africa, and South America. The tradition of wall painting can be traced back to Indian rock art paintings that date back to 4000 BC.[2] History tells us that Out-of-home advertising and billboards are the oldest forms of advertising. As the towns and cities of the Middle Ages began to grow, and the general populace was unable to read, signs that today would say cobbler, miller, tailor or blacksmith would use an image associated with their trade such as a boot, a suit, a hat, a clock, a diamond, a horse shoe, a candle or even a bag of flour. Fruits and vegetables were sold in the city square from the backs of carts and wagons and their proprietors used street callers (town criers) to announce their whereabouts for the convenience of the customers. As education became an apparent need and reading, as well as printing, developed advertising expanded to include handbills. In the 17th century advertisements started to appear in weekly newspapers in England. These early print advertisements were used mainly to promote books and newspapers, which became increasingly affordable with advances in the printing press; and medicines, which were increasingly sought after as disease ravaged Europe. However, false advertising and so-called "quack" advertisements became a problem, which ushered in the regulation of advertising content. As the economy expanded during the 19th century, advertising grew alongside. In the United States, the success of this advertising format eventually led to the growth of mail-order advertising. In June 1836, French newspaper La Presse was the first to include paid advertising in its pages, allowing it to lower its price, extend its readership and increase its profitability and the formula was soon copied by all titles. Around 1840, Volney B. Palmer established a predecessor to advertising agencies inBoston.[3] Around the same time, in France, CharlesLouis Havas extended the services of his news agency, Havas to include advertisement brokerage, making it the first French group to organize. At first, agencies were brokers for advertisement space in newspapers. N. W. Ayer & Son was the first full-service agency to assume responsibility for advertising content. N.W. Ayer opened in 1869, and was located in Philadelphia.[3]

At the turn of the century, there were few career choices for women in business; however, advertising was one of the few. Since women were responsible for most of the purchasing done in their household, advertisers and agencies recognized the value of women's insight

during the creative process. In fact, the first American advertising to use a sexual sell was created by a woman – for a soap product. Although tame by today's standards, the advertisement featured a couple with the message "The skin you love to touch".[4]

In the early 1920s, the first radio stations were established by radio equipment manufacturers and retailers who offered programs in order to sell more radios to consumers. As time passed, many non-profit organizations followed suit in setting up their own radio stations, and included: schools, clubs and civic groups.[5] When the practice of sponsoring programs was popularised, each individual radio program was usually sponsored by a single business in exchange for a brief mention of the business' name at the beginning and end of the sponsored shows. However, radio station owners soon realised they could earn more money by selling sponsorship rights in small time allocations to multiple businesses throughout their radio station's broadcasts, rather than selling the sponsorship rights to single businesses per show.

A print advertisement for the 1913 issue of the Encyclopædia Britannica

This practice was carried over to television in the late 1940s and early 1950s. A fierce battle was fought between those seeking to commercialise the radio and people who argued that the radio spectrum should be considered a part of the commons – to be used only non-commercially and for the public good. The United Kingdom pursued a public funding model for the BBC, originally a private company, the British Broadcasting Company, but incorporated as a public body by Royal Charter in 1927. In Canada, advocates like Graham Spry were likewise able to persuade the federal

government to adopt a public funding model, creating the Canadian Broadcasting Corporation. However, in the United States, the capitalist model prevailed with the passage of the Communications Act of 1934 which created the Federal Communications Commission. [5] However, the U.S. Congress did require commercial broadcasters to operate in the "public interest, convenience, and necessity".[6] Public broadcasting now exists in the United States due to the 1967 Public Broadcasting Act which led to the Public Broadcasting Service andNational Public Radio. In the early 1950s, the DuMont Television Network began the modern practice of selling advertisement time to multiple sponsors. Previously, DuMont had trouble finding sponsors for many of their programs and compensated by selling smaller blocks of advertising time to several businesses. This eventually became the standard for the commercial television industry in the United States. However, it was still a common practice to have single sponsor shows, such as The United States Steel Hour. In some instances the sponsors exercised great control over the content of the show—up to and including having one's advertising agency actually writing the show. The single sponsor model is much less prevalent now, a notable exception being the Hallmark Hall of Fame. The 1960s saw advertising transform into a modern approach in which creativity was allowed to shine, producing unexpected messages that made advertisements more tempting to consumers' eyes. The Volkswagen ad campaign—featuring such headlines as "Think Small" and "Lemon" (which were used to describe the appearance of the car)—ushered in the era of modern advertising by promoting a "position" or "unique selling proposition" designed to associate each brand with a specific idea in the reader or viewer's mind. This period of American advertising is called the Creative Revolution and its archetypewas William Bernbach who helped create the revolutionary Volkswagen ads among others. Some of the most creative and long-standing American advertising dates to this period. The late 1980s and early 1990s saw the introduction of cable television and particularly MTV. Pioneering the concept of the music video, MTV ushered in a new type of advertising: the consumer tunes in for the advertising message, rather than it being a by-product or

afterthought. As cable and satellite televisionbecame increasingly prevalent, specialty channels emerged, including channels entirely devoted to advertising, such as QVC, Home Shopping Network, andShopTV Canada. Marketing through the Internet opened new frontiers for advertisers and contributed to the "dot-com" boom of the 1990s. Entire corporations operated solely on advertising revenue, offering everything from coupons to free Internet access. At the turn of the 21st century, a number of websites including the search engine Google, started a change in online advertising by emphasizing contextually relevant, unobtrusive ads intended to help, rather than inundate, users. This has led to a plethora of similar efforts and an increasing trend of interactive advertising.

Advertisement for a live radio broadcast, sponsored by a milk company and published in the Los Angeles Times on May 6, 1930

The share of advertising spending relative to GDP has changed little across large changes in media. For example, in the US in 1925, the main advertising media were newspapers, magazines, signs on streetcars, and outdoor posters. Advertising spending as a share of GDP was about 2.9 percent. By 1998, television and radio had become major advertising media. Nonetheless, advertising spending as a share of GDP was slightly lower—about 2.4 percent.[7]

A recent advertising innovation is "guerrilla marketing", which involve unusual approaches such as staged encounters in public places, giveaways of products such as cars that are covered with brand messages, and interactive advertising where the viewer can respond to become part of the advertising message.Guerrilla advertising is becoming increasing more popular with a lot of companies. This type of advertising is unpredictable and innovative, which causes consumers to buy the product or idea. This reflects an increasing trend of interactive and "embedded" ads, such as via product placement, having consumers vote through text messages, and various innovations utilizing social network services such as Facebook.
[edit]Public

service advertising

The advertising techniques used to promote commercial goods and services can be used to inform, educate and motivate the public about non-commercial issues, such as HIV/AIDS, political ideology, energy conservation and deforestation. Advertising, in its non-commercial guise, is a powerful educational tool capable of reaching and motivating large audiences. "Advertising justifies its existence when used in the public interest—it is much too powerful a tool to use solely for commercial purposes." Attributed to Howard Gossage by David Ogilvy. Public service advertising, non-commercial advertising, public interest advertising, cause marketing, and social marketing are different terms for (or aspects of) the use of sophisticated advertising and marketing communications techniques (generally associated with commercial enterprise) on behalf of non-commercial, public interest issues and initiatives. In the United States, the granting of television and radio licenses by the FCC is contingent upon the station broadcasting a certain amount of public service advertising. To meet these requirements, many broadcast stations in America air the bulk of their required public service announcements during the late night or early morning when the smallest percentage of viewers are watching, leaving more day and prime time commercial slots available for high-paying advertisers. Public service advertising reached its height during World Wars I and II under the direction of more than one government. During

WWII President Roosevelt commissioned the creation of The War Advertising Council (now known as the Ad Council) which is the nation's largest developer of PSA campaigns on behalf of government agencies and non-profit organizations, including the longest-running PSA campaign, Smokey Bear.
[edit]Marketing

mix

The marketing mix has been the key concept to advertising. The marketing mix was suggested by professor E. Jerome McCarthy in the 1960s. The marketing mix consists of four basic elements called the four P’s Product is the first P representing the actual product. Price represents the process of determining the value of a product. Place represents the variables of getting the product to the consumer like distribution channels, market coverage and movement organization. The last P stands for Promotion which is the process of reaching the target market and convincing them to go out and buy the product.[8]
[edit]Advertising 

theory

Hierarchy of effects model[9]

It clarifies the objectives of an advertising campaign and for each individual advertisement. The model suggests that there are six steps a consumer or a business buyer moves through when making a purchase. The steps are: 1. 2. 3. 4. 5. 6.

Awareness Knowledge Liking Preference Conviction Purchase

Means-End Theory

This approach suggests that an advertisement should contain a message or means that leads the consumer to a desired end state.

Leverage Points

It is designed to move the consumer from understanding a product's benefits to linking those benefits with personal values.

Verbal and Visual Images of advertising

[edit]Types

Paying people to hold signs is one of the oldest forms of advertising, as with thisHuman billboard pictured above

A bus with an advertisement for GAP in Singapore. Buses and other vehicles are popular mediums for advertisers.

A DBAG Class 101 with UNICEF ads at Ingolstadt main railway station

Virtually any medium can be used for advertising. Commercial advertising media can include wall paintings, billboards, street furniture components, printed flyers and rack cards, radio, cinema and television adverts, web banners, mobile telephone screens, shopping carts, web popups, skywriting, bus stop benches, human billboards, magazines, newspapers, town criers, sides of buses, banners

attached to or sides of airplanes ("logojets"), in-flight advertisements on seatback tray tables or overhead storage bins, taxicab doors, roof mounts and passenger screens, musical stage shows, subway platforms and trains, elastic bands on disposable diapers,doors of bathroom stalls,stickers on apples in supermarkets, shopping cart handles (grabertising), the opening section of streaming audio and video, posters, and the backs of event tickets and supermarket receipts. Any place an "identified" sponsor pays to deliver their message through a medium is advertising.
[edit]Digital

advertising

Television advertising / Music in advertising The TV commercial is generally considered the most effective mass-market advertising format, as is reflected by the high prices TV networks charge for commercial airtime during popular TV events. The annual Super Bowl football game in the United States is known as the most prominent advertising event on television. The average cost of a single thirty-second TV spot during this game has reached US$3 million (as of 2009). The majority of television commercials feature a song or jingle that listeners soon relate to the product. Virtual advertisements may be inserted into regular television programming through computer graphics. It is typically inserted into otherwise blank backdrops[10] or used to replace local billboards that are not relevant to the remote broadcast audience.[11] More controversially, virtual billboards may be inserted into the background[12] where none exist in real-life. This technique is especially used in televised sporting events.[13][14] Virtual product placement is also possible.[15][16] Infomercials: An infomercial is a long-format television commercial, typically five minutes or longer. The word "infomercial" combining the words "information" & "commercial". The main objective in an infomercial is to create an impulse purchase, so that the consumer sees the presentation and then immediately buys the product through the advertisedtoll-free telephone number or website. Infomercials describe, display, and often demonstrate products and their features, and commonly have testimonials from consumers and industry professionals. Radio advertising

Radio advertising is a form of advertising via the medium of radio. Radio advertisements are broadcast as radio waves to the air from a transmitter to an antenna and a thus to a receiving device. Airtime is purchased from a station or network in exchange for airing the commercials. While radio has the obvious limitation of being restricted to sound, proponents of radio advertising often cite this as an advantage. Online advertising Online advertising is a form of promotion that uses the Internet and World Wide Web for the expressed purpose of delivering marketing messages to attract customers. Examples of online advertising include contextual ads that appear on search engine results pages, banner ads, in text ads, Rich Media Ads, Social network advertising, online classified advertising, advertising networks and e-mail marketing, including e-mail spam. Product placements Covert advertising, also known as guerrilla advertising, is when a product or brand is embedded in entertainment and media. For example, in a film, the main character can use an item or other of a definite brand, as in the movie Minority Report, where Tom Cruise's character John Anderton owns a phone with the Nokia logo clearly written in the top corner, or his watch engraved with the Bulgari logo. Another example of advertising in film is in I, Robot, where main character played by Will Smith mentions his Converse shoes several times, calling them "classics," because the film is set far in the future.I, Robot and Spaceballs also showcase futuristic cars with the Audi and Mercedes-Benz logos clearly displayed on the front of the vehicles. Cadillacchose to advertise in the movie The Matrix Reloaded, which as a result contained many scenes in which Cadillac cars were used. Similarly, product placement for Omega Watches, Ford, VAIO, BMW and Aston Martin cars are featured in recent James Bond films, most notably Casino Royale. In "Fantastic Four: Rise of the Silver Surfer", the main transport vehicle shows a large Dodge logo on the front. Blade Runner includes some of the most obvious product placement; the whole film stops to show a Coca-Cola billboard.

[edit]Physical

advertising

Press advertising Press advertising describes advertising in a printed medium such as a newspaper, magazine, or trade journal. This encompasses everything from media with a very broad readership base, such as a major national newspaper or magazine, to more narrowly targeted media such as local newspapers and trade journals on very specialized topics. A form of press advertising is classified advertising, which allows private individuals or companies to purchase a small, narrowly targeted ad for a low fee advertising a product or service. Another form of press advertising is the Display Ad, which is a larger ad (can include art) that typically run in an article section of a newspaper. Billboard advertising: Billboards are large structures located in public places which display advertisements to passing pedestrians and motorists. Most often, they are located on main roads with a large amount of passing motor and pedestrian traffic; however, they can be placed in any location with large amounts of viewers, such as on mass transit vehicles and in stations, in shopping malls or office buildings, and in stadiums.

The RedEye newspaper advertised to its target market at North Avenue Beach with a sailboat billboard on Lake Michigan.

Mobile billboard advertising

Mobile billboards are generally vehicle mounted billboards or digital screens. These can be on dedicated vehicles built solely for carrying advertisements along routes preselected by clients, they can also be specially equipped cargo trucks or, in some cases, large banners strewn from planes. The billboards are often lighted; some being backlit, and others employing spotlights. Some billboard displays are static, while others change; for example, continuously or periodically rotating among a set of advertisements. Mobile displays are used for various situations in metropolitan areas throughout the world, including: Target advertising, One-day, and long-term campaigns, Conventions, Sporting events, Store openings and similar promotional events, and Big advertisements from smaller companies. In-store advertising In-store advertising is any advertisement placed in a retail store. It includes placement of a product in visible locations in a store, such as at eye level, at the ends of aisles and near checkout counters, eye-catching displays promoting a specific product, and advertisements in such places as shopping carts and instore video displays. Coffee cup advertising Coffee cup advertising is any advertisement placed upon a coffee cup that is distributed out of an office, café, or drivethrough coffee shop. This form of advertising was first popularized in Australia, and has begun growing in popularity in the United States, India, and parts of the Middle East.[citation needed] Street advertising This type of advertising first came to prominence in the UK by Street Advertising Services to create outdoor advertising on street furniture and pavements. Working with products such as Reverse Graffiti and 3d pavement advertising, the media became an affordable and effective tool for getting brand messages out into public spaces. Celebrity branding

This type of advertising focuses upon using celebrity power, fame, money, popularity to gain recognition for their products and promote specific stores or products. Advertisers often advertise their products, for example, when celebrities share their favorite products or wear clothes by specific brands or designers. Celebrities are often involved in advertising campaigns such as television or print adverts to advertise specific or general products. The use of celebrities to endorse a brand can have its downsides, however. One mistake by a celebrity can be detrimental to the public relations of a brand. For example, following his performance of eight gold medals at the 2008 Olympic Games in Beijing, China, swimmer Michael Phelps' contract with Kellogg's was terminated, as Kellogg's did not want to associate with him after he was photographed smoking marijuana. Sales promotions Sales promotions are another way to advertise. Sales promotions are double purposed because they are used to gather information about what type of customers you draw in and where they are, and to jumpstart sales. Sales promotions include things like contests and games, sweepstakes, product giveaways, samples coupons, loyalty programs, and discounts. The ultimate goal of sales promotions is to stimulate potential customers to action.[17]

Media and advertising approaches Increasingly, other media are overtaking many of the "traditional" media such as television, radio and newspaper because of a shift toward consumer's usage of the Internet for news and music as well as devices like digital video recorders (DVRs) such as TiVo. Advertising on the World Wide Web is a recent phenomenon. Prices of Web-based advertising space are dependent on the "relevance" of the surrounding web content and the traffic that the website receives.

Digital signage is poised to become a major mass media because of its ability to reach larger audiences for less money. Digital signage also offer the unique ability to see the target audience where they are reached by the medium. Technological advances have also made it possible to control the message on digital signage with much precision, enabling the messages to be relevant to the target audience at any given time and location which in turn, gets more response from the advertising. Digital signage is being successfully employed in supermarkets.[18] Another successful use of digital signage is in hospitality locations such as restaurants.[19] and malls.[20] E-mail advertising is another recent phenomenon. Unsolicited bulk Email advertising is known as "e-mail spam". Spam has been a problem for email users for many years. Some companies have proposed placing messages or corporate logos on the side of booster rockets and the International Space Station. Controversy exists on the effectiveness of subliminal advertising (see mind control), and the pervasiveness of mass messages (see propaganda). Unpaid advertising (also called "publicity advertising"), can provide good exposure at minimal cost. Personal recommendations ("bring a friend", "sell it"), spreading buzz, or achieving the feat of equating a brand with a common noun (in the United States, "Xerox" = "photocopier", "Kleenex" = tissue, "Vaseline" = petroleum jelly, "Hoover" = vacuum cleaner, "Nintendo" (often used by those exposed to many video games) = video games, and "Band-Aid" = adhesive bandage) — these can be seen as the pinnacle of any advertising campaign. However, some companies oppose the use of their brand name to label an object. Equating a brand with a common noun also risks turning that brand into a genericized trademark - turning it into a generic term which means that its legal protection as a trademark is lost. As the mobile phone became a new mass media in 1998 when the first paid downloadable content appeared on mobile phones in Finland, it was only a matter of time until mobile advertising followed, also first launched in Finland in 2000. By 2007 the value of mobile advertising had reached $2.2 billion and providers such as Admob delivered billions of mobile ads.

More advanced mobile ads include banner ads, coupons, Multimedia Messaging Service picture and video messages, advergames and various engagement marketing campaigns. A particular feature driving mobile ads is the 2D Barcode, which replaces the need to do any typing of web addresses, and uses the camera feature of modern phones to gain immediate access to web content. 83 percent of Japanese mobile phone users already are active users of 2D barcodes. A new form of advertising that is growing rapidly is social network advertising. It is online advertising with a focus on social networking sites. This is a relatively immature market, but it has shown a lot of promise as advertisers are able to take advantage of the demographic information the user has provided to the social networking site. Friendertising is a more precise advertising term in which people are able to direct advertisements toward others directly using social network service. From time to time, The CW Television Network airs short programming breaks called "Content Wraps," to advertise one company's product during an entire commercial break. The CW pioneered "content wraps" and some products featured were Herbal Essences, Crest, Guitar Hero II, CoverGirl, and recently Toyota. Recently, there appeared a new promotion concept, "ARvertising", advertising on Augmented Reality technology.
[edit]Current [edit]Rise

trends

in new media

With the dawn of the Internet came many new advertising opportunities. Popup, Flash, banner, Popunder, advergaming, and email advertisements (the last often being a form of spam) are now commonplace. Particularly since the rise of "entertaining" advertising, some people may like an advertisement enough to wish to watch it later or show a friend. In general, the advertising community has not yet made this easy, although some have used the Internet to widely distribute their ads to anyone willing to see or hear them. In the last three quarters of 2009 mobile and internet advertising grew by 18.1% and 9.2% respectively. Older media advertising saw declines: −10.1%

(TV), −11.7% (radio), −14.8% (magazines) and −18.7% (newspapers ).[citation needed]
[edit]Niche

marketing

Another significant trend regarding future of advertising is the growing importance of the niche market using niche or targeted ads. Also brought about by the Internet and the theory of The Long Tail, advertisers will have an increasing ability to reach specific audiences. In the past, the most efficient way to deliver a message was to blanket the largest mass market audience possible. However, usage tracking, customer profiles and the growing popularity of niche content brought about by everything from blogs to social networking sites, provide advertisers with audiences that are smaller but much better defined, leading to ads that are more relevant to viewers and more effective for companies' marketing products. Among others, Comcast Spotlight is one such advertiser employing this method in their video on demand menus. These advertisements are targeted to a specific group and can be viewed by anyone wishing to find out more about a particular business or practice at any time, right from their home. This causes the viewer to become proactive and actually choose what advertisements they want to view.[21]
[edit]Crowdsourcing

Main article: Crowdsourcing The concept of crowdsourcing has given way to the trend of usergenerated advertisements. User-generated ads are created by consumers as opposed to an advertising agency or the company themselves, most often they are a result of brand sponsored advertising competitions. For the 2007 Super Bowl, the Frito-Lays division of PepsiCo held the Crash the Super Bowl contest, allowing consumers to create their own Doritos commercial.[22] Chevrolet held a similar competition for their Tahoe line of SUVs.[22] Due to the success of the Doritos user-generated ads in the 2007 Super Bowl, Frito-Lays relaunched the competition for the 2009 and 2010 Super Bowl. The resulting ads were among the most-watched and most-liked Super Bowl ads. In fact, the winning ad that aired in the 2009 Super Bowl was ranked by the USA Today Super Bowl Ad Meter as the top ad for the year while the winning ads that aired in the 2010 Super Bowl were found by Nielsen's BuzzMetrics to be the "most buzzed-about".[23][24]

This trend has given rise to several online platforms that host usergenerated advertising competitions on behalf of a company. Founded in 2007, Zooppa has launched ad competitions for brands such as Google, Nike, Hershey’s, General Mills, Microsoft, NBC Universal, Zinio, and Mini Cooper. Crowdsourced advertisements have gained popularity in part to its cost effective nature, high consumer engagement, and ability to generate word-of-mouth. However, it remains controversial, as the long-term impact on the advertising industry is still unclear.[25]
[edit]Global

advertising

Advertising has gone through five major stages of development: domestic, export, international, multi-national, and global. For global advertisers, there are four, potentially competing, business objectives that must be balanced when developing worldwide advertising: building a brand while speaking with one voice, developing economies of scale in the creative process, maximising local effectiveness of ads, and increasing the company’s speed of implementation. Born from the evolutionary stages of global marketing are the three primary and fundamentally different approaches to the development of global advertising executions: exporting executions, producing local executions, and importing ideas that travel.[26] Advertising research is key to determining the success of an ad in any country or region. The ability to identify which elements and/or moments of an ad that contributes to its success is how economies of scale are maximised. Once one knows what works in an ad, that idea or ideas can be imported by any other market. Market research measures, such as Flow of Attention, Flow of Emotion and branding moments provide insight into what is working in an ad in any country or region because the measures are based on the visual, not verbal, elements of the ad.[27]
[edit]Foreign

public messaging

Foreign governments, particularly those that own marketable commercial products or services, often promote their interests and positions through the advertising of those goods because the target audience is not only largely unaware of the forum as vehicle for foreign messaging but also willing to receive the message while in a mental state of absorbing information from advertisements during

television commercial breaks, while reading a periodical, or while passing by billboards in public spaces. A prime example of this messaging technique is advertising campaigns to promote international travel. While advertising foreign destinations and services may stem from the typical goal of increasing revenue by drawing more tourism, some travel campaigns carry the additional or alternative intended purpose of promoting good sentiments or improving existing ones among the target audience towards a given nation or region. It is common for advertising promoting foreign countries to be produced and distributed by the tourism ministries of those countries, so these ads often carry political statements and/or depictions of the foreign government's desired international public perception. Additionally, a wide range of foreign airlines and travelrelated services which advertise separately from the destinations, themselves, are owned by their respective governments; examples include, though are not limited to, the Emirates airline (Dubai), Singapore Airlines (Singapore), Qatar Airways (Qatar), China Airlines (Taiwan/Republic of China), and Air China (People's Republic of China). By depicting their destinations, airlines, and other services in a favorable and pleasant light, countries market themselves to populations abroad in a manner that could mitigate prior public impressions.See: Soft Power

See also: International Travel Advertising

[edit]Diversification

In the realm of advertising agencies, continued industry diversification has seen observers note that “big global clients don't need big global agencies any more”.[28] This is reflected by the growth of nontraditional agencies in various global markets, such as Canadian business TAXI and SMART in Australia and has been referred to as "a revolution in the ad world".[29]
[edit]New

technology

The ability to record shows on digital video recorders (such as TiVo) allow users to record the programs for later viewing, enabling them to fast forward through commercials. Additionally, as more seasons of pre-recorded box sets are offered for sale of television programs; fewer people watch the shows on TV. However, the fact that these

sets are sold, means the company will receive additional profits from the sales of these sets. To counter this effect, many advertisers have opted for product placement on TV shows like Survivor.
[edit]Advertising

education

Advertising education has become widely popular with bachelor, master and doctorate degrees becoming available in the emphasis. A surge in advertising interest is typically attributed to the strong relationship advertising plays in cultural and technological changes, such as the advance of online social networking. A unique model for teaching advertising is the student-run advertising agency, where advertising students create campaigns for real companies. [30] Organizations such as American Advertising Federation and AdU Network partner established companies with students to create these campaigns.
[edit]Criticisms

Main article: Criticism of advertising While advertising can be seen as necessary for economic growth, it is not without social costs. Unsolicited Commercial Email and other forms of spam have become so prevalent as to have become a major nuisance to users of these services, as well as being a financial burden on internet service providers.[31] Advertising is increasingly invading public spaces, such as schools, which some critics argue is a form of child exploitation.[32] In addition, advertising frequently uses psychological pressure (for example, appealing to feelings of inadequacy) on the intended consumer, which may be harmful.
[edit]Regulation

Main article: Advertising regulation In the US many communities believe that many forms of outdoor advertising blight the public realm.[33] As long ago as the 1960s in the US there were attempts to ban billboard advertising in the open countryside.[34] Cities such as São Paulo have introduced an outright ban[35] with London also having specific legislation to control unlawful displays. There have been increasing efforts to protect the public interest by regulating the content and the influence of advertising. Some

examples are: the ban on television tobacco advertising imposed in many countries, and the total ban of advertising to children under 12 imposed by the Swedish government in 1991. Though that regulation continues in effect for broadcasts originating within the country, it has been weakened by the European Court of Justice, which had found that Sweden was obliged to accept foreign programming, including those from neighboring countries or via satellite. Greece’s regulations are of a similar nature, “banning advertisements for children's toys between 7 am and 10 pm and a total ban on advertisement for war toys".[36] In Europe and elsewhere, there is a vigorous debate on whether (or how much) advertising to children should be regulated. This debate was exacerbated by a report released by the Kaiser Family Foundation in February 2004 which suggested fast food advertising that targets children was an important factor in the epidemic of childhood obesity in the United States. In New Zealand, South Africa, Canada, and many European countries, the advertising industry operates a system of selfregulation. Advertisers, advertising agencies and the media agree on a code of advertising standards that they attempt to uphold. The general aim of such codes is to ensure that any advertising is 'legal, decent, honest and truthful'. Some self-regulatory organizations are funded by the industry, but remain independent, with the intent of upholding the standards or codes like the Advertising Standards Authority in the UK. In the UK most forms of outdoor advertising such as the display of billboards is regulated by the UK Town and County Planning system. Currently the display of an advertisement without consent from the Planning Authority is a criminal offense liable to a fine of £2,500 per offence. All of the major outdoor billboard companies in the UK have convictions of this nature. Many advertisers employ a wide-variety of linguistic devices to bypass regulatory laws (e.g. printing English words in bold and French translations in fine print to deal with the Article 120 of the 1994Toubon Law limiting the use of English in French advertising).[37] The advertisement of controversial products such as cigarettes and condoms are subject to government regulation in many countries. For

instance, the tobacco industry is required by law in most countries to display warnings cautioning consumers about the health hazards of their products. Linguistic variation is often used by advertisers as a creative device to reduce the impact of such requirements.
[edit]Advertising

research

Main article: Advertising research Advertising research is a specialized form of research that works to improve the effectiveness and efficiency of advertising. It entails numerous forms of research which employ different methodologies. Advertising research includes pre-testing (also known as copy testing) and post-testing of ads and/or campaigns—pre-testing is done before an ad airs to gauge how well it will perform and post-testing is done after an ad airs to determine the in-market impact of the ad or campaign on the consumer. Continuous ad tracking and the Communicus System are competing examples of post-testing advertising research types.

Advertising Adstock
Advertising Adstock is a term coined by Simon Broadbent[1] to describe the prolonged or lagged effect of advertising on consumer purchase behavior. It is also known as 'advertising carry-over'. Adstock is an important component of marketing-mix models. Adstock is a model of how response to advertising builds and decays in consumer markets. Advertising tries to expand consumption in two ways; it both reminds and teaches. It reminds in-the-market consumers in order to influence their immediate brand choice and teaches to increase brand awareness and salience, which makes it easier for future advertising to influence brand choice. Adstock is the mathematical manifestation of this behavioral process. The Adstock theory hinges on the assumption that exposure to television advertising builds awareness in the minds of the consumers, influencing their purchase decision. Each new exposure to advertising builds awareness and this awareness will be higher if there have been recent exposures and lower if there have not been. In the absence of further exposures adstock eventually decays to negligible levels. Measuring and determining adstock, especially when developing a marketing-mix model, is a key component of determining marketing effectiveness. There are two dimensions to Advertising Adstock: 1. 2. Decay or Lagged Effect Saturation or Diminishing Returns Effect

3. Advertising Lag: Decay Effect
4. The lagged or decay component of Advertising Adstock can be mathematically modelled and
is usually expressed in terms of the 'half-life' of the ad copy, modeled using TV Gross Rating Point (GRP). A 'two-week half-life' means that it takes two weeks for the awareness of a copy to decay to half its present level. Every Ad copy is assumed to have a unique half-life. Some academic studies have suggested half-life range around 7–12 weeks,.[2] Other academic studies find shorter half lives of approximately four weeks,[3] and industry practitioners typically report half-lives between 2–5 weeks, with the average for Fast Moving Consumer Goods (FMCG) Brands at 2.5 weeks.[4]

5. 6. The copy in the above graph has a half-life of 2.5 weeks.

7. [edit]Advertising

Saturation: Diminishing Returns Effect

8. Increasing the amount of advertising increases the percent of the audience reached by the advertising, hence increases demand, but a linear increase in the advertising exposure doesn’t have a similar linear effect on demand. Typically each incremental amount of advertising causes a progressively lesser effect on demand increase. This is advertising saturation. Saturation only occurs above a threshold level that can be determined by Adstock Analysis.

9. 10. For e.g. for the ad copy in the above graph, saturation only kicks in above 110 GRPs per week.

11. Adstock can be transformed to an appropriate nonlinear form like the logistic or negative
exponential distribution, depending upon the type of diminishing returns or ‘saturation’ effect the response function is believed to follow.

12. [edit]Applications
13. Measuring the Advertising Half-Life enables Brand Managers to efficiently space advertising schedules to maximize the effect of each advertising exposure. Measuring the Advertising Saturation indicates if current levels of advertising are too high or too low, helping Brand Managers determine if more or less investment is needed to make advertising more effective

Classified advertising
Classified advertising is a form of advertising which is particularly common in newspapers, online and other periodicals which may be sold or distributed free of charge. Advertisements in a newspaper are typically short, as they are charged for by the line, and one newspaper column wide. Publications printing news or other information often have sections of classified advertisements; there are also publications which contain only advertisements. The advertisements are grouped into categories or classes such as "for sale - telephones", "wanted - kitchen appliances", and "services plumbing", hence the term "classified". Classified advertisements are much cheaper than larger display advertisements used by businesses, and are mostly placed by private individuals with single items they wish to sell or buy.

Overview Classified advertisements are usually charged for according to length; the publications in which they appear may be sold or given away free of charge. Advertisements usually comprise text with no graphics, and may be as short as a statement of the article on sale or wanted and a telephone number, or may have more information such as name and address, detailed description of the item or items ("red woman's sweater, V neck, size 10, slightly used, good condition"). There are usually no pictures or other graphics, although sometimes a logo may be used. Classified advertising is called such because it is generally grouped within the publication under headings classifying the product or service being offered (headings such as Accounting, Automobiles, Clothing,e, For Sale, For Rent, etc.) and is grouped entirely in a distinct section of the periodical, which makes it distinct from display advertising, which often contains graphics or other art work and which is more typically distributed throughout a publication adjacent to editorial content. A hybrid of the two forms — classified display advertising — may often be found, in which categorized advertisements with larger amounts of graphical detail can be found among the text listings of a classified advertising section in a publication. Business opportunities often use classifieds to sell their services, usually employing 1-800 numbers. Classified and classified display ads are used by many companies to recruit applicants for jobs. Printed classified ads are typically just a few column lines in length, and they are often filled with abbreviations to save space and money.
[edit]Developments

In recent years the term "classified advertising" or "classified ads" has expanded from merely the sense of print advertisements in periodicals to include similar types of advertising on computer services, radio, and even television, particularly cable television but occasionally broadcast television as well, with the latter occurring typically very early in the morning hours[citation needed]. Like most forms of printed media, the classified ad has found its way to the Internet.

Internet classified ads do not typically use per-line pricing models, so tend to be longer. They are also searchable, unlike printed material, tend to be local, and may foster a greater sense of urgency as a result of their daily structure and wider scope for audiences. Because of their self-policing nature and low cost structures, some companies offer free classifieds internationally. Other companies focus mainly on their local hometown region, while others blanket urban areas by using postal codes. Craigslist.org was one of the first online classified sites, and has grown to become the largest classified source, bringing in over 14 million unique visitors a month according to comScore Media Metrix[citation needed]. A growing number of sites and companies have begun to provide specialized classified marketplaces online, catering to niche market products and services, such include boats, pianos, pets, and adult services, amongst others. In many cases, these specialized services provide better and more targeted search capabilities than general search engines or general classified services can provide. A number of online services called aggregators crawl and aggregate classifieds from sources such as blogs and RSS feeds, as opposed to relying on manually submitted listings. Additionally, other companies provide online advertising services and tools to assist members in designing online ads using professional ad templates and then automatically distributing the finished ads to the various online ad directories as part of their service. In this sense these companies act as both an application service provider and a content delivery platform. Social classifieds is niche that is growing in online classified ads.
[edit]Statistics

In 2003 the market for classified ads in the United States was $15.9 billion (newspapers), $14.1 billion (online) according to market researcher Classified Intelligence. The worldwide market for classified ads in 2003 was estimated at over $100 billion. Perhaps due to the lack of a standard for reporting, market statistics vary concerning the total market for internet classified ads. The Kelsey Research Group listed online classified ads as being worth $13.3 billion[citation needed], while Jupiter Research provided a conservative appraisal of $2.6 billion as of 2005[citation needed] and the Interactive Advertising Bureau listed the net

worth of online classified revenue at $2.1 billion as of April 2006[citation needed] . Newspaper's revenue from classifieds advertisements is decreasing continually as internet classifieds grow. Classified advertising at some of the larger newspaper chains dropped by 14% to 20% in 2007, while traffic to classified sites grew by 23%.[1] As the online classified advertising sector develops, there is an increasing emphasis toward specialization. Vertical markets for classifieds are developing quickly along with the general marketplace for classifieds websites. Like search engines, classified websites are often specialised, with sites providing advertising platforms for niche markets of buyers of sellers.

Personal advertisement
From Wikipedia, the free encyclopedia

"Personals" redirects here. For other uses, see Personal (disambiguation). "W4M" redirects here. For the video game, see Worms 4: Mayhem.

A personal or personal ad is an item or notice traditionally in the newspaper, similar to a classified ad but personal [disambiguation needed] in nature. In British English it is also commonly known as an advert in a lonely hearts column.[1] With its rise in popularity, the World Wide Web has also become a common medium for personals, commonly referred to as online dating. Personals are generally meant to generate romance, friendship, or casual (sometimes sexual) encounters, and usually include a basic description of the person posting it, and their interests. Due to newspaper prices being based on characters or lines of text, a jargon of abbreviations, acronyms and code words arose in personals, and have carried over to the internet

Contact magazine
From Wikipedia, the free encyclopedia

A contact magazine is a type of classified magazine that is largely or wholly dedicated to personal ads. As well as publishing the personal ads, the publishers of contact magazines often run an anonymous mail forwarding service that allows advertisers to identify themselves only with box numbers.

Many contact magazines are sex-contact magazines aimed at a readership of people looking for or offering sex. Specialist contact magazines also exist for those with specific sexual preferences, such as those seeking BDSM encounters, or the services of professional dominants or submissives.

Marketing management
From Wikipedia, the free encyclopedia Marketing

Key concepts

Product • Pricing Distribution • Service • Retail Brand management Account-based marketing Marketing ethics Marketing effectiveness Market research Market segmentation Marketing strategy Marketing management Market dominance Promotional content

Advertising • Branding • Underwriting Direct marketing • Personal Sales Product placement • Publicity Sales promotion • Sex in advertising Loyalty marketing • Premiums • Prizes Promotional media

Printing • Publication Broadcasting • Out-of-home Internet marketing • Point of sale Promotional merchandise

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Marketing Management is a business discipline which is focused on the practical application of marketing techniques and the management of a firm's marketing resources and activities. Rapidly emerging forces of globalization have compelled firms to market beyond the borders of their home country making International marketing highly significant and an integral part of a firm's marketing strategy.
[1]

Marketing managers are often responsible for influencing the level, timing, and

composition of customer demand accepted definition of the term. In part, this is because the role of a marketing manager can vary significantly based on a business' size, corporate culture, and industry context. For example, in a large consumer products company, the marketing manager may act as the overallgeneral manager of his or her assigned product [2] To create an effective, cost-efficient Marketing management strategy, firms must possess a detailed, objectiveunderstanding of their own business and the market in which they operate.[3] In analyzing these issues, the discipline of marketing management often overlaps with the related discipline of strategic planning.
Contents
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• o o o o o • • • •

1 Structure 1.1 Marketing strategy 1.2 Implementation planning 1.3 Project, process, and vendor management 1.4 Organizational management and leadership 1.5 Reporting, measurement, feedback and

control systems 2 See also 3 References 4 Further reading 5 External links

[edit]Structure

Traditionally, marketing analysis was structured into three areas: Customer analysis, Company analysis, and Competitor analysis (so-called "3Cs" analysis). More recently, it has become fashionable in some marketing circles to divide these further into certain five "Cs": Customer analysis, Company analysis, Collaborator analysis, Competitor analysis, and analysis of the industry Context. In Customer analysis is to develop a schematic diagram for market segmentation, breaking down the market into various constituent groups of customers, which are called customer segments or market segmentation's. Marketing managers work to develop detailed profiles of each segment, focusing on any number of variables that may differ among the segments: demographic, psycho graphic, geographic, behavioral, needsbenefit, and other factors may all be examined. Marketers also attempt to track these segments' perceptions of the various products in the market using tools such as perceptual mapping. company analysis, marketers focus on understanding the company's cost structure and cost position relative to competitors, as well as working to identify a firm's core competencies and other competitively distinct company resources. Marketing managers may also work with the accounting department to analyze the profits the firm is generating from various product lines and customer accounts. The company may also conduct periodic brand audits to assess the strength of its brands and sources of brand equity.[4] The firm's collaborators may also be profiled, which may include various suppliers, distributors and other channel partners, joint venture partners, and others. An analysis of complementary products may also be performed if such products exist. Marketing management employs various tools from economics and competitive strategy to analyze the industry context in which the firm operates. These include Porter's five forces, analysis ofstrategic groups of competitors, value chain analysis and others.[5] Depending on the industry, the regulatory context may also be important to examine in detail. In Competitor analysis, marketers build detailed profiles of each competitor in the market, focusing especially on their relative competitive strengths and weaknesses using SWOT analysis. Marketing managers will examine each competitor's cost structure, sources of profits, resources and competencies, competitive positioning and product differentiation, degree of vertical integration, historical responses to industry developments, and other factors. Marketing management often finds it necessary to invest in research to collect the data required to perform accurate marketing analysis. As such, they often conduct market

research (alternatelymarketing research) to obtain this information. Marketers employ a variety of techniques to conduct market research, but some of the more common include:
   

Qualitative marketing research, such as focus groups Quantitative marketing research, such as statistical surveys Experimental techniques such as test markets Observational techniques such as ethnographic (on-site) observation

Marketing managers may also design and oversee various environmental scanning and competitive intelligence processes to help identify trends and inform the company's marketing analysis.
[edit]Marketing

strategy

Main article: Marketing strategy If the company has obtained an adequate understanding of the customer base and its own competitive position in the industry, marketing managers are able to make their own key strategic decisions and develop a marketing strategy designed to maximize the revenues and profits of the firm. The selected strategy may aim for any of a variety of specific objectives, including optimizing short-term unit margins, revenue growth, market share, long-term profitability, or other goals. To achieve the desired objectives, marketers typically identify one or more target customer segments which they intend to pursue. Customer segments are often selected as targets because they score highly on two dimensions: 1) The segment is attractive to serve because it is large, growing, makes frequent purchases, is not price sensitive (i.e. is willing to pay high prices), or other factors; and 2) The company has the resources and capabilities to compete for the segment's business, can meet their needs better than the competition, and can do so profitably.[3] In fact, a commonly cited definition of marketing is simply "meeting needs profitably." [6] The implication of selecting target segments is that the business will subsequently allocate more resources to acquire and retain customers in the target segment(s) than it will for other, non-targeted customers. In some cases, the firm may go so far as to turn away customers who are not in its target segment.The doorman at a swanky nightclub, for example, may deny entry to unfashionably dressed individuals because the business has made a strategic decision to target the "high fashion" segment of nightclub patrons. In conjunction with targeting decisions, marketing managers will identify the desired positioning they want the company, product, or brand to occupy in the target

customer's mind. This positioning is often an encapsulation of a key benefit the company's product or service offers that is differentiated and superior to the benefits offered by competitive products.[7] For example, Volvo has traditionally positioned its products in the automobile market in North America in order to be perceived as the leader in "safety", whereas BMW has traditionally positioned its brand to be perceived as the leader in "performance." Ideally, a firm's positioning can be maintained over a long period of time because the company possesses, or can develop, some form of sustainable competitive advantage.
[8]

The positioning should also be sufficiently relevant to the target segment such that it

will drive the purchasing behavior of target customers.[7]
[edit]Implementation

planning

Main article: Marketing plan

The Marketing Metrics Continuum provides a framework for how to categorize metrics from the tactical to strategic.

After the firm's strategic objectives have been identified, the target market selected, and the desired positioning for the company, product or brand has been determined, marketing managers focus on how to best implement the chosen strategy. Traditionally, this has involved implementation planning across the "4Ps" of marketing: Product management, Pricing (at what price slot do you position your product, for e-g low, medium or high price), Place (the place/area where you are going to be selling your products, it could be local, regional, country wide or International) (i.e. sales and distribution channels), and People. Now a new P has been added making it a total of 5P's. The 5th P is Politics which affects marketing in a significant way. Taken together, the company's implementation choices across the 4(5)Ps are often described as the marketing mix, meaning the mix of elements the business will employ to "go to market" and execute the marketing strategy. The overall goal for the marketing

mix is to consistently deliver a compelling value proposition that reinforces the firm's chosen positioning, builds customer loyalty and brand equity among target customers, and achieves the firm's marketing and financial objectives. In many cases, marketing management will develop a marketing plan to specify how the company will execute the chosen strategy and achieve the business' objectives. The content of marketing plans varies from firm to firm, but commonly includes:
 

An executive summary Situation analysis to summarize facts and insights gained from market research The company's mission statement or long-term strategic vision A statement of the company's key objectives, often subdivided into marketing The marketing strategy the business has chosen, specifying the target segments Implementation choices for each element of the marketing mix (the 4(5)Ps)

and marketing analysis
 

objectives and financial objectives

to be pursued and the competitive positioning to be achieved

[edit]Project,

process, and vendor management

Once the key implementation initiatives have been identified, marketing managers work to oversee the execution of the marketing plan. Marketing executives may therefore manage any number of specific projects, such as sales force management initiatives, product development efforts, channel marketing programs and the execution of public relations and advertising campaigns. Marketers use a variety of project management techniques to ensure projects achieve their objectives while keeping to established schedules and budgets. More broadly, marketing managers work to design and improve the effectiveness of core marketing processes, such as new product development, brand management, marketing communications, and pricing. Marketers may employ the tools of business process reengineering to ensure these processes are properly designed, and use a variety of process management techniques to keep them operating smoothly. Effective execution may require management of both internal resources and a variety of external vendors and service providers, such as the firm's advertising agency. Marketers may therefore coordinate with the company's Purchasing department on the procurement of these services.
[edit]Organizational

management and leadership

Marketing management may spend a fair amount of time building or maintaining a marketing orientation for the business. Achieving a market orientation, also known as

"customer focus" or the "marketing concept", requires building consensus at the senior management level and then driving customer focus down into the organization. Cultural barriers may exist in a given business unit or functional area that the marketing manager must address in order to achieve this goal. Additionally, marketing executives often act as a "brand champion" and work to enforce corporate identitystandards across the enterprise. In larger organizations, especially those with multiple business units, top marketing managers may need to coordinate across several marketing departments and also resources from finance, research and development, engineering, operations, manufacturing, or other functional areas to implement the marketing plan. In order to effectively manage these resources, marketing executives may need to spend much of their time focused on political issues and inte-departmental negotiations. The effectiveness of a marketing manager may therefore depend on his or her ability to make the internal "sale" of various marketing programs equally as much as the external customer's reaction to such programs.[6]
[edit]Reporting,

measurement, feedback and control systems

Marketing management employs a variety of metrics to measure progress against objectives. It is the responsibility of marketing managers – in the marketing department or elsewhere – to ensure that the execution of marketing programs achieves the desired objectives and does so in a cost-efficient manner. Marketing management therefore often makes use of various organizational control systems, such as sales forecasts, sales force and reseller incentive programs, sales force management systems, and customer relationship management tools (CRM). Recently, some software vendors have begun using the term "marketing operations management" or "marketing resource management" to describe systems that facilitate an integrated approach for controlling marketing resources. In some cases, these efforts may be linked to various supply chain management systems, such as enterprise resource planning (ERP), material requirements planning (MRP), efficient consumer response (ECR), and inventory management systems. Measuring the return on investment (ROI) of and marketing effectiveness various marketing initiatives is a significant problem for marketing management. Various market research, accounting and financial tools are used to help estimate the ROI of marketing investments. Brand valuation, for example, attempts to identify the percentage of a company's market value that is generated by the company's brands, and thereby estimate the financial value of specific investments in brand equity. Another technique, integrated marketing communications (IMC), is a CRM database-driven

approach that attempts to estimate the value of marketing mix executions based on the changes in customer behavior these executions generate.[9]

Predictive analytics
From Wikipedia, the free encyclopedia

Predictive analytics encompasses a variety of techniques from statistics, data mining and game theory that analyze current and historical facts to make predictions about future events. In business, predictive models exploit patterns found in historical and transactional data to identify risks and opportunities. Models capture relationships among many factors to allow assessment of risk or potential associated with a particular set of conditions, guiding decision making for candidate transactions. Predictive analytics is used in actuarial science, financial services, insurance, telecommunications, retail, travel, healthcare, pharmaceuticals and other fields. One of the most well-known applications is credit scoring, which is used throughout financial services. Scoring models process a customer’s credit history, loan application, customer data, etc., in order to rankorder individuals by their likelihood of making future credit payments on time. A well-known example would be the FICO score.

Predictive analytics
From Wikipedia, the free encyclopedia

Predictive analytics encompasses a variety of techniques from statistics, data mining and game theory that analyze current and historical facts to make predictions about future events. In business, predictive models exploit patterns found in historical and transactional data to identify risks and opportunities. Models capture relationships among many factors to allow assessment of risk or potential associated with a particular set of conditions, guiding decision making for candidate transactions. Predictive analytics is used in actuarial science, financial services, insurance, telecommunications, retail, travel, healthcare, pharmaceuticals a nd other fields. One of the most well-known applications is credit scoring, which is used throughout financial services. Scoring models process a customer’s credit history, loan application, customer data, etc., in order to rank-order individuals by their likelihood of making future credit payments on time. A well-known example would be the FICO score.

Definition Predictive analytics is an area of statistical analysis that deals with extracting information from data and using it to predict future trends and behavior patterns. The core of predictive analytics relies on capturing relationships between explanatory variables and the predicted variables from past occurrences, and exploiting it to predict future outcomes. It is important to note, however, that the accuracy and usability of results will depend greatly on the level of data analysis and the quality of assumptions.
[edit]Types

Generally, the term predictive analytics is used to mean predictive modeling, scoring of predictive models, and forecasting. However, people are increasingly using the term to describe related analytical disciplines, such as descriptive modeling and decision modeling or optimization. These disciplines also involve rigorous data analysis, and are widely used in business for segmentation and decision making, but have different purposes and the statistical techniques underlying them vary.
[edit]Predictive

models

Predictive models analyze past performance to assess how likely a customer is to exhibit a specific behavior in the future in order to improve marketing effectiveness. This category also encompasses models that seek out subtle data patterns to answer questions about customer performance, such as fraud detection models. Predictive models often perform calculations during live transactions, for example, to evaluate the risk or opportunity of a given customer or transaction, in order to guide a decision. With advancement in computing speed, individual agent modeling systems can simulate human behavior or reaction to given stimuli or scenarios. The new term for animating data specifically linked to an individual in a simulated environment is avatar analytics.
[edit]Descriptive

models

Descriptive models quantify relationships in data in a way that is often used to classify customers or prospects into groups. Unlike predictive models that focus on predicting a single customer behavior (such as credit risk), descriptive models identify many different relationships between customers or products. Descriptive models do not rank-order customers by their likelihood of taking a particular action the way predictive models do. Descriptive models can be used, for example, to categorize customers by their product preferences and life stage. Descriptive modeling tools can be utilized to develop further models that can simulate large number of individualized agents and make predictions.
[edit]Decision

models

Decision models describe the relationship between all the elements of a decision — the known data (including results of predictive models), the decision and the forecast results of the decision — in order to predict the results of decisions involving many variables. These models can be used in optimization, maximizing certain outcomes while minimizing others. Decision models are generally used to develop decision logic or a set of business rules that will produce the desired action for every customer or circumstance.
[edit]Applications

Although predictive analytics can be put to use in many applications, we outline a few examples where predictive analytics has shown positive impact in recent years.
[edit]Analytical

customer relationship management (CRM)

Analytical Customer Relationship Management is a frequent commercial application of Predictive Analysis. Methods of predictive analysis are applied to customer data to pursue CRM objectives.
[edit]Clinical

decision support systems

Experts use predictive analysis in health care primarily to determine which patients are at risk of developing certain conditions, like diabetes, asthma, heart disease and other lifetime illnesses. Additionally, sophisticated clinical decision support systems incorporate predictive analytics to support medical decision making at the point of care. A working definition has been proposed by Dr. Robert Hayward of the Centre for Health Evidence: "Clinical Decision

Support systems link health observations with health knowledge to influence health choices by clinicians for improved health care."
[edit]Collection

analytics

Every portfolio has a set of delinquent customers who do not make their payments on time. The financial institution has to undertake collection activities on these customers to recover the amounts due. A lot of collection resources are wasted on customers who are difficult or impossible to recover. Predictive analytics can help optimize the allocation of collection resources by identifying the most effective collection agencies, contact strategies, legal actions and other strategies to each customer, thus significantly increasing recovery at the same time reducing collection costs.
[edit]Cross-sell

Often corporate organizations collect and maintain abundant data (e.g. customer records, sale transactions) and exploiting hidden relationships in the data can provide a competitive advantage to the organization. For an organization that offers multiple products, an analysis of existing customer behavior can lead to efficient cross sell of products. This directly leads to higher profitability per customer and strengthening of the customer relationship. Predictive analytics can help analyze customers’ spending, usage and other behavior, and help cross-sell the right product at the right time.
[edit]Customer

retention

With the amount of competing services available, businesses need to focus efforts on maintaining continuous consumer satisfaction. In such a competitive scenario, consumer loyalty needs to be rewarded and customer attrition needs to be minimized. Businesses tend to respond to customer attrition on a reactive basis, acting only after the customer has initiated the process to terminate service. At this stage, the chance of changing the customer’s decision is almost impossible. Proper application of predictive analytics can lead to a more proactive retention strategy. By a frequent examination of a customer’s past service usage, service performance, spending and other behavior patterns, predictive models can determine the likelihood of a customer wanting to terminate service sometime in the near future. An intervention with lucrative offers can increase the chance of retaining the customer. Silent attrition is the behavior of a customer to slowly

but steadily reduce usage and is another problem faced by many companies. Predictive analytics can also predict this behavior accurately and before it occurs, so that the company can take proper actions to increase customer activity.
[edit]Direct

marketing

When marketing consumer products and services there is the challenge of keeping up with competing products and consumer behavior. Apart from identifying prospects, predictive analytics can also help to identify the most effective combination of product versions, marketing material, communication channels and timing that should be used to target a given consumer. The goal of predictive analytics is typically to lower the cost per order or cost per action.
[edit]Fraud

detection

Fraud is a big problem for many businesses and can be of various types. Inaccurate credit applications, fraudulent transactions (both offline and online), identity thefts and false insurance claims are some examples of this problem. These problems plague firms all across the spectrum and some examples of likely victims are credit card issuers, insurance companies, retail merchants, manufacturers, business to business suppliers and even services providers. This is an area where a predictive model is often used to help weed out the “bads” and reduce a business's exposure to fraud. Predictive modeling can also be used to detect financial statement fraud in companies, allowing auditors to gauge a company's relative risk, and to increase substantive audit procedures as needed. The Internal Revenue Service (IRS) of the United States also uses predictive analytics to try to locate tax fraud.
[edit]Portfolio,

product or economy level prediction

Often the focus of analysis is not the consumer but the product, portfolio, firm, industry or even the economy. For example a retailer might be interested in predicting store level demand for inventory management purposes. Or the Federal Reserve Board might be interested in predicting the unemployment rate for the next year. These type of problems can be addressed by predictive analytics using Time Series techniques (see below).
[edit]Underwriting

Many businesses have to account for risk exposure due to their different services and determine the cost needed to cover the risk. For example, auto insurance providers need to accurately determine the amount of premium to charge to cover each automobile and driver. A financial company needs to assess a borrower’s potential and ability to pay before granting a loan. For a health insurance provider, predictive analytics can analyze a few years of past medical claims data, as well as lab, pharmacy and other records where available, to predict how expensive an enrollee is likely to be in the future. Predictive analytics can help underwriting of these quantities by predicting the chances of illness, default, bankruptcy, etc. Predictive analytics can streamline the process of customer acquisition, by predicting the future risk behavior of a customer using application level data. Predictive analytics in the form of credit scores have reduced the amount of time it takes for loan approvals, especially in the mortgage market where lending decisions are now made in a matter of hours rather than days or even weeks. Proper predictive analytics can lead to proper pricing decisions, which can help mitigate future risk of default.
[edit]Statistical

techniques

The approaches and techniques used to conduct predictive analytics can broadly be grouped into regression techniques and machine learning techniques.
[edit]Regression

techniques

Regression models are the mainstay of predictive analytics. The focus lies on establishing a mathematical equation as a model to represent the interactions between the different variables in consideration. Depending on the situation, there is a wide variety of models that can be applied while performing predictive analytics. Some of them are briefly discussed below.
[edit]Linear regression model

The linear regression model analyzes the relationship between the response or dependent variable and a set of independent or predictor variables. This relationship is expressed as an equation that predicts the response variable as a linear function of the parameters. These parameters are adjusted so that a measure of fit is optimized. Much of the effort in model fitting is focused on minimizing the size of the

residual, as well as ensuring that it is randomly distributed with respect to the model predictions. The goal of regression is to select the parameters of the model so as to minimize the sum of the squared residuals. This is referred to as ordinary least squares (OLS) estimation and results in best linear unbiased estimates (BLUE) of the parameters if and only if the GaussMarkov assumptions are satisfied. Once the model has been estimated we would be interested to know if the predictor variables belong in the model – i.e. is the estimate of each variable’s contribution reliable? To do this we can check the statistical significance of the model’s coefficients which can be measured using the t-statistic. This amounts to testing whether the coefficient is significantly different from zero. How well the model predicts the dependent variable based on the value of the independent variables can be assessed by using the R² statistic. It measures predictive power of the model i.e. the proportion of the total variation in the dependent variable that is “explained” (accounted for) by variation in the independent variables.
[edit]Discrete

choice models

Multivariate regression (above) is generally used when the response variable is continuous and has an unbounded range. Often the response variable may not be continuous but rather discrete. While mathematically it is feasible to apply multivariate regression to discrete ordered dependent variables, some of the assumptions behind the theory of multivariate linear regression no longer hold, and there are other techniques such as discrete choice models which are better suited for this type of analysis. If the dependent variable is discrete, some of those superior methods are logistic regression,multinomial logit and probit models. Logistic regression and probit models are used when the dependent variable is binary.
[edit]Logistic regression

For more details on this topic, see logistic regression. In a classification setting, assigning outcome probabilities to observations can be achieved through the use of a logistic model, which is basically a method which transforms information about the binary dependent variable into an unbounded continuous variable and

estimates a regular multivariate model (See Allison’s Logistic Regression for more information on the theory of Logistic Regression). The Wald and likelihood-ratio test are used to test the statistical significance of each coefficient b in the model (analogous to the t tests used in OLS regression; see above). A test assessing the goodnessof-fit of a classification model is the –.
[edit]Multinomial logistic regression

An extension of the binary logit model to cases where the dependent variable has more than 2 categories is the multinomial logit model. In such cases collapsing the data into two categories might not make good sense or may lead to loss in the richness of the data. The multinomial logit model is the appropriate technique in these cases, especially when the dependent variable categories are not ordered (for examples colors like red, blue, green). Some authors have extended multinomial regression to include feature selection/importance methods such as Random multinomial logit.
[edit]Probit regression

Probit models offer an alternative to logistic regression for modeling categorical dependent variables. Even though the outcomes tend to be similar, the underlying distributions are different. Probit models are popular in social sciences like economics. A good way to understand the key difference between probit and logit models, is to assume that there is a latent variable z. We do not observe z but instead observe y which takes the value 0 or 1. In the logit model we assume that y follows a logistic distribution. In the probit model we assume that y follows a standard normal distribution. Note that in social sciences (example economics), probit is often used to model situations where the observed variable y is continuous but takes values between 0 and 1.
[edit]Logit versus probit

The Probit model has been around longer than the logit model. They look identical, except that the logistic distribution tends to be a little flat tailed. One of the reasons the logit model was formulated was that the probit model was difficult to compute because it involved calculating difficult integrals. Modern computing however has made this

computation fairly simple. The coefficients obtained from the logit and probit model are also fairly close. However, the odds ratio makes the logit model easier to interpret. For practical purposes the only reasons for choosing the probit model over the logistic model would be: There is a strong belief that the underlying distribution is normal  The actual event is not a binary outcome (e.g. Bankrupt/not bankrupt) but a proportion (e.g. Proportion of population at different debt levels).
 [edit]Time

series models

Time series models are used for predicting or forecasting the future behavior of variables. These models account for the fact that data points taken over time may have an internal structure (such as autocorrelation, trend or seasonal variation) that should be accounted for. As a result standard regression techniques cannot be applied to time series data and methodology has been developed to decompose the trend, seasonal and cyclical component of the series. Modeling the dynamic path of a variable can improve forecasts since the predictable component of the series can be projected into the future. Time series models estimate difference equations containing stochastic components. Two commonly used forms of these models are autoregressive models (AR) and moving average (MA) models. TheBox-Jenkins methodology (1976) developed by George Box and G.M. Jenkins combines the AR and MA models to produce the ARMA (autoregressive moving average) model which is the cornerstone of stationary time series analysis. ARIMA (autoregressive integrated moving average models) on the other hand are used to describe non-stationary time series. Box and Jenkins suggest differencing a non stationary time series to obtain a stationary series to which an ARMA model can be applied. Non stationary time series have a pronounced trend and do not have a constant long-run mean or variance. Box and Jenkins proposed a three stage methodology which includes: model identification, estimation and validation. The identification stage involves identifying if the series is stationary or not and the presence of seasonality by examining plots of the series, autocorrelation and

partial autocorrelation functions. In the estimation stage, models are estimated using non-linear time series or maximum likelihood estimation procedures. Finally the validation stage involves diagnostic checking such as plotting the residuals to detect outliers and evidence of model fit. In recent years time series models have become more sophisticated and attempt to model conditional heteroskedasticity with models such as ARCH (autoregressive conditional heteroskedasticity) and GARCH (generalized autoregressive conditional heteroskedasticity) models frequently used for financial time series. In addition time series models are also used to understand inter-relationships among economic variables represented by systems of equations using VAR (vector autoregression) and structural VAR models.
[edit]Survival

or duration analysis

Survival analysis is another name for time to event analysis. These techniques were primarily developed in the medical and biological sciences, but they are also widely used in the social sciences like economics, as well as in engineering (reliability and failure time analysis). Censoring and non-normality, which are characteristic of survival data, generate difficulty when trying to analyze the data using conventional statistical models such as multiple linear regression. Thenormal distribution, being a symmetric distribution, takes positive as well as negative values, but duration by its very nature cannot be negative and therefore normality cannot be assumed when dealing with duration/survival data. Hence the normality assumption of regression models is violated. The assumption is that if the data were not censored it would be representative of the population of interest. In survival analysis, censored observations arise whenever the dependent variable of interest represents the time to a terminal event, and the duration of the study is limited in time. An important concept in survival analysis is the hazard rate, defined as the probability that the event will occur at time t conditional on surviving until time t. Another concept related to the hazard rate is the survival function which can be defined as the probability of surviving to time t.

Most models try to model the hazard rate by choosing the underlying distribution depending on the shape of the hazard function. A distribution whose hazard function slopes upward is said to have positive duration dependence, a decreasing hazard shows negative duration dependence whereas constant hazard is a process with no memory usually characterized by the exponential distribution. Some of the distributional choices in survival models are: F, gamma, Weibull, log normal, inverse normal, exponential etc. All these distributions are for a non-negative random variable. Duration models can be parametric, non-parametric or semiparametric. Some of the models commonly used are KaplanMeier and Cox proportional hazard model (non parametric).
[edit]Classification

and regression trees

Main article: decision tree learning Classification and regression trees (CART) is a nonparametric Decision tree learning technique that produces either classification or regression trees, depending on whether the dependent variable is categorical or numeric, respectively. Decision trees are formed by a collection of rules based on values of certain variables in the modeling data set Rules are selected based on how well splits based on variables’ values can differentiate observations based on the dependent variable  Once a rule is selected and splits a node into two, the same logic is applied to each “child” node (i.e. it is a recursive procedure)  Splitting stops when CART detects no further gain can be made, or some pre-set stopping rules are met

Each branch of the tree ends in a terminal node
 

Each observation falls into one and exactly one terminal node Each terminal node is uniquely defined by a set of rules

A very popular method for predictive analytics is Leo Breiman's Random forests or derived versions of this technique like Random multinomial logit.

[edit]Multivariate

adaptive regression splines

Multivariate adaptive regression splines (MARS) is a nonparametric technique that builds flexible models by fitting piecewise linear regressions. An important concept associated with regression splines is that of a knot. Knot is where one local regression model gives way to another and thus is the point of intersection between two splines. In multivariate and adaptive regression splines, basis functions are the tool used for generalizing the search for knots. Basis functions are a set of functions used to represent the information contained in one or more variables. Multivariate and Adaptive Regression Splines model almost always creates the basis functions in pairs. Multivariate and adaptive regression spline approach deliberately overfits the model and then prunes to get to the optimal model. The algorithm is computationally very intensive and in practice we are required to specify an upper limit on the number of basis functions.
[edit]Machine

learning techniques

Machine learning, a branch of artificial intelligence, was originally employed to develop techniques to enable computers to learn. Today, since it includes a number of advanced statistical methods for regression and classification, it finds application in a wide variety of fields including medical diagnostics, credit card fraud detection, face and speech recognition and analysis of the stock market. In certain applications it is sufficient to directly predict the dependent variable without focusing on the underlying relationships between variables. In other cases, the underlying relationships can be very complex and the mathematical form of the dependencies unknown. For such cases, machine learning techniques emulate human cognition and learn from training examples to predict future events. A brief discussion of some of these methods used commonly for predictive analytics is provided below. A detailed study of machine learning can be found in Mitchell (1997).

[edit]Neural networks

Neural networks are nonlinear sophisticated modeling techniques that are able to model complex functions. They can be applied to problems of prediction, classification or control in a wide spectrum of fields such as finance, cognitive psychology/neuroscience, medicine, engineering, and physics. Neural networks are used when the exact nature of the relationship between inputs and output is not known. A key feature of neural networks is that they learn the relationship between inputs and output through training. There are two types of training in neural networks used by different networks, supervised and unsupervised training, with supervised being the most common one. Some examples of neural network training techniques are backpropagation, quick propagation, conjugate gradient descent, projection operator, Delta-Bar-Delta etc. Some unsupervised network architectures are multilayer perceptrons, Kohonen networks, Hopfield networks, etc.
[edit]Radial basis functions

A radial basis function (RBF) is a function which has built into it a distance criterion with respect to a center. Such functions can be used very efficiently for interpolation and for smoothing of data. Radial basis functions have been applied in the area of neural networks where they are used as a replacement for the sigmoidal transfer function. Such networks have 3 layers, the input layer, the hidden layer with the RBF non-linearity and a linear output layer. The most popular choice for the non-linearity is the Gaussian. RBF networks have the advantage of not being locked into local minima as do the feed-forward networks such as the multilayer perceptron.
[edit]Support vector machines

Support Vector Machines (SVM) are used to detect and exploit complex patterns in data by clustering, classifying and ranking the data. They are learning machines that are used to perform binary classifications and regression estimations. They commonly use kernel based methods to apply linear classification techniques to non-linear classification problems. There are a number of types of SVM such as linear, polynomial, sigmoid etc.

[edit]Naïve Bayes

Naïve Bayes based on Bayes conditional probability rule is used for performing classification tasks. Naïve Bayes assumes the predictors are statistically independent which makes it an effective classification tool that is easy to interpret. It is best employed when faced with the problem of ‘curse of dimensionality’ i.e. when the number of predictors is very high.
[edit]k-nearest neighbours

The nearest neighbour algorithm (KNN) belongs to the class of pattern recognition statistical methods. The method does not impose a priori any assumptions about the distribution from which the modeling sample is drawn. It involves a training set with both positive and negative values. A new sample is classified by calculating the distance to the nearest neighbouring training case. The sign of that point will determine the classification of the sample. In the k-nearest neighbour classifier, the k nearest points are considered and the sign of the majority is used to classify the sample. The performance of the kNN algorithm is influenced by three main factors: (1) the distance measure used to locate the nearest neighbours; (2) the decision rule used to derive a classification from the k-nearest neighbours; and (3) the number of neighbours used to classify the new sample. It can be proved that, unlike other methods, this method is universally asymptotically convergent, i.e.: as the size of the training set increases, if the observations are independent and identically distributed (i.i.d.), regardless of the distribution from which the sample is drawn, the predicted class will converge to the class assignment that minimizes misclassification error. See Devroy et al.
[edit]Geospatial predictive modeling

Conceptually, geospatial predictive modeling is rooted in the principle that the occurrences of events being modeled are limited in distribution. Occurrences of events are neither uniform nor random in distribution – there are spatial environment factors (infrastructure, sociocultural, topographic, etc.) that constrain and influence where the locations of events occur. Geospatial predictive modeling attempts to describe those constraints and influences by spatially correlating occurrences of historical geospatial locations with environmental factors that represent those constraints and influences. Geospatial

predictive modeling is a process for analyzing events through a geographic filter in order to make statements of likelihood for event occurrence or emergence.
[edit]Tools

There are numerous tools available in the marketplace which help with the execution of predictive analytics. These range from those which need very little user sophistication to those that are designed for the expert practitioner. The difference between these tools is often in the level of customization and heavy data lifting allowed. In an attempt to provide a standard language for expressing predictive models, the Predictive Model Markup Language (PMML) has been proposed. Such an XML-based language provides a way for the different tools to define predictive models and to share these between PMML compliant applications. PMML 4.0 was released in June, 2009.

Strategic management
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments.[1] It entails specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs. A balanced scorecard is often used to evaluate the overall performance of the business and its progress towards objectives. Recent studies and leading management theorists have advocated that strategy needs to start with stakeholders expectations and use a modified balanced scorecard which includes all stakeholders. Strategic management is a level of managerial activity under setting goals and over Tactics. Strategic management provides overall direction to the enterprise and is closely related to the field ofOrganization Studies. In the field of business administration it is useful to talk about "strategic alignment" between the organization and its environment or "strategic consistency." According to Arieu (2007), "there is strategic consistency when the actions of an organization are consistent with the expectations of management, and these in turn are with the market and the context." Strategic management includes not only the management team but can also include the Board of Directors and other stakeholders of the organization. It depends on the organizational structure. “Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and

strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb, 1984:ix)[2]

Strategy formation Strategic formation is a combination of three main processes which are as follows: Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.  Concurrent with this assessment, objectives are set. These objectives should be parallel to a time-line; some are in the shortterm and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.  These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.
 [edit]Strategy 

evaluation

Measuring the effectiveness of the organizational strategy, it's extremely important to conduct a SWOT analysis to figure out the strengths, weaknesses, opportunities and threats (both internal and external) of the entity in business. This may require taking certain precautionary measures or even changing the entire strategy. In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic options are evaluated against three key success criteria:[3]
 

Suitability (would it work?) Feasibility (can it be made to work?)

Acceptability (will they work it?)

[edit]Suitability

Suitability deals with the overall rationale of the strategy. The key point to consider is whether the strategy would address the key strategic issues underlined by the organisation's strategic position. Does it make economic sense?  Would the organization obtain economies of scale or economies of scope?  Would it be suitable in terms of environment and capabilities?

Tools that can be used to evaluate suitability include:
 

Ranking strategic options Decision trees

[edit]Feasibility

Feasibility is concerned with whether the resources required to implement the strategy are available, can be developed or obtained. Resources include funding, people, time and information. Tools that can be used to evaluate feasibility include:
  

cash flow analysis and forecasting break-even analysis resource deployment analysis

[edit]Acceptability

Acceptability is concerned with the expectations of the identified stakeholders (mainly shareholders, employees and customers) with the expected performance outcomes, which can be return, risk and stakeholder reactions. Return deals with the benefits expected by the stakeholders (financial and non-financial). For example, shareholders would expect the increase of their wealth, employees would expect improvement in their careers and customers would expect better value for money.

Risk deals with the probability and consequences of failure of a strategy (financial and non-financial).  Stakeholder reactions deals with anticipating the likely reaction of stakeholders. Shareholders could oppose the issuing of new shares, employees and unions could oppose outsourcing for fear of losing their jobs, customers could have concerns over a merger with regards to quality and support.

Tools that can be used to evaluate acceptability include:
 

what-if analysis stakeholder mapping approaches

[edit]General

In general terms, there are two main approaches, which are opposite but complement each other in some ways, to strategic management:

The Industrial Organizational Approach  based on economic theory — deals with issues like competitive rivalry, resource allocation, economies of scale  assumptions — rationality, self discipline behaviour, profit maximization The Sociological Approach  deals primarily with human interactions  assumptions — bounded rationality, satisfying behaviour, profit sub-optimality. An example of a company that currently operates this way is Google. The stakeholder focused approach is an example of this modern approach to strategy.

Strategic management techniques can be viewed as bottom-up, topdown, or collaborative processes. In the bottom-up approach, employees submit proposals to their managers who, in turn, funnel the best ideas further up the organization. This is often accomplished by a capital budgeting process. Proposals are assessed using financial criteria such as return on investment or cost-benefit analysis.Cost underestimation and benefit overestimation are major sources of error. The proposals that are approved form the substance of a new strategy, all of which is done without a grand strategic design

or a strategic architect. The top-down approach is the most common by far. In it, the CEO, possibly with the assistance of a strategic planning team, decides on the overall direction the company should take. Some organizations are starting to experiment with collaborative strategic planning techniques that recognize the emergent nature of strategic decisions. Strategic decisions should focus on Outcome, Time remaining, and current Value/priority. The outcome comprises both the desired ending goal and the plan designed to reach that goal. Managing strategically requires paying attention to the time remaining to reach a particular level or goal and adjusting the pace and options accordingly. Value/priority relates to the shifting, relative concept of value-add. Strategic decisions should be based on the understanding that the value-add of whatever you are managing is a constantly changing reference point. An objective that begins with a high level of value-add may change due to influence of internal and external factors. Strategic management by definition, is managing with a heads-up approach to outcome, time and relative value, and actively making course corrections as needed.
[edit]The

strategy hierarchy

In most (large) corporations there are several levels of management. Corporate strategy is the highest of these levels in the sense that it is the broadest - applying to all parts of the firm - while also incorporating the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are typically business-level competitive strategies and functional unit strategies. Corporate strategy refers to the overarching strategy of the diversified firm. Such a corporate strategy answers the questions of "which businesses should we be in?" and "how does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?" Business strategy refers to the aggregated strategies of single business firm or a strategic business unit (SBU) in a diversified corporation. According to Michael Porter, a firm must formulate a business strategy that incorporates either cost leadership, differentiation, or focus to achieve a sustainable competitive advantage and long-term success. Alternatively,

according to W. Chan Kim and Renée Mauborgne, an organization can achieve high growth and profits by creating a Blue Ocean Strategythat breaks the previous value-cost trade off by simultaneously pursuing both differentiation and low cost. Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies. Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have reengineered according to processes or SBUs. A strategic business unit is a semi-autonomous unit that is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. A technology strategy, for example, although it is focused on technology as a means of achieving an organization's overall objective(s), may include dimensions that are beyond the scope of a single business unit, engineering organization or IT department. An additional level of strategy called operational strategy was encouraged by Peter Drucker in his theory of management by objectives (MBO). It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies. Since the turn of the millennium, some firms have reverted to a simpler strategic structure driven by advances in information technology. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. This notion of strategy has been captured under the rubric of dynamic strategy, popularized by Carpenter and Sanders's textbook [1]. This work builds on that of

Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.
[edit]Historical [edit]Birth

development of strategic management

of strategic management

Strategic management as a discipline originated in the 1950s and 60s. Although there were numerous early contributors to the literature, the most influential pioneers were Alfred D. Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. Alfred Chandler recognized the importance of coordinating the various aspects of management under one all-encompassing strategy. Prior to this time the various functions of management were separate with little overall coordination or strategy. Interactions between functions or between departments were typically handled by a boundary position, that is, there were one or two managers that relayed information back and forth between two departments. Chandler also stressed the importance of taking a long term perspective when looking to the future. In his 1962 groundbreaking workStrategy and Structure, Chandler showed that a long-term coordinated strategy was necessary to give a company structure, direction, and focus. He says it concisely, “structure follows strategy.”[4] In 1957, Philip Selznick introduced the idea of matching the organization's internal factors with external environmental circumstances.[5] This core idea was developed into what we now call SWOT analysis by Learned, Andrews, and others at the Harvard Business School General Management Group. Strengths and weaknesses of the firm are assessed in light of the opportunities and threats from the business environment. Igor Ansoff built on Chandler's work by adding a range of strategic concepts and inventing a whole new vocabulary. He developed a strategy grid that compared market penetration strategies, product development strategies, market development strategies and horizontal and vertical integration and diversification strategies. He felt that management could use these strategies to systematically

prepare for future opportunities and challenges. In his 1965 classic Corporate Strategy, he developed the gap analysis still used today in which we must understand the gap between where we are currently and where we would like to be, then develop what he called “gap reducing actions”.[6] Peter Drucker was a prolific strategy theorist, author of dozens of management books, with a career spanning five decades. His contributions to strategic management were many but two are most important. Firstly, he stressed the importance of objectives. An organization without clear objectives is like a ship without a rudder. As early as 1954 he was developing a theory of management based on objectives.[7] This evolved into his theory of management by objectives (MBO). According to Drucker, the procedure of setting objectives and monitoring your progress towards them should permeate the entire organization, top to bottom. His other seminal contribution was in predicting the importance of what today we would call intellectual capital. He predicted the rise of what he called the “knowledge worker” and explained the consequences of this for management. He said that knowledge work is non-hierarchical. Work would be carried out in teams with the person most knowledgeable in the task at hand being the temporary leader. In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements of strategic management theory by the 1970s:[8] Strategic management involves adapting the organization to its business environment.  Strategic management is fluid and complex. Change creates novel combinations of circumstances requiring unstructured nonrepetitive responses.  Strategic management affects the entire organization by providing direction.  Strategic management involves both strategy formation (she called it content) and also strategy implementation (she called it process).  Strategic management is partially planned and partially unplanned.

Strategic management is done at several levels: overall corporate strategy, and individual business strategies.  Strategic management involves both conceptual and analytical thought processes.
 [edit]Growth

and portfolio theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory. The PIMS study was a long term study, started in the 1960s and lasted for 19 years, that attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly the effect of market share. Started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now contains decades of information on the relationship between profitability and strategy. Their initial conclusion was unambiguous: The greater a company's market share, the greater will be their rate of profit. The high market share provides volume and economies of scale. It also provides experience and learning curve advantages. The combined effect is increased profits.[9] The studies conclusions continue to be drawn on by academics and companies today: "PIMS provides compelling quantitative evidence as to which business strategies work and don't work" - Tom Peters. The benefits of high market share naturally lead to an interest in growth strategies. The relative advantages of horizontal integration, vertical integration, diversification, franchises, mergers and acquisitions, joint ventures, and organic growth were discussed. The most appropriate market dominance strategies were assessed given the competitive and regulatory environment. There was also research that indicated that a low market share strategy could also be very profitable. Schumacher (1973),[10] Woo and Cooper (1982),[11] Levenson (1984),[12] and later Traverso (2002) [13] showed how smaller niche players obtained very high returns. By the early 1980s the paradoxical conclusion was that high market share and low market share companies were often very profitable but most of the companies in between were not. This was sometimes called the “hole in the middle” problem. This anomaly would be explained by Michael Porter in the 1980s.

The management of diversified organizations required new techniques and new ways of thinking. The first CEO to address the problem of a multi-divisional company was Alfred Sloan at General Motors. GM was decentralized into semi-autonomous “strategic business units” (SBU's), but with centralized support functions. One of the most valuable concepts in the strategic management of multi-divisional companies was portfolio theory. In the previous decade Harry Markowitz and other financial theorists developed the theory of portfolio analysis. It was concluded that a broad portfolio of financial assets could reduce specific risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a company’s operating divisions were seen as an element in the corporate portfolio. Each operating division (also called strategic business units) was treated as a semi-independent profit center with its own revenues, costs, objectives, and strategies. Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970s. This was the theory that gave us the wonderful image of a CEO sitting on a stool milking a cash cow. Shortly after that the G.E. multi factoral model was developed by General Electric. Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.
[edit]The

marketing revolution

The 1970s also saw the rise of the marketing oriented firm. From the beginnings of capitalism it was assumed that the key requirement of business success was a product of high technical quality. If you produced a product that worked well and was durable, it was assumed you would have no difficulty selling them at a profit. This was called the production orientation and it was generally true that good products could be sold without effort, encapsulated in the saying "Build a better mousetrap and the world will beat a path to your door." This was largely due to the growing numbers of affluent and middle class people that capitalism had created. But after the untapped demand caused by the second world war was saturated in the 1950s it became obvious that products were not selling as easily as they had

been. The answer was to concentrate on selling. The 1950s and 1960s is known as the sales era and the guiding philosophy of business of the time is today called the sales orientation. In the early 1970s Theodore Levitt and others at Harvard argued that the sales orientation had things backward. They claimed that instead of producing products then trying to sell them to the customer, businesses should start with the customer, find out what they wanted, and then produce it for them. The customer became the driving force behind all strategic business decisions. This marketingorientation, in the decades since its introduction, has been reformulated and repackaged under numerous names including customer orientation, marketing philosophy, customer intimacy, customer focus, customer driven, and market focused.
[edit]The

Japanese challenge

In 2009, industry consultants Mark Blaxill and Ralph Eckardt suggested that much of the Japanese business dominance that began in the mid 1970s was the direct result of competition enforcement efforts by the Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ). In 1975 the FTC reached a settlement with Xerox Corporation in its anti-trust lawsuit. (At the time, the FTC was under the direction of Frederic M. Scherer). The 1975 Xerox consent decree forced the licensing of the company’s entire patent portfolio, mainly to Japanese competitors. (See "compulsory license.") This action marked the start of an activist approach to managing competition by the FTC and DOJ, which resulted in the compulsory licensing of tens of thousands of patent from some of America's leading companies, including IBM, AT&T, DuPont, Bausch & Lomb, and Eastman Kodak.[original research?] Within four years of the consent decree, Xerox's share of the U.S. copier market dropped from nearly 100% to less than 14%. Between 1950 and 1980 Japanese companies consummated more than 35,000 foreign licensing agreements, mostly with U.S. companies, for free or low-cost licenses made possible by the FTC and DOJ. The post-1975 era of anti-trust initiatives by Washington D.C. economists at the FTC corresponded directly with the rapid, unprecedented rise in Japanese competitiveness and a simultaneous stalling of the U.S. manufacturing economy.[14]

[edit]Competitive

advantage

The Japanese challenge shook the confidence of the western business elite, but detailed comparisons of the two management styles and examinations of successful businesses convinced westerners that they could overcome the challenge. The 1980s and early 1990s saw a plethora of theories explaining exactly how this could be done. They cannot all be detailed here, but some of the more important strategic advances of the decade are explained below. Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and interactive; less “arm-chair planning” was needed. They introduced terms like strategic intent and strategic architecture.[15][16] Their most well known advance was the idea of core competency. They showed how important it was to know the one or two key things that your company does better than the competition.[17] Active strategic management required active information gathering and active problem solving. In the early days of Hewlett-Packard (HP), Dave Packard and Bill Hewlett devised an active management style that they called management by walking around (MBWA). Senior HP managers were seldom at their desks. They spent most of their days visiting employees, customers, and suppliers. This direct contact with key people provided them with a solid grounding from which viable strategies could be crafted. The MBWA concept was popularized in 1985 by a book by Tom Peters and Nancy Austin. [18] Japanese managers employ a similar system, which originated at Honda, and is sometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, which translate into “actual place”, “actual thing”, and “actual situation”). Probably the most influential strategist of the decade was Michael Porter. He introduced many new concepts including; 5 forces analysis, generic strategies, the value chain, strategic groups, andclusters. In 5 forces analysis he identifies the forces that shape a firm's strategic environment. It is like a SWOT analysis with structure and purpose. It shows how a firm can use these forces to obtain a sustainable competitive advantage. Porter modifies Chandler's dictum about structure following strategy by introducing a second level of structure: Organizational structure follows strategy, which in turn

follows industry structure. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies. Although he did not introduce these terms, he showed the importance of choosing one of them rather than trying to position your company between them. He also challenged managers to see their industry in terms of a value chain. A firm will be successful only to the extent that it contributes to the industry's value chain. This forced management to look at its operations from the customer's point of view. Every operation should be examined in terms of what value it adds in the eyes of the final customer. In 1993, John Kay took the idea of the value chain to a financial level claiming “ Adding value is the central purpose of business activity”, where adding value is defined as the difference between the market value of outputs and the cost of inputs including capital, all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter, Kay claims that the role of strategic management is to identify your core competencies, and then assemble a collection of assets that will increase value added and provide a competitive advantage. He claims that there are 3 types of capabilities that can do this; innovation, reputation, and organizational structure. The 1980s also saw the widespread acceptance of positioning theory. Although the theory originated with Jack Trout in 1969, it didn’t gain wide acceptance until Al Ries and Jack Trout wrote their classic book “Positioning: The Battle For Your Mind” (1979). The basic premise is that a strategy should not be judged by internal company factors but by the way customers see it relative to the competition. Crafting and implementing a strategy involves creating a position in the mind of the collective consumer. Several techniques were applied to positioning theory, some newly invented but most borrowed from other disciplines. Perceptual mapping for example, creates visual displays of the relationships between positions. Multidimensional scaling, discriminant analysis, factor analysis, and conjoint analysis are mathematical techniques used to determine the most relevant characteristics (called dimensions or factors) upon which positions should be based. Preference regression can be used to determine vectors of ideal positions and cluster analysis can identify clusters of positions.

Others felt that internal company resources were the key. In 1992, Jay Barney, for example, saw strategy as assembling the optimum mix of resources, including human, technology, and suppliers, and then configure them in unique and sustainable ways.[19] Michael Hammer and James Champy felt that these resources needed to be restructured.[20] This process, that they labeled reengineering, involved organizing a firm's assets around whole processes rather than tasks. In this way a team of people saw a project through, from inception to completion. This avoided functional silos where isolated departments seldom talked to each other. It also eliminated waste due to functional overlap and interdepartmental communications. In 1989 Richard Lester and the researchers at the MIT Industrial Performance Center identified seven best practices and concluded that firms must accelerate the shift away from the mass production of low cost standardized products. The seven areas of best practice were:[21] Simultaneous continuous improvement in cost, quality, service, and product innovation  Breaking down organizational barriers between departments  Eliminating layers of management creating flatter organizational hierarchies.  Closer relationships with customers and suppliers  Intelligent use of new technology  Global focus  Improving human resource skills

The search for “best practices” is also called benchmarking.[22] This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying its best practices in your firm. A large group of theorists felt the area where western business was most lacking was product quality. People like W. Edwards Deming, [23] Joseph M. Juran,[24] A. Kearney,[25] Philip Crosby,[26] andArmand Feignbaum[27] suggested quality improvement techniques like total

quality management (TQM), continuous improvement (kaizen), lean manufacturing, Six Sigma, and return on quality (ROQ). An equally large group of theorists felt that poor customer service was the problem. People like James Heskett (1988),[28] Earl Sasser (1995), William Davidow,[29] Len Schlesinger,[30] A. Paraurgman (1988), Len Berry,[31] Jane Kingman-Brundage,[32] Christopher Hart, and Christopher Lovelock (1994), gave us fishbone diagramming, service charting, Total Customer Service (TCS), the service profit chain, service gaps analysis, the service encounter, strategic service vision, service mapping, and service teams. Their underlying assumption was that there is no better source of competitive advantage than a continuous stream of delighted customers. Process management uses some of the techniques from product quality management and some of the techniques from customer service management. It looks at an activity as a sequential process. The objective is to find inefficiencies and make the process more effective. Although the procedures have a long history, dating back to Taylorism, the scope of their applicability has been greatly widened, leaving no aspect of the firm free from potential process improvements. Because of the broad applicability of process management techniques, they can be used as a basis for competitive advantage. Some realized that businesses were spending much more on acquiring new customers than on retaining current ones. Carl Sewell, [33] Frederick F. Reichheld,[34] C. Gronroos,[35] and Earl Sasser[36]showed us how a competitive advantage could be found in ensuring that customers returned again and again. This has come to be known as the loyalty effect after Reicheld's book of the same name in which he broadens the concept to include employee loyalty, supplier loyalty, distributor loyalty, and shareholder loyalty. They also developed techniques for estimating the lifetime value of a loyal customer, called customer lifetime value (CLV). A significant movement started that attempted to recast selling and marketing techniques into a long term endeavor that created a sustained relationship with customers (called relationship selling, relationship marketing, and customer relationship management). Customer

relationship management (CRM) software (and its many variants) became an integral tool that sustained this trend. James Gilmore and Joseph Pine found competitive advantage in mass customization.[37] Flexible manufacturing techniques allowed businesses to individualize products for each customer without losing economies of scale. This effectively turned the product into a service. They also realized that if a service is mass customized by creating a “performance” for each individual client, that service would be transformed into an “experience”. Their book, The Experience Economy,[38] along with the work of Bernd Schmitt convinced many to see service provision as a form of theatre. This school of thought is sometimes referred to as customer experience management (CEM). Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years conducting empirical research on what makes great companies. Six years of research uncovered a key underlying principle behind the 19 successful companies that they studied: They all encourage and preserve a core ideology that nurtures the company. Even though strategy and tactics change daily, the companies, nevertheless, were able to maintain a core set of values. These core values encourage employees to build an organization that lasts. In Built To Last (1994) they claim that short term profit goals, cost cutting, and restructuring will not stimulate dedicated employees to build a great company that will endure.[39] In 2000 Collins coined the term “built to flip” to describe the prevailing business attitudes in Silicon Valley. It describes a business culture where technological change inhibits a long term focus. He also popularized the concept of the BHAG (Big Hairy Audacious Goal). Arie de Geus (1997) undertook a similar study and obtained similar results. He identified four key traits of companies that had prospered for 50 years or more. They are: Sensitivity to the business environment — the ability to learn and adjust  Cohesion and identity — the ability to build a community with personality, vision, and purpose  Tolerance and decentralization — the ability to build relationships

Conservative financing

A company with these key characteristics he called a living company because it is able to perpetuate itself. If a company emphasizes knowledge rather than finance, and sees itself as an ongoing community of human beings, it has the potential to become great and endure for decades. Such an organization is an organic entity capable of learning (he called it a “learning organization”) and capable of creating its own processes, goals, and persona. There are numerous ways by which a firm can try to create a competitive advantage - some will work but many will not. To help firms avoid a hit and miss approach to the creation of competitive advantage, Will Mulcaster [40] suggests that firms engage in a dialogue that centres around the question "Will the proposed competitive advantage create Perceived Differential Value?" The dialogue should raise a series of other pertinent questions, including: "Will the proposed competitive advantage create something that is different from the competition?"  "Will the difference add value in the eyes of potential customers?" - This question will entail a discussion of the combined effects of price, product features and consumer perceptions.  "Will the product add value for the firm?" - Answering this question will require an examination of cost effectiveness and the pricing strategy.
 [edit]The

military theorists

In the 1980s some business strategists realized that there was a vast knowledge base stretching back thousands of years that they had barely examined. They turned to military strategy for guidance. Military strategy books such as The Art of War by Sun Tzu, On War by von Clausewitz, and The Red Book by Mao Zedong became instant business classics. From Sun Tzu, they learned the tactical side of military strategy and specific tactical prescriptions. From Von Clausewitz, they learned the dynamic and unpredictable nature of military strategy. From Mao Zedong, they learned the principles of guerrilla warfare. The main marketing warfare books were:

Business War Games by Barrie James, 1984

 

Marketing Warfare by Al Ries and Jack Trout, 1986 Leadership Secrets of Attila the Hun by Wess Roberts, 1987

Philip Kotler was a well-known proponent of marketing warfare strategy. There were generally thought to be four types of business warfare theories. They are:
   

Offensive marketing warfare strategies Defensive marketing warfare strategies Flanking marketing warfare strategies Guerrilla marketing warfare strategies

The marketing warfare literature also examined leadership and motivation, intelligence gathering, types of marketing weapons, logistics, and communications. By the turn of the century marketing warfare strategies had gone out of favour. It was felt that they were limiting. There were many situations in which non-confrontational approaches were more appropriate. In 1989, Dudley Lynch and Paul L. Kordis published Strategy of the Dolphin: Scoring a Win in a Chaotic World. "The Strategy of the Dolphin” was developed to give guidance as to when to use aggressive strategies and when to use passive strategies. A variety of aggressiveness strategies were developed. In 1993, J. Moore used a similar metaphor.[41] Instead of using military terms, he created an ecological theory of predators and prey (see ecological model of competition), a sort of Darwinianmanagement strategy in which market interactions mimic long term ecological stability.
[edit]Strategic

change

In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity to describe the way change forces disruptions into the continuity of our lives.[42] In an age of continuity attempts to predict the future by extrapolating from the past can be somewhat accurate. But according to Drucker, we are now in an age of discontinuity and extrapolating from the past is hopelessly ineffective. We cannot assume that trends that exist today will continue into the future. He

identifies four sources of discontinuity: new technologies, globalization, cultural pluralism, and knowledge capital. In 1970, Alvin Toffler in Future Shock described a trend towards accelerating rates of change.[43] He illustrated how social and technological norms had shorter lifespans with each generation, and he questioned society's ability to cope with the resulting turmoil and anxiety. In past generations periods of change were always punctuated with times of stability. This allowed society to assimilate the change and deal with it before the next change arrived. But these periods of stability are getting shorter and by the late 20th century had all but disappeared. In 1980 in The Third Wave, Toffler characterized this shift to relentless change as the defining feature of the third phase of civilization (the first two phases being the agricultural and industrial waves).[44] He claimed that the dawn of this new phase will cause great anxiety for those that grew up in the previous phases, and will cause much conflict and opportunity in the business world. Hundreds of authors, particularly since the early 1990s, have attempted to explain what this means for business strategy. In 2000, Gary Hamel discussed strategic decay, the notion that the value of all strategies, no matter how brilliant, decays over time.[45] In 1978, Dereck Abell (Abell, D. 1978) described strategic windows and stressed the importance of the timing (both entrance and exit) of any given strategy. This has led some strategic planners to build planned obsolescence into their strategies.[46] In 1989, Charles Handy identified two types of change.[47] Strategic drift is a gradual change that occurs so subtly that it is not noticed until it is too late. By contrast, transformational change is sudden and radical. It is typically caused by discontinuities (or exogenous shocks) in the business environment. The point where a new trend is initiated is called a strategic inflection point by Andy Grove. Inflection points can be subtle or radical. In 2000, Malcolm Gladwell discussed the importance of the tipping point, that point where a trend or fad acquires critical mass and takes off.[48]

In 1983, Noel Tichy wrote that because we are all beings of habit we tend to repeat what we are comfortable with.[49] He wrote that this is a trap that constrains our creativity, prevents us from exploring new ideas, and hampers our dealing with the full complexity of new issues. He developed a systematic method of dealing with change that involved looking at any new issue from three angles: technical and production, political and resource allocation, and corporate culture. In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that businesses continuously reinvent themselves. [50] His famous maxim is “Nothing fails like success” by which he means that what was a strength yesterday becomes the root of weakness today, We tend to depend on what worked yesterday and refuse to let go of what worked so well for us in the past. Prevailing strategies become self-confirming. To avoid this trap, businesses must stimulate a spirit of inquiry and healthy debate. They must encourage a creative process of self renewal based on constructive conflict. Peters and Austin (1985) stressed the importance of nurturing champions and heroes. They said we have a tendency to dismiss new ideas, so to overcome this, we should support those few people in the organization that have the courage to put their career and reputation on the line for an unproven idea. In 1996, Adrian Slywotzky showed how changes in the business environment are reflected in value migrations between industries, between companies, and within companies.[51] He claimed that recognizing the patterns behind these value migrations is necessary if we wish to understand the world of chaotic change. In “Profit Patterns” (1999) he described businesses as being in a state ofstrategic anticipation as they try to spot emerging patterns. Slywotsky and his team identified 30 patterns that have transformed industry after industry.[52] In 1997, Clayton Christensen (1997) took the position that great companies can fail precisely because they do everything right since the capabilities of the organization also defines its disabilities. [53] Christensen's thesis is that outstanding companies lose their market leadership when confronted with disruptive technology. He called the approach to discovering the emerging markets for disruptive

technologies agnostic marketing, i.e., marketing under the implicit assumption that no one - not the company, not the customers - can know how or in what quantities a disruptive product can or will be used before they have experience using it. A number of strategists use scenario planning techniques to deal with change. The way Peter Schwartz put it in 1991 is that strategic outcomes cannot be known in advance so the sources of competitive advantage cannot be predetermined.[54] The fast changing business environment is too uncertain for us to find sustainable value in formulas of excellence or competitive advantage. Instead, scenario planning is a technique in which multiple outcomes can be developed, their implications assessed, and their likeliness of occurrence evaluated. According to Pierre Wack, scenario planning is about insight, complexity, and subtlety, not about formal analysis and numbers.[55] In 1988, Henry Mintzberg looked at the changing world around him and decided it was time to reexamine how strategic management was done.[56][57] He examined the strategic process and concluded it was much more fluid and unpredictable than people had thought. Because of this, he could not point to one process that could be called strategic planning. Instead Mintzberg concludes that there are five types of strategies: Strategy as plan - a direction, guide, course of action - intention rather than actual  Strategy as ploy - a maneuver intended to outwit a competitor  Strategy as pattern - a consistent pattern of past behaviour realized rather than intended  Strategy as position - locating of brands, products, or companies within the conceptual framework of consumers or other stakeholders - strategy determined primarily by factors outside the firm  Strategy as perspective - strategy determined primarily by a master strategist

In 1998, Mintzberg developed these five types of management strategy into 10 “schools of thought”. These 10 schools are grouped into three categories. The first group is prescriptive or normative. It

consists of the informal design and conception school, the formal planning school, and the analytical positioning school. The second group, consisting of six schools, is more concerned with how strategic management is actually done, rather than prescribing optimal plans or positions. The six schools are the entrepreneurial, visionary, or great leader school, the cognitive or mental process school, the learning, adaptive, or emergent process school, the power or negotiation school, the corporate culture or collective process school, and the business environment or reactive school. The third and final group consists of one school, the configuration or transformation school, an hybrid of the other schools organized into stages, organizational life cycles, or “episodes”.[58] In 1999, Constantinos Markides also wanted to reexamine the nature of strategic planning itself.[59] He describes strategy formation and implementation as an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is planned and emergent, dynamic, and interactive. J. Moncrieff (1999) also stresses strategy dynamics.[60] He recognized that strategy is partially deliberate and partially unplanned. The unplanned element comes from two sources: emergent strategies (result from the emergence of opportunities and threats in the environment) and Strategies in action (ad hoc actions by many people from all parts of the organization). Some business planners are starting to use a complexity theory approach to strategy. Complexity can be thought of as chaos with a dash of order. Chaos theory deals with turbulent systems that rapidly become disordered. Complexity is not quite so unpredictable. It involves multiple agents interacting in such a way that a glimpse of structure may appear.
[edit]Information-

and technology-driven strategy

Peter Drucker had theorized the rise of the “knowledge worker” back in the 1950s. He described how fewer workers would be doing physical labor, and more would be applying their minds. In 1984, John Nesbitt theorized that the future would be driven largely by information: companies that managed information well could obtain an advantage, however the profitability of what he calls the “information float” (information that the company had and others desired) would all

but disappear as inexpensive computers made information more accessible. Daniel Bell (1985) examined the sociological consequences of information technology, while Gloria Schuck and Shoshana Zuboff looked at psychological factors.[61] Zuboff, in her five year study of eight pioneering corporations made the important distinction between “automating technologies” and “infomating technologies”. She studied the effect that both had on individual workers, managers, and organizational structures. She largely confirmed Peter Drucker's predictions three decades earlier, about the importance of flexible decentralized structure, work teams, knowledge sharing, and the central role of the knowledge worker. Zuboff also detected a new basis for managerial authority, based not on position or hierarchy, but on knowledge (also predicted by Drucker) which she called “participative management”.[62] In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed de Geus' notion of the learning organization, expanded it, and popularized it. The underlying theory is that a company's ability to gather, analyze, and use information is a necessary requirement for business success in the information age. (See organizational learning.) To do this, Senge claimed that an organization would need to be structured such that:[63] People can continuously expand their capacity to learn and be productive,  New patterns of thinking are nurtured,  Collective aspirations are encouraged, and  People are encouraged to see the “whole picture” together.

Senge identified five disciplines of a learning organization. They are: Personal responsibility, self reliance, and mastery — We accept that we are the masters of our own destiny. We make decisions and live with the consequences of them. When a problem needs to be fixed, or an opportunity exploited, we take the initiative to learn the required skills to get it done.  Mental models — We need to explore our personal mental models to understand the subtle effect they have on our behaviour.

Shared vision — The vision of where we want to be in the future is discussed and communicated to all. It provides guidance and energy for the journey ahead.  Team learning — We learn together in teams. This involves a shift from “a spirit of advocacy to a spirit of enquiry”.  Systems thinking — We look at the whole rather than the parts. This is what Senge calls the “Fifth discipline”. It is the glue that integrates the other four into a coherent strategy. For an alternative approach to the “learning organization”, see Garratt, B. (1987).

Since 1990 many theorists have written on the strategic importance of information, including J.B. Quinn,[64] J. Carlos Jarillo,[65] D.L. Barton, [66] Manuel Castells,[67] J.P. Lieleskin,[68] Thomas Stewart,[69] K.E. Sveiby,[70] Gilbert J. Probst,[71] and Shapiro and Varian[72] to name just a few. Thomas A. Stewart, for example, uses the term intellectual capital to describe the investment an organization makes in knowledge. It is composed of human capital (the knowledge inside the heads of employees), customer capital (the knowledge inside the heads of customers that decide to buy from you), and structural capital (the knowledge that resides in the company itself). Manuel Castells, describes a network society characterized by: globalization, organizations structured as a network, instability of employment, and a social divide between those with access to information technology and those without. Geoffrey Moore (1991) and R. Frank and P. Cook[73] also detected a shift in the nature of competition. In industries with high technology content, technical standards become established and this gives the dominant firm a near monopoly. The same is true of networked industries in which interoperability requires compatibility between users. An example is word processor documents. Once a product has gained market dominance, other products, even far superior products, cannot compete. Moore showed how firms could attain this enviable position by using E.M. Rogers five stage adoption process and focusing on one group of customers at a time, using each group as a base for marketing to the next group. The most difficult step is making the transition between visionaries and pragmatists (See Crossing the

Chasm). If successful a firm can create a bandwagon effect in which the momentum builds and your product becomes a de facto standard. Evans and Wurster describe how industries with a high information component are being transformed.[74] They cite Encarta's demolition of the Encyclopedia Britannica (whose sales have plummeted 80% since their peak of $650 million in 1990). Encarta’s reign was speculated to be short-lived, eclipsed by collaborative encyclopedias like Wikipedia that can operate at very low marginal costs. Encarta's service was subsequently turned into an on-line service and dropped at the end of 2009. Evans also mentions the music industry which is desperately looking for a new business model. The upstart information savvy firms, unburdened by cumbersome physical assets, are changing the competitive landscape, redefining market segments, and disintermediating some channels. One manifestation of this is personalized marketing. Information technology allows marketers to treat each individual as its own market, a market of one. Traditional ideas of market segments will no longer be relevant if personalized marketing is successful. The technology sector has provided some strategies directly. For example, from the software development industry agile software development provides a model for shared development processes. Access to information systems have allowed senior managers to take a much more comprehensive view of strategic management than ever before. The most notable of the comprehensive systems is the balanced scorecard approach developed in the early 1990s by Drs. Robert S. Kaplan (Harvard Business School) and David Norton (Kaplan, R. and Norton, D. 1992). It measures several factorsfinancial, marketing, production, organizational development, and new product development to achieve a 'balanced' perspective.
[edit]Knowledge

Adaptive Strategy

Most current approaches to business "strategy" focus on the mechanics of management—e.g., Drucker's operational "strategies" -and as such are not true business strategy. In a post-industrialworld these operationally focused business strategies hinge on conventional sources of advantage have essentially been eliminated:

Scale used to be very important. But now, with access to capital and a global marketplace, scale is achievable by multiple organizations simultaneously. In many cases, it can literally be rented.  Process improvement or “best practices” were once a favored source of advantage, but they were at best temporary, as they could be copied and adapted by competitors.  Owning the customer had always been thought of as an important form of competitive advantage. Now, however, customer loyalty is far less important and difficult to maintain as new brands and products emerge all the time.

In such a world, differentiation, as elucidated by Michael Porter, Botten and McManus is the only way to maintain economic or market superiority (i.e., comparative advantage) over competitors. A company must OWN the thing that differentiates it from competitors. Without IP ownership and protection, any product, process or scale advantage can be compromised or entirely lost. Competitors can copy them without fear of economic or legal consequences, thereby eliminating the advantage. This principle is based on the idea of evolution: differentiation, selection, amplification and repetition. It is a form of strategy to deal with complex adaptive systems which individuals, businesses, the economy are all based on. The principle is based on the survival of the "fittest". The fittest strategy employed after trail and error and combination is then employed to run the company in its current market. Failed strategic plans are either discarded or used for another aspect of a business. The trade off between risk and return is taken into account when deciding which strategy to take. Cynefin model and the adaptive cycles of businesses are both good ways to develop KAS, reference Panarchy and Cynefin. Analyze the fitness landscapes for a product, idea, or service to better develop a more adaptive strategy. (For an explanation and elucidation of the "post-industrial" worldview, see George Ritzer and Daniel Bell.)
[edit]Strategic

decision making processes

Will Mulcaster [75] argues that while much research and creative thought has been devoted to generating alternative strategies, too little work has been done on what influences the quality of strategic decision making and the effectiveness with which strategies are implemented. For instance, in retrospect it can be seen that the financial crisis of 2008-9 could have been avoided if the banks had paid more attention to the risks associated with their investments, but how should banks change the way they make decisions to improve the quality of their decisions in the future? Mulcaster's Managing Forces framework addresses this issue by identifying 11 forces that should be incorporated into the processes of decision making and strategic implementation. The 11 forces are: Time; Opposing forces; Politics; Perception; Holistic effects; Adding value; Incentives; Learning capabilities; Opportunity cost; Risk; Style—which can be remembered by using the mnemonic 'TOPHAILORS'.
[edit]The

psychology of strategic management

Several psychologists have conducted studies to determine the psychological patterns involved in strategic management. Typically senior managers have been asked how they go about making strategic decisions. A 1938 treatise by Chester Barnard, that was based on his own experience as a business executive, sees the process as informal, intuitive, non-routinized, and involving primarily oral, 2-way communications. Bernard says “The process is the sensing of the organization as a whole and the total situation relevant to it. It transcends the capacity of merely intellectual methods, and the techniques of discriminating the factors of the situation. The terms pertinent to it are “feeling”, “judgement”, “sense”, “proportion”, “balance”, “appropriateness”. It is a matter of art rather than science.”[76] In 1973, Henry Mintzberg found that senior managers typically deal with unpredictable situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. . He says, “The job breeds adaptive information-manipulators who prefer the live concrete situation. The manager works in an environment of stimulous-response, and he develops in his work a clear preference for live action.”[77] In 1982, John Kotter studied the daily activities of 15 executives and concluded that they spent most of their time developing and working a

network of relationships that provided general insights and specific details for strategic decisions. They tended to use “mental road maps” rather than systematic planning techniques.[78] Daniel Isenberg's 1984 study of senior managers found that their decisions were highly intuitive. Executives often sensed what they were going to do before they could explain why.[79] He claimed in 1986 that one of the reasons for this is the complexity of strategic decisions and the resultant information uncertainty.[80] Shoshana Zuboff (1988) claims that information technology is widening the divide between senior managers (who typically make strategic decisions) and operational level managers (who typically make routine decisions). She claims that prior to the widespread use of computer systems, managers, even at the most senior level, engaged in both strategic decisions and routine administration, but as computers facilitated (She called it “deskilled”) routine processes, these activities were moved further down the hierarchy, leaving senior management free for strategic decision making. In 1977, Abraham Zaleznik identified a difference between leaders and managers. He describes leadershipleaders as visionaries who inspire. They care about substance. Whereas managers are claimed to care about process, plans, and form.[81] He also claimed in 1989 that the rise of the manager was the main factor that caused the decline of American business in the 1970s and 80s.The main difference between leader and manager is that, leader has followers and manager has subordinates. In capitalistic society leaders make decisions and manager usually follow or execute.[82] Lack of leadership is most damaging at the level of strategic management where it can paralyze an entire organization.[83] According to Corner, Kinichi, and Keats,[84] strategic decision making in organizations occurs at two levels: individual and aggregate. They have developed a model of parallel strategic decision making. The model identifies two parallel processes that both involve getting attention, encoding information, storage and retrieval of information, strategic choice, strategic outcome, and feedback. The individual and organizational processes are not independent however. They interact at each stage of the process.
[edit]Reasons

why strategic plans fail

There are many reasons why strategic plans fail, especially: Failure to execute by overcoming the four key organizational hurdles[85]  Cognitive hurdle  Motivational hurdle  Resource hurdle  Political hurdle  Failure to understand the customer  Why do they buy  Is there a real need for the product  inadequate or incorrect marketing research  Inability to predict environmental reaction  What will competitors do  Fighting brands  Price wars  Will government intervene  Over-estimation of resource competence  Can the staff, equipment, and processes handle the new strategy  Failure to develop new employee and management skills  Failure to coordinate  Reporting and control relationships not adequate  Organizational structure not flexible enough  Failure to obtain senior management commitment  Failure to get management involved right from the start  Failure to obtain sufficient company resources to accomplish task  Failure to obtain employee commitment  New strategy not well explained to employees  No incentives given to workers to embrace the new strategy  Under-estimation of time requirements  No critical path analysis done  Failure to follow the plan  No follow through after initial planning

No tracking of progress against plan  No consequences for above Failure to manage change  Inadequate understanding of the internal resistance to change  Lack of vision on the relationships between processes, technology and organization Poor communications  Insufficient information sharing among stakeholders  Exclusion of stakeholders and delegates

[edit]Limitations

of strategic management

Although a sense of direction is important, it can also stifle creativity, especially if it is rigidly enforced. In an uncertain and ambiguous world, fluidity can be more important than a finely tuned strategic compass. When a strategy becomes internalized into a corporate culture, it can lead to group think. It can also cause an organization to define itself too narrowly. An example of this is marketing myopia. Many theories of strategic management tend to undergo only brief periods of popularity. A summary of these theories thus inevitably exhibits survivorship bias (itself an area of research in strategic management). Many theories tend either to be too narrow in focus to build a complete corporate strategy on, or too general and abstract to be applicable to specific situations. Populism or faddishnesscan have an impact on a particular theory's life cycle and may see application in inappropriate circumstances. See business philosophies and popular management theories for a more critical view of management theories. In 2000, Gary Hamel coined the term strategic convergence to explain the limited scope of the strategies being used by rivals in greatly differing circumstances. He lamented that strategies converge more than they should, because the more successful ones are imitated by firms that do not understand that the strategic process involves designing a custom strategy for the specifics of each situation.[45] Ram Charan, aligning with a popular marketing tagline, believes that strategic planning must not dominate action. "Just do it!" while not

quite what he meant, is a phrase that nevertheless comes to mind when combatting analysis paralysis.
[edit]The

linearity trap

It is tempting to think that the elements of strategic management – (i) reaching consensus on corporate objectives; (ii) developing a plan for achieving the objectives; and (iii) marshalling and allocating the resources required to implement the plan – can be approached sequentially. It would be convenient, in other words, if one could deal first with the noble question of ends, and then address the mundane question of means. But in the world where strategies must be implemented, the three elements are interdependent. Means are as likely to determine ends as ends are to determine means.[86] The objectives that an organization might wish to pursue are limited by the range of feasible approaches to implementation. (There will usually be only a small number of approaches that will not only be technically and administratively possible, but also satisfactory to the full range of organizational stakeholders.) In turn, the range of feasible implementation approaches is determined by the availability of resources. And so, although participants in a typical “strategy session” may be asked to do “blue sky” thinking where they pretend that the usual constraints – resources, acceptability to stakeholders , administrative feasibility – have been lifted, the fact is that it rarely makes sense to divorce oneself from the environment in which a strategy will have to be implemented. It’s probably impossible to think in any meaningful way about strategy in an unconstrained environment. Our brains can’t process “boundless possibilities”, and the very idea of strategy only has meaning in the context of challenges or obstacles to be overcome. It’s at least as plausible to argue that acute awareness of constraints is the very thing that stimulates creativity by forcing us to constantly reassess both means and ends in light of circumstances. The key question, then, is, "How can individuals, organizations and societies cope as well as possible with ... issues too complex to be fully understood, given the fact that actions initiated on the basis of inadequate understanding may lead to significant regret?"[87]

The answer is that the process of developing organizational strategy must be iterative. It involves toggling back and forth between questions about objectives, implementation planning and resources. An initial idea about corporate objectives may have to be altered if there is no feasible implementation plan that will meet with a sufficient level of acceptance among the full range of stakeholders, or because the necessary resources are not available, or both. Even the most talented manager would no doubt agree that "comprehensive analysis is impossible" for complex problems. [88] Formulation and implementation of strategy must thus occur sideby-side rather than sequentially, because strategies are built on assumptions that, in the absence of perfect knowledge, are never perfectly correct. Strategic management is necessarily a "...repetitive learning cycle [rather than] a linear progression towards a clearly defined final destination."[89] While assumptions can and should be tested in advance, the ultimate test is implementation. You will inevitably need to adjust corporate objectives and/or your approach to pursuing outcomes and/or assumptions about required resources. Thus a strategy will get remade during implementation because "humans rarely can proceed satisfactorily except by learning from experience; and modest probes, serially modified on the basis of feedback, usually are the best method for such learning."[90] It serves little purpose (other than to provide a false aura of certainty sometimes demanded by corporate strategists and planners) to pretend to anticipate every possible consequence of a corporate decision, every possible constraining or enabling factor, and every possible point of view. At the end of the day, what matters for the purposes of strategic management is having a clear view – based on the best available evidence and on defensible assumptions – of what it seems possible to accomplish within the constraints of a given set of circumstances. As the situation changes, some opportunities for pursuing objectives will disappear and others arise. Some implementation approaches will become impossible, while others, previously impossible or unimagined, will become viable. The essence of being “strategic” thus lies in a capacity for "intelligent trial-and error"[91] rather than linear adherence to finally honed and detailed strategic plans. Strategic management will add little value—

indeed, it may well do harm—if organizational strategies are designed to be used as a detailed blueprints for managers. Strategy should be seen, rather, as laying out the general path—but not the precise steps —an organization will follow to create value.[92] Strategic management is a question of interpreting, and continuously reinterpreting, the possibilities presented by shifting circumstances for advancing an organization's objectives. Doing so requires strategists to think simultaneously about desired objectives, the best approach for achieving them, and the resources implied by the chosen approach. It requires a frame of mind that admits of no boundary between means and ends. It may not be so limiting as suggested in "The linearity trap" above. Strategic thinking/ identification takes place within the gambit of organizational capacity and Industry dynamics. The two common approaches to strategic analysis are value analysis and SWOT analysis. Yes Strategic analysis takes place within the constraints of existing/potential organizational resources but its would not be appropriate to call it a trap. For e.g., SWOT tool involves analysis of the organization's internal environment (Strengths & weaknesses) and its external environment (opportunities & threats). The organization's strategy is built using its strengths to exploit opportunities, while managing the risks arising from internal weakness and external threats. It further involves contrasting its strengths & weaknesses to determine if the organization has enough strengths to offset its weaknesses. Applying the same logic, at the external level, contrast is made between the externally existing opportunities and threats to determine if the organization is capitalizing enough on opportunities to offset emerging threats.

Enterprise marketing management
Enterprise Marketing Management defines a category of software used by marketing operations to manage their end-to-end internal processes. EMM is subset of Marketing Technologies which consists of a total of 3 key technology types that allow for corporations and customers to participate in a holistic and real-time marketing campaign. EMM consists of other marketing software categories such as Web Analytics, Campaign Management, Digital Asset Management, Web Content Management, Marketing Resource Management, Marketing Dashboards, Lead Management, Event-driven Marketing, Predictive Modeling and more. The goal of deploying and using EMM is to

improve both the efficiency and effectiveness of marketing by increasing operational efficiency, decreasing costs and waste, and standardizing marketing processes for an accurate and predictable time to market. The benefit of using an EMM suite rather than a variety of point solutions is improved collaboration, efficiency and visibility across the entire marketing function, as well as reduced total cost of ownership. Depending on the variable combinations of solutions, EMM can mean several different things to specific brands and industries. Enterprise Marketing Management allows for corporations to put in place a baseline of their operations that will allow them to begin evolution towards a holistic solution that incorporates customer experience, expectation and brand value associated with Marketing Technologies.

Economic order quantity
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Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his early in-depth analysis of it.[1]
[edit]Overview

EOQ only applies where the demand for a product is constant over the year and that each new order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each order placed, regardless of the number of units ordered. There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item). We want to determine the optimal number of units of the product to order so that we minimize the total cost associated with the purchase, delivery and storage of the product The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. Note that the number of times an order is placed will also affect the total cost, however, this number can be determined from the other parameters
[edit]Underlying

assumptions

1. 2.
3.

The ordering cost is constant. The rate of demand is constant The lead time is fixed The purchase price of the item is constant i.e. no discount is available The replenishment is made instantaneously, the whole batch is delivered

4. 5.

at once. EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A common misunderstanding is that the formula tries to find when these are equal.)
[edit]Variables      

Q = order quantity Q * = optimal order quantity D = annual demand quantity of the product P = purchase cost per unit S = fixed cost per order (not per unit, in addition to unit cost) H = annual holding cost per unit (also known as carrying cost or storage cost)

(warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)
[edit]The

Total Cost function

The single-item EOQ formula finds the minimum point of the following cost function: Total Cost = purchase cost + ordering cost + holding cost - Purchase cost: This is the variable cost of goods: purchase unit price × annual demand quantity. This is P×D - Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to order D/Q times per year. This is S × D/Q - Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H × Q/2

. To determine the minimum point of the total cost curve, set the ordering cost equal to the holding cost:

Solving for Q gives Q* (the optimal order quantity):

Therefore:

.

Q* is independent of P; it is a function of only S, D, H.
[edit]Extensions

Several extensions can be made to the EOQ model, including backordering costs and multiple items. Additionally, the economic order interval can be determined from the EOQ and the economic production quantity model (which determines the optimal production quantity) can be determined in a similar fashion. A version of the model, the Baumol-Tobin model, has also been used to determine the money demand function, where a person's holdings of money balances can be seen in a way parallel to a firm's holdings of inventory.[2]
[edit]Example     

Suppose annual requirement (AR) = 10000 units Cost per order (CO) = $2 Cost per unit (CU)= $8 Carrying cost %age (%age of CU) = 0.02 Carrying cost Per unit = $0.16

Economic order quantity = Economic order quantity = 500 units Number of order per year (based on EOQ) Number of order per year (based on EOQ) = 20 Total cost = CU * AR + CO(AR / EOQ) + CC(EOQ / 2) Total cost = 8 * 10000 + 2(10000 / 500) + 0.16(500 / 2) Total cost = $80080 If we check the total cost for any order quantity other than 500(=EOQ), we will see that the cost is higher. For instance, supposing 600 units per order, then

Total cost = 8 * 10000 + 2(10000 / 600) + 0.16(600 / 2) Total cost = $80081 Similarly, if we choose 300 for the order quantity then Total cost = 8 * 10000 + 2(10000 / 300) + 0.16(300 / 2) Total cost = $80091 This illustrates that the Economic Order Quantity is always in the best interests of the entity.

Stock management
Stock management is the function of understanding the stock mix of a company and the different demands on that stock. The demands are influenced by both external and internal factors and are balanced by the creation of Purchase order requests to keep supplies at a reasonable or prescribed level.
Contents
[hide]

• o

1 Retail supply chain 1.1 Weighted Average Price

Method

• • • •

2 Software applications 3 Business models 4 See also 5 References

[edit]Retail

supply chain

Stock management in the retail supply chain follows the following sequence: 1. 2. 3. 4. 5. 6. 7. Request for new stock from stores to head office Head office issues purchase orders to the vendor Vendor ships the goods Warehouse receives the goods Warehouse stocks and distributes to the stores Stores receive the goods Goods are sold to customers at the stores

The management of the inventory in the supply chain involves managing the physical quantities as well as the costing of the goods as it flows through the supply chain. In managing the cost prices of the goods throughout the supply chain, several costing methods are employed: 1. 2. 3. 4. 5. 6. Retail method Weighted Average Price method FIFO (First In First Out) method LIFO (Last In First Out) method LPP (Last Purchase Price) method BNM (Bottle neck method)

[edit]Weighted

Average Price Method

The calculation can be done for different periods. If the calculation is done on a monthly basis, then it is referred to the periodic method. In this method, the available stock is calculated by: ADD Stock at beginning of period ADD Stock purchased during the period AVERAGE total cost by total qty to arrive at the Average Cost of Goods for the period. This Average Cost Price is applied to all movements and adjustments in that period. Ending stock in qty is arrived at by Applying all the changes in qty to the Available balance. Multiplying the stock balance in qty by the Average cost gives the Stock cost at the end of the period. Using the perpetual method, the calculation is done upon every purchase transaction. Thus, the calculation is the same based on the periodic calculation whether by period (periodic) or by transaction (perpetual). The only difference is the 'periodicity' or scope of the calculation. - Periodic is done monthly - Perpetual is done for the duration of the purchase until the next purchase In practice, the daily averaging has been used to closely approximate the perpetual method. 6. Bottle neck method ( depends on proper planning support)
[edit]Software

applications

The implementation of inventory management applications has become a valuable tool for organizations looking to more efficiently manage stock. While the capabilities of applications vary, most inventory management applications give organizations a

structured method of accounting for all incoming and outgoing inventory within their facilities. Organizations save a significant amount in costs associated with manual inventory counts, administrative errors and reductions in inventory stock-outs.
[edit]Business

models

Just-in-time Inventory (JIT), Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI) are a few of the popular models being employed by organizations looking to have greater stock management control. JIT is a model which attempts to replenish inventory for organizations when the inventory is required. The model attempts to avoid excess inventory and its associated costs. As a result, companies receive inventory only when the need for more stock is approaching. VMI and CMI are two business models that adhere to the JIT inventory principles. VMI gives the vendor in a vendor/customer relationship the ability to monitor, plan and control inventory for their customers. Customers relinquish the order making responsibilities in exchange for timely inventory replenishment that increases organizational efficiency. CMI allows the customer to order and control their inventory from their vendors/suppliers. Both VMI and CMI benefit the vendor as well as the customer. Vendors see a significant increase in sales due to increased inventory turns and cost savings realized by their customers, while customers realize similar benefits.

Stock control
Stock control is used to evaluate how much stock is used. It is also used to know what is needed to be ordered. Stock control can only happen if a stock take has taken place. Stock rotation must be put into use with stock control by using the oldest products before the newer products.

Stock-taking
A stocktake involves the physical verification of the quantities and condition of items held in an inventory, warehouse etc., in order to provide an accurate audit of existing inventory and stock valuation. It is also the source of stock discrepancy information.

Matching principle
The matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in whichrevenues and expenses are recognized. According to the principle, expenses are recognized when obligations are (1) incurred (usually when goods are transferred or services rendered, e.g. sold), and (2) offset against recognized revenues, which were generated from those expenses (related on the cause-and-effect basis), no matter when cash is paid out. In cash accounting—in contrast—expenses are recognized when cash is paid out, no matter when obligations are incurred through transfer of goods or rendition of services: e.g., sale. This is often voted on at the shareholders meetings! If no cause-andeffect relationship exists (e.g., a sale is impossible), costs are recognized as expenses in the accounting period they expired: i.e., when have been used up or consumed (e.g., of spoiled, dated, or substandard goods, or not demanded services). Prepaid expenses are not recognized as expenses, but as assetsuntil one of the qualifying conditions is met resulting in a recognition as expenses. Lastly, if no connection with revenues can be established, costs are recognized immediately as expenses (e.g., general administrative and research and development costs). Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses (cost of goods sold), but asassets (deferred expenses), until the actual products are sold. The matching principle allows better evaluation of actual profitability and performance (shows how much was spent to earn revenue), and reduces noise from timing mismatch between when costs are incurred and when revenue is realized.

periods as expenses are recognized, because expenses are recognized when obligations are incurred regardless when cash is paid out according to the matching principle in accrual accounting. Cash can be paid out in an earlier or latter period than obligations are incurred (when goods or services are received) and related expenses are recognized that results in the following two types of accounts:   Accrued expense: Expense is recognized before cash is paid out. Deferred expense: Expense is recognized after cash is paid out.

Accrued expenses is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision. An example is an obligation to pay for goods or services received from a counterpart, while cash for them is to be paid out in a later accounting period when its amount is deducted from accrued expenses. It shares characteristics with deferred

income (or deferred revenue) with the difference that a liability to be covered latter is cash received from a counterpart, while goods or services are to be delivered in a latter period, when such income item is earned, the related revenue item is recognized, and the same amount is deducted from deferred revenues. Deferred expenses (or prepaid expenses or prepayment) is an asset, such as cash paid out TO a counterpart for goods or services to be received in a latter accounting period when fulfilling the promise to pay is actually acknowledged, the related expense item is recognized, and the same amount is deducted from prepayments. It shares characteristics with accrued revenue (or accrued assets) with the difference that an asset to be covered latter are proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a later period, when its amount is deducted from accrued revenues. [edit]Examples  Accrued expense allows one to match future costs of products with the proceeds from their

sales prior to paying out such costs.  Deferred expense (prepaid expense) allows one to match costs of products paid out and not

received yet.  Depreciation matches the cost of purchasing fixed assets with revenues generated by them

by spreading such costs over their expected life. [edit]Accrued

expenses

Accrued expense is a liability used—according to matching principle—to enable management of future costs with an uncertain timing or amount. For example, supplying goods in one accounting period by a vendor, but paying for them in a later period results in an accrued expense that prevents a fictitious increase in the receiving company's value equal to the increase in its inventory (assets) by the cost of the goods received, but unpaid. Without such accrued expense, a sale of such goods in the period they were supplied would cause that the unpaid inventory (recognized as an expense fictitiously incurred) would effectively offset the sale proceeds (revenue) resulting in a fictitious profit in the period of sale, and in a fictitious loss in the latter period of payment, both equal to the cost of goods sold. Period costs, such as office salaries or selling expenses, are immediately recognized as expenses (and offset against revenues of the accounting period) also when employees are paid in the next period. Unpaid period costs are accrued expenses (liabilities) to avoid such costs (as expenses fictitiously incurred) to offset period revenues that would result in a fictitious profit. An example is a commission earned at the moment of sale (or delivery) by a sales representative who is compensated at the end of the following week, in the next accounting period. The company

recognizes the commission as an expense incurred immediately in its current income statement to match the sale proceeds (revenue), so the commission is also added to accrued expenses in the sale period to prevent it from otherwise becoming a fictitious profit, and it is deducted from accrued expenses in the next period to prevent it from otherwise becoming a fictitious loss, when the rep is compensated. [edit]Deferred

expenses

A Deferred expense (prepaid expenses or prepayment) is an asset used to enable management of costs paid out and not recognized as expenses according to the matching principle. For example, when the accounting periods are monthly, an 11/12 portion of an annually paid insurance cost is added to prepaid expenses, which are decreased by 1/12 of the cost in each subsequent period when the same fraction is recognized as an expense, rather than all in the month in which such cost is billed. The not-yet-recognized portion of such costs remains as prepayments (assets) to prevent such cost from turning into a fictitious loss in the monthly period it is billed, and into a fictitious profit in any other monthly period. Similarly, cash paid out for (the cost of) goods and services not received by the end of the accounting period is added to the prepayments to prevent it from turning into a fictitious loss in the period cash was paid out, and into a fictitious profit in the period of their reception. Such cost is not recognized in the income statement (profit and loss or P&L) as the expense incurred in the period of payment, but in the period of their reception when such costs are recognized as expenses in P&L and deducted from prepayments (assets) on balance sheets. [edit]Depreciation Depreciation is used to distribute the cost of the asset over its expected life span according to the matching principle. If a machine is bought for $100,000, has a life span of 10 years, and can produce the same amount of goods each year, then $10,000 of the cost of the machine is matched to each year, rather than charging $100,000 in the first year and nothing in the next 9 years. So, the cost of the machine is offset against the sales in that year. This matches costs to sales

Comparison of Cash Method and Accrual Method of accounting
The two primary accounting methods of the cash and the accruals basis (the difference being primarily one of timing) are used to calculate US public debt,[1] as well as taxable income for U.S. federal income taxes and other income taxes. According to the Internal Revenue Code, a taxpayer may compute taxable income by: 1. 2. the cash receipts and disbursements method; an accrual method;

3. 4.

any other method permitted by the chapter; or any combination of the foregoing methods permitted under regulations

prescribed by the Secretary.[2] As a general rule, a taxpayer must compute taxable income using the same accounting method he / she uses to compute income in keeping his / her books.[3] Also, the taxpayer must maintain a consistent method of accounting from year to year. Should he / she change from the cash basis to the accrual basis (or vice versa), he / she must notify and secure the consent of the Secretary.[4]

Revenue recognition
The Revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are (1) realised or realisable, and are (2) earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting in contrast - revenues are recognized when cash is received no matter when goods or services are sold. Cash can be received in an earlier or latter period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:
 

Accrued revenue: Revenue is recognized before cash is received. Deferred revenue: Revenue is recognized after cash is received.

The Revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are (1) realised or realisable, and are (2) earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting - in contrast - revenues are recognized when cash is received no matter when goods or services are sold. Cash can be received in an earlier or latter period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:  Accrued revenue: Revenue is recognized before cash is received.

Deferred revenue: Revenue is recognized after cash is received.

General rule Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1) and (2) are met. (1) Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash. (2) Revenues are earned when such goods/services are transferred/rendered. Both, such payment assurance and final delivery completion (with a provision for returns, warranty claims, etc.), are required for revenue recognition. Recognition of revenue from four types of transactions: Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery. 2. Revenues from rendering services are recognized when services are completed and billed. 3. Revenue from permission to use company’s assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used. 4. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place.
1.

In practice, this means that revenue is recognized when an invoice has been sent.
[edit]Revenue

vs. cash timing

Accrued revenue (or accrued assets) is an asset such as proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a latter accounting period, when its amount is deducted from accrued revenues. It shares characteristics with deferred expense (or prepaid expense, or prepayment) with the difference that an asset to be covered latter is cash paid out TO a counterpart for goods or services to be received in a latter period

when the obligation to pay is actually incurred, the related expenseitem is recognized, and the same amount is deducted from prepayments Deferred revenue (or deferred income) is a liability, such as cash received FROM a counterpart for goods or services are to be delivered in a later accounting period, when such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. It shares characteristics with accrued expense with the difference that a liability to be covered later is an obligation to pay for goods or services received FROM a counterpart, while cash for them is to be paid out in a later period when its amount is deducted from accrued expenses. For example, a company receives an annual software license fee paid out by a customer upfront on the January 1. However the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.
[edit]Advances

Advances are not considered to be a sufficient evidence of sale, thus no revenue is recorded until the sale is completed. Advances are considered a deferred income and are recorded as liabilities until the whole price is paid and the delivery made (i.e. matching obligations are incurred).
[edit]Exceptions [edit]Revenues

not recognized at sale

The general rule says that revenue from selling inventory is recognized at the point of sale, but there are several exceptions. Buyback agreements: buyback agreement means that a company sells a product and agrees to buy it back after some time. If buyback price covers all costs of the inventory plus related holding costs, the inventory remains on the seller’s books. In plain: there was no sale.

Returns: companies which cannot reasonably estimate the amount of future returns and/or have extremely high rates of returns should recognize revenues only when the right to return expires. Those companies which can estimate the number of future returns and have a relatively small return rate can recognize revenues at the point of sale, but must deduct estimated future returns.

Revenues recognized before Sale
Long-term contracts

This exception primarily deals with long-term contracts such as constructions (buildings, stadiums, bridges, highways, etc.), development of aircraft, weapons, and space exploration hardware. Such contracts must allow the builder (seller) to bill the purchaser at various parts of the project (e.g. every 10 miles of road built). Percentage-of-completion method says that if (1) the contract clearly specifies the price and payment options with transfer of ownership, (2) the buyer is expected to pay the whole amount and (3) the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract. This method is preferred. However, expected loss should be recognized fully and immediately due to conservatism constraint.  Completed contract method should be used only if percentage-of-completion is not applicable or the contract involves extremely high risks. Under this method, revenues, costs, and gross profit are recognized only after the project is fully completed. Thus, if a company is working only on one project, its income statement will show $0 revenues and $0 construction-related costs until the final year. However, expected loss should be recognized fully and immediately due to conservatism constraint.
 [edit]Completion of production basis

This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals because (1) there is

a ready market for these products with reasonably assured prices, (2) the units are interchangeable, and (3) selling and distributing does not involve significant costs.
[edit]Revenues

recognized after Sale

Sometimes, the collection of receivables involves a high level of risk. If there is a high degree of uncertainty regarding collectibility then a company must defer the recognition of revenue. There are three methods which deal with this situation: Installment Sales Method allows recognizing income after the sale is made, and proportionately to the product of gross profit percentage and cash collected calculated. The unearned income is deferred and then recognized to income when cash is collected. [1] For example, if a company collected 45% of total product price, it can recognize 45% of total profit on that product.  Cost Recovery Method is used when there is an extremely high probability of uncollectble payments. Under this method no profit is recognized until cash collections exceed the seller’s cost of the merchandise sold. For example, if a company sold a machine worth $10,000 for $15,000, it can start recording profit only when the buyer pays more than $10,000. In other words, for each dollar collected greater than $10,000 goes towards your anticipated gross profit of $5,000.  Deposit Method is used when the company receives cash before sufficient transfer of ownership occurs. Revenue is not recognized because the risks and rewards of ownership have not transferred to the buyer.[2]

Accrual
Accrual (accumulation) of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.[1]

For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue in its current income statement still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period.[2] The proceeds are also a accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is received. Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as anexpense in its current income statement, even though s-/he will actually get paid at the end of the following week in the next accounting period. The commission is also a accrued expense (liability) on the balance sheet for the delivery period, but not for the next period the commission (cash) is paid out to her/him. Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic / accounting characteristics.
 

Accrued revenue: Revenue is recognized before cash is received. Accrued expense: Expense is recognized before cash is paid out.

Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related revenue item is recognized, while cash is to be received in a latter period, when the amount is deducted from accrued revenues. In the rental industry, there are specialized revenue accruals for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date. For example a rental contract which began on 15 January, being invoiced on a recurring monthly basis will not generate its first invoice until 14 February. Therefore at the end of the January financial period an accrual must be raised for 16 days worth of the monthly charge. This may be a simple pro-rata basis (e.g. 16/31 of the monthly charge) or may be more complex if only week days are being charged or a standardized month is being used (e.g. 28 days, 30 days etc.). Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as aprovision. An example is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period when the amount is deducted from accrued expenses. In the United States of America, this difference is best summarized by IAS 37 which states:

"11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast: "(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and "(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. "Accruals are often reported as part of trade and other payables, whereas provisions are reported separately." To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectable.

Accruals in payroll In payroll, a common benefit that an employer will provide for employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick or vacation time and this time is placed into a bank. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.
[edit]Length

of Service

For most employers, a time-off policy is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time. Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).
[edit]Trial

Period

In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days) where no time is awarded to the employee. This does not prevent an employee from calling in sick immediately after being hired, but it does mean that they will not get paid for this time off. However it does prevent an employee for example, scheduling a vacation for the second week of work. After this trial period, the award of time may begin or it may be retroactive, back to the date of hire.
[edit]Rollover/Carry

Over

Some accrual policies have the ability to carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that is in the bank is usually lost at the end of the employer's calendar year.

Accrued interest
In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals. Accrued income is an income which has been accumulated or accrued irrespective to actual Receipt, which means event occurred but cash not yet received.

Formula The primary formula for calculating the interest accrued in a given period is: where IA is the accrued interest, T is the fraction of the year, P is the principal, and R is the annualized interest rate.
T

is calculated as follows:

where DP is the number of days in the period, and DY is the number of days in the year.

A compounding instrument adds the previously accrued interest to the principal each period. The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.
[edit]Day

count conventions

Main article: Day count convention Common day count conventions that affect the accrued interest calculation are:

actual/360 (days per month, days per year)

Each month is treated normally and the year is assumed to be 360 days e.g. in a period from February 1, 2005 to April 1, 2005 T is considered to be 59 days divided by 360.

30/360

Each month is treated as having 30 days, so a period from February 1, 2005 to April 1, 2005 is considered to be 60 days. The year is considered to have 360 days. This convention is frequently chosen for ease of calculation: the payments tend to be regular and at predictable amounts.

actual/365

Each month is treated normally, and the year is assumed to have 365 days, regardless of leap year status. For example, a period from February 1, 2005 to April 1, 2005 is considered to be 59 days. This convention results in periods having slightly different lengths.

actual/actual (ACT/ACT) - (1)

Each month is treated normally, and the year has the usual number of days. For example, a period from February 1, 2005 to April 1, 2005 is considered to be 59 days. In this convention leap years do affect the final result.

actual/actual (ACT/ACT) - (2)

Each month is treated normally, and the year is the number of days in the current coupon period multiplied by the number of coupons in a year e.g. if the coupon is payable 1 February and August then on April 1, 2005 the days in the year is 362 i.e. 181 (the number of days between 1 February and 1 August 2005) x 2 (semi-annual).
[edit]Date

rolling

Date rolling comes into effect because many instruments can only pay out accrued interest on business days. This often results in interest accruing for a slightly shorter or longer period. Common date rolling conventions are: Following business day. The payment date is rolled to the next business day.  Modified following business day. The payment date is rolled to the next business day, unless doing so would cause the payment to be in the next calendar month, in which case the payment date is rolled to the previous business day. Many institutions have monthend accounting procedures that necessitate this.  Previous business day. The payment date is rolled to the previous business day.  Modified previous business day. The payment date is rolled to the previous business day, unless doing so would cause the payment to be in the previous calendar month, in which case the payment date is rolled to the next business day. Many institutions have month-end accounting procedures that necessitate this.

Accrued jurisdiction
Accrued jurisdiction within the context of the Australian legal system is the power held over state matters by federal courts. Accrued jurisdiction will occur when there are several cases brought to theFederal Court of Australia (FCA) where there are competing jurisdictions between them. In essence the state vests judicial authority in the federal court providing that a number of requirements are met. A claim that is based on a state law for example can be heard in a federal court depending on: 1. 2. the actions done by respective parties the relationship between the parties

3. the laws which attach rights or liabilities to the conduct and relationship of parties 4. whether the different claims arise under the same subject matter 5. whether the different claims are so related that the determination of one depends on the other The above test is applied by the court and a decision reached as to whether the court has accrued jurisdiction. A convenient example of this process is outlined in the case Re Wakim; Ex parte McNally (1999) HCA where there is a conflict between state and federal jurisdictions. In this particular case it was held that accrued jurisdiction did exist but had it not the FCA would have been actingunconstitutionally had it proceeded hearing the case.

Accrued liabilities
Accrued liabilities are liabilities which have occurred, but have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable. There are two general types of Accrued Liabilities:
 

Routine and recurring Infrequent or non-routine

[edit]Example: Accrued Wages Payable Most companies pay their employees on a predetermined schedule. Let's say that the "Imaginary company Ltd." pays its employees each Friday for the hours worked that week. Because wages are accrued for an entire week before they are paid, wages paid on Friday June 5 are compensation for the week ended June 5. If the total wages for the 4 Fridays in June are $1000.00 ($250.00 per week or $50.00 per day) "Imaginary company Ltd." makes routine entries for wage payments at the end of each week. As the company pays wages it increases 'Wage Expense' and decreases 'Cash'. In this example "Imaginary company Ltd." would pay wages on the 5th, 12th, 19th, and 26 June. Assuming that the company prepares Financial statements each month, they owe an additional $100.00 in wages for the last two

workdays in June (29th & 30th). The company will not pay these wages until Friday the 3rd of July; to make sure the company's report remains correct an adjustment must be made.
Accrued liabilities are liabilities which have occurred, but have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable. There are two general types of Accrued Liabilities:   Routine and recurring Infrequent or non-routine

[edit]Example:

Accrued Wages Payable

Most companies pay their employees on a predetermined schedule. Let's say that the "Imaginary company Ltd." pays its employees each Friday for the hours worked that week. Because wages are accrued for an entire week before they are paid, wages paid on Friday June 5 are compensation for the week ended June 5. If the total wages for the 4 Fridays in June are $1000.00 ($250.00 per week or $50.00 per day) "Imaginary company Ltd." makes routine entries for wage payments at the end of each week. As the company pays wages it increases 'Wage Expense' and decreases 'Cash'. In this example "Imaginary company Ltd." would pay wages on the 5th, 12th, 19th, and 26 June. Assuming that the company prepares Financial statements each month, they owe an additional $100.00 in wages for the last two workdays in June (29th & 30th). The company will not pay these wages until Friday the 3rd of July; to make sure the company's report remains correct an adjustment must be made. Wage Expense Cash Wage Expense Accrued Wages Payable $1000.00 $1000.00 $100.00 $100.00

If the company does not record the 2nd transaction, both Expenses and Liabilities are understated. This will make the company's Income appear higher than it really is, which can have very serious consequences. Accrued liabilities is the direct opposite of prepaid expense. See Matching principle.

Deferral
Deferred, in accrual accounting, is any account where the asset or liability is not realized until a future date (accounting period), e.g. annuities, charges,taxes, income, etc. The

deferred item may be carried, dependent on type of deferral, as either an asset or liability. See also accrual. Unfortunately, the term deferral is also often used as an abbreviation for the terms deferred expense and deferred revenue that share the common name word, but they have the opposite economic / accounting characteristics.
 

Deferred expense: Expense is recognized after cash is paid out. Deferred revenue: Revenue is recognized after cash is received.

Deferral
Deferred, in accrual accounting, is any account where the asset or liability is not realized until a future date (accounting period), e.g. annuities, charges,taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability. See also accrual. Unfortunately, the term deferral is also often used as an abbreviation for the terms deferred expense and deferred revenue that share the common name word, but they have the opposite economic / accounting characteristics.     Deferred expense: Expense is recognized after cash is paid out. Deferred revenue: Revenue is recognized after cash is received.

Deferral (deferred charge) Deferred charge(or deferral) is cost that is accounted-for in latter accounting period for its anticipated future benefit, or to comply with the requirement ofmatching costs with revenues. Deferred charges include costs of starting up, obtaining long-term debt, advertising campaigns, etc., and are carried as a non-current asset on the balance sheet pending amortization. Deferred charges often extend over five years or more and occur infrequently unlike prepaid expenses, e.g. insurance, interest, rent. Financial ratios are based on the total assets excluding deferred charges since they have no physical substance (cash realization) and cannot be used in reducing total liabilities.[1]
[edit]Deferred

 

expense

Deferred expense (or prepaid expense, prepayment) is an asset used to enable cash paid out to a counterpart for goods

or services to be received in a later accounting period when fulfilling the promise to pay is actually acknowledged, the related expense item is recognized, and the same amount is deducted from prepayments. It shares characteristics with accrued revenue (or accrued assets) with the difference that an asset to be covered latter are proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a later period, when its amount is deducted from accrued revenues.

For example, when the accounting periods are monthly, an 11/12 portion of an annually paid insurance cost is added to prepaid expenses, which are decreased by 1/12 of the cost in each subsequent period when the same fraction is recognized as an expense, rather than all in the month in which such cost is billed. The not-yet-recognized portion of such costs remains as prepayments (assets) to prevent such cost from turning into a fictitious loss in the monthly period it is billed, and into a fictitious profit in any other monthly period. Similarly, cash paid out for (the cost of) goods and services not received by the end of the accounting period is added to the prepayments to prevent it from turning into a fictitious loss in the period cash was paid out, and into a fictitious profit in the period of their reception. Such cost is not recognized in the income statement (profit and loss or P&L) as the expense incurred in the period of payment, but in the period of their reception when such costs are recognized as expenses in P&L and deducted from prepayments (assets) on balance sheets.
[edit]Deferred

 

revenue

Deferred revenue (or deferred income) is a liability, such as cash received FROM a counterpart for goods or services are to be delivered in a latter accounting period, when such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. It shares characteristics with accrued expense with the difference that a liability to be covered latter is an obligation to pay for goods or services

received FROM a counterpart, while cash for them is to be paid out in a latter period when its amount is deducted from accrued expenses.

For example, a company receives an annual software license fee paid out by a customer upfront on the January 1. However the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.

Accrual
From Wikipedia, the free encyclopedia

Accountancy
Key concepts

Accountant · Accounting period ·Bookkeeping · Cash and accrual basis ·Constant Item Purchasing Power Accounting ·Cost of goods sold · Debits and credits ·Doubleentry system · Fair value accounting ·FIFO & LIFO · GAAP / International Financial Reporting Standards · General ledger ·Historical cost · Matching principle · Revenue recognition · Trial balance

Fields of accounting

Cost · Financial · Forensic · Fund ·Management · Tax

Financial statements

Statement of Financial Position · Statement of cash flows · Statement of changes in equity ·Statement of comprehensive income · Notes ·MD&A · XBRL

Auditing

Auditor's report · Financial audit · GAAS / ISA ·Internal audit · Sarbanes–Oxley Act

Accounting qualifications

CA · CCA · CGA · CMA · CPA · CGFM

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Accrual (accumulation) of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cashbased assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.[1] For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue in its current income statement still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period.[2] The proceeds are also a accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is received. Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as anexpense in its current income statement, even though s-/he will actually get paid at the end of the following week in the next accounting period. The commission is also a accrued expense (liability) on the balance sheet for the delivery period, but not for the next period the commission (cash) is paid out to her/him. Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic / accounting characteristics.
 

Accrued revenue: Revenue is recognized before cash is received. Accrued expense: Expense is recognized before cash is paid out.

Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related revenue item is recognized, while cash is to be received in a latter period, when the amount is deducted from accrued revenues.

In the rental industry, there are specialized revenue accruals for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date. For example a rental contract which began on 15 January, being invoiced on a recurring monthly basis will not generate its first invoice until 14 February. Therefore at the end of the January financial period an accrual must be raised for 16 days worth of the monthly charge. This may be a simple pro-rata basis (e.g. 16/31 of the monthly charge) or may be more complex if only week days are being charged or a standardized month is being used (e.g. 28 days, 30 days etc.). Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as aprovision. An example is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period when the amount is deducted from accrued expenses. In the United States of America, this difference is best summarized by IAS 37 which states: "11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast: "(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and "(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. "Accruals are often reported as part of trade and other payables, whereas provisions are reported separately." To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectable.
Contents
[hide]

• o o o

1 Accruals in payroll 1.1 Length of Service 1.2 Trial Period 1.3 Rollover/Carry

Over

• • •

2 See also 3 References 4 External links

[edit]Accruals

in payroll

In payroll, a common benefit that an employer will provide for employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick or vacation time and this time is placed into a bank. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.
[edit]Length

of Service

For most employers, a time-off policy is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time. Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).
[edit]Trial

Period

In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days) where no time is awarded to the employee. This does not prevent an employee from calling in sick immediately after being hired, but it does mean that they will not get paid for this time off. However it does prevent an employee for example, scheduling a vacation for the second week of work. After this trial period, the award of time may begin or it may be retroactive, back to the date of hire.
[edit]Rollover/Carry

Over

Some accrual policies have the ability to carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that is in the bank is usually lost at the end of the employer's calendar year.

Income statement
Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement orstatement of operations)[1] is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.[1] The purpose of the income statement is to show managersand investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. The income statement can be prepared in one of two methods.[2] The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.

Usefulness and limitations of income statement
Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses. However, information of an income statement has several limitations:

Items that might be relevant but cannot be reliably measured are not reported Some numbers depend on accounting methods used (e.g. using FIFO or LIFO Some numbers depend on judgments and estimates (e.g. depreciation expense

(e.g. brand recognition and loyalty).

accounting to measure inventory level).

depends on estimated useful life and salvage value).

- INCOME STATEMENT BOND LLC For the year ended DECEMBER 31 2007 € Debit Revenues GROSS REVENUES (including rental income) Expenses: ADVERTISING BANK & CREDIT CARD FEES BOOKKEEPING EMPLOYEES ENTERTAINMENT INSURANCE LEGAL & PROFESSIONAL SERVICES LICENSES PRINTING, POSTAGE & STATIONERY RENT RENTAL MORTGAGES AND FEES TELEPHONE UTILITIES TOTAL EXPENSES NET INCOME

€ Credit 496,397 --------

6,300 144 3,350 88,000 5,550 750 1,575 632 320 13,000 74,400 1,000 491 -------(195,512) -------300,885

Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S.. Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions.

If applicable to the business, summary values for the following items should be included in the income statement:[3]
[edit]Operating 

section

Revenue - Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.  Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs,direct labour, and overhead costs (as in absorption costing), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc.  Selling, General and Administrative expenses (SG&A or SGA) - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour.  Selling expenses - represent expenses needed to sell products (e.g. salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).  General and Administrative (G&A) expenses represent expenses to manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc.).  Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.

Research & Development (R&D) expenses - represent expenses included in research and development.

Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104)
[edit]Non-operating 

section

Other revenues or gains - revenues and gains from other than primary business activities (e.g. rent, income from patents). It also includes unusual gains that are either unusual or infrequent, but not both (e.g. gain from sale of securities or gain from disposal of fixed assets) Other expenses or losses - expenses or losses not related to primary business operations, (e.g. foreign exchange loss).

Finance costs - costs of borrowing from various creditors (e.g. interest expenses, bank charges).

Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).
 [edit]Irregular

items

They are reported separately because this way users can better predict future cash flows - irregular items most likely will not recur. These are reported net of taxes. Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately.

Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be appliedretrospectively and shown as adjustments to the beginning balance of affected components in Equity. All comparative financial statements should be restated. (IAS 8) However, changes in estimates (e.g. estimated useful life of a fixed asset) only requires prospective changes. (IAS 8) No items may be presented in the income statement as extraordinary items. (IAS 1.87) Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster might not qualify depending on location (e.g. frost damage would not qualify in Canada but would in the tropics).] Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)
[edit]Disclosures

Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including:[3] (IAS 1.98) Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs  Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring  Disposals of items of property, plant and equipment  Disposals of investments  Discontinued operations  Litigation settlements  Other reversals of provisions
 [edit]Earnings

per share

Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes.

There are two forms of EPS reported: Basic: in this case "weighted average of shares outstanding" includes only actual stocks outstanding.  Diluted: in this case "weighted average of shares outstanding" is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares aretransformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS.
 [edit]Sample

income statement

The following income statement is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of items appeared a firm, but it shows the most usual ones. Please note the difference between IFRS and US GAAP when interpreting the following sample income statements.
Fitness Equipment Limited INCOME STATEMENTS (in millions) 2009

Year Ended March 31, 2008 2007 --------------------------------------------------------------------------------Revenue $ 14,580.2 $ 11,900.4 $ 8,290.3 Cost of sales (6,740.2) (5,650.1) (4,524.2) ----------------------------------Gross profit 7,840.0 6,250.3 3,766.1 -----------------------------------

SGA expenses (3,034.0) -----------Operating profit 732.1 -----------Gains from disposal of fixed assets Interest expense (142.8) -----------Profit before tax 589.3 -----------Income tax expense (235.7) -----------Profit (or loss) for the year 353.6

(3,624.6) ------------$ 4,215.4

(3,296.3) -----------$ 2,954.0 $

------------46.3 (119.7) ------------4,142.0 ------------(1,656.8) ------------$ 2,485.2

-----------(124.1) -----------2,829.9 -----------(1,132.0) -----------$ 1,697.9 $

DEXTERITY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) Year Ended December 31, 2009 2008 2007 --------------------------------------------------------------------------------------------Revenue $ 36,525.9 $ 29,827.6 $ 21,186.8 Cost of sales (18,545.8) (15,858.8) (11,745.5) --------------------- -----------Gross profit 17,980.1 13,968.8 9,441.3 --------------------- -----------Operating expenses: Selling, general and administrative expenses (4,142.1) (3,732.3) (3,498.6) Depreciation (602.4) (584.5) (562.3) Amortization (209.9) (141.9) (111.8) Impairment loss (17,997.1) — —

--------------------- -----------Total operating expenses (4,458.7) (4,172.7) ----------- -----------Operating profit (or loss) 9,510.1 $ 5,268.6 ----------- -----------Interest income 11.7 12.0 Interest expense (742.9) (799.1) ----------- -----------Profit (or loss) from continuing operations before tax, share of profit (or loss) from associates and non-controlling interest 8,778.9 $ 4,481.5 ----------- -----------Income tax expense (3,510.5) (1,789.9) Profit (or loss) from associates, net of tax 0.1 (37.3) Profit (or loss) from non-controlling interest, net of tax (4.7) (3.3) ----------- -----------Profit (or loss) from continuing operations 5,263.8 $ 2,651.0 ----------- -----------Profit (or loss) from discontinued operations, net of tax (802.4) 164.6 ----------- -----------Profit (or loss) for the year 4,461.4 $ 2,815.6 [edit]Bottom (22,951.8) ----------$ (4,971.7) ----------25.3 (718.9) ----------$

$ (5,665.3) ----------(1,678.6) (20.8)

$

(5.1) ----------$ (7,369.8) ----------$

(1,090.3) ----------$ (8,460.1) $

line

"Bottom line" is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called "bottom line." It is important to investors as it represents the profit for the year attributable to the shareholders.

After revision to IAS 1 in 2003, the Standard is now using profit or loss rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement.
[edit]Requirements

of IFRS

On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1: Presentation of Financial Statements, which is effective for annual periods beginning on or after 1 January 2009. A business entity adopting IFRS must include:
 

a Statement of Comprehensive Income or two separate statements comprising: an Income Statement displaying components of profit or loss and 2. a Statement of Comprehensive Income that begins with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1.81)
1.

All non-owner changes in equity (i.e. comprehensive income ) shall be presented in either in the statement of comprehensive income (or in a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity. Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)
Items and disclosures

The statement of comprehensive income should include:[3] (IAS 1.82)

Revenue 2. Finance costs (including interest expenses) 3. Share of the profit or loss of associates and joint ventures accounted for using the equity method 4. Tax expense 5. A single amount comprising the total of (1) the posttax profit or loss of discontinued operations and (2) the posttax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation 6. Profit or loss 7. Each component of other comprehensive income classified by nature 8. Share of the other comprehensive income of associates and joint ventures accounted for using the equity method 9. Total comprehensive income
1.

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83) Profit or loss for the period attributable to non-controlling interests and owners of the parent  Total comprehensive income attributable to non-controlling interests and owners of the parent

No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items.

Comprehensive income
Comprehensive income (or earnings) is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point of view (All changes in Equity except those resulting from investment by or distribution to owners.)

Accounting
Comprehensive income is defined by the Financial Accounting Standards Board, or FASB,
[1]

as “the change in equity [net assets] of a business enterprise during a period from

transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.” Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from available for sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole. Items included in comprehensive income, but not net income are reported under the accumulated other comprehensive income section of shareholder's equity.

Financial Analysis
Comprehensive income attempts to measure the sum total of all operating and financial events that have changed the value of an owner's interest in a business. It is measured on a per-share basis to capture the effects of dilution and options. It cancels out the effects of equity transactions for which the owner would be indifferent; dividend payments, share buybacks and share issues at market value. It is calculated by reconciling the book value per-share from the start of the period to the end of the period. This is conceptually the same as measuring a child's growth by finding the difference between his height on each birthday. All other line items are calculated, and the equation solved for comprehensive earnings. [2]
Shareholders' Equity, beg. of period (per share) - Dividends paid (per share) + Shares issued (premium over book value per share) - Share buy-backs (premium over book value per share) + Comprehensive Income (per share) -----------------------------------------= Shareholders' Equity, end of period (per share)

Net income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement). The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company advertising, manufacturing, and design and development costs are included.

An equation for net income Net sales revenue – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense

Dividend
From Wikipedia, the free encyclopedia

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.[1] When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense. Dividends are usually paid in the form of cash, store credits (common among retail consumers' cooperatives) and shares in the company (either newly created shares or existing shares bought in the market.) Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder. The word "dividend" comes from the Latin word "dividendum" meaning "thing to be divided".[2]
Contents
[hide]

• o o o o o

1 Joint stock company dividends 1.1 Forms of payment 1.2 Reliability of dividends 1.3 Dividend Dates 1.4 Dividend-reinvestment 1.5 Dividend Taxation

   o • o o o • • •

1.5.1 Australia and New Zealand 1.5.2 UK 1.5.3 India 1.6 Criticism

2 Other corporate entities 2.1 Cooperatives 2.2 Trusts 2.3 Mutuals 3 See also 4 References 5 External links

General ledger
From Wikipedia, the free encyclopedia

Accountancy
Key concepts

Accountant · Accounting period ·Bookkeeping · Cash and accrual basis ·Constant Item Purchasing Power Accounting ·Cost of goods sold · Debits and credits ·Doubleentry system · Fair value accounting ·FIFO & LIFO · GAAP / International Financial Reporting Standards · General ledger ·Historical cost · Matching principle · Revenue recognition · Trial balance

Fields of accounting

Cost · Financial · Forensic · Fund ·Management · Tax

Financial statements

Statement of Financial Position · Statement of cash flows · Statement of changes in equity ·Statement of comprehensive income · Notes ·MD&A · XBRL

Auditing

Auditor's report · Financial audit · GAAS / ISA ·Internal audit · Sarbanes–Oxley Act

Accounting qualifications

CA · CCA · CGA · CMA · CPA · CGFM

This box: view · talk · edit

The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and

expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand side lists debit transactions and the right hand side lists credit transactions. This gives a 'T' shape to each individual general ledger account. A "T" account showing debits on the left and credits on the right.
Debi Credi ts ts

The general ledger is a collection of the group of accounts that supports the value items shown in the major financial statements. It is built up by posting transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. For instance, an accounts receivable subsidiary ledger would contain a separate account for each credit customer, tracking that customer's balance separately. This subsidiary ledger would then be totalled and compared with itscontrolling account (in this case, Accounts Receivable) to ensure accuracy as part of the process of preparing a trial balance.[1] There are seven basic categories in which all accounts are grouped:
1. 2. 3. 4. 5. 6. 7.

Assets Expense Gains (Profits) Liability Losses Owner's equity Revenue

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is

where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a checkbook). The listing of the account names is called the chart of accounts. The extraction of account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits. The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into subledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc. Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation: Assets = Liabilities + (Shareholders or Owners equity)[2] The accounting equation is the mathematical structure of the balance sheet. Although a general ledger appears to be fairly simple, in large or complex organizations or organizations with various subsidiaries, the general ledger can grow to be quite large and take several hours or days to audit or balance.[citation needed]

Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).[1] The balance sheet of a firm records the monetary[2] value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.[1] Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.
[3]

Current assets include inventory, while fixed assets include such items as buildings and equipment.[4]

Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs,[4] and financial assets, including such items asaccounts receivable, bonds and stocks.

Formal definition

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity[5](Framework Par 49).
 [edit]Asset

characteristics

It should be noted that - other than software companies and the like employees are not considered as assets, like machinery is, even though they are capable of producing value. The probable present benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;  The entity can control access to the benefit;  The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.

In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset's benefit for qualifying a resource as being an asset, provided the entity can control its use by other means. It is important to understand that in an accounting sense an asset is not the same as ownership. Assets are equal to "equity" plus "liabilities." The accounting equation relates assets, liabilities, and owner's equity: Assets = Liabilities +Stockholder's Equity (Owner's Equity) The accounting equation is the mathematical structure of the balance sheet. Assets are listed on the balance sheet. Similarly, in economics an asset is any form in which wealth can be held. Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board .[6] The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise."[7]

Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.[clarification needed] In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.[8]
[edit]Current

assets

Main article: Current asset Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts). 2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3. Receivables — usually reported as net of allowance for uncollectable accounts. 4. Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule. 5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.
1.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.

[edit]Long-term

investments

Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of four types of investments: 1. Investments in securities such as bonds, common stock, or long-term notes. 2. Investments in fixed assets not used in operations (e.g., land held for sale). 3. Investments in special funds (e.g. sinking funds or pension funds). Different forms of insurance may also be treated as long term investments.
[edit]Fixed

assets

Main article: Fixed asset Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings,machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. These are also called capital assets in management accounting.
[edit]Intangible

assets

Main article: Intangible asset Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trad e names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under either tangible or intangible assets.

[edit]Tangible

assets

Tangible assets are those that have a physical substance and can be touched, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals.
[edit]Other

related meanings
asset

[edit]Information

Main article: asset (computer security) In Information technology, chiefly in Information security, data needed to conduct the organization business and the technical equipment to manage (input, store, display, print) are called information asset. They can represent a large portion of intangible and tangible asset of an organization. If these assets become unavailable, business operations can be disrupted. Confidential information disclosure can represent a huge liability. While evaluating the potential loss tied to an asset or a group of assets, the value tied to the largest sum between the related asset and their value should be considered.[9] [10]

Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses of dining, refreshments, a feast, etc. In accounting, expense has a very specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or

better current or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity. The International Accounting Standards Board defines expenses as ...decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.[1]

Bookkeeping for expenses In double-entry bookkeeping, expenses are recorded as a debit to an expense account (an income statement account) and a credit to either an asset account or a liability account, which are balance sheet accounts. An expense decreases assets or increases liabilities. Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense.
[edit]Cash

flow

In a cash flow statement, expenditures are divided into operating, investing, and financing expenditures.
  

Operational expense (OPEX)—salary for employees Capital expenditure (CAPEX)—buying equipment Financing expense—interest expense for loans and bonds

An important issue in accounting is whether a particular expenditure is classified as an expense, which is reported immediately on the business's income statement; or whether it is classified as acapital expenditure or an expenditure subject to depreciation, which is not an expense. These latter types of expenditures are reported as expenses when they are depreciated by businesses that useaccrual-basis accounting, which is most large businesses and all C corporations. The most common interpretation of whether an expense is of capital or income variety depends upon its term. Viewing an expense as a purchase helps alleviate this distinction. If, soon after the "purchase", that which was expensed holds no value then it is usually identified as an expense. If it retains value soon and long after the purchase, it will

be viewed as capital with life that should beamortized/depreciated and retained on the Balance Sheet.
[edit]Deduction

of business expenses under the US tax code

For tax purposes, the Internal Revenue Code permits the deduction of business expenses in the taxable year in which those expenses are paid or incurred. This is in contrast to capital expenditures[2]that are paid or incurred to acquire an asset. Expenses are costs that do not acquire, improve, or prolong the life of an asset. For example, a person who buys a new truck for a business would be making a capital expenditure because they have acquired a new businessrelated asset. This cost could not be deducted in the current taxable year. However, the gas the person buys during that year to fuel that truck would be considered a deductible expense. The cost of purchasing gas does not improve or prolong the life of the truck but simply allows the truck to run.[3] Even if something qualifies as an expense, it is not necessarily deductible. As a general rule, expenses are deductible if they relate to a taxpayer’s trade or business activity or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (investment activity). Section 162(a) of the Internal Revenue Code is the deduction provision for business or trade expenses. In order to be a trade or business expense and qualify for a deduction, it must satisfy 5 elements in addition to qualifying as an expense. It must be (1) ordinary and (2) necessary (Welch v. Helvering, 290 U.S. 111, defines this as necessary for the development of the business at least in that they were appropriate and helpful). Expenses paid to preserve one’s reputation do not appear to qualify (Welch v. Helvering). In addition, it must be (3) paid or incurred during the taxable year. It must be paid (4) in carrying on (meaning not prior to the start of a business or in creating it) (5) a trade or business activity. To qualify as a trade or business activity, it must be continuous and regular, and profit must be the primary motive. Section 212 of the Internal Revenue Code is the deduction provision for investment expenses. In addition to being an expense and satisfying elements 1-4 above, expenses are deductible as an

investment activity under Section 212 of the Internal Revenue Code if they are (1) for the production or collection of income, (2) for the management, conservation, or maintenance of property held for the production of income, or (3) in connection with the determination, collection, or refund of any tax. In investing, one controversy that mounted throughout 2002 and 2003 was whether companies should report the granting of stock options to employees as an expense on the income statement, or should not report this at all in the income statement, which is what had previously been the norm.
[edit]Expense

Report

An expense report is a form of document that contains all the expenses that an individual as incurred as a result of the business operation. For example, if the owner of a business travels to another location for a meeting, the cost of travel, the meals, and all other expenses that he/she has incurred may be added to the expense report. Consequently, these expenses will be considered business expenses and are tax deductible.

Cash flow statement
In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the shortterm viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standardthat deals with cash flow statements. People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will be able to

cover payroll and other immediate expenses

Potential lenders or creditors, who want a clear picture of a company's ability to Potential investors, who need to judge whether the company is financially sound Potential employees or contractors, who need to know whether the company will be Shareholders of the business.

repay
 

able to afford compensation

Purpose
Statement of Cash Flow - Simple Example for the period 01/01/2006 to 12/31/2006 Cash flow from operations Cash flow from investing Cash flow from financing Net cash flow $4,000 $(1,000) $(2,000) $1,000

Parentheses indicate negative values
The cash flow statement was previously known as the flow of Cash statement.[2] The cash flow statement reflects a firm's liquidity. The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few.[3] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes. The cash flow statement is intended to[4] 1. 2. equity 3. 4. improve the comparability of different firms' operating performance by indicate the amount, timing and probability of future cash flows eliminating the effects of different accounting methods provide information on a firm's liquidity and solvency and its ability to provide additional information for evaluating changes in assets, liabilities and

change cash flows in future circumstances

The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.[5]

History & variations Cash basis financial statements were very common before accrual basis financial statements. The "flow of funds" statements of the past were cash flow statements. In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory. This new financial statement was the genesis of Cash Flow Statement that is used today.[6] In the United States in 1971, the Financial Accounting Standards Board (FASB) defined rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of "funds" was not clear."Net working capital" might be cash or might be the difference between current assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows.[7] In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements.[8] In 1992, the International Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash Flow Statements, which became effective in 1994, mandating that firms provide cash flow statements.[9] US GAAP and IAS 7 rules for cash flow statements are similar, but some of the differences are: IAS 7 requires that the cash flow statement include changes in both cash and cash equivalents. US GAAP permits using cash alone or cash and cash equivalents.[5]  IAS 7 permits bank borrowings (overdraft) in certain countries to be included in cash equivalents rather than being considered a part of financing activities.[10]

IAS 7 allows interest paid to be included in operating activities or financing activities. US GAAP requires that interest paid be included in operating activities.[11]  US GAAP (FAS 95) requires that when the direct method is used to present the operating activities of the cash flow statement, a supplemental schedule must also present a cash flow statement using the indirect method. The IASC strongly recommends the direct method but allows either method. The IASC considers the indirect method less clear to users of financial statements. Cash flow statements are most commonly prepared using the indirect method, which is not especially useful in projecting future cash flows.
 [edit]Cash

flow activities

The cash flow statement is partitioned into three segments, namely: cash flow resulting from operating activities, cash flow resulting from investing activities, and cash flow resulting from financing activities. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.
[edit]Operating

activities

Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under IAS 7, operating cash flows include:[11] Receipts from the sale of goods or services  Receipts for the sale of loans, debt or equity instruments in a trading portfolio  Interest received on loans  Dividends received on equity securities  Payments to suppliers for goods and services  Payments to employees or on behalf of employees  Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include: Depreciation (loss of tangible asset value over time)  Deferred tax  Amortization (loss of intangible asset value over time)  Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)
 [edit]Investing

activities

Examples of Investing activities are Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)  Loans made to suppliers or received from customers  Payments related to mergers and acquisitions
 [edit]Financing

activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. Under IAS 7, Proceeds from issuing short-term or long-term debt  Payments of dividends  Payments for repurchase of company shares  Repayment of debt principal, including capital leases  For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes

Items under the financing activities section include:

Dividends paid

  

Sale or repurchase of the company's stock Net borrowings Payment of dividend tax of non-cash activities

[edit]Disclosure

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include[11] Leasing to purchase an asset  Converting debt to equity  Exchanging non-cash assets or liabilities for other non-cash assets or liabilities  Issuing shares in exchange for assets
 [edit]Preparation

methods

The direct method of preparing a cash flow statement results in a more easily understood report.[12] The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method.
[edit]Direct

method

The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Sample cash flow statement using the direct method[13]
Cash flows from (used in) operating activities

Cash receipts from customers

9,500

Cash paid to suppliers and employees

(2,00 0)

Cash generated from operations (sum)

7,500

Interest paid

(2,00 0)

Income taxes paid

(3,00 0)

Net cash flows from operating activities

2,500

Cash flows from (used in) investing activities

Proceeds from the sale of equipment

7,500

Dividends received

3,000

Net cash flows from investing activities

10,500

Cash flows from (used in) financing activities

Dividends paid

(2,50 0)

Net cash flows used in financing activities

(2,500)

.

Net increase in cash and cash equivalents

10,500

Cash and cash equivalents, beginning of year

1,000

Cash and cash equivalents, end of year [edit]Indirect

$11,50 0

method

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted for net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.[14]
[edit]Rules (Operating Activities) To Find Cash Flows from Operating Activities using the Balance Sheet and Net Income For Increases in Current Assets (Non-Cash) Current Liabilities For All Non-Cash... *Expenses (Decreases in Fixed Assets) Increase Net Inc Adj Decrease Increase

*Non-cash expenses must be added back to NI. Such expenses may be represented on the balance sheet as decreases in long term asset accounts. Thus decreases in fixed assets increase NI.

The following rules can be followed to calculate Cash Flows from Operating Activities when given only a two year comparative balance sheet and the Net Income figure. Cash Flows from Operating Activities can be found by adjusting Net Income relative to the change

in beginning and ending balances of Current Assets, Current Liabilities, and sometimes Long Term Assets. When comparing the change in long term assets over a year, the accountant must be certain that these changes were caused entirely by their devaluation rather than purchases or sales (ie they must be operating items not providing or using cash) or if they are nonoperating items.[15] Decrease in non-cash current assets are added to net income  Increase in non-cash current asset are subtracted from net income  Increase in current liabilities are added to net income  Decrease in current liabilities are subtracted from net income  Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period)  Revenues with no cash inflows are subtracted from net income  Non operating losses are added back to net income  Non operating gains are subtracted from net income

The intricacies of this procedure might be seen as, For example, consider a company that has a net income of $100 this year, and its A/R increased by $25 since the beginning of the year. If the balances of all other current assets, long term assets and current liabilities did not change over the year, the cash flows could be determined by the rules above as $100 – $25 = Cash Flows from Operating Activities = $75. The logic is that, if the company made $100 that year (net income), and they are using the accrual accounting system (not cash based) then any income they generated that year which has not yet been paid for in cash should be subtracted from the net income figure in order to find cash flows from operating activities. And the increase in A/R meant that $25 dollars of sales occurred on credit and have not yet been paid for incash. In the case of finding Cash Flows when there is a change in a fixed asset account, say the Buildings and Equipment account decreases, the change is subtracted from Net Income. The reasoning behind this is that because Net Income is calculated by, Net Income = Rev - Cogs

- Depreciation Exp - Other Exp then the Net Income figure will be decreased by the building's depreciation that year. This depreciation is not associated with an exchange of cash, therefore the depreciation is added back into net income to remove the non-cash activity.
[edit]Rules (Financing Activities)

Finding the Cash Flows from Financing Activities is much more intuitive and needs little explanation. Generally, the things to account for are financing activities: Include as outflows, reductions of long term notes payable (as would represent the cash repayment of debt on the balance sheet)  Or as inflows, the issuance of new notes payable  Include as outflows, all dividends paid by the entity to outside parties  Or as inflows, dividend payments received from outside parties  Include as outflows, the purchase of notes stocks or bonds  Or as inflows, the receipt of payments on such financing vehicles.[citation needed]

In the case of more advanced accounting situations, such as when dealing with subsidiaries, the accountant must
 

Exclude intra-company dividend payments. Exclude intra-company bond interest.[citation needed]

A traditional equation for this might look something like,

Example: cash flow of Citigroup:[16][17][18]
Citigroup Cash Flow Statement (all numbers in millions of US$)

Period ending

12/31/20 12/31/20 12/31/200 07 06 5

Net income

21,538

24,589

17,046

Operating activities, cash flows provided by or used in:

Depreciation and amortization

2,790

2,592

2,747

Adjustments to net income

4,617

621

2,910

Decrease (increase) in accounts receivable

12,503

17,236

--

Increase (decrease) in liabilities (A/P, taxes payable)

131,622

19,822

37,856

Decrease (increase) in inventories

--

--

--

Increase (decrease) in other operating activities

(173,057)

(33,061)

(62,963)

Net cash flow from operating activities

13

31,799

(2,404)

Investing activities, cash flows provided by or used in:

Capital expenditures

(4,035)

(3,724)

(3,011)

Investments

(201,777)

(71,710)

(75,649)

Other cash flows from investing activities

1,606

17,009

(571)

Net cash flows from investing activities

(204,206)

(58,425)

(79,231)

Financing activities, cash flows provided by or used in:

Dividends paid

(9,826)

(9,188)

(8,375)

Sale (repurchase) of stock

(5,327)

(12,090)

133

Increase (decrease) in debt

101,122

26,651

21,204

Other cash flows from financing activities

120,461

27,910

70,349

Net cash flows from financing activities

206,430

33,283

83,311

Effect of exchange rate changes

645

(1,840)

731

Net increase (decrease) in cash and cash equivalents

2,882

4,817

2,407

Statement of retained earnings
The Statement of Retained Earnings (also known as Equity Statement, Statement of Owner's Equity for a single proprietorship, Statement of Partner's Equity for partnership, and Statement of Retained Earnings and Stockholders' Equity for corporation)[1] is one of the basic financial statements as perGenerally Accepted Accounting Principles, and it explains the changes in a company's retained earnings over the reporting period. It breaks down changes affecting the account, such as profits or losses from operations, dividends paid, and any other items charged or credited to retained earnings.

Requirements of the U.S. GAAP A retained earnings statement is required by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule. Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet.

Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity (shareholders' equity)" and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company's owners / stockholders. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period. The general equation can be expressed as following: Ending Retained Earnings = Beginning Retained Earnings Dividends Paid + Net Income
[edit]Requirements

of IFRS

IAS 1 requires a business entity to present a separate Statement of Changes in Equity (SOCE) as one of the components of financial statements. The statement shall show: (IAS1.106) total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests 2. the effects of retrospective application, when applicable, for each component 3. reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
1.

profit or loss  each item of other comprehensive income  transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

However, the amount of dividends recognised as distributions, and the related amount per share, may be presented in the notes instead of presenting in the statement of changes in equity. (IAS1.107) For Small and Medium-size Enterprises (SMEs), the Statement of Changes in Equity should show all changes in equity including:
 total

comprehensive income  owners' investments  dividends  owners' withdrawals of capital  treasury share transactions They can omit the statement of changes in equity if the entity has no owner investments or withdrawals other than dividends, and elects to present a combined statement of comprehensive income and retained earnings.

Retained earnings
In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. Retained earnings are reported in the shareholders' equity section of the balance sheet. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings or Statement of Retained Losses.

Stockholders' equity When total assets are greater than total liabilities, stockholders have a positive equity (positive book value). Conversely, when total liabilities are greater than total assets, stockholders have a negative

stockholders' equity (negative book value) — also sometimes called stockholders' deficit. A stockholders' deficit does not mean that stockholders owe money to the corporation as they own only its net assets and are not accountable for its liabilities. It means that the value of the assets of the company must rise above its liabilities before the stockholders hold positive equity value in the company. Liabilities that exceed assets is the classic definition of bankruptcy. Dividends
The decision of whether a firm should retain net income or have it paid out as dividends depends on several factors including, but not limited to the:
 

Tax treatment of dividends; and Funds required for reinvestment in the corporation (called retention).

Equity (finance)
in accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common orpreferred stock. At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capitalas the business is a separate entity from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for, the positive remainder is deemed the owner's interest in the business. This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last orresidual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital or simply, equity.

Equity investments

An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains, as the value of the stock rises. It may also refer to the acquisition of equity (ownership) participation in a private (unlisted) company or a startup company. When the investment is in infant companies, it is referred to as venture capital investing and is generally understood to be higher risk than investment in listed going-concern situations. The equities held by private individuals are often held via mutual funds or other forms of collective investment scheme, many of which have quoted prices that are listed in financial newspapers or magazines; the mutual funds are typically managed by prominent fund management firms, such as Schroders, Fidelity Investments or The Vanguard Group. Such holdings allow individual investors to obtain the diversification of the fund(s) and to obtain the skill of the professional fund managers in charge of the fund(s). An alternative, which is usually employed by large private investors and pension funds, is to hold shares directly; in the institutional environment many clients who own portfolios have what are called segregated funds, as opposed to or in addition to the pooled mutual fund alternatives. A calculation can be made to assess whether an equity is over or underpriced, compared with a long-term government bond. This is called the Yield Gap or Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-term bond. Accounting In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities.[1] It appears on the balance sheet / statement of financial position,[2] one of the four primary financial statements. Ownership equity includes both tangible and intangible items (such as brand names and reputation / goodwill). Accounts listed under ownership equity include (example):
  

Share capital (common stock) Preferred stock Capital surplus

   

Retained earnings Treasury stock Stock options Reserve
value

[edit]Book

The book value of equity will change in the case of the following events: Changes in the firm's assets relative to its liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit, it is increasing its assets.  Depreciation - Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm's balance sheet as a decrease in shareholders' equity.  Issue of new equity in which the firm obtains new capital increases the total shareholders' equity.  Share repurchases, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.  Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income[citation needed](from the point of view of the common share owners).  Other reasons - Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

[edit]Shareholders'

equity

When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes and options. This complicates both analysis for stock valuation and accounting. The individual investor is interested not only in the total changes to equity, but also in the increase / decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a per share basis. Equity (beg. of year)  + net income inter net money you gained  − dividends how much money you gained or lost so far  +/− gain/loss from changes to the number of shares outstanding.more or less  = Equity (end of year) if you get more money during the year or less or not anything
 [edit]Market

value of shares

In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, which are often much higher, are based on other considerations related to the business' operating cash flow, profits and future prospects; some factors are derived from the accounting statements. Thus, there is little or no correlation between the equity seen in financial statements and the stock valuation of the business.
[edit]Equity

in Real Estate

The notion of equity with respect to real estate comes the equity of redemption. This equity is a property right valued at the difference between the market price of the property and the amount of any mortgage or other encumbrance.

Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.
[2]

Assets are followed by the liabilities. The difference between the assets and the liabilities

is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.[3] Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

Types A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets.[4] Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.[5] Large businesses also may prepare balance sheets for segments of their businesses.[6] A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.[7][8]
[edit]Personal

balance sheet

A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.[9]
[edit]US

small business balance sheet
Sample Small Business Balance Sheet[10]

Assets

Liabilities and Owners' Equity

Cash

$6,600 Liabilities

Accounts Receivable

$6,200 Notes Payable

$30,000

Accounts Payable

Total liabilities

$30,000

Tools and equipment $25,000 Owners' equity

Capital Stock

$7,000

Retained Earnings

$800

Total owners' equity

$7,800

Total

$37,800 Total

$37,800

A really small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and

liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.[11]
[edit]Public

Business Entities balance sheet structure

Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee (now International Accounting Standards Board) and numerous country-specific organizations/companys. Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.[12][13][14][15] If applicable to the business, summary values for the following items should be included in the balance sheet:[16] Assets are all the things the business own, this will include property tools, cars, etc.
[edit]Assets

Current assets Cash and cash equivalents 2. Inventories 3. Accounts receivable 4. Prepaid expenses for future services that will be used within a year
1.

Non-current assets (Fixed assets) Property, plant and equipment 2. Investment property, such as real estate held for investment purposes 3. Intangible assets 4. Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 5. Investments accounted for using the equity method
1.

Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.[17]
6.
[edit]Liabilities

Accounts payable 2. Provisions for warranties or court decisions 3. Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Unearned revenue for services paid for by customers but not yet provided
1.
[edit]Equity

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. It comprises: Issued capital and reserves attributable to equity holders of the parent company (controlling interest) 2. Non-controlling interest in equity
1.

Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as doubleentry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual. Regarding the items in equity section, the following disclosures are required: Numbers of shares authorized, issued and fully paid, and issued but not fully paid
1.

Par value of shares 3. Reconciliation of shares outstanding at the beginning and the end of the period 4. Description of rights, preferences, and restrictions of shares 5. Treasury shares, including shares held by subsidiaries and associates 6. Shares reserved for issuance under options and contracts 7. A description of the nature and purpose of each reserve within owners' equity
2.
[edit]Sample

balance sheet

The following balance sheet is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of assets, liabilities and equity, but it shows the most usual ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd. As of 31 December 2009 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable (Debtors) Less : Allowances for Doubtful Accounts Inventories Prepaid Expenses Investment Securities (Held for trading) Other Current Assets Non-Current Assets (Fixed Assets) Property, Plant and Equipment (PPE) Less : Accumulated Depreciation Investment Securities (Available for sale/Held-to-maturity) Investments in Associates Intangible Assets (Patent, Copyright, Trademark, etc.) Less : Accumulated Amortization Goodwill Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable LIABILITIES and SHAREHOLDERS' EQUITY LIABILITIES Current Liabilities (Creditors: amounts falling due within one year) Accounts Payable Current Income Tax Payable

Current portion of Loans Payable Short-term Provisions Other Current Liabilities, e.g. Unearned Revenue, Deposits Non-Current Liabilities (Creditors: amounts falling due after more than one year) Loans Payable Issued Debt Securities, e.g. Notes/Bonds Payable Deferred Tax Liabilities Provisions, e.g. Pension Obligations Other Non-Current Liabilities, e.g. Lease Obligations SHAREHOLDERS' EQUITY Paid-in Capital Share Capital (Ordinary Shares, Preference Shares) Share Premium Less: Treasury Shares Retained Earnings Revaluation Reserve Accumulated Other Comprehensive Income Non-Controlling Interest

Capital expenditure
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company toacquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). Capex is commonly found on the cash flow statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection. For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid or incurred and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US,

Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.[1] Included in capital expenditures are amounts spent on: 1. acquiring fixed assets 2. fixing problems with an asset that existed prior to acquisition if it results in a superior fixture 3. preparing an asset to be used in business 4. restoring property or adapting it to a new or different use 5. starting a new business An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. The counterpart of capital expenditure is operational expenditure ("OpEx").

In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically. Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the supply chain (the series of events in the production process that, in concert, result in a product) into financial values. There are various managerial accounting approaches:

standardized or standard cost accounting

• • • • •

lean accounting activity-based costing resource consumption accounting throughput accounting marginal costing/cost-volume-profit analysis

Classical cost elements are: 1. raw materials 2. labor 3. indirect expenses/overhead

Origins
Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components, and pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldn't sell below that price without losing money on each coach. Any price above $300 became a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both cases.

[edit] Elements of cost

1. Material(Material is a very important part of business) o A. Direct material 2. Labor o A. Direct labor 3. Overhead o A. Indirect material o B. Indirect labor

(In some companies, machine cost is segregated from overhead and reported as a separate element) They are grouped further based on their functions as,
• • • •

1. Production or works overheads 2. Administration overheads 3. Selling overheads 4. Distribution overheads

[edit] Classification of costs
Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:
• • • • • •

By nature or element: materials, labor, expenses By functions: production, selling, distribution, administration, R&D, development, By traceability: direct and indirect By variability: fixed, variable, semi-variable By controllability: controllable, uncontrollable By normality: normal, abnormal

[edit] Standard cost accounting
In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.

This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor. For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference. An important part of standard cost accounting is a variance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation.

[edit] The development of throughput accounting
Main article: Throughput accounting As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came under question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. As business management learned to identify the constraints, they increasingly adopted throughput accounting to manage them and "maximize the throughput dollars" (or other currency) from each unit of constrained resource. For example: The railway coach company was offered a contract to make 15 opentopped streetcars each month, using a design that included ornate brass foundry work, but very little of the metalwork needed to produce a covered rail coach. The buyer offered to pay $280 per streetcar. The company had a firm order for 40 rail coaches each month for $350 per unit. The company accountant determined that the cost of operating the foundry vs. the metalwork shop each month was as follows: Overhead Cost by Department Total Cost Hours Available per month Cost per hour Foundry $ 7,300.00 160 $45.63 Metal shop $ 3,300.00 160 $20.63 Total $10,600.00 320 $33.13 The company was at full capacity making 40 rail coaches each month. And since the foundry was expensive to operate, and purchasing brass as a raw material for the streetcars was expensive, the accountant determined that the company would lose money on any streetcars it built. He showed an analysis of the estimated product costs based on standard cost accounting and recommended that the company decline to build any streetcars. Standard Cost Accounting Analysis Streetcars Rail coach Monthly Demand 15 40 Price $280 $350 Foundry Time (hrs) 3.0 2.0 Metalwork Time (hrs) 1.5 4.0 Total Time 4.5 6.0

Foundry Cost $136.88 $ 91.25 Metalwork Cost $ 30.94 $ 82.50 Raw Material Cost $120.00 $ 60.00 Total Cost $287.81 $233.75 Profit per Unit $ (7.81) $116.25 However, the company's operations manager knew that recent investment in automated foundry equipment had created idle time for workers in that department. The constraint on production of the railcoaches was the metalwork shop. She made an analysis of profit and loss if the company took the contract using throughput accounting to determine the profitability of products by calculating "throughput" (revenue less variable cost) in the metal shop. Throughput Cost Accounting Analysis Decline Contract Take Contract Coaches Produced 40 34 Streetcars Produced 0 15 Foundry Hours 80 113 Metal shop Hours 160 159 Coach Revenue $14,000 $11,900 Streetcar Revenue $0 $ 4,200 Coach Raw Material Cost $(2,400) $(2,040) Streetcar Raw Material Cost $0 $(1,800) Throughput Value $11,600 $12,260 Overhead Expense $(10,600) $(10,600) Profit $1,000 $1,660 After the presentations from the company accountant and the operations manager, the president understood that the metal shop capacity was limiting the company's profitability. The company could make only 40 rail coaches per month. But by taking the contract for the streetcars, the company could make nearly all the railway coaches ordered, and also meet all the demand for streetcars. The result would increase throughput in the metal shop from $6.25 to $10.38 per hour of available time, and increase profitability by 66 percent.

[edit] Activity-based costing
Main article: Activity-based costing Activity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity inside most companies. Accountants assign 100% of each employee's time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity. A company can use the resulting activity cost data to determine where to focus their operational improvements. For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written

customer order. Via ABC, the accountants now have a currency amount pegged to the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for resolving this process deficiency. Activitybased management includes (but is not restricted to) the use of activity-based costing to manage a business. While ABC may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and subject to errors. As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs do not vary according to each month's production volume. For example, an elimination of one product would not eliminate the overhead or even direct labor cost assigned to it. ABC better identifies product costing in the long run, but may not be too helpful in day-to-day decision-making.

[edit] Lean accounting
Main article: Lean accounting Lean accounting[1] has developed in recent years to provide the accounting, control, and measurement methods supporting lean manufacturing and other applications of lean thinking such as healthcare, construction, insurance, banking, education, government, and other industries. There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is not different from applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors & defects, and make the process clear and understandable. The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change & improvement, provide information that is suitable for control and decisionmaking, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activitybased costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports. These are replaced by:
• • • • • • • • •

lean-focused performance measurements simple summary direct costing of the value streams decision-making and reporting using a box score financial reports that are timely and presented in "plain English" that everyone can understand radical simplification and elimination of transactional control systems by eliminating the need for them driving lean changes from a deep understanding of the value created for the customers eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP) value-based pricing correct understanding of the financial impact of lean change

As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of lean accounting in fact creates a lean management system (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation.

Marginal costing
See also: Cost-Volume-Profit Analysis and Marginal cost This method is used particularly for short-term decision-making. Its principal tenets are:
• •

Revenue (per product) − variable costs (per product) = contribution (per product) Total contribution − total fixed costs = (total profit or total loss)

Thus, it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource (see Development of throughput accounting, above).

Fixed asset turnover
From Wikipedia, the free encyclopedia

Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales.

[1]

Generally speaking, the higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.

Trial balance A trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.

The name comes from the purpose of a trial balance which is to prove that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a business's performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced. The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.

Trial balance limitations
A trial balance only checks the sum of debits against the sum of credits. That is why it does not guarantee that there are no errors. The following are the main classes of error that are not detected by the trial balance:

• •

An error of original entry is when both sides of a transaction include the wrong amount.[1] For example, if a purchase invoice for £21 is entered as £12, this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for £9 less, so the total of both columns will be £9 less, and will thus balance. An error of omission is when a transaction is completely omitted from the accounting records.[1] As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance.[2] An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa.[1] For example, if a cash sale for £100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals. An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type.[1] For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals. An error of principle is when the entries are made to the correct amount, and the appropriate side (debit or credit), as with an error of commission, but the wrong type of account is used.[1] For example, if fuel costs (an expense account), are debited to stock (an asset account). This will not affect the totals. Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out.[1] A Transposition Error is an error caused by switching the position of two adjacent digits. Since the resulting error is always divisible by 9, accountants use this fact to locate the misentered number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates that one of the switched digit is either more, or less, by 8 than the other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the totals.

Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.[3] Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets.[4] Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.[5] Large businesses also may prepare balance sheets for segments of their businesses.[6] A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.[7][8]

[edit] Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.[9]

[edit] US small business balance sheet

Sample Small Business Balance Sheet[10] Assets Liabilities and Owners' Equity Cash $6,600 Liabilities Accounts Receivable $6,200 Notes Payable $30,000 Accounts Payable Total liabilities $30,000 Tools and equipment $25,000 Owners' equity Capital Stock $7,000 Retained Earnings $800 Total owners' equity $7,800 Total $37,800 Total $37,800 A really small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.[11]

[edit] Public Business Entities balance sheet structure
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee (now International Accounting Standards Board) and numerous country-specific organizations/companys. Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.[12][13][14][15] If applicable to the business, summary values for the following items should be included in the balance sheet:[16] Assets are all the things the business own, this will include property tools, cars, etc.

[edit] Assets
Current assets
1. 2. 3. 4.

Cash and cash equivalents Inventories Accounts receivable Prepaid expenses for future services that will be used within a year

Non-current assets (Fixed assets)
1. Property, plant and equipment 2. Investment property, such as real estate held for investment purposes 3. Intangible assets

4. Financial assets (excluding investments accounted for using the equity method,

accounts receivables, and cash and cash equivalents)
5. Investments accounted for using the equity method 6. Biological assets, which are living plants or animals. Bearer biological assets are

plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.[17]

[edit] Liabilities
1. Accounts payable 2. Provisions for warranties or court decisions 3. Financial liabilities (excluding provisions and accounts payable), such as promissory

notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Unearned revenue for services paid for by customers but not yet provided

[edit] Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. It comprises:
1. Issued capital and reserves attributable to equity holders of the parent company

(controlling interest)
2. Non-controlling interest in equity

Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual. Regarding the items in equity section, the following disclosures are required:
1. Numbers of shares authorized, issued and fully paid, and issued but not fully paid 2. Par value of shares

3. Reconciliation of shares outstanding at the beginning and the end of the period 4. Description of rights, preferences, and restrictions of shares 5. Treasury shares, including shares held by subsidiaries and associates 6. Shares reserved for issuance under options and contracts 7. A description of the nature and purpose of each reserve within owners' equity

[edit] Sample balance sheet
The following balance sheet is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of assets, liabilities and equity, but it shows the most usual

ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd. As of 31 December 2009 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable (Debtors) Less : Allowances for Doubtful Accounts Inventories Prepaid Expenses Investment Securities (Held for trading) Other Current Assets Non-Current Assets (Fixed Assets) Property, Plant and Equipment (PPE) Less : Accumulated Depreciation Investment Securities (Available for sale/Held-to-maturity) Investments in Associates Intangible Assets (Patent, Copyright, Trademark, etc.) Less : Accumulated Amortization Goodwill Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable LIABILITIES and SHAREHOLDERS' EQUITY LIABILITIES Current Liabilities (Creditors: amounts falling due within one year) Accounts Payable Current Income Tax Payable Current portion of Loans Payable Short-term Provisions Other Current Liabilities, e.g. Unearned Revenue, Deposits Non-Current Liabilities (Creditors: amounts falling due after more than one year) Loans Payable Issued Debt Securities, e.g. Notes/Bonds Payable Deferred Tax Liabilities Provisions, e.g. Pension Obligations Other Non-Current Liabilities, e.g. Lease Obligations SHAREHOLDERS' EQUITY Paid-in Capital Share Capital (Ordinary Shares, Preference Shares) Share Premium Less: Treasury Shares Retained Earnings Revaluation Reserve Accumulated Other Comprehensive Income Non-Controlling Interest

Balance sheet substantiation
Balance Sheet Substantiation is the accounting process conducted by businesses on a regular basis to confirm that the balances held in the primary accounting system of record (e.g. SAP, Oracle, other ERP system's General Ledger) are reconciled (in balance with) with the balance and transaction records held in the same or supporting sub-systems. Balance Sheet Substantiation includes multiple processes including reconciliation (at a transactional or at a balance level) of the account, a process of review of the reconciliation and any pertinent supporting documentation and a formal certification (sign-off) of the account in a predetermined form driven by corporate policy. Balance Sheet Substantiation is an important process that is typically carried out on a monthly, quarterly and year-end basis. The results help to drive the regulatory balance sheet reporting obligations of the organization. Historically, Balance Sheet Substantiation has been a wholly manual process, driven by spreadsheets, email and manual monitoring and reporting. In recent years software solutions have been developed to bring a level of process automation, standardization and enhanced control to the Balance Sheet Substantiation or account certification process. These solutions are suitable for organizations with a high volume of accounts and/or personnel involved in the Balance Sheet Substantiation process and can be used to drive efficiencies, improve transparency and help to reduce risk. Balance Sheet Substantiation is a key control process in the SOX 404 top-down risk assessment.

Income statement
Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations)[1] is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.[1] The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. The income statement can be prepared in one of two methods.[2] The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.

Usefulness and limitations of income statement
Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses. However, information of an income statement has several limitations:
• • •

Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty). Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level). Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).
- INCOME STATEMENT BOND LLC For the year ended DECEMBER 31 2007 € Debit

See also: Creative accounting
€ Credit 496,397 -------6,300

Revenues GROSS REVENUES (including rental income) Expenses: ADVERTISING

BANK & CREDIT CARD FEES BOOKKEEPING EMPLOYEES ENTERTAINMENT INSURANCE LEGAL & PROFESSIONAL SERVICES LICENSES PRINTING, POSTAGE & STATIONERY RENT RENTAL MORTGAGES AND FEES TELEPHONE UTILITIES TOTAL EXPENSES NET INCOME

144 3,350 88,000 5,550 750 1,575 632 320 13,000 74,400 1,000 491 -------(195,512) -------300,885

Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S.. Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions. If applicable to the business, summary values for the following items should be included in the income statement:[3]

[edit] Operating section

Revenue - Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations. o Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs, direct labour, and overhead costs (as in absorption costing), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc. o Selling, General and Administrative expenses (SG&A or SGA) - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour.  Selling expenses - represent expenses needed to sell products (e.g. salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).  General and Administrative (G&A) expenses - represent expenses to manage the business (salaries of officers / executives, legal and

o

o

professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc.). Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement. Research & Development (R&D) expenses - represent expenses included in research and development.

Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104)

[edit] Non-operating section

Other revenues or gains - revenues and gains from other than primary business activities (e.g. rent, income from patents). It also includes unusual gains that are either unusual or infrequent, but not both (e.g. gain from sale of securities or gain from disposal of fixed assets) Other expenses or losses - expenses or losses not related to primary business operations, (e.g. foreign exchange loss). Finance costs - costs of borrowing from various creditors (e.g. interest expenses, bank charges). Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

[edit] Irregular items
They are reported separately because this way users can better predict future cash flows irregular items most likely will not recur. These are reported net of taxes.

Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately.

Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. All comparative financial statements should be restated. (IAS 8)

However, changes in estimates (e.g. estimated useful life of a fixed asset) only requires prospective changes. (IAS 8) No items may be presented in the income statement as extraordinary items. (IAS 1.87) Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster might not qualify depending on location (e.g. frost damage would not qualify in Canada but would in the tropics).] Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)

[edit] Disclosures
Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including:[3] (IAS 1.98)
• • • • • • •

Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring Disposals of items of property, plant and equipment Disposals of investments Discontinued operations Litigation settlements Other reversals of provisions

[edit] Earnings per share
Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes.

There are two forms of EPS reported:
• •

Basic: in this case "weighted average of shares outstanding" includes only actual stocks outstanding. Diluted: in this case "weighted average of shares outstanding" is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS.

[edit] Sample income statement
The following income statement is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of items appeared a firm, but it shows the most usual ones.

Please note the difference between IFRS and US GAAP when interpreting the following sample income statements.
Fitness Equipment Limited INCOME STATEMENTS (in millions) 2009

Year Ended March 31, 2008 2007 --------------------------------------------------------------------------------Revenue $ 14,580.2 $ 11,900.4 $ 8,290.3 Cost of sales (6,740.2) (5,650.1) (4,524.2) ----------------------------------Gross profit 7,840.0 6,250.3 3,766.1 ----------------------------------SGA expenses (3,624.6) (3,296.3) (3,034.0) ----------------------------------Operating profit $ 4,215.4 $ 2,954.0 $ 732.1 ----------------------------------Gains from disposal of fixed assets 46.3 Interest expense (119.7) (124.1) (142.8) ----------------------------------Profit before tax 4,142.0 2,829.9 589.3 ----------------------------------Income tax expense (1,656.8) (1,132.0) (235.7) ----------------------------------Profit (or loss) for the year $ 2,485.2 $ 1,697.9 $ 353.6 DEXTERITY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) Year Ended December 31, 2009 2008 2007 --------------------------------------------------------------------------------------------Revenue $ 36,525.9 $ 29,827.6 $ 21,186.8 Cost of sales (18,545.8) (15,858.8) (11,745.5) --------------------- -----------Gross profit 17,980.1 13,968.8 9,441.3 --------------------- ------------

Operating expenses: Selling, general and administrative expenses (3,732.3) (3,498.6) Depreciation (584.5) (562.3) Amortization (141.9) (111.8) Impairment loss — — ----------- -----------Total operating expenses (4,458.7) (4,172.7) ----------- -----------Operating profit (or loss) 9,510.1 $ 5,268.6 ----------- -----------Interest income 11.7 12.0 Interest expense (742.9) (799.1) ----------- -----------Profit (or loss) from continuing operations before tax, share of profit (or loss) from associates and non-controlling interest 8,778.9 $ 4,481.5 ----------- -----------Income tax expense (3,510.5) (1,789.9) Profit (or loss) from associates, net of tax 0.1 (37.3) Profit (or loss) from non-controlling interest, net of tax (4.7) (3.3) ----------- -----------Profit (or loss) from continuing operations 5,263.8 $ 2,651.0 ----------- -----------Profit (or loss) from discontinued operations, net of tax (802.4) 164.6 ----------- -----------Profit (or loss) for the year 4,461.4 $ 2,815.6

(4,142.1) (602.4) (209.9) (17,997.1) ----------(22,951.8) ----------$ (4,971.7) ----------25.3 (718.9) ----------$

$ (5,665.3) ----------(1,678.6) (20.8) (5.1) ----------$ (7,369.8) ----------(1,090.3) ----------$ (8,460.1)

$

$

$

[edit] Bottom line
"Bottom line" is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called "bottom line." It is important to investors as it represents the profit for the year attributable to the shareholders.

After revision to IAS 1 in 2003, the Standard is now using profit or loss rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement.

[edit] Requirements of IFRS
On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1: Presentation of Financial Statements, which is effective for annual periods beginning on or after 1 January 2009. A business entity adopting IFRS must include:
• •

a Statement of Comprehensive Income or two separate statements comprising: an Income Statement displaying components of profit or loss and a Statement of Comprehensive Income that begins with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1.81)
1. 2.

All non-owner changes in equity (i.e. comprehensive income ) shall be presented in either in the statement of comprehensive income (or in a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity. Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)

[edit] Items and disclosures
The statement of comprehensive income should include:[3] (IAS 1.82)
1. Revenue 2. Finance costs (including interest expenses) 3. Share of the profit or loss of associates and joint ventures accounted for using the

equity method
4. Tax expense 5. A single amount comprising the total of (1) the post-tax profit or loss of discontinued

operations and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation 6. Profit or loss 7. Each component of other comprehensive income classified by nature 8. Share of the other comprehensive income of associates and joint ventures accounted for using the equity method

9. Total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83)
• •

Profit or loss for the period attributable to non-controlling interests and owners of the parent Total comprehensive income attributable to non-controlling interests and owners of the parent

No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items.

Comprehensive income
Comprehensive income (or earnings) is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point of view (All changes in Equity except those resulting from investment by or distribution to owners.

Accounting
Comprehensive income is defined by the Financial Accounting Standards Board, or FASB,[1] as “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.” Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from available for sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole. Items included in comprehensive income, but not net income are reported under the accumulated other comprehensive income section of shareholder's equity.

[edit] Financial Analysis
Comprehensive income attempts to measure the sum total of all operating and financial events that have changed the value of an owner's interest in a business. It is measured on a per-share basis to capture the effects of dilution and options. It cancels out the effects of equity transactions for which the owner would be indifferent; dividend payments, share buybacks and share issues at market value.

It is calculated by reconciling the book value per-share from the start of the period to the end of the period. This is conceptually the same as measuring a child's growth by finding the difference between his height on each birthday. All other line items are calculated, and the equation solved for comprehensive earnings. [2]
Shareholders' Equity, beg. of period (per share) - Dividends paid (per share) + Shares issued (premium over book value per share) - Share buy-backs (premium over book value per share) + Comprehensive Income (per share) -----------------------------------------= Shareholders' Equity, end of period (per share)

Net income
From Wikipedia, the free encyclopedia "Bottom line" redirects here. For other uses, see Bottom line (disambiguation). It has been suggested that this article or section be merged with profit (accounting). (Discuss)

Accountancy
Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Constant Item Purchasing Power Accounting · Cost of goods sold · Debits and credits · Double-entry system · Fair value accounting · FIFO & LIFO · GAAP / International Financial Reporting Standards · General ledger · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Statement of Financial Position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA ·

Internal audit · Sarbanes–Oxley Act Accounting qualifications CA · CCA · CGA · CMA · CPA · CGFM This box: view · talk · edit

Net income
is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement). The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company advertising, manufacturing, and design and development costs are included.

An equation for net income
Net sales revenue – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)

Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident.[1]

"Except as otherwise provided" by law, Gross income means "all income from whatever source," and is not limited to cash received. However, tax regulations expand on this and say "all income from whatever source derived, unless excluded by law." The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income. The time at which gross income becomes taxable is determined under Federal tax rules, which differ in some cases from financial accounting rules.

What is income
Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries ("taxpayers") are subject to Income tax in the United States. The amount on which tax is computed, taxable income, equals gross income less allowable tax deductions. The Internal Revenue Code states that "gross income means all income from whatever source derived," and gives specific examples.[2] The examples are not all inclusive. The term "income" is not defined in the law or regulations. However, a very early Supreme Court case stated, "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets."[3] The Court also held that the amount of gross income on disposition of property is the proceeds less the capital value (cost basis) of the property.[4] Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services."[5] Following are some of the things that are included in income:

• • • •

• • • •

Wages, fees for services, tips, and similar income. It is well established that income from personal services must be included in the gross income of the person who performs the services. Mere assignment of the income does not shift the liability for the tax.[6] Interest received,[7] as well as imputed interest on below market and gift loans.[8] Dividends, including capital gain distributions, from corporations.[9] Gross profit from sale of inventory. The sales price, net of discounts, less cost of goods sold is included in income.[10] Gains on disposition of other property. Gain is measured as the excess of proceeds over the taxpayer's adjusted basis in the property.[11] Losses from property may be allowed as tax deductions.[12] Rents and royalties from use of tangible or intangible property.[13] The full amount of rent or royalty is included in income, and expenses incurred to produce this income may be allowed as tax deductions.[14] Alimony and separate maintenance payments.[15] Pensions,[16] annuities,[17] and income from life insurance or endowment contracts.[18] Distributive share of partnership income[19] or pro rata share of income of an S corporation.[20] State and local income tax refunds, to the extent previously deducted. Note that these are generally excluded from gross income for state and local income tax purposes.

Any other income from whatever source. Even income from crimes is taxable and must be reported, as failure to do so is a crime in itself.[21]

Gifts and inheritances are not considered income to the recipient under U.S. law.[22] However, gift or estate tax may be imposed on the donor or the estate of the decedent.

[edit] Year of inclusion
A taxpayer must include income as part of taxable income in the year recognized under the taxpayer's method of accounting. Generally, a taxpayer using the cash method of accounting (cash basis taxpayer) recognizes income when received. A taxpayer using the accrual method (accrual basis taxpayer) recognizes income when earned. Income is generally considered earned:
• •

on sales of property when title to the property passes to the customer, and on performance of services when the services are performed.

[edit] Amount of income
For a cash basis taxpayer, the measure of income is generally the amount of money or fair market value of property received. For an accrual basis taxpayer, it is the amount the taxpayer has a right to receive.[23] Certain specific rules apply, including:
• • •

Constructive receipt, Deferral of income from advance payment for goods or services (with exceptions), Determination what portion of an annuity is income and what is return of capital,

The value of goods or services received is included in income in barter transactions.

[edit] Exclusions from gross income
Gross income includes "all income from whatever source derived." The courts have consistently given very broad meaning to this phrase, interpreting it to include all income unless a specific exclusion applies.[24] Certain types of income are specifically excluded from gross income. These may be referred to as exempt income, exclusions, or tax exemptions. Among the more common excluded items[25] are the following:

• • • •

Tax exempt interest. For Federal income tax, interest on state and municipal bonds is excluded from gross income.[26] Some states provide an exemption from state income tax for certain bond interest. Social Security benefits. The amount exempt has varied by year. The exemption is phased out for individuals with gross income above certain amounts.[27] Gifts and inheritances.[28] However, a "gift" from an employer to an employee is considered compensation, and is generally included in gross income. Life insurance proceeds.[29] Compensation for personal physical injury or physical sickness, including:

• •

• • • • • •

Amounts received under worker’s compensation acts for personal physical injuries or physical sickness, o Amounts received as damages (other than punitive damages) in a suit or settlement for personal physical injuries or physical sickness, o Amounts received through insurance for personal physical injuries or physical sickness, and o Amounts received as a pension, annuity, or similar allowance for personal physical injuries or physical sickness resulting from active service in the armed forces.[30] Scholarships. However, amounts in the nature of compensation, such as for teaching, are included in gross income.[31] Certain employee benefits. Non-taxable benefits include group health insurance, group life insurance for policies up to $50,000, and certain fringe benefits, including those under a flexible spending orcafeteria plan.[32] Certain elective deferrals of salary (contributions to "401(k)" plans). Meals and lodging provided to employees on employer premises for the convenience of the employer.[33] Foreign earned income exclusion for U.S. citizens or residents for income earned outside the U.S. when the individual met qualifying tests.[34] Income from discharge of indebtedness for insolvent taxpayers or in certain other cases.[35] Contributions to capital received by a corporation.[36] Gain up to $250,000 ($500,000 on a married joint tax return) on the sale of a personal residence.[37]
o

There are numerous other specific exclusions. Restrictions and specific definitions apply. Some state rules provide for different inclusions and exclusions.[38]

[edit] Source of income
United States persons (including citizens, residents, and U.S. corporations) are generally subject to U.S. federal income tax on their worldwide income. Foreign persons (i.e., persons who are not U.S. persons) are subject to U.S. federal income tax only on income from a U.S. business and certain income from United States sources. Source of income is determined based on the type of income. The source of compensation income is the place where the services giving rise to the income were performed. The source of certain income, such as dividends and interest, is based on location of the residence of the payor. The source of income from property is based on the location where the property is used. Significant additional rules apply.[39]

[edit] Taxation of foreign persons
Foreign persons are subject to regular income tax on income from a U.S. business or for services performed in the U.S.[40] Foreign persons are subject to a flat rate of U.S. income tax on certain enumerated types of U.S. source income, generally collected as a withholding tax. [41] The rate of tax is 30% of the gross income, unless reduced by a tax treaty. Foreign persons are not subject to U.S. tax on capital gains. Wages may be treated as effectively connected income, or may be subject to the flat 30% tax, depending on the facts and circumstances.

Effective gross income
This term used for an income-producing property, derived from the potential gross income, less the vacancy factor and a collection loss amount. This is the relationship or ratio between the sale price of the value of a property and its effective gross rental income. The anticipated income from all operations of the real property after an allowance is made for a vacancy and collection losses. Effective gross income includes items constituting other income, i.e., income generated from the operation of the real property that is not derived from space rental (e.g., parking rental or income from vending machines). For example: Let's say that we have a couple properties that have a potential income of $15,000 if they are all filled to maximum occupancy. The average vacancy rate of the properties in cash is $1,250 (this is the sum of the rent that is not coming in due to vacancy in the properties). We then subtract the average vacancy rate in dollars from the potential income from renting the properties. Our total is then $13,750. Therefore the Effective Gross Rental Income is then $13,750. Earnings before interest and taxes
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses.[1] Operating income is the difference between operating revenues and operating expenses. When a firm has zero nonoperating income, then operating income is sometimes used as a synonym for EBIT and operating profit.[2] EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income Operating Income = Operating Revenue – Operating Expenses[1] A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA and EBIT), and then determines the optimal use of debt vs. equity. To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[3] Profit is later obtained by subtracting interest and taxes from the result

Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover. Some companies receive revenue from interest, dividends or royalties paid to them by other companies.[1] Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $42 million." Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.[2] For non-profit organizations, annual revenue may be referred to as gross receipts.[3] This revenue includes donations from individuals and corporations, support from government agencies, income from activities related to the organization's mission, and income from fundraising activities, membership dues, and financial investments such as stock shares in companies. In general usage, revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received from selling goods or services over a period of time. Tax revenue is income that a government receives from taxpayers. In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, do not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on generally accepted accounting principles or International Financial Reporting Standards.

In a double-entry bookkeeping system, revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement. Revenue account names describe the type of revenue, such as "Repair service revenue", "Rent revenue earned" or "Sales". Business revenue
Business revenue is income from activities that are ordinary for a particular corporation, company, partnership, or sole-proprietorship. For some businesses, such as manufacturing and/or grocery, most revenue is from the sale of goods. Service businesses such as law firms and barber shops receive most of their revenue from rendering services. Lending businesses such as car rentals and banks receive most of their revenue from fees and interest generated by lending assets to other organizations or individuals. Revenues from a business's primary activities are reported as sales, sales revenue or net sales. This excludes product returns and discounts for early payment of invoices. Most

businesses also have revenue that is incidental to the business's primary activities, such as interest earned on deposits in a demand account. This is included in revenue but not included in net sales.[5] Sales revenue does not include sales tax collected by the business. Other revenue (a.k.a. non-operating revenue) is revenue from peripheral (non-core) operations. For example, a company that manufactures and sells automobiles would record the revenue from the sale of an automobile as "regular" revenue. If that same company also rented a portion of one of its buildings, it would record that revenue as “other revenue” and disclose it separately on its income statement to show that it is from something other than its core operations.

[edit] Financial statement analysis
Main article: Financial statement analysis Revenue is a crucial part of financial statement analysis. A company’s performance is measured to the extent to which its asset inflows (revenues) compare with its asset outflows (expenses). Net Income is the result of this equation, but revenue typically enjoys equal attention during a standard earnings call. If a company displays solid “top-line growth,” analysts could view the period’s performance as positive even if earnings growth, or “bottomline growth” is stagnant. Conversely, high income growth would be tainted if a company failed to produce significant revenue growth. Consistent revenue growth, as well as income growth, is considered essential for a company's publicly traded stock to be attractive to investors. Revenue is used as an indication of earnings quality. There are several financial ratios attached to it, the most important being gross margin and profit margin. Also, companies use revenue to determine bad debt expense using the income statement method. Price / Sales is sometimes used as a substitute for a Price to earnings ratio when earnings are negative and the P/E is meaningless. Though a company may have negative earnings, it almost always has positive revenue. Gross Margin is a calculation of revenue less cost of goods sold, and is used to determine how well sales cover direct variable costs relating to the production of goods. Net income/sales, or profit margin, is calculated by investors to determine how efficiently a company turns revenues into profits....

[edit] Government revenue
Main article: Government revenue Government revenue includes all amounts of money received from sources outside the government entity. Large governments usually have an agency or department responsible for collecting government revenue from companies and individuals.[6] Government revenue may also include reserve bank currency which is printed. This is recorded as an advance to the retail bank together with a corresponding currency in

circulation expense entry. The income derives from the Official Cash rate payable by the retail banks for instruments such as 90 day bills.There is a question as to whether using generic business based accounting standards can give a fair and accurate picture of government accounts in that with a monetary policy statement to the reserve bank directing a positive inflation rate the expense provision for the return of currency to the reserve bank is largely symbolic in that to totally cancel the currency in circulation provision all currency would have to be returned to the reserve bank and cancelled.

List of companies by revenue
This is a list of the world's largest public and private businesses by gross revenues. The list is limited to companies with annual revenues exceeding 40 billion U.S. dollars.

Cautionary notes
1. The availability and reliability of up to date information on private companies is limited and varies from country to country. 2. Revenue is only one of many ways of measuring company size and it is not the most appropriate for all purposes. Using a different measure, such as total assets or market capitalisation, would produce a fundamentally different list. 3. Many major companies, especially outside the USA, do not have a 31 December year end, so the figures are for years to a variety of dates. 4. This list is shown in U.S. dollars, but many of the companies on it prepare their accounts in other currencies. The value of their turnover in dollar terms may change substantially in a short period of time due to exchange rate fluctuations. 5. Figures are latest full year results; the year these results were reported in is shown beside them. 6. This list may be incomplete.

[edit] List of companies by revenue
Market capitali Reven zation ue Fiscal Primary CEO, Ran Company Primary (Dec Emplo Headqua (USD Year Stock compens k name Industry 2009, yees rters Billion listing ation USD ) million)
[1]

1

Walmart

Retailing

Bento Mike Januar nville, $408.2 $203,65 2,150,0 NYSE: W Duke, y 31, Arkansas, 14[2] 4 00 MT $19.23M[ 2010 United 3] States

2

Royal $368.0 $186,61 Oil and gas [4] 2010 Dutch Shell 56 8

3

ExxonMobi $301.5[ $323,71 Oil and gas 5] 2009 l 7

4

BP

Oil and gas

$297.1 $181,80 [7] 2010 07 6 $233.3[
8]

5

Saudi Aramco

Oil and gas

2008

$781,00 0[9]

11

Total S.A. Oil and gas

$212.8 $151,54 2010 15[10] 4

6 7

March $203.6 $143,70 Automotive 31, 87[11] 5 2010 March Japan Post Conglomera $200.9 31, Holdings te 95[12] 2010 Toyota Motors

The Hague, Netherlan 112,00 LSE: RDS Peter ds and 0A Voser Londo n, United Kingdom Irving Rex W. NYSE: X , Texas, Tillerson, 90,800 OM United $10.53M[ 6] States Londo n, Robert 97,600 LSE: BP England, Dudley United Kingdom Dhahr Governme Khalid A. 54,441 an, Saudi nt-owned Al-Falih Arabia Courb evoie, Christoph 111,40 Euronext: Île-de- e de 1 FP France, Margerie France Toyot 316,12 TYO: a, Aichi, Fujio Cho 1 7203 Japan 3,251 Governme Tokyo Jiro Saito nt-owned , Japan

8

9

10

12

Houst on, ConocoPhil $198.6 NYSE: C James Oil and gas 2010 $97,435 29,700 Texas, lips 55[13] OP Mulva United States SSE: $197.0 $159,26 400,51 600028, Beijin Jiming Sinopec Oil and gas 2009 19[14] 3 3 SEHK: 03 g, China Wang 86 Rotter dam, Netherlan [ ds and Raw $195.0 Vitol - Private 15] 2010 material Genev a, Switzerla nd State Grid Electricity $184.5 2009 1,502,0 Governme Beijin Liu [16] Corporatio 61 00 nt-owned g, China Zhenya

n of China Samsung Group Conglomera $172.5 2009 te 00[17] Sams KRX: ung 275,00 005930, Town, 0 KRX: Seoul, 005935 South Korea Wolfs ISIN: burg, 329,30 DE000766 Lower 5 4005 Saxony, Germany San Ramon, NYSE: C 61,533 Californi VX a, United States Fairfi eld, 287,00 NYSE: G Connecti 0E cut, United States SSE: 464,00 601857, Beijin 0 SEHK: 08 g, China 57 Lee Kunhee

13

14

Volkswage $169.5 Automotive 2010 $42,507 n Group 3[18]

Martin Winterko rn

15

Chevron

Oil and gas

$167.4 $154,46 [19] 2009 02 2

David J. O'Reilly

16

General Electric

Conglomera $150.2 $161,09 2010 te 11[20] 6

Jeffrey Immelt

17

PetroChina Oil and gas Glencore Raw Internation materials al Allianz Financial services Financial services

$149.3[
21]

2009

$353,14 0

Zhou Jiping

18

$144.9 2010 78[22] $142.2 2010 $54.008 4[23] $140.7 2010 $37,414 29[24]

19

20

ING Group

21

Berkshire Conglomera $136.1 $153,62 [25] 2010 Hathaway te 85 4

22

General Motors

Automotive

$135.5 $13,180[ [26] 2010 27] 92

Baar, Ivan 52,000 Private Switzerla Glasenbe rg nd Munic ISIN: Michael 151,38 h, DE000840 Diekman 8 Bavaria, 4005 n Germany Amste 107,10 Euronext: rdam, Jan 6 INGA Netherlan Hommen ds Omah NYSE: B a, 217,00 RKA, Warren Nebraska 0 NYSE: B Buffett , United RKB States Detroi G. t, 284,00 NYSE: G Richard Michigan 0M Wagoner, , United Jr. States

23

Daimler AG

Automotive

$130.6 260,10 FWB: DA [28] 2010 $56,671 28 0[28] I

32

Ford Motor $128.9 327,53 Automotive 2010 $32,362 NYSE: F Company 54[29] 1

25

HewlettPackard

Octob Information $126.0 $121,77 321,00 NYSE: H [30] er 31, technology 33 8 0 PQ 2010 $125.8 475,97 Euronext: [31] 2009 $33,940 78 6 CA

26

Carrefour

Retailing

27

AT&T

Telecommu $124.2 $165,40 266,59 NYSE: T [32] 2010 nications 8 5 0[32]

28

E.ON

Electricity; gas

$124.0 FWB: EO 2010 $58,392 85,105 84[33] AN

24

AXA

Financial services Oil and gas

$121.5 189,92 Euronext: [34] 2010 $54,340 77 7 CS $121.5 $102,28 78,417[3 2009 6] BIT: ENI 07[35] 8 $121.2 2010 $42,037 85,368 BIT: G 99[37] $115.1 160,70 Euronext: 2009 $98,209 15[38] 0 SZE $111.3 2010 $134,53 203,42 NYSE: B 9[39] 4 5 AC

29

Eni

30

Assicurazio Insurance ni Generali Public utilities Banking

33 31

GDF Suez Bank of America

Stuttg art, Baden- Dieter Württem Zetsche berg, Germany Dearb orn, Alan Michigan Mulally , United States Palo Alto, Léo Californi Apotheke a, United r States Levall oisLars Perret, Olofsson France Dallas Randall , Texas, L. United Stephens States on Düsse ldorf, North Johannes RhineTeyssen Westphal ia, Germany Paris, Île-de- Henri de France, Castries France Rome, Paolo Lazio, Scaroni Italy Triest Sergio e, Friuli- Balbinot, Venezia Giovanni Giulia, Perissinot Italy to Gérard Paris, Mestralle France t Charl Brian otte, Moyniha North n

34

Nippon Telegraph and Telephone McKesson Corporatio n

35

36

Cargill

37

Verizon

Carolina, United States Tokyo March Telecommu $108.9 205,28 TYO: , Tokyo Norio 31, $61,717 nications 77[40] 8 9432 Prefectur Wada 2010 e, Japan San Francisco March John $108.7 $16,970[ NYSE: M , Health care 31, 27] 31,800 Hammerg 02[41] CK Californi 2010 ren a, United States Wayz May ata, $107.8 158,00 Greg Agriculture 31, Private Minnesot 82[42] 0 Page 2010 a, United States New Jersey, Ivan Telecommu $106.5 $104,64 203,10 NYSE: V New 2010 Seidenber nications 65[43] 6 0Z Jersey, g United States Food processing Vevey $104.9 $190,16 253,00 SIX: NES , Vaud, Paul 2010 [44] 72[44] 3 0N Switzerla Bulcke nd Mosc $104.0 $299,76 432,00 RTS:GAZ Alexei 2009 ow, 24[45] 4 0P Miller Russia Septe Munic $103.6 mber 480,00 h, Peter $84,219 FWB: SIE [46] 95 30, 0 Bavaria, Löscher 2010 Germany New York, $100.4 $145,88 176,00 NYSE: JP New Jamie [47] 2009 34 1 0M York, Dimon United States Wichi ta, $100.0[ 2009 Charles 80,000 Private Kansas, 48] est. Koch, ? United States [ $99.87 2010 $159,39 426,75 NYSE: IB Armo Samuel J. 49] 2 2[49] M nk, New Palmisan York, o

38

Nestlé

39

Gazprom Siemens AG

Oil and Gas Conglomera te

40

41

JPMorgan Financial Chase Services

42 43

Koch Industries IBM

Conglomera te Information technology

45

46

47

44

48

49

50

51

52

53 54

United States Dubli June Cardinal $98.50 $21,090[ NYSE: C n, Ohio, George Health care 30th, 27] 40,000 Health 3[50] AH United Barrett 2010 States March JX $96.86[ TYO: Energy Japan 51] 31, Holdings 5020 2010 Tokyo March Hitachi, Conglomera $96.43 306,87 TYO: , Tokyo Etsuhiko 31, $19,999 Ltd. te 6[52] 6 6501 Prefectur Shoyama 2010 e, Japan Woon socket, CVS $96.41 $47,423[ 160,00 NYSE: C Rhode Tom Retailing [53] 2010 53] Caremark 3 0 VS Island, Ryan United States Paris, Electricité Electricity $95.56 $159,11 156,15 Euronext: Île-de- Henri 2009 de France generation 4[54] 8 2 EDF France, Proglio France Chesh Febru unt, $95.06 ary 310,41 LSE: TSC Terry Tesco Retailing $59,131 England, [55] 3 27, 1O Leahy United 2010 Kingdom Rome, Electricity $94.24 BIT: Fulvio Enel 2009 $65,863 58,548 Lazio, [56] generation 9 ENEL Conti Italy Minne tonka, UnitedHeal $94.15 NYSE: U Stephen Health care 2010 $42,998 55,000 Minnesot th Group 5[57] NH Hemsley a, United States Kuwait March Petroleum $93.88 Kuwa Saad Al Oil and gas 31, 18,500 Corporatio 4[58] it Shuwaib 2009 n Tokyo [ March $92.21 181,87 TYO: , Tokyo Takeo Honda Automotive $52,445 59] 31, 6[60] 7267 Prefectur Fukui 2010 e, Japan Petrobras Oil and gas $91.86 2009 $199,10 38,908 Bovespa: Rio de José [61] 9 8 PETR3,4 Janeiro, Sérgio State of Gabrielli Rio de de Janeiro, Azevedo

55

Statoil

Oil and gas

$90.73 2010 3[62] $89.87[
64]

56 57

Metro AG Retailing Dexia Banking

2010

$88.78 2009 4[65]

58

Citigroup

Financial services

$86.60 2010 1[67]

58 59

LG Group Société Générale

Conglomera $86.51 2009 te 0[68] Financial Services $85.86 2009 0[69]

60

BASF

Chemical industry

$85.34 2010 7[70]

61

Wells Fargo

Banking / Financial services

$85.21[
71]

2010

62

Nokia

Telecommu $84.61 2009 nications 8[73]

63

Telefónica

Telecommu $84.09 2009 nications 6[74] Telecommu $83.40 2010

64

Deutsche

Brazil Stava 30,344[6 Helge nger, $95,752 3] OSE: STL Rogaland Lund , Norway ISIN: Düsse 263,79 Eckhard $26,284 DE000725 ldorf, 4 Cordes 7503 Germany Bruss 34,234[6 Euronext: Pierre $33,708 els, 6] DX Mariani Belgium New York, $106,69 299,00 New Vikram NYSE: C 6 0 York, Pandit United States Seoul, $12,240[ 177,00 KRX: Koo BonSouth 27] 0 003550 Moo Korea 120,00 Euronext: Paris, Frédéric $57,315 0 GLE France Oudéa Ludwi gshafen am Rhein, Jurgen FWB: BA $66,302 85,124 Rhinelan Hambrec S dht Palatinate , Germany San Francisco John 160,00 NYSE: W , Stumpf, $95,937 0 FC Californi $21.34M[ a, United 72] States Espoo , $120,58 OMX: NO Stephen 62,763 Southern 3 K1V Elop Finland, Finland Madri d, $137,66 173,55 Euronext: Communi César 0 4 TFA ty of Alierta Madrid, Spain $72,907 246,77 ISIN: Bonn, René

Telekom

nications

7[75]

65

LUKoil

Oil and Gas

$81.08 2009 $72,723 3[77] $80.80 2010 $35,742 9[78] $80.64 2009 3[79] March $80.46 31, $37,425 2[80] 2010 March $79.39 31, $53,234 9[81] 2010 $79.2[82

66

BMW

Automotive

67

Pemex

Oil and gas

68

Nissan Motors

Automotive

69

Panasonic Corporatio Electronics n Raw materials

North RhineDE000555 Oberman 7[76] Westphal 7508 n ia, Germany Mosc Vagit 150,00 RTS:LKO ow, Alekpero 0H Russia v Munic 104,34 ISIN: h, Norbert 2 DE0005 Bavaria, Reithofer Germany Mexic Jesús F. 138,21 Governme o City, Reyes 5 nt-owned Mexico Heroles Yoko hama, 127,62 TYO: Kanagaw Carlos 5 7201 a Ghosn Prefectur e, Japan Kado Kunio 290,49 TYO: ma, Nakamur 3 6752 Osaka, a Japan

70

71

72

73 74

75

Lucer ne, Trafigura 4,000 Private ? ] 2010 Switzerla nd Groupe $79.19 127,00 Paris, François Banking [83] 2009 BPCE 5 0 France Pérol Cinci Robert A. June nnati, Procter & Consumer $78.93 $215,64 138,00 NYSE: P "Bob" 30, Ohio, Gamble goods 8[84] 0 0G McDonal 2010 United d States Seoul, Chung Hyundai $78.33 $15,610[ 117,00 KRX: Automotive 2009 27] South MongMotors 4[85] 0 005380 Korea Koo National March Masoud $78.00[ Governme Tehra Iranian Oil Oil and gas 21, 36,000 Mir 86] nt-owned n, Iran Company 2009 Kazemi Chest Septe erbrook, Amerisourc $77.95 mber $6,780[2 NYSE: A Pennsylv R. David Health care 12,300 eBergen 4[87] 30, 7] BC ania, Yost 2010 United States

76

77

78

79

80

81

82

83

84

85

86

New York, Robert American Financial $77.30 $109,09 NYSE: AI New Benmosc Internation 86,000 [88] 2010 services 1 1 G York, he, al Group United $2.7M[89] States March $77.21 $38,494[ TYO: Tokyo Howard Sony Electronics 31, 91] [90] 6 6758 , Japan Stringer 2010 Cinci Januar nnati, $76.73 $16,380[ 334,00 NYSE: K David Kroger Retailing y 31, 27] Ohio, [92] [92] 3 0 R Dillon 2010 United States Issaqu ah, Augus $76.25 132,00 NASDAQ Washingt Jim Costco Retailing t 29, $28,149 5[93] 0 : COST on, Sinegal 2010 United States Turin, Sergio Conglomera $75.17 162,23 Fiat 2010 $28,591 BIT: F Piedmont Marchion te 2[94] 7 , Italy ne Carac as, Petróleos $74.99 Governme Maracaib Rafael de Oil and gas 2009 67,900 6[95] nt-owned o Ramírez Venezuela Venezuel a Houst on, Clarence Marathon $73.62 NYSE: M Oil and gas 2010 $32,329 28,855 Texas, Cazalot, Oil 1[96] RO United Jr. States Colog REWE $73.34 325,84 Alain Retailing Private ne, [97] 2009 Group 1 8 Caparros Germany Londo n, Financial $73.10 Andrew Aviva 2009 $32,247 59,000 LSE: AV. England, [98] services 6 Moss United Kingdom Bonn, North ISIN: Deutsche $71.75 436,65 Rhine- Frank Courier 2010 $37,180 DE000555 Post 1[99] 1[100] Westphal Appel 2004 ia, Germany RWE Public $71.24 2010 $68,287 127,02 ISIN: Essen, Jürgen

utilities

6[101]

87

Legal & General Repsol YPF Nippon Life Insurance PSA Peugeot Citroën

Financial services Oil and Gas Insurance

$71.03 2009 3[102] $70.63 2009 $42,288 5[103] March $70.58 31, 6[104] 2010 $69.75[
105] 2009

88 89

90

Automotive

$17,980[
27]

91 92

Prudential Banking plc CNP Insurance Assurances Toshiba

$69.29 2009 $34,743 1[107] $68.98 $16,360[ [108] 2009 27] 1

93

March Conglomera $68.30 31, $21,659 te 6[109] 2010 $68.28 2009 $56,881 1[110]

94

Boeing

Aerospace

95

Valero Energy

Oil and gas

$68.14 2009 $26,257 4[111]

North RhineDE000703 Großman 8 Westphal 7129 n ia, Germany Londo n, LSE: LGE Tim England, N Breedon United Kingdom BMAD: R Madri Antonio 41,017 EP d, Spain Brufau Chūōku, Kunie 67,348 Mutual Osaka, Okamoto Japan Paris, 186,22 Euronext: Île-de- Philippe 0[106] UG France, Varin France Londo Tidjane 26,000 LSE: PRU n, United Thiam Kingdom Gilles Euronext: Paris, Benoist, CNP France €1.027M Tokyo 199,00 TYO: , Tokyo Tadashi 0 6502 Prefectur Okamura e, Japan Chica go, Jim 157,00 NYSE: B Illinois, McNerne 0A United y States San Antonio, NYSE: V Bill 22,000 Texas, LO Klesse United States

96 97

Zurich Financial Services

Insurance

Walgreens Retailing

Zürich SIX: ZUR , Martin 112] 2010 $46,024 58,000 N Switzerla Senn nd $67.42[ Augus $37,762 238,00 NYSE: W Deerfi Jeff Rein 113] [114] t 31, 0 AG eld, 2010 Illinois, United $67.85[

98

March Telecommu $67.36 $159,33 Vodafone 31, nications 8[115] 7 2010 United States Postal Service Septe $67.05 mber N/A 2[116] 30, 2010

99

Courier

100 Itaúsa

Conglomera $66.36[ 117] 2009 te

101 Petronas

Oil and gas

$66.34[

March 118] 31, 2010

102 103

China Mobile France Télécom

Telecommu $66.22 2009 nications 3[119] Telecommu $66.18 2009 $88,049 nications 7[120] Financial services $66.18 $199,25 2009 1[121] 5

104 HSBC

105

Home Retailing Depot, Inc.

Januar $66.17 y 31, $47,203 6[123] 2010

106 SK Group

Conglomera $65.66 $8,530[2 [124] 2009 7] te 6 $65.25 2009 $41,205 7[125]

Target 107 Corporatio Retailing n Lloyds 108 Banking Group

Financial Services

$65.25 2009 $41,723 5[126]

States Newb LSE: VO ury, Vittorio D United Colao Kingdom Washi ngton, 583,90 Governme John E. D.C., 8 nt agency Potter United States Alfredo BM&F São Egydio 117,37 Bovespa: Paulo, Arruda 3 ITSA3 / Brazil Villela ITSA4 Filho Tan Sri Kuala Dato Sri Governme 33,944 Lumpur, Mohd nt-owned Malaysia Hassan Marican Hong 145,93 SEHK: 09 Kong Li Yue 4 41 SAR., China 191,00 Euronext: Paris, Stéphane 0 FTE France Richard Londo n, 302,00 LSE: HSB Stephen England, 0[122] A Green United Kingdom Vinin gs, 317,00 NYSE: H Frank Georgia, 0D Blake United States Seoul, KRX: Choi TaeSouth 003600 Won Korea Minne apolis, Gregg 352,00 NYSE: T Minnesot Steinhafe 0 GT a, United l States Edinb urgh, LSE: LLO Eric 72,000 Scotland, Y Daniels United Kingdom

Cuper tino, NASDAQ Steve 109 Apple Inc. Electronics Californi : AAPL Jobs a, United States Euronext: Luxe MT), mbourg ArcelorMitt $65.11[ $119,12 319,57 (NYSE: M Lakshmi 110 Steel City, 128] 2009 al 4 8 T, Mittal Luxembo LuxSE: M urg T Crédit Financial $64.17 134,00 Euronext: Paris, Jean-Paul 112 [129] 2009 $51,857 Agricole Services 2 0 ACA France Chifflet Londo United n, Barclays $63.97 Kingdom John 113 Banking 2010 $50,861 77,000 England, Bank 8[130] LSE: BAR Varley United C Kingdom [13 Agricultural $63.5 114 ZEN-NOH 12,557 Japan 1] 2005 marketing Redm ond, June Information $62.48 $270,63 NASDAQ Washingt Steve 115 Microsoft 30, 71,000 technology 4[132] 5 : MSFT on, Ballmer 2010 United States New Philip York, Morris Tobacco $62.08[ 77,300[1 NYSE: P New Louis C. 116 133] 2009 $93,935 33] Internation industry M York, Camilleri al United States Schip Netherlan hol-Rijk, $61.68 109,13 ds North Louis 117 EADS Aerospace [134] 2009 $19,361 9 5 (Euronext: Holland, Gallois EAD) Netherlan ds Decat Archer Agriculture, June ur, Patricia $61.68 NYSE: A 118 Daniels Food 30, $26,490 30,000 Illinois, A. 2[135] DM Midland processing 2010 United Woertz States New Brunswic William Johnson & $61.58 $183,75 120,50 NYSE: JN k, New 119 Health care 2010 C. Johnson 7[136] 1 0J Jersey, Weldon United States Septe $65.22 mber $189,80 5[127] 25, 2 2010

120

State Farm Insurance Insurance Edeka Group

$61.5[13 2009 (Mutual 68,800 7] ) $60.59 2009 2[138] $61.45 2008 4[139]

121

Retailing

122 Pertamina Oil and gas

Medco 123 Health Solutions

Health care

$59.80 2009 $22,943 4[140]

124 Munich Re

Financial services

$59.67 2009 $30,777 4[141]

125 Unilever

Consumer goods

$59.14 $101,64 2010 3[142] 2

111 WellPoint Health care

$58.80 2010 $23,916 18[143]

Septe ThyssenKr Conglomera $58.16 mber 126 $29,544 upp te 9[144] 30, 2010 BNP Financial $57.89 127 2009 $91,689 Paribas Services 9[145] Seven & I March $57.43[ Tokyo Toshifum 128 Holdings Retailing $24,023 55,815 TYO: 382 147] 31, , Japan i Suzuki Co. 2010 Croix, Christoph $57.15[ 243,00 129 Auchan Retailing Nord, e 148] 2009 0 France Dubrulle 130 Grupo Banking $56.73 2009 $136,63 129,74 BMAD: S Santa Emilio Santander 2[149] 1 9 AN nder, Botín

Bloo mington, Edward Illinois, B. Rust United Jr. States Hamb - Private urg, Germany Jakart Karen Governme 15,868 a, Agustiaw nt-owned Indonesia an Frankl in Lakes, NYSE: M New David B. 14,800 HS Jersey, Snow, Jr. United States Munic ISIN: Nikolaus h, 41,431 DE000843 von Bavaria, 0026 Bomhard Germany Lo ndon, United Kingdom 179,00 Euronext: Paul / 0 UNA Polman Rotterda m, Netherlan ds Indian apolis, NYSE: W Angela 42,000 Indiana, LP Braly United States Essen ISIN: 188,00 & Ekkehard DE000750 0 Duisburg, D. Schulz 0001 Germany 201,70 Euronext: Paris, Baudouin [146] 0 BNP France Prot

Cantabria , Spain 131 ÆON 132 133 Noble Group Dai-ichi Life Retailing Raw materials Insurance Febru $56.7[15 ary $9,420[2 0] 27, 7] 2010 $56.69 2010 6[151] March $56.66 31, 5[152] 2010 TYO: 8267 SGX: N21 TYO: 8750 Tokyo , Japan Hong Ricardo Kong Leiman Tokyo , Japan

134

Royal Bank Financial of Scotland services

Edinb urgh, $55.73 120,00 Stephen LSE: RBS Scotland, [153] 2009 $67,158 7 0 Hester United Kingdom $55.1[15
4]

Iraq National 135 Oil Company 136 Bosch Group

Oil and gas

2007 -

?270,68 Private 7

Iraq Gerlin gen, Germany

?

Automotive Sovereign Wealth Fund

$54.99 2009 3[155]

Temasek 137 Holdings 138

139

140

141

142 143

March $54.78 Governme Singa [156] 31, 1 nt-owned pore 2010 Indian Oil March New $54.73 $16,360[ B.M.Ban Corporatio Oil and Gas 31, 27] 36,127 NSE: IOC Delhi, 4[157] sal n 2010 India PierreSaintConstructio $54.43 208,00 Euronext: Paris, André de 2009 $30,626 Gobain n 5[158] 0 SGO France Chalenda r Hartfo rd, United Conglomera $54.32 215,00 NYSE: U Connecti George Technologi 2010 $67,548 te 6[159] 0 TX cut, David es United States Tokyo Tsunehis Tokyo March Electricity $53.90 TYO: , Tokyo a Electric 31, $36,222 39,619 generation 9[160] 9501 Prefectur Katsumat Power 2010 e, Japan a, ? Roun Januar d Rock, Information $52.90 NASDAQ Michael Dell y 29, $44,640 95,000 Texas, technology 2[161] : DELL Dell 2010 United States [2 Toyota Sogo $52.89 March $9,070 20,708 TYO: Nago Masaaki

Tsusho

shosha

3[162]

31, 2010

7]

8015

ya, Japan Furukawa

144

BHP Billiton

Mining

145

Deutsche Bank

Banking

Melbo urne, LSE: BLT Victoria, Jun. $52.79 $201,24 , Australia Marius 34,000 [163] 30, 8 8 ASX: BH and Kloppers 2010 P London, United Kingdom Frank Josef $51.66 FWB: DB furt am 2009 $44,021 82,504 Ackerma 6[164] K Main, nn Germany

China Railway Infrastructur $50.53 SEHK: 11 Beijin 146 [165] 2009 Constructio e 1 86 g, China n March Hiroaki $50.31 $14,990[ 157,04 TYO: Tokyo 147 Fujitsu Electronics 31, 27] Kurokaw 7[166] 4 6702 , Japan 2010 a, ? Zürich , Canton Brady Credit Financial $50.19 SIX: CSG 148 of Zürich, Dougan [167] 2009 $58,682 60,477 Suisse services 3 N Switzerla nd $50.05 170,00 Milan, Federico 149 UniCredit Banking BIT: UCG [168] 2009 $89,654 5 0 Italy Ghizzoni New York $50.00 $141,50 106,00 NYSE: PF Jeff 150 Pfizer Health care 2009 City, 9[169] 7 0E Kindler United States Veolia Public $49.77 312,59 Euronext: Paris, Antoine 151 Environne 2009 $32,938 utilities 4[170] 0 VIE France Frérot ment SSE: China Life $49.69 601628, Beijin 152 Insurance [171] 2009 Insurance 8 SEHK: 26 g, China 28 Richfi Feb. eld, $49.69 NYSE: B Brian J. 153 Best Buy Retailing 27, Minnesot [172] 4 BY Dunn 2010 a, United States 154 United Transportati $49.54 2010 $50,553 400,60 NYSE: U Sandy Scott Parcel on 5[173] 0 PS Springs, Davis Service Georgia,

United States Banco 155 Bradesco China Railway Engineerin 156 g Corporatio n Mitsubishi 157 Corporatio n Banking BM&F $49.26 Bovespa: Osasc [174] 2009 $58,441 85,577 7 BBDC3/B o, Brazil BDC4 SEHK: 39 Beijin 0 g, China Luiz Carlos Trabuco Cappi

Infrastructur $48.84 2009 e 8[175] March $48.83 $34,794[ [176] 31, 177] 3 2010

Sogo shosha

TYO: 8058

Tokyo Mikio , Japan Sasaki

158 Renault

A. P. 159 Møller Mærsk 160

Boulo gne$48.56 121,42 Euronext: Billancou Carlos Automotive 2009 $31,650 6[178] 2 RNO rt, Île-de- Ghosn France, France OMX: M Copen $48.52 110,00 AERSK Nils Transport 2009 $49,039 hagen, [179] 2 0 A,MAER Andersen Denmark SK B

161

162

163

164 165

Basel, Severin Hoffmann$47.62 $165,24 Health care 74,372 SIX: ROG Switzerla [180] 2009 La Roche 9 1 Schwan nd PTT Public Bangk Prasert $47.61 Company Oil and Gas 2009 $28,285 3,681 SET: PTT ok, Bunsump 9[181] Limited Thailand un Banco Bilbao $47.42 BMAD: B Bilba Francisco Banking 2009 $68,452 91,000 Vizcaya 9[182] BVA o, Spain González Argentaria Moor esville, $47.22[ 210,00 NYSE: L North Robert Lowe's Retailing 183] 2009 $33,552 0 OW Carolina, Niblock United States Mosc $46.82 RTS:ROS Rosneft Oil and gas 2009 ow, 6[184] N Russia National Insurance $46.8[13 2005 6,248 Japan 1] Mutual Insurance Federation

of Agricultura l Cooperativ es (Zenkyoren or JA Kyosai) RueilConstructio $46.76 162,00 Euronext: Xavier 166 VINCI Malmaiso [185] 2009 $35,334 n 2 0 DG Huillard n, France Woori Seoul, Financial $46.45 KRX: Lee Pal 167 Financial 2009 South services 9[186] 053000 Seung Group Korea $46.42 120,00 Governme Algier Djenane 168 Sonatrach Oil and gas 2009 0[187] 0 nt-owned s, Algeria El Malik Londo n, GlaxoSmit $46.01 $114,83 100,01 Andrew 169 Health care 2009 LSE: GSK England, [188] hKline 6 3 9 Witty United Kingdom Hon Hai Tuche $45.89 920,00 TWSE: Terry 170 Precision Electronics 2009 $40,635 ng, 9[189] 0 2317 Gou Industry Taiwan Bethe sda, Lockheed $45.80 140,00 NYSE: L Robert J. 171 Aerospace 2010 $40,527 Maryland Martin 3[190] 0 MT Stevens , United States Industrial SSE: and $45.32 $268,95 385,60 601398, Beijin Jiang 172 Commercia Banking [191] 2009 2 6 9 SEHK: 13 g, China Jianqing l Bank of 98 China New York City, Goldman Financial $45.17 NYSE: G Lloyd 173 2009 $65,479 30,335 New [192] Sachs services 3 S Blankfein York, United States June Bella Michael Woolworth $45.17 195,00 ASX: WO 174 Retailing 28, $31,224 Vista, Luscomb s Limited 0[193] 0W 2010 Australia e Conglomera $45.16 113,30 Euronext: Paris, Martin 175 Bouygues [194] 2009 $22,157 te 7 0 EN France Bouygues 176 Bayer Health care $44.90 2009 106,00 FWB: BA Lever Marijn [195] 1 0 YN kusen, Dekkers North

RhineWestphal ia, Germany China Investment Sovereign $44.87 177 2009 Corporatio wealth fund 6[196] n 178 Dow Chemical Manufacturi ng Governme Beijin Lou Jiwei nt-owned g, China

179

Imperial Tobacco Reliance Industries

Tobacco industry Conglomera te Health care Conglomera te

180

181 Novartis Mitsui & Co.

182

183

Sears Holdings

Retailing

184 Rio Tinto

Mining

Shinhan 185 Financial Group 186

Financial services

Wesfarmer Retailing s

187 Mitsubishi Banking

Midla nd, Andrew $44.87 NYSE: D 2009 $34,625 46,000 Michigan N. 5[197] OW , United Liveris States Septe Bristo $44.71 mber Gareth - LSE: IMT l, United 3[198] 30, Davis Kingdom 2010 March $44.63 BSE: 5003 Mum Mukesh [199] 31, 2 25 bai, India Ambani 2010 Januar $44.26 $134,92 100,73 SIX: NOV Basel, Joseph y 26, Switzerla Jimenez 7[200] 8 5N 2010 nd March $44.04 TYO: Tokyo 31, ? ? 8[201] 8045 , Japan 2010 Hoff man Januar $44.04 $12,660[ 355,00 NASDAQ Estates, Alan J. y 30, 27] 3[202] 0 : SHLD Illinois, Lacy 2010 United States Londo n, United Kingdom $44.03 101,99 and Tom ASX: RIO [203] 2009 6 4 City of Albanese Melbourn e, Australia KRX: Seoul, Sang $43.97 055550, 2009 South Hoon 5[204] NYSE: S Korea Shin HG June $43.94 200,00 ASX: WE Perth, Bob 30, $32,530 9[205] 0S Australia Every 2010 $43.89 March $68,694 57,500 TYO: Tokyo Nobuo

UFJ Financial Group Semiconduc tors

6[206]

31, 2010

8306

, Japan

Kuroyana gi

188 Intel

Sumitomo 189 Life Insurance Insurance 190 PepsiCo Food

191 Aegon

Insurance

192 Caterpillar Deutsche Bahn SanofiAventis

Heavy equipment Transportati on Health care

193 194

195 Chrysler

Automotive

196

Bunge Limited

Agriculture

197 Sojitz

Sogo shosha

198 MetLife

Insurance

Moun Dece tain $43.62 mber $109,21 NASDAQ View, Paul S. 82,500 [207] 3 25, 0 : INTC Californi Otellini 2010 a , United States March $43.27 N/A Osaka 31, 2[208] (Mutual) , Japan 2010 Purch ase, New $43.23 NYSE: PE Indra York, [209] 2009 2 P Nooyi United States The Alex $42.85 Euronext: Hague, 2009 $23,967 29,000 Wynaend 9[210] AGN Netherlan ts ds Douglas Peoria $42.58 NYSE: C R. , Illinois, [211] 2010 8 AT Oberhelm USA an Berlin $42.26[ 229,20 Rüdiger 2009 , 212] 0 Grube Germany Chris $42.21 $102,84 Euronext: Paris, 2009 96,439 Viehbach 8[213] 9 SAN France er Aubur Sergio $41.94 Private n Hills, 2010 N/A Marchion 6[214] company Michigan ne , USA White Plains, $41.92 $13,400[ NYSE: B New Alberto 2009 27] 30,000 6[215] G York, Weisser United States March $41.33 $4,790[2 TYO: Tokyo Yutaka 31, 7] 17,331 [216] 8 2768 , Japan Kase 2010 New York C. Robert $41.05 NYSE: M 2009 $42,734 83,800 City, Henrikso 8[217] ET United n States

199 Safeway

Retailing

200 SuperValu Retailing

201 UBS

Financial services

202 Kraft Foods Food Federal Home Loan Financial 203 Mortgage services Corporatio n 204 Ahold 205 Cisco Retailing Information technology

Pleasa Januar nton, $40.85 $12,650[ 201,00 NYSE: S Steven Californi [218] y 2, 27] 07 0 WY Burd 2010 a, United States Eden Febru Prairie, $40.59 ary $5,550[2 200,00 NYSE: S Craig Minnesot [219] 7] 7 27, 0 VU Herkert a, United 2010 States SIX: UBS Zurich [2 $40.56 65,233 N, & Basel, Oswald 2009 21] 1[220] NYSE: U Switzerla Grübel BS nd North field, Irene $40.38 $40,172[ 97,000[2 NYSE: K 2009 222] Illinois, Rosenfel 22] 6[222] FT United d States McLe an, $40.34 $16,270[ NYSE: FR Richard 2009 27] 5,000 Virginia, 6[223] E F. Syron United States Amste [ $40.22 $15,790 206,00 Euronext: rdam, John 2009 27] 9[224] 0[225] AH Netherlan Rishton ds

CHA PTE R1

INT ROD

UCT ION:

Bank ing is an

impo rtant sect

or of the econ

omy of any

coun try and

for the deve

lopm ent of

the econ omy

a healt hy

bank ing syste

m is a must

. After the

liber alizat ion

of the econ

omy, the bank

ing syste m

has unde rgon

ea total chan

ge in India .Ther

e is hard com

petiti on in the

bank ing indu

stry to survi

ve in the curre

nt circu msta

nces . With

the purp ose

to have bette

r finan cial

disci pline & to

ensu re unifo

rmity in acco

untin g norm

s RBI intro

duce d the conc

ept of asse

t class ificati

on & inco me

reco gniti on

as per the

reco mme ndati

ons of Nara

simh an Com

mitte e. It was

also sugg este

d to class ify

the adva nces

give n by bank

s into Perf

ormi ng & Non

Perf ormi ng

Adva nces

(N.P. A.).

Bank s and

Fina ncial Instit

ution s lend

mon ey agai

nst hypo thec

ation and pled

ge of stock s,

book debt s

and secu rities

. Bank s

have to close

ly moni tor

the activi ty of

borro wer to

ensu re that

the mon ey

lend ed by

bank is secu

re & there is

adeq uate marg

in for reco very

of loan.

To ensu re

the safeg uard

of the adva

nces given and

to identi fy the

prob able N.P.

A. at an early

stage , the Bank

s and Fina ncial

Instit ution s

appr oach exter

nal Audit or to

carry out an

indep ende nt

exam inatio n of

these hypot hecat

ed and pledg

ed stock s,

book debts and

secur ities. The

role of the

Audit or assu

mes a great

impo rtanc e, as

he is an indep

ende nt and

neutr al party

whos e repor

t is looke d

upon with resp

ect and

credi bility.

CHA PTE R2

STO CK &

REC EIVA BLE

AUD IT

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