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Chapter 1 Introduction to accounting and finance 1.

1 Introduction Text and Cases is designed to introduce critical topics in the areas of accounting and finance in a basic context. This material is relevant for the general business manager as well as those who do not have a business background but wish to gain a foundational level of understanding and expertise. The topics are presented from a conceptual point of view to give the manager a fundamental understanding of the material. Additionally, an underlying emphasis of each topic presentation will be; what does the individual need to know to ask the correct questions or to comprehend information as presented by the accountant or financial manager. 1.2 Learning objectives Obviously not every area of accounting and finance can be covered in a single text at the introductory level. In accounting, topics such as adjusting entries and more in-depth presentations on the various methods to record inventory and depreciation are left for a more advanced accounting text. Detailed discussions of the acquisition, use, and disposal of fixed assets and debt instruments are not included. In the area of finance, specific presentations related to stockholders equity, dividend policy, convertible securities, warrants, and options are left for more advanced finance texts. 1.3 What are accounting and finance? The American Accounting Association defines accounting as "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information."1Accounting is called the "language of business" as it provides a means of systematically recording and reporting information in a financial format. Finance does not generally have a definition in the way that accounting was previously defined. Finance seems to be recognized more as a means to achieving an objective. An underlying goal for a company is the maximization of shareholder wealth, or the maximization of the total market value of the current shareholders' common stock. The financing activity is oriented toward achieving this specific goal. Years ago finance focused primarily on descriptive activities such as raising capital, government and other forms of regulation, and merger and acquisition activities. More recently, the area of finance has broadened with greater emphasis on internal activities in support of management. Issues such as working capital management, capital budgeting, firm valuation, security analysis, and capital structure theory are critical to a company's financial operation. 1.4 Accounting and user needs Several professional organizations in accounting and finance have developed codes of professional conduct or codes of ethics. A review of the major components of these codes can assist the business manager in understanding how the accountant or financial manager is expected to act in an ethical manner. The American Institute of Certified Public Accountants Code of Professional Conduct includes six articles, which define the principles to which the accountant performs unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. 1.5 Not-for-profit organizations You buy goods of daily consumption from the general store of your locality, such as clothes from cloth shop or you see a movie in a cinema hall. These are all business organizations that deal in purchasing and selling goods and services. Their objective is to earn profit. You must have studied in a school; you go to a hospital for treatment. You may be a member of a sports club of your area. These are the organizations that are founded not to earn profits but to provide services to their members and to the public in general. You have learnt the preparation of financial statements of profit organizations. While performing the activities these organizations also engage in financial transactions. They also want to know the results of their activities for a particular period. For this they also prepare financial statements. You will study in this lesson the system of accounting of these organizations i.e. Not-forProfit Organizations (Knops) such as sports club, literacy society, etc. 1.6 Accounting as a service function One way of viewing accounting is as a form of service. Accountants provide economic information to their clients who are the various users. The quality of the service provided will be determined by the extent to which the information needs of the user groups have been met. It can be argued that, to be useful, accounting information should possess certain key qualitative characteristics: Relevance Accounting information must have the ability to influence decisions. This information may be relevant to the prediction of future events or relevant in helping confirm past events. Reliability accounting

information should be free from any material error or bias. It should be capable of being relied on by users to represent what is true and fair. Comparability Items which are basically the same should be treated in the same manner for measurement and presentation purposes. Understandability accounting reports should be expressed as clearly as possible and should be understood by those for whom the information is aimed. Timeliness accounting information should be available at reasonably frequent intervals and the time which elapses between the end of the financial period and the production of the accounting reports should not be too long. The first two characteristics relevance and reliability are really what make accounting information useful. The last three characteristics comparability, understandability and timeliness will limit the usefulness of accounting information to the extent that they are missing. For example, information which is relevant to a particular decision may cease to be relevant if the information is not produced in a timely manner. 1.7 The threshold of materiality The threshold of materiality, that is the amount of common costs which are allocated on a discretional (proportional) basis at the end of the cost allocation cycle should be the lowest possible and, in general, not exceed 10% of the total of the costs. 1.8 Costs and benefits of accounting information There are compelling evidences that indicate more disclosure results in more liquid markets. The greatest disclosure usually leads to the lowest cost of capital. This is only true when public disclosure is governed by cost-of-capital considerations. The existence of information asymmetries in capital markets may ameliorate the cost of capital during disclosure, thereby providing an economic basis for evaluation of costs and benefits of accounting information. 1.9 Accounting as an information system Accounting is an information system for measuring, processing and communicating information that is useful in making economic decision. Every business is conducted to make profit. Accounting knowledge is there to assist the business man to assess whether the business is making profit or loss. In accounting brings discipline on how to source money, how to spend and how much to save. Accounting ensures consistency in the treatment of various transactions. Accounting involves gathering of financial data, recording classifying, summarizing and communicate the results to the owners of the business, or to others allowed to receive this information. Accounting should not be confused with Book keeping as Book keeping is the part of accounting concerned with recording of financial data. Book keeping is the process of recording data relating to accounting transactions in the books of accounts. 1.10 Planning and control Business Planning and Control System (BPCS) is a popular system of application programs for manufacturing and other industries that is developed and sold by Systems Software Associates (SSA). SSA reports that BPCS is installed at over 8,000 business sites worldwide. The BPCS applications are divided into: Configurable enterprise financials (including accounts receivable and payable, cost accounting, remittance processing, and budgeting and analysis) Supply chain management applications (including sale performance management, purchasing, promotion, inventory management, and forecasting) 1.11 Management and financial accounting Cost accounting, management accounting, and financial accounting all use basic financial accounting concepts to arrive at their intended goal. All 3 use techniques such as depreciation, present values, future values, accruals, deferrals, and inventory valuations (such as LIFO and FIFO). Although the reports that they create are each different, the basic statements remain similar in construction and terminology. Management accounting is specifically for the use of top level managers who are interested in appeasing shareholders. Therefore, managerial accounting is constantly searching for higher net incomes and benefits for the shareholders. 1.12 Has accounting become too interesting? Ethics is an important aspect especially when it comes to dealing with money and financial accountability. Professional accounting and financial associations have taken a strong stand in support of codes of conduct and financial integrity. The business manager should be aware of the ethical standards to which the accountant or financial manager is held accountable. Everyone in the business environment should work together in the stewardship of company resources by following

ethical guidelines. Maintaining an individual and companys integrity should be a primary objective in any business setting. 1.13 Why do I need to know anything about accounting and finance? New business leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such; financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business. 1.14 Business objectives Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, We must triple the sales of our product by next year. Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful.

Chapter 2 Measuring and reporting financial position 2.1 Introduction We saw in the previous chapter that accounting has two distinct strands financial accounting and management accounting. This chapter, along with Chapters 3 to 7, will examine the three major financial statements that form the core of financial accounting. We start by taking an overview of these statements to see how each contributes towards an assessment of the overall financial position and performance of a business. Following this overview, we begin a more detailed examination by turning our attention towards one of these financial statements the balance sheet. We shall see how it is prepared, and examine the principles underpinning this statement. We shall also consider its value for decision-making purposes. 2.2 Learning objectives Explain the nature and purpose of the three major financial statements prepare a simple balance sheet and interpret the information that it contains discuss the accounting conventions underpinning the balance sheet Discuss the limitations of the balance sheet in portraying the financial position of a business. 2.3 The major financial statements - an overview Financial statements are necessary sources of information about companies for a wide variety of users. Those who use financial statement information include company management teams, investors, creditors, governmental oversight agencies and the Internal Revenue Service. Users of financial statement information do not necessarily need to know everything about accounting to use the information in basic statements. However, to effectively use financial statement information, it is helpful to know a few simple concepts and to be familiar with some of the fundamental characteristics of basic financial statements. The balance sheet: 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". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. 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. 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. Another way to look at the same equation is that assets equal 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." 2.5 The effect of trading operations on the balance sheet The P&L for the period influences on the balance sheet as an adding up to (or a diminution of) capital. Any funds initiated or reserved by the owner for living everyday expenditure or other reasons also have an effect on capital, but are shown unconnectedly. By doing this, we provide more inclusive information for users of the financial statements. Note that, like all balance sheet items, the sum of capital is snowballing. This means that any profit made that is not taken out as drawings by the owner(s) leftovers in the business. These keeps (or ploughed-back) profits have the effect of increasing the trade. 2.6 The classification of assets Combining economic resources into categories according to their characteristics. In financial analysis, classification of assets is used in order to evaluate the health of a company by examining how well each of the company's type of assets is performing. Asset classes include fixed assets, investments, intangible assets, current assets and deferred costs. 2.7 The classification of claims Process of grouping obligations by when they are due. The categories used are Current Liability and Long-Term Liability. Liability classification assists financial statement users in evaluating the firm's financial position and ability to take on additional short-term or longterm debt. Current Liabilities - A

company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. Long Term Liabilities - Recorded on the balance sheet, a company's liabilities for leases, bond repayments and other items due in more than one year. 2.8 Balance sheet formats At the top of your balance sheet, list your company name on one line, and the date the balance sheet is relevant for on the next. Then, create a section each for your assets, liabilities and equity. In each section the following items should be listed in columnar format, being added or subtracted as demonstrated in this balance sheet format: current assets + cash in the bank + petty cash = net cash (by totaling the previous three items); inventory + accounts receivable + net cash = total current assets fixed assets + land + buildings - depreciation = net land and buildings equipment - depreciation = net equipment total assets accounts payable + wages payable + taxes payable = total current liabilities long term loans + mortgage = total long term liabilities total liabilities 2.9 The balance sheet as a position at a point in time It was the Dutch mathematician Simon Stevin who persuaded merchants to make it a rule to summarize accounts at the end of every year in a chapter entitled Coopmansbouckhouding op de Italianesque wyse of his Wisconstigheg hedachtenissen. Although the balance sheet he required every enterprise to prepare every year was based on entries of the ledger, it was prepared separately from the major books of account. The oldest semi-public balance sheet recorded was that of the East India Company dated 30th April 1671, which was submitted to the company's General Meeting on in 30th August 1671. The publication and audit of the balance sheet was still a rarity in England until the passing of the Bank Charter Act 1844. 2.10 Accounting conventions and the balance sheet In the asset sections mentioned above, the accounts are listed in the descending order of their liquidity (how quickly and easily they can be converted to cash). Similarly, liabilities are listed in the order of their priority for payment. In financial reporting, the terms current and non-current are synonymous with the terms short-term and long-term, respectively, and are used interchangeably. It should not be surprising that the diversity of activities included among publicly-traded companies is reflected in balance sheet account presentations. The balance sheets of utilities, banks, insurance companies, brokerage and investment banking firms and other specialized businesses are significantly different in account presentation from those generally discussed in investment literature. In these instances, the investor will have to make allowances and/or defer to the experts. Lastly, there is little standardization of account nomenclature. For example, even the balance sheet has such alternative names as a "statement of financial position" and "statement of condition". Balance sheet accounts suffer from this same phenomenon. Fortunately, investors have easy access to extensive dictionaries of financial terminology to clarify an unfamiliar account entry. 2.11 Accounting for goodwill and product brands THE argument is gradually gaining strength that the brands or brand names of a company under which its products or services are marketed, represents as much an asset as any tangible asset such as building, plant etc. As the profitability of any undertaking depends on the marketability of its products or services, all expenditure of an enduring nature incurred in improving their marketability should legitimately be termed as asset as the benefit of such expenditure will extend indefinitely into the future. Protagonists for the accounting recognition of brands argue that enormous sums of money spent on the creation of brands are not quantified and reflected in financial statements. There is, therefore, no indication from published financial statements of the financial outlay involved in the creation of those brands and, of the impact of brand names on sales and profits achieved during the period. Acknowledging the need for reflecting the value of brands in the accounts, two large companies in the United Kingdom Ranks Hovis McDougall PLC and Grand Metropolitan PLC have made a start by capitalizing the value of their brands in their published financial statements. The question, naturally, arises as to whether the reflection of this item as an asset in the balance sheet serves any meaningful purpose or is just another attempt by the accountants to create more work for themselves. Why would a company pay more than the appraised value of a company's total net assets? Goodwill represents favorable characteristics of a company that are intangible and not easily measured by a mere listing of its assets. Rather, there is a greater aspect of the business that is represented in, for example, its reputation, a superior product, customer loyalty, superior management, or other favorable characteristics that go beyond the collection of assets listed on the

balance sheet. The Oakley name represents a superior brand and technological innovation in sports sunglasses. Luxottica not only purchased Oakley's net assets, but it purchased its brand name and superior reputation and technology for which it paid a premium of $1.3 billion. Accounting for goodwill attempts to capture this benefit as an intangible asset on the balance sheet. There should not be any more hesitation to account for brands in view of their obvious importance to a company. The creation of a market asset, in this manner, is a departure from the conventional practice of accountants in treating the majority of assets as arising from, or conducive to, the production function. The reference to brand accounting in the chairmans address at a recent shareholders meeting that for a consumer product business the primary assets are its brands (5), would seem to indicate that there is enough awareness already in India to the emergence of this new concept. He goes on to say that a companys annual accounts and balance sheet do not quantify the value of these major assets, but some new treatments are beginning to reflect it internationally. We all know as consumers how we relate to various brands and how much our choices are influenced by them. Investing on brands and nurturing them carefully is a worldwide Unilever strategy and philosophy. We have added three new brands and we hope to make brand properties out of them 2.12 The basis of valuation of assets on the balance sheet The sub-division of financial statements and the valuation of assets were two of the most important elements in the development of modern financial statements. The purpose of this paper is to explore the historical evolution of the recognition, grouping, and valuation of current assets on the balance sheet in the United States between 1865 and 1940 at which time the basic format for reporting such assets had been adopted. The paper expands the examination of the balance sheet beyond a traditional emphasis on long-life assets to an investigation of the evolving classification of current assets with a special emphasis on the influence of financial users (especially creditors) for its unique development. Historical illustrations of the ways in which companies presented and valued current assets on the balance sheet are presented. In matters of form the greatest change which later statements showed was the grouping of data into subsections

Chapter 3 Measuring and reporting financial performance 3.1 Introduction The primary objectives of this report are to improve the quality of information displayed in financial statements so that investors, creditors, and others can better evaluate an enterprises financial performance and to ascertain that sufficient information is contained in the financial statements to permit calculation of key financial measures used by investors and creditors. The report will focus on form and content, classification and aggregation, and display of specified items and summarized amounts on the face of all basic financial statements, interim as well as annual. 3.2 Learning objectives discuss the nature and purpose of the profit and loss account prepare a profit and loss account from relevant financial information discuss the main recognition and measurement issues that must be considered when preparing the profit and loss account Explain the main accounting conventions underpinning the profit and loss account. 3.3 The income statement (profit and loss account) Income statement, also referred as profit and loss statement (P&L), earnings statement, operating statement or statement of operations, 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 (depreciation and amortization of various assets) and taxes. 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. 3.4 Relationship between the income statement and the balance sheet The B/S contains information expressed at a moment in time about resources (assets) that are owned or controlled by the firm. Assets have probable future economic value usually through use or sale, are controlled by the firm and are related to a prior transaction. The B/S also contains information about the firms obligations (liabilities). Liabilities involve probable future economic sacrifices, are unavoidable and are related to a prior transaction. The last part of the B/S is owners equity representing the aggregate investment by owners. Owners equity is often called net assets because it equals assets less liabilities. 3.5 The format of the income statement An income statement shows all income and expense accounts over a period of time. It is also referred to as a profit and loss statement (or P & L), from an income statement you can determine how much money your business made after all expenses are accounted for, i.e., how much profit youre made. Here is an Example of an Income Statement. The basic format is that all the income sources are listed and totaled on the top of the statement, and all the expenses are listed and totaled next. The total of the expenses is subtracted from the total of the income to give the profit over that time period. Income is usually broken down by Gross Sales from which Returns and Allowances are subtracted to give Net Sales. Cost of Goods sold is estimated by adding the inventory in stock at the beginning of the period to the purchases during the period, less the inventory at the end of the period. Subtracting Cost of Goods Sold from Net Sales gives you the Profit from Sales, also known as the margin. 3.6 The income statement - some further aspects It seems fitting to begin with a more formal definition of accounting: Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic unit. The economic unit is generally considered to be a separate enterprise. The information is potentially reported to a variety of different types of interested parties. These include business managers, owners, creditors, governmental units, financial analysts, and even employees. In one way or another, these users of accounting information tend to be concerned about their own interests in the entity. Business managers need accounting information to make sound leadership decisions. Investors hold out hope for profits that may eventually lead to distributions from the business (e.g., "dividends"). Creditors are always concerned about the entity's ability to repay its obligations. Governmental units need information to tax and regulate. Analysts use accounting data to form their opinions on which

they base their investment recommendations. Employees want to work for successful companies to further their individual careers, and they often have bonuses or options tied to enterprise performance. Accounting information about specific entities helps satisfy the needs of all these interested parties. 3.7 Profit measurement and the recognition of revenue As part of our guide to financial statements, you learned that the accrual concept - matching revenues with expenses - was the cornerstone of accounting. Only by comparing cash with the cost of generating it can the investor develop an understanding of the profitability of a business. Yet, within Generally Accepted Accounting Principles (GAAP), there are multiple ways to recognize revenue. Depending upon which method is chosen, the financial may look drastically different even though economic reality is the same. Times New Roman (Body) 3.8 Profit measurement and the recognition of expenses The issue of recognizing and measurement of financial instruments in International Business was culminated as long process aimed at defining and establishing recognition and measurement guidance for financial instruments. When the International Accounting Standards Committee (JASC, the predecessor of the IASB) deliberated IAS 39, FASB was the only major accounting standards setter with formal guidance on the recognition and measurement of financial instruments. Thus, the IASC based much of its deliberations and final guidance on U.S. standards. 3.9 Profit measurement and the calculation of depreciation There are many ways of computing accounting profits which lead to widely differing profit figures and not all deductions however legitimate and within the bounds of permissible discretion - truly coincide with expenses incurred in earning a profit. To see this we must ask what motivates a business choice of basis of computation. There are many influences. The business may wish to convey a particular signal to the market. For example a low figure for reported profit may stifle pressure to pay higher dividends thus preserving funds for investment. It may wish to smooth profits on the grounds that undue reported volatility harms the share price. The business may use bases which serve politics or incentivisation rather than optimal economic reporting. Permissible preference for an accounting method may affect the tax burden. From his experience as an auditor the writer recalls protracted disputes involving auditor, tax authorities and management concerning timing of recognition of accruing profit on long-term contracts. Other opportunities for discretionary reporting of higher or lower profits are capitalizations of research and development, advertising and small tools and not assume that income recorded is the most appropriate for tithing purposes. 3.11 Profit measurement and the problem of bad or doubtful debts The measurement of profit and financial position is not as precise and objective as you may, at first, imagine. In order to prepare the profit and loss account and balance sheet, we have to employ estimates and assumptions. As a result, the portrayal of the financial health of a business can vary according to the particular estimates and assumptions that we make. There are three measurement areas that are critical to the measurement of profit and financial position: depreciation, stock valuation and the problem of bad and doubtful debts. In this course we examine each of these areas in turn. 3.12 Interpreting the income statement The income statement is like a history book, presenting to you the story of what's happened to your business over a specific period. That period will be shown near the top of the statement, where you'll place the phrase, "For the year ended xxx," or something similar. This phrase allows you to quickly identify in which period the revenues and expenses occurred. Youll find that reviewing income statements is most useful when you look at more than one period together, so that you can see each period in relation to others. It's one thing to know that you had net income of $50,000 this year, but it makes a difference whether last year you made $25,000 or $110,000. It's the trend you're interested in here. In what direction is the net income heading? Like a balance statement, an income statement is a means for measuring a companys financial performance. Some of the ratios discussed draw data from both the income statement and the balance sheet. Well continue using the published data from Target as an example. Note that all figures represent millions of dollars. Gross profit margin: The money Target earns from selling a T-shirt, minus what it paid for that item -known as cost of goods sold, or COGS -- is called gross profit. Sales minus COGS, divided by sales, yields the gross profit margin. According to Targets income statement, that would be 59,490 minus 39,399, divided by 59,490, which equals 0.337, or 33.7 percent.

Operating income: This is gross profit minus operating expenses minus depreciation. It is also called EBIT (earnings before interest and taxes). Using Targets data, the formula would be expressed as: 59,490 minus 39,399 minus 12,819 minus 707 minus 1,496, which equals 5,069. Operating profit margin: Use the total derived in the previous step and divides it by total sales. In this case the equation is 5,069 divided by 59,490, which equals .085, or 8.5 percent. Interpretation: This tally is also known as EBIT margin and is an effective way to measure operational efficiency. If you find this number to be low, either raise revenues or cut costs. It may help to analyze which of your customers are the most profitable and concentrate your efforts there. Net profit margin: Net earnings divided by total revenue yields the net profit margin. In this case, 2,787 divided by 59,490, which equals .047, or 4.7 percent. ROA: This stands for return on assets and measures how much profit a company is generating for each dollar of assets. Calculate ROA by dividing the revenue figure from the income statement by assets from the balance sheet. For Target, that equates to 59,490 divided by 14,706, which equals 4.04. In other words, for every dollar Target has in assets, it is able to generate $4.04 of revenue. ROE: The same idea as above, but replacing assets with the equity. In this case, 59,490 divided by 15,633, which equals 3.81. Accounts receivable collection: Many businesses experience a lag between the time they bill customers and when they see the revenue. This may be due to trade credit or because customers are not paying. While you can note this potential revenue in the balance sheet under accounts receivable, if youre not able to collect it, eventually your business will lack sufficient cash. Interpretation: To measure how many days it takes to collect all accounts receivable, use this formula: 365 (days) divided by accounts receivable turnover (total net sales divided by accounts receivable). In Targets case, that equates to 365 divided by the sum of 59,490 divided by 6,194, which equals 38. This means that, on average, it takes Target 38 days to collect on its accounts. If you find your business has a healthy balance sheet but is short on cash, increase collection on outstanding accounts.

Chapter 4 Accounting for limited companies 4.1 Introduction Limited companies are run by individuals which is why we create an individual solution for each client. The service can include a total accountancy package or simply the preparation of annual accounts; it's completely up to you. You can also alter your solution as your business circumstances and requirements change. With every solution, we provide you with a dedicated account manager who is on hand to advise you as you need. Your account manager will take the time to get to know your business in order to give the right kind of support, advice and service. Most new businesses require the services of an accountant who understands their situation and can offer complete services that let you focus on your work. Trafalgar has been managing limited company accounts for over 15 years and will not only take you through the same-day process of setting up your company, but will walk you through every step of the process as you go. We provide company and personal tax services, VAT and IR35 advice, the preparation of statutory accounts, and general business and tax advice that will ensure your company is compliant and profitable. 4.2 Learning objectives discuss the nature of the limited company explain the role of directors of limited companies outline and explain the particular features and restrictions of the owners' claim, in the context of limited companies prepare a profit and loss account and a balance sheet for a limited company. 4.3 Generating wealth through limited companies A Real estate development company, DB Realty is focused on residential, commercial, retail and other projects, such as mass housing and cluster redevelopment, in and around Mumbai. As of December 31, 2009, DB has 11 Ongoing Projects, aggregating approximately 19.51 million square feet of Saleable Area, 8 Forthcoming Projects, aggregating approximately 19.28 million square feet of Saleable Area and 6 Upcoming Projects, aggregating approximately 22.24 million square feet of Saleable Area. 4.4 Managing a company - corporate governance and the role of directors The following corporate governance guidelines and the charters of the committees of the Board of Directors of the Company have been approved by the Board of Directors and provide the framework for the corporate governance of the Company. The Companys business is managed under the direction of the Board of Directors. The Board elevates to the Chief Executive Officer and through that individual to other senior management, his authority and responsibility for managing the Companys business. The Boards role is to oversee he management and governance of the Company and to monitor senior managements performance. The Board of Directors is comprised of such number of directors as the Board deems appropriate to function efficiently as a body, subject to the Companys Articles of Association. The Corporate Governance and Nominating Committee reviews the composition of the full Board to identify the qualifications and areas of expertise needed to further enhance the composition of the Board, makes recommendations to the Board concerning the appropriate size and needs of the Board and, on its own or with the assistance of management or others, identifies candidates with those qualifications. The Board is made up of a substantial majority of independent, non-employee directors and the Board considers this to be the appropriate structure 4.5 Financing limited companies For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that you understand the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business. The latter point regarding 'assessment' is particularly important at A2 level where you are expected to make judgments. Internal Sources Traditionally, the major sources of finance for a limited company were internal sources: Personal savings Retained profit Working capital Sale of assets External Sources Ownership Capital In this context, 'owners' refers to those people/institutions who are shareholders. Some traders and partnerships do not have shareholders - the individual or the partners are the owners of the business but do not hold shares. 4.6 Raising share capital Selling shares in your company is one way of raising long-term finance for your business. This is also known as equity finance. The advantage of equity finance is that you don't have to repay the finance

or pay interest on it as you would with an overdraft or bank loan. Shares represent ownership in a company. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the distributed profits of the company, known as dividends. This guide will explain how shares are issued and sold, what dividends are and the tax implications associated with dividends. 4.7 Loans and other sources of finance Construction Loans and alternative construction finance sources one of the major problems facing any business enterprise is that of obtaining finance. This is a problem not merely of quantity but also of type. The situation is further compounded by legislation. Dynamism of the economy, but fundamentally by the requirement to minimize costs. The construction industry comprises a wide variety of firms from the single person enterprise to the large multinational public company. The sources of capital available to any firm are quite numerous but public companies have the great variety of sources available for their use and the single person enterprise, the least variety .Construction Loans .can be classified into short term and long term borrowings. Long term Finance. It is that capital required for five to ten years, either to start a business or to carry out expansion programs. Broadly the capital is used to purchase buildings, plant and equipment. The risks to the lender are high because of the time scale involved, consequently only established firms are generally considered by the lending institutions. Short term Finance The firm when established often needs short term capital to overcome immediate cash flow problems. Materials have to be purchased, plant hired, labor and sub-contractors paid and so on before payment is received from the Employer. 4.8 Restriction on the right of shareholders to make drawings of capital A shareholder agreement is a document stating that a new shareholder has been officially adapted as a member of the current body of shareholders. It contains the names of the signatory of the Deed, if there authorized representative, the official name of the company and its office address. 4.9 Accounting for limited companies Limited companies are run by individuals which is why we create an individual solution for each client. The service can include a total accountancy package or simply the preparation of annual accounts; it's completely up to you. You can also alter your solution as your business circumstances and requirements change. With every solution, we provide you with a dedicated account manager who is on hand to advise you as you need. Your account manager will take the time to get to know your business in order to give the right kind of support, advice and service. Most new businesses require the services of an accountant who understands their situation and can offer complete services that let you focus on your work. Trafalgar has been managing limited company accounts for over 15 years and will not only take you through the same-day process of setting up your company, but will walk you through every step of the process as you go. We provide company and personal tax services, VAT and IR35 advice, the preparation of statutory accounts, and general business and tax advice that will ensure your company is compliant and profitable. 4.10 The directors duty to account A strong line of judicial opinion has developed whereby in certain circumstances it is mandatory for directors, in discharging their duties to their companies, to take into account the interests of their companies' creditors. But there is uncertainty as to what the actual circumstances is that will lead to directors being required to do this. This article, after briefly discussing the rationale for the duty to take into account the interests of creditors, and its development, identifies and examines the circumstances that have been said to trigger the duty. Next, the article assesses the positions taken in the various cases and considers what circumstances should exist before directors are obliged to consider creditors' interests. 4.11 The need for accounting rules The mounting sense of urgency has been triggered by widespread fears of losing public confidence and by the need to strengthen internal controls. This long postponed issue has become a priority: Should a wide range of different accounting rules continue to coexist, or should international accounting rules take a leading role? Could such rules really be applied? Transparency, confidence, control and security are the keywords most likely to come to mind after the scandals at Enron and Xerox, where accounting fraud was discovered. As a result, many analysts now believe that the accounting profession must move more and more toward creating clear and precise rules that apply worldwide. After all, we live in a globalized world.

4.12 The main sources of accounting rules The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA). 4.13 Directors report The Directors have the pleasure of presenting the Thirty Fifth Annual Report of your Company together with the audited accounts for the year ended 31st March 2008.The summary of standalone operating results for the year and appropriation of divisible profits is given below: the sales and operating income increased to Rs. 995.90 crores from Rs. 882.90 crores in the previous year yielding a growth of 12.80%. The export turnover aggregated to Rs. 235.91 crores registering a growth rate of 16.97%. The operating profit for the year under review increased to Rs. 216.48 crores as against Rs. 167.49 crores in the previous year registering a growth of 29.25%. The profits after tax for the year under review increased to Rs. 155.52 crores as against Rs. 112.96 crores in the previous year registering a growth of 37.70%. The earnings per share for the year were Rs. 18.38 as against Rs. 13.35 in the previous year. 4.14 Auditors The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person / organization/system (etc) in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors. 4.15 Accounting rules and the quality of financial statements The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA).

Chapter 5 Measuring and reporting cash flows 5.1 Introduction Without a comparison standard ratios provide little insight is a GP margin of 23% acceptable? Debtors turnover of 5 times reasonable? Current ratio of 1.7 times secures? Comparison should be made with: Terms (what credit period is offered) Budget (plan) Past periods/ intertemporal (trend) other firms in the same industry (intra-industry or interfere comparison) Liquidity and solvency are distinguished by time. Liquidity focuses on s/term survival to meet immediate and s/term cash commitments. Solvency is linked to longer term financial stability of the entity and the level of external funding vs. OE/internal funding. Profitability is concerned with financial performance (absolute or relative returns) whereas efficiency is concerned with how quickly assets/liabilities are turned over. Profitability Ratios - Gross Profit Margin Net Profit Margin Return on Assets Return on Owners Equity Efficiency Ratios - Debtors turnover Creditors Turnover Inventory Turnover Total Asset Turnover (sales turnover Efficient use of resources can increase the relative return on assets or owners equity. Answers sometimes may be overly simplistic. Stakeholders are generally be interested in different aspects of financial performance or position but may emphasize one over others. Resource Providers - Current shareholders Prospective shareholders Lender Suppliers of goods or services Employees and prospective employees. 5.2 Learning objectives It may be best to start with what learning objectives arent: They arent simply a list of the topics to be covered in the course. Certainly, there will be a body of knowledge that students should know and understand by the time the course is complete. But if the goals for what students should achieve stops there may be many missed opportunities for providing them with a more productive learning experience. A learning objective should describe what students should know or be able to do at the end of the course that they couldnt do before. Learning objectives should be about student performance. 5.3 The cash flow statement The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.)The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. Example, the heading may state "For the Three Months Ended December 31, 2009" or "The Fiscal Year Ended September 30, 2009". 5.4 Preparing the cash flow statement A cash flow statement is important to your business because it can be used to assess the timing, amount and predictability of future cash flows and it can be the basis for budgeting. A cash flow statement can answer the questions, where did the money come from?" "Where did it go? This Business Builder will introduce you to the cash flow statement and its importance for financial management. Through the use of a worksheet, the Business Builder will guide you through the construction of a cash flow statement for your business. The cash flow statement is a complex financial statement and by necessity, this Business Builder contains information on sophisticated accounting topics. 5.5 What does the cash flow statement tell us? The income statement is prepared under the accrual basis of accounting; the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement. Here are a few ways the statement of cash flows is used. The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.

Chapter 6 Analyzing and interpreting financial statements 6.1 Introduction Understanding the financial details of your business and, at times, being able to communicate them to others can mean the difference between success and failure. Informed business owners pay attention to the numbers that show whether a business is profitable, has cash flow problems or is spending too much in certain areas. Analyzing financial data also can help you set business objectives on a monthly, quarterly or yearly basis. Here are three reasons to organize and study financial statements: Get an overview of how your business is doing and where it is heading. Keep control of general and administrative expenses. Careful records can help attract investors to your business. 6.2 Learning objectives Identify the major categories of ratios that can be used for analysis purposes calculate important ratios for assessing the financial performance and position of a business, and explain the significance of the ratios calculated discuss the limitations of ratios as a tool of financial analysis discuss the use of ratios in helping to predict financial failure. 6.3 Financial ratios The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business. Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the allimportant early warning indications that allow you to solve your business problems before your business is destroyed by them. 6.4 Financial ratio classifications Factor and transformation analysis are used to find stable categories of financial ratios, and to test hypotheses concerning accrual ratios, cash flow ratios, and market-based ratios. Six stable factors are observed for Finnish data covering 1974-84. Contrary to expectations market based ratios disperse widely. Cash flow ratios show strong internal cohesion and stability as expected. The expected dichotomy of accrual ratios into dynamic performance and static financial standing measures gets some support. The conventional text-book classification into profitability, liquidity, solvency, and turnover measures does not get direct support. Results on the interdependence of firm sizes and security betas are supported and the importance of measuring growth in financial statement. 6.5 The need for comparison A study was conducted to measure the effect and compare the results of developmental reading instruction for college students as prescribed from the specific results of a diagnostic reading test and a general, more traditionally used, survey reading test. The sample consisted of 226 students enrolled in different sections of a reading course required at the University of South Carolina for students with low Stanford Achievement Test scores. All students received two hours per week of classroom instruction. Experimental and control treatments were provided by graduate assistants for one hour of lab time each week. Individual prescriptions for lab instruction were written for the experimental students based on information from the subtests of the Stanford Diagnostic Reading Test only. Only the information from the subtests of the survey instrument, the Nelson-Denny Reading Test, was used in writing prescriptions for the control students. The gain in reading was measured by the pretest and posttest differences on both tests. There was a statistically significant difference in the means of the gain scores between the experimental students and the control group on many of the sub skills on the Stanford Diagnostic Reading Test. However, the gains on the Nelson-Denny Reading Test did not reflect evidence of a significant difference 6.6 Calculating the ratios Start with this scenario: If a small project had a total of 5.0 FTEs and one FTE was a secretary, the secretarial to no secretarial ratio would be 1 to 4. If the project doubled in size to 10 FTEs and added another secretary, the secretarial to no secretarial ratio would continue to be 1 to 4.What did you just do to figure that out? Maybe you said to yourself, "There are 2 secretaries and 8 no secretaries, or 2 to 8, which is the same as 1 to 4." To convert the ratio 2 to 8 to the form we prefer, 1 to X, you divided both sides of the ratio by 2, the number of secretaries.

6.7 A brief overview India is the 6th biggest country in the world and hosts a population of just over one billion people who collectively speak over 1500 languages. It is located in southern Asia (with an area of 3,287,590 sq km) bordering the Arabian Sea and the Bay of Bengal, between Burma and Pakistan. A land of marked contrasts makes India without doubt one of the worlds most intriguing places to visit. The fertile plains of the south stand out against the huge peaks of the Himalayas in the North, whilst the desert conditions of Rajasthan distinguish themselves from those areas that are availed with the monsoon rains. Maharajas and palaces are ubiquitous throughout the major cities which now show the dramatic contrasts of 21st century businesses juxtaposed to street children and slums. 6.8 Profitability Profit generally is the making of gain in business activity for the benefit of the owners of the business. The word comes from Latin meaning "to make progress", and is defined in two different ways, one for economics and one for accounting. 6.9 Efficiency Economic, a general term, capturing the amount of waste or other undesirable features Financial market efficiency, how efficient is the trading going on the financial markets Pareto efficiency, making one individual better off, without making any other individual worse off Caldor-Hicks efficiency, like a less stringent Pareto efficiency. Allocative efficiency, an optimal distribution of goods Efficiency wages, paying workers more than the market rate for increased productivity Business efficiency, expenses as a percentage of revenue, etc. Efficiency Movement, of the Progressive, advocated efficiency in the economy, society and government 6.10 The relationship between profitability and efficiency This paper is aimed at analyzing the relationship between Working Capital Management Efficiency and Earnings before Interest amp; Taxes of the Paper Industry in India during 1997-1998 to 20052006. To measure the WCME three index values viz., Performance Index (PI), Utilization Index , and Efficiency Index are computed, and are associated with explanatory variables, viz., Cash Conversion Cycle , Accounts Payable Days (APDAYS), Accounts Receivables Days , Inventory Days (INVDAYS). Further, Fixed Financial Assets Ratio (FIXDFARA), Financial Debt Ratio (FINBTRA) and Size (Natural log of Sales) are considered as control variables in the analysis, and are associated with the obit. The study reveals that the Paper Industry has managed the WC satisfactorily. The APDAYS has a significant relationship with obit, which indicates that by deploying payment to suppliers they improve the obit. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills, and pursue a decrease in CCC. 6.11 Liquidity In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset An act of exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity also refers both to a business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets, and to such assets themselves. 6.12 Gearing A gear is a rotating machine part having cut teeth, or cogs, which mesh with another toothed part in order to transmit torque. Two or more gears working in tandem are called a transmission and can produce a mechanical advantage through a gear ratio and thus may be considered a simple machine. Geared devices can change the speed, magnitude, and direction of a power source. The most common situation is for a gear to mesh with another gear; however a gear can also mesh a nonrotating toothed part, called a rack, thereby producing translation instead of rotation. 6.13 Investment ratios However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation. The most well-known investment valuation ratio is the P/E ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one

simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market. 6.14 Trend analysis The term "trend analysis" refers to the concept of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has more formally-defined meanings. In project trend analysis is a mathematical technique that uses historical results to predict future outcome. This is achieved by tracking variances in cost and schedule performance. In this context, it is a project management quality control tool. Although trend analysis is often used to predict future events, it could be used to estimate uncertain events in the past, such as how many ancient kings probably ruled between two dates, based on data such as the average years which other known kings reigned. 6.15 Ratios and prediction models The models developed in the literature with respect to the prediction of a company s failure are based on ratios. It has been shown before that these models should be rejected on theoretical grounds. Our study of industrial companies in the Netherlands shows that the ratios which are used in insolvency models do not have the predicting properties they are credited with. We have investigated whether the alternative for ratios mentioned in the literature, i.e. the regression analysis, gives reliable insolvency models. However, the regression analysis appears to be useful in a limited sense only, depending on the size of the company. 6.16 Limitations of ratio analysis Following are some of the limitations of ratio analysis. The first limitation category is "Accounting information". The first limitations in this category are the uses of different accounting policies which may distort intercompany comparisons. Secondly, through creative accounting some accounts of the company are adjusted therefore, ratio analysis can give false explanations to the users. The second limitation category is "Information problems". The limitations in information problems are there because ratios are not definitive measures, outdated information is presented in the financial statements, historical costs is not good for decision making, and ratios give general interpretations. Third category of limitation is "Comparison of performance over time".

Chapter 7 Cost-volume-profit analysis 7.1 Introduction Cost-Volume-Profit Analysis (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions. Costvolume- profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis. 7.2 Learning objectives A task analysis itemizes each discrete skill found in a job, but it only provides end-goal statements. Each goal provides the basis for a terminal objective. The designer must then determine the prerequisite skills required for the task and create learning objectives for each behavior or skill. 7.3 The behavior of costs Analysis of the effect on total costs of a change in the level of a given activity in an organization. Some costs, called fixed costs, remain relatively unaltered regardless of a change in the level of the activity. By contrast, variable costs rise or fall in proportion to a rise or fall in the level of the activity and other costs known as semi-variable costs, exhibit characteristics of both fixed and variable costs. 7.4 Fixed costs In economics, fixed costs are business expenses that are not dependent on the activities of the business they tend to be time-related, such as salaries or rents being paid per month. This is in contrast to variable costs, which are volume-related (and are paid per quantity).In management accounting, fixed costs are defined as expenses that do not change in proportion to the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales. Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs. 7.5 Variable costs Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but costs. Variable costs are sometimes called unitlevel costs as they vary with the number of units produced. 7.6 Semi-fixed costs Semi-fixed costs that are constant within a defined level of activity but that can increase or decrease when activity reaches upper and lower levels. 7.7 Break-even analysis The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break even analysis can also be used to analyze the potential profitability of an expenditure in a sales-based business. 7.8 Contribution Contribution may refer to: Donation Sharing Payment a payment between defendants with joint and several liabilities to apportion liability. Publication in a newspaper, magazine, etc. Transport of audio or video content by broadcasters prior to distribution (for example audio or video links between a sports venue or concert hall and the broadcaster's studios). Contribution margin in cost accounting and analysis. When a request for contributions is directed to more than one party then fundraising is being attempted. 7.9 Margin of safety and operation gearing Last May a semi truck mishandled the curvy Haw Ridge section of Highway 95 and crashed into a ditch. The ORNL Fire Department, situated only a couple of miles away, responded and extricated the

driver from the tangled cab with a rescue tool commonly called the Jaws of Life. The firefighters set of jaws is one of several pieces of fire and rescue equipment the Labs fire department has upgraded this year. According to the departments manager, David Bait, The equipment and necessary training that has come with it enable the ORNL Fire Department to provide the high level of emergency service expected from it. The fire hall near the west portal is sporting a new ambulance and a new rescue truck. In addition to the Jaws of Life, the firefighters have new air packs, new fire-retardant uniforms, and even new helmets. Weve improved and updated our services and wed like for the people here to know that, Bait says. Over the past couple of years weve had tremendous support from Lab management to improve fire and emergency medical services. 7.10 Marginal analysis Since resources are scarce and we cannot have everything that we want, tough choices must be made. The concept of opportunity cost reminds us that every time we make a choice, something else must be given up. Economics provides us with a set of tools that can help us to make better choices. Often times, the best decision is made by weighing the marginal benefits against the marginal cost Economic theory are often based upon the philosophy of utilitarianism. The foundation of utilitarian philosophy is "the greatest good for the greatest number." In other words, utilitarian philosophy suggests that decisions be made with the ultimate objective of maximizing societal welfare. Sometimes this choice is easy. For example, when deciding what type of new car to purchase, a consumer should purchase the one that she likes the best given her tastes, so long as it is within her budget. In other words, a consumer can maximize utility by purchasing the things that she likes the best. Other times, the utilitarian principle is not so easy to apply. Should health care be denied to some of our elderly so that the young can have better health care? Should more education funds be devoted to the inner cities at the expense of reducing funds to children in the suburbs? The "greatest good for the greatest number" hinges directly on how we define and quantify "good." To help us answer these types of questions, we need to understand the concepts of marginal costs and marginal benefits. 7.11 Accepting/rejecting special contracts These Special Contract Terms and Conditions supplement the Standard Contract Terms and Conditions for Statewide Contracts for Supplies. To the extent that these Special Contract Terms and Conditions conflict with the Standard Contract Terms and Conditions for Statewide Contracts for Supplies, these Special Contract Terms and Conditions shall prevail. The Contract shall commence on the Effective Date no earlier than August 1, 2004 and expire on July 31, 2006. The Department of General Services reserves the right, upon notice to the Contractor, to extend the Contract or any part of the Contract for up to three (3) months upon the same terms and conditions. This will be utilized to prevent a lapse in Contract coverage and only for the time necessary, up to three (3) months, to enter into a new contract. The Department of General Services reserves the right to purchase supplies covered under this Contract through separate competitive bidding procedure, whenever the department deems it to be in the best interest of the Commonwealth. The right will generally be exercised only when a specific need for Delivery shall be made F.O.B. Destination, Department of Corrections, Correctional Industries, and Dallas, Pennsylvania 18612 ONLY. Bid prices include all transportation, delivery, and handling charges. Delivery shall be made within normal delivery lead times as indicated below after receipt of the field purchase order, unless otherwise agreed to, in writing, between the Department of Corrections and the Contractor. Except in cases of emergency, material will be called for in reasonable lots and normal delivery times. However, there will be emergencies during the life of the contract and it will be necessary to have practically overnight deliveries. There is limited storage space available at the SCI plant, therefore, delivery time is unimportant factor, and any bid proposal that requires lengthy lead time may be rejected. Normal deliveries F.O.B. Destination - $800.00For emergency orders, the minimum will be $50.00 F.O.B.Destination (Vendor to prepay freight charges and add to invoice. Receipted freight or express bills must accompany invoice).Each mattress shall have a label stating all new material, consisting of name and address of vendor or manufacturer, registry number, finished size and net weight filling material required. A random sampling will be made on all deliveries. Copies of Federal specifications may be obtained at the price indicated in the current index to Federal specifications upon application accompanied by a check, money 7.12 The most efficient use of scarce resources Retirement plan dollars are a scarce resource for two main reasons. First, an individual only has a certain defined level of income in any given year. With 70 percent of Americans living paycheck to

paycheck and spending on average $1.22 for every $1 earned, there is only a finite amount of funds that an individual may defer for retirement on his or her own. [Although the ratio of spending to earning is 22 percent, this amount is skewed by those who spend far more than they earn, rather than all individuals spending more than they earn at a rate of 22 percent.] The majority of Americans appear to be spending more than they are earning, which makes it difficult for them to participate in a retirement plan. Second, in the world of 401(k) plans, an individual is limited as to the amount of dollars that can be deferred into the plan tax-free on his or her behalf. [IRC [subsection] 402(g), 415] A US-based worker may defer only a limited amount of funds tax-free, despite any desire to increase that deferral amount. The premise that 401(k) limits make retirement dollars a scarce resource is theoretical, but not rooted in reality. In 2002 US employees, the average deferral amount was 5.2 percent for nonhighly compensated employees and 6.3 percent for highly compensated employees. [46th Annual Survey of Profit Sharing and 40l (k) Plans, Profit Sharing 401(k) Council of America] Therefore, employees earning less than $90,000 are deferring on average less than $5,000 per year, far below the legal deferral limits. This does not include the amount paid by employees in FICA taxes for Social Security. Thus, the spending habits of workers appear to be a primary reason for retirement plan dollars to be a scarce resource. The individual investor, as a general rule, wants to have the most money possible at retirement. This is the unlimited want. The importance of looking at the retirement plan system from an economic study perspective is to determine how to use those scarce dollars in the most efficient manner possible. Efficiency is defined as the absence of waste. Applied to the retirement plan system, efficiency is using the resources available as effectively as possible to allow the employee to retire with as much money as possible. In other words, because employees have a finite or limited amount of resources being contributed for retirement and have an ostensible desire to retire at some point with some minimum income level, it is critical to use the retirement dollars contributed in the most efficient manner possible. 7.13 Make or buy decisions Business decision that compares the costs and benefits of manufacturing a product or product component against purchasing it. If the purchase price is higher than what it would cost the manufacturer to make it, or if the manufacturer has excess capacity that could be used for that product, or the manufacturer's suppliers are unreliable, then the manufacturer may choose to make the product. This assumes the manufacturer has the skills and equipment necessary, access to raw materials, and the ability to meet its own product standards. A company who chooses to make rather than buy is at risk of losing alternative sources, design flexibility, and access to technological innovations. 7.14 Closing or continuation decisions If you need to make a decision that involves a limited time, and small changes to existing practice, you mostly care about the variable costs. (Variable costs are the same thing as marginal costs). Variable costs change depending on the outcome of the decision, making them a relevant cost. In the same vein, fixed costs are irrelevant because the decision wont affect them. Marginal analysis is what you use to make short term decisions. So what are some decisions marginal analysis might be used on? Its normally used in these four key decision areas:

Chapter 8 full costing 8.1 Introduction This Tender is invited with a view to conclude Annual Bulk Supply Contracts with the manufacturers of Pharmaceutical Items, valid for a minimum period of One Year from the date of issue of Order for supply of Medicines and other Miscellaneous Items as specified in the purchaser's tender documents, required for the Hospital run/managed by Department of Atomic Tenders in response to this invitation for tender, shall be submitted only by the Pharmaceutical Goods Manufacturers and the tenders received from the Dealers/Distributors/Stockiest, etc. will not at all be considered. All Companies quoting against this tender shall be Tenders shall be submitted in triplicate in a sealed envelope addressed to the Regional Director, Purchase & Stores, to reach this Directorate on or before the due date and time specified in this tender documents. Late/Delayed tenders will note considered at all and therefore it is the responsibility of the TENDERERS to ensure that their tender reach this Directorate positively well before the due date and time specified in the tender. The tenderness shall quote their prices for the items strictly as per the packing size indicated in this tender. Quotations submitted for a different packing size shall not be considered at all. In case, any of the TENDERERS submit their printed Price-List/Catalogue against this tender, such offers are liable for rejection. The prices quoted shall be valid for conclusion of the contract for a period of one year. 8.2 Learning objectives Training programs should be designed by trainers and/or learners to achieve certain overall goals for the learner. Programs should also include various learning objectives that when reached culminate in the learner achieving the overall goals of the training program. Learners implement one or more learning strategies/methods/activities to reach learning objectives. When designing a training plan, each learning objective should be designed and worded to the extent that others can clearly detect if the objective has been achieved or not. From reading the learning objective, readers should be able to answer the question: "What will the learner be able to do as a result of the learning activities/methods/strategies?" 8.3 The nature of full costing Full-Cost Pricing pricing strategies in which all relevant variable costs and a full share of fixed costs directly attributable to the product are used in setting its selling price. See Incremental-Cost Pricing. 8.4 Deriving full costs in a single product operation Cost-volume-profit (CVP) analysis is a mathematical representation of the economics of producing a product. The relationships between a product's revenue and cost functions expressed within the CVP model are used to evaluate the financial implications of a wide range of strategic and operational decisions. For example, CVP analysis is employed to assess the financial implications of product mix, pricing, and product and process improvement decisions. Perhaps equally important, CVP analysis facilitates measuring the sensitivity of a product's profitability to variations in one or more of its underlying parameters. Finally, CVP analysis may be used to determine the trade-offs in profitability and risk from alternative product design and production possibilities. In effect, CVP is a quantitative model for developing much of the financial information relevant for evaluating resource allocation decisions. 8.5 Deriving full costs in multi-product organizations Each year companies commit to development budgets which include funds for new and ongoing projects. Since the initial funding of a project implies future costs for continuing work and revenues (or other benefits) from the product, it is clear that new project funding for the coming year will continue to affect profit and loss into the future. If the distributions over time of the costs and the resulting revenues can be estimated, a planning model can be built which will facilitate decision-making under criteria such as steady growth in annual costs or specified revenue-to-cost ratio for particular years. The tedious manual application of this model can be greatly assisted by means of an interactive computer program. A long-range development budget can then be quickly prepared. 8.6 Activity based costing (ABC) Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into costs. In this way an organization can precisely estimate the cost of its individual products and services for the purposes of identifying and eliminating those which are unprofitable and lowering the prices of those which are overpriced.

8.7 Uses of full cost information Full cost accounting (FCA) generally refers to the process of collecting and presenting information (costs as well as advantages) for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct costs and allocates indirect costs. [1] A synonym, true cost accounting (TCA) is also often used. Experts consider both terms problematic as definitions of "true" and "full" are inherently subjective 8.8 Criticisms of full costing In recent years, privatization has been one of the most controversial but sought-after issues in management and delivery of public services at all levels of government. The term privatization is defined variously as the transfer of government functions or assets to the private sector; the shifting of government management and service delivery to private providers; the shift from publicly-to privatelyproduced goods or services; and government reliance on the private sector to satisfy the needs of society. In essence, privatization means the use of the private sector in government management and delivery of public services. Goals of privatization (and competition) include reducing costs, improving services and raising the level of productivity by a public sector entity. For educational systems, privatization/competition has, as its goals: service improvements; cost reductions; and reallocation of resources from non-instructional support services to provide more resources for direct student instructional technology and other student centered activities, with the desired outcome being higher productivity (increased student achievement).With the focus of parents, the business community and the Legislature on results and accountability, Florida school districts must explore all available options to ensure that the highest possible student achievement is attained. Pressure on local school boards to find new, innovative ways to engage in educational improvement is recognized by the National School Boards Association, its federation of state school boards associations, and the American Association of School Administrators. Contracting, as a way of improving the quality and efficiency of public education is receiving serious attention in Washington, D.C. and in many state capitals. The Florida School Boards Association and Florida Tax Watch are conducting a multi-phase study to provide the Commissioner of Education, School Boards and the Legislature with "best practice" policy options for the privatization/competition of non-instructional services. In Phase One of the project, it was noted that increasingly, school districts around the country are faced with the problem of how to increase student achievement while constrained by a relatively constant level of resources. An important ingredient of this dilemma is provision of services by the most efficient and effective means possible. Phase Two of the project focuses on development of model Request for Proposals (Raps) for food services, transportation and custodial services, and "full-cost" analysis procedures to allow school districts to compare their current cost of operations with proposals from RFP respondents. The study addresses changes that would need to be made if a full cost accounting model is developed for each functional service of a school system, including those that may be privatized.

Chapter 9 Budgets 9.1 Introduction Budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast. 9.2 Learning objectives In the design of instructional materials, training needs are first analyzed and the learning goals of the program are determined. Mangers central concept is that a learning goal should be broken into a subset of smaller tasks or learning objectives. By his definition, a behavioral objective should have three components Behavior. The behavior should be specific and observable. Condition. The conditions under which the behavior is to be completed should be stated, including what tools or assistance is to be provided. Standard. The level of performance that is desirable should be stated, including an acceptable range of answers that are allowable as correct. Consider the following behavioral objective: Given a stethoscope and normal clinical environment, the medical student will be able to diagnose a heart arrhythmia in 90% of effected patients. Describes the observable behavior (identifying the arrhythmia), the conditions (given a stethoscope and a normal clinical environment), and the standard (90% accuracy).Today, the performance objectives in most training programs ignore an indication of the conditions and standards. When these are omitted, it is assumed that the conditions involve normal workplace conditions, and standards are set at perfection. What are always included; however, are the most important criteria for a valuable objective - a written indication of the behavior using measurable or observable verbs. According to Manger, vague verbs such as "understand," "know," or "learn about" should be replaced with more specific verbs. The list that follows provides some of the verbs appropriate for use with the statement "At the conclusion of this lesson you will be able to:" 9.3 Budgets, long term plans and corporate objectives Next to preparing the annual budget, the exercise that many CFOs dread most is creating a five-year plan. The document can take months to craft, is impossible to get right, and generally becomes obsolete within six months. Why, then, are companies still wedded to it? The answers are varied. Some CFOs, especially those at capital-intensive companies or municipalities, produce five-year plans to support bond issues or other long-term capital financing. Others do them simply because their bosses want one. No matter why they do it, however, CFOs agree on one thing: after year two, it's all guesswork. Learn the most common mistakes new business owners make when budgeting, and how they can be avoided. Overstating projections and ignoring the tax man are two of the common errors discussed. See the article for more information. If you've put in the work and created a business budget, follow it! If you don't, you'll lose the benefits that you planned for when you built the little monster. Get started by reminding yourself that your business budget is not a monster. It's nothing more than a set of guidelines for your spending and saving habits. Below, I've laid out some common problems that pop up with many established budgets, along with some solutions that can help you stay within budgetary guidelines. The act of budgeting for your business forces you to think through all the important numbers and to develop a picture of what your business is going to look like in three, six, nine and 12 months. A budget is a powerful business tool that will help you make better decisions. It enables you to develop and maintain a thorough understanding of the internal financial workings of your business. Strategic planning means adopting new budgeting and forecasting processes and practices. While budget planning usually starts with the previous year's numbers, strategic budget planning begins with the organization's objectives--say, increasing sales 10%--and then building a budget designed to achieve those goals. "People are using budgets more for planning and control, and to tie the budget back to actual results. 9.4 Time horizon of plans and budgets Budget time horizon - this refers to the immediate future where on the basis of past business decisions and commitments the consequences are action can be predicted with a reasonable degree Strategic planning horizon - far into the future- it is concerned with the long term aspirations of senior managers 9.5 Budgets and forecasts

This section offers How tos on preparing and verifying your forecasts and budgets and it will also aid you in determining what reports to use to assist you through these processes. General Budget Guidelines Oracle Budget and Forecast File Names Oracle Report Guidelines to data we are providing a list of Oracle reports that you may find useful when working on the Budget and Financial Review. Please do not limit yourself to these reports, but you may find these a useful starting point for analysis. 9.6 The interrelationship of various budgets The present study explores the complex issue of budgeting for advertising by agribusinesses. An empirical study of U.S. diversified and marketing agricultural cooperatives is utilized in this exploratory study. The findings suggest that agribusiness cooperatives tend to utilize the more economic/rational build-up method of advertising budgeting. 9.7 The uses of budgets A budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending. [1] A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. 9.8 The extent that budgets are prepared Consider the historical patterns of behavior for your customers, your markets, your products, and your competitors. The success of your company depends on the success of your customers. Company sales will be affected by the economy. Identify how future economic events will affect your business. This includes looking at consumer outlook, inflation, taxes, political events, and the business cycle. Ask the sales organization for its input. The salespeople know the customers and markets better than anyone else. Salespeople are optimistic, by their stereotypical nature. On the other hand, they have been known to lowball forecasts in order to minimize quotas. Somehow, given the balance between these two forces, a consensus forecast by the sales team usually provides very usable information. Identify all known or anticipated events that will affect your market in the upcoming year. This should include competitors entering or leaving the market and product additions and eliminations. Industry trade shows are an excellent source of this information: Look at what is and what is not being featured. What shows companies take booths at is often an indicator of those companies perceived strategic identity. 9.9 Preparing the cash budget Properly preparing your cash budget will show how cash flows in and out of your business. Also, it may then be used in planning your short-term credit needs. In today's financial world, you are required by most financial institutions to prepare cash budgets before making capital expenditures for new assets as well as for expenditures associated with any planned expansion. The cash budget determines your future ability to pay debts as well as expenses. For example, preliminary budget estimates may reveal that your disbursements are lumped together and that, with more careful planning, you can spread your payments to creditors more evenly throughout the entire year. As a result, less bank credit will be needed and interest costs will be lower. Banks and other credit-granting institutions are more inclined to grant you loans under favorable terms if your loan request is supported by a methodical cash plan. Similarly, businesses that operate on a casual day-to-day basis are more likely to borrow funds at inopportune times and in excessive amounts. Without planning, there is no certainty that you will be able to repay your loans on schedule. However, once you've carefully mapped out a cash budget, you will be able to compare it to the actual cash inflows and outflows of your business. You will find that this comparison will go a long way in assisting you during future cash budget preparation. Also, a monthly cash budget helps pinpoint estimated cash balances at the end of each month which may foresee short-term cash shortfalls. 9.10 Preparing other budgets A budget is probably the most important tool a business can have. It provides a game plan for not only long-term business operations, but day to day operations as well. Properly used, a budget can help a business meet its goals, help it become more profitable, and give it the edge in getting through tough financial times. 9.11 Using budgets for control Your budget must be a vibrant document, one that is well considered and that is used on an ongoing basis. Use it as a historical reporting system. Dont look at how youve measured up to your goals

months or even weeks after a period has closed. Check the important elements (direct costs as one example) far more frequently. 9.12 Comparing the actual performance with the budget Understanding how to get the most out of your strategic plan is important. A robust strategic planning process includes translating the strategic and operational objectives into pro forma financial results. These financial results, like the strategic plan, typically span a 3 to 5 year period. Each year of the strategic plan can be translated into financial statements for the period. Years 1 through 3 of the strategic plan are often detailed by month and as the plan extends into years 4 and 5, the detail may be at the quarterly or annual basis depending upon the organization. 9.13 Standard quantities and cost The profession is one that provides a qualification gained following formal education, specific training and experience that provide a general set of skills that are then applied to a diverse variety of problems. Predominantly these relate to costs and contracts on construction projects. Other areas in which QS find employment include property surveys for hidden defects on behalf of potential purchasers, running estates, valuing the mineral deposits for mining companies, selling property and even Leasehold Reform Act work. 9.14 Reasons for adverse variances In budgeting (or management accounting in general), a variance is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold. Variances can be computed for both costs and revenues. The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company. 9.15 Investigating variances In a typical standard costing or budgetary control system, a manager might receive a variance analysis reporting several hundred variances, of which many may have arisen due to random factors, or may be too insignificant to merit attention. The managers use his knowledge and experience to identify the important variances which demand further investigation. Both management accounting theory and statistical decision theory can make significant contributions towards improving this decision, but both make extravagant demands on the manager in terms of the theoretical and factual knowledge expected of him. Much of this knowledge, even if available, is scattered throughout the organization with very little readily accessible to top management itself. This research takes the view that a knowledge. Base / Expert System approach can be useful in this context. An expert system was implemented in Turbo Prolog using fuzzy logic and MYCIN type certainty factors to handle uncertainty. 9.16 Compensating variances An apparatus and method for facilitating the respiration of a patient are disclosed which are particularly useful in treating mixed and obstructive sleep apnea and certain cardiovascular conditions, among others, by increasing nasal air pressure delivered to the patient's respiratory passages just prior to inhalation and by subsequently decreasing the pressure to ease exhalation effort. The preferred apparatus includes a patient-coupled gas delivery device for pressurizing the patient's nasal passages at a controllable pressure, and a controller coupled with the delivery device having a pressure transducer for monitoring the nasal pressure and a microcontroller for selectively controlling the nasal pressure. In operation, the controller determines a point in the patient breathing cycle just prior to inhalation and initiates an increase in nasal pressure at that point in order to stimulate normal inhalation, and subsequently lowers the nasal pressure to ease exhalation efforts. 9.17 Making budgetary control effective Budgeting and forecasting are universally loathed. For the finance department, the process can take six months to complete. For most operations people, it's an overly financial exercise designed mainly to please corporate headquarters. The result, is that people don't take ownership of the process." Part of the problem is that more often than not, budgeting and forecasting are not linked to strategic planning or performance measurement the other components of what consultants say should be an integrated planning process. Well over half of CFO readers surveyed blame the absence of a welldefined strategy for the lack of value in their planning efforts, and point out that whatever strategy is in place isn't linked to operational plans.

9.18 Limitations of the traditional approach to control through variances and standards The article analyses the meaning and importance of strategic controls are analyzed. Several contrasting approaches to strategic control, and the merits and deficiencies of each, are described. Enhancements are proposed to the ways in which the concept of strategic control has traditionally been developed. The authors suggest some factors that organizations need to take into account when adopting a more comprehensive approach to strategic control. 9.19 Behavioral aspects of budgetary control Planning and control are major activities of management in all organizations. Budgets are central to the process of planning and control. The involvement with budgets places the management accountant as a key player in the provision of management information. Readers will not be surprised to know that most organizations employ some form of budgeting, those of any size have quite formal mechanisms. A large survey of over 300 companies supported by ACCA, on which the author was engaged, reported recently that almost all respondents used some form of budgeting and budgetary control.

Chapter 10 Making capital investment decisions 10.1 Introduction Corporate finance is an area of finance dealing with financial decisions business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are longterm choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate company's financial needs and raise the appropriate type of capital that best fits those needs. 10.2 Learning objectives Capital investment decisions are long-term corporate finance decisions relating to. Value over time by determining the right investment objectives, policy framework, and working capital management applies different criteria in decision making: the Wikiversity has learning materials about corporate finance. 10.3 The nature of investment decisions The role of managerial judgment and involvement in strategic investment decisions (SIDs) has received limited attention in Management Accounting and Finance literature. This study inquired into the nature of managerial involvement, individually and collectively, in making SIDs. It validates and extends Harris (1999) investment appraisal model; builds on psychology concepts (heuristics, framing and group consensus), that are employed by managers in decision making, to identify factors that enhance/enable or inhibit managerial judgment and involvement in SIDs; and explores the nature of managerial involvement in SID making. The study was conducted in two phases. 10.4 Methods of investment appraisal One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organizations use can be categorized one of two ways: traditional methods and discounted cash flow techniques. Traditional methods include the Average Rate of Return (ARR) and the Payback method; discounted cash flow (DCF) methods use Net Present Value (NPV) and Internal Rate of Return techniques. 10.5 Accounting rate of return (ARR) ARR provides a quick estimate of a project's worth over its useful life. ARR is derived by finding profits before taxes and interest. 10.6 Payback period (PP) Payback period in business and economics refers to the period of time required for the return on an investment to "repay" the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. It intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used due to its ease of use despite its limitations. 10.7 Net present value (NPV) In finance, the net present value (NPV) or net present worth (NPW) [1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (Paves) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the NPV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.

10.8 Why NPV is superior to ARR and PP In finance, the net present value (NPV) or net present worth (NPW) [1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (Paves) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the NPV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. 10.9 Internal rate of return (IRR) The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR). [1] In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (the interest rate or inflation). 10.10 Some practical points Include course and behavior norms and expectations for students and teachers in course and module handbooks. This is obviously easier to achieve if staff are prepared to agree AND ENFORCE a consistent policy across a programmer or department. Potentially disruptive students may play on mixed and inconsistent messages. Discuss these norms and expectations with students at induction and/or the start of modules. Share control and responsibility with them, obtaining agreement about the norms for classroom behavior. If they have additional suggestions/norms, discuss them, and, if agreed add them to your list. This list could form part of a formal learning contract. 10.11 Investment appraisal in practice This case study examines the capital budgeting practices of four companies operating in different industry. The findings indicate that most companies follow decentralized project decision-making. Despite the use of DCF techniques, there is a tendency to combine with the newly crafted value management tools, which shows a trend shift in the capital budgeting methods. In addition, firms are found trying to modify the original DFC tools so as to accommodate their needs. However, firms don't use the same technique from project inception to completion.

Chapter 11 Managing working capital 11.1 Introduction Working capital, also known as net working capital or NWC, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. 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 Current Liabilities 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. 11.2 Learning objectives Managing working capital on a day-to-day basis is probably the most important task for financial managers. To neglect any component can cost money and can affect relationships with customers and suppliers. This chapter looks closely at the problems facing managers and at some of the processes available to deal with them. You already know the components of working capital, how to present them in financial reports and some useful ratios external analysts can use to get a feel for a firm's short-term solvency. We now look at the management tasks and procedures that lie behind the accounting concepts and measures. 11.3 The nature and purpose of working capital Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, the Current Liabilities and the inter-relationship that exists between them. The term Current Assets refers to those Assets which in the ordinary course of business can be, or will be, converted into Cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The Major Current Assets are Cash, Marketable Securities, Accounts Receivables and Inventory. 11.4 The scale of working capital Working capital comprises the total net current assets of a business minus its liabilities. Current assets a" current liabilities Current assets are cash and assets that can be converted to cash within one year or a normal operating cycle; current liabilities are monies owed that are due within one year. 11.5 Managing inventories (stock) Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. It is also used for a list of the contents of a household and for a list for testamentary purposes of the possessions of someone who has died. In accounting inventory 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. 11.6 Managing receivables (debtors) Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. 11.7 Managing cash The statement of cash flow reports the movement of cash into and out of your business in a given year. Cash is the lifeblood of your company. Cash includes currency, checks on hand, and deposits in banks. Cash equivalents are short-term, temporary investments such as treasury bills, certificates of deposit, or commercial paper that can be quickly and easily converted to cash. The statement of cash flow reports the movement of cash into and out of your business in a given year. Cash is the lifeblood

of your company. Cash includes currency, checks on hand, and deposits in banks. Cash equivalents are short-term, temporary investments such as treasury bills, certificates of deposit, or commercial paper that can be quickly and easily converted to cash. Your business will use cash to pay bills, repay loans, and make investments, allowing you to provide goods and services to your customers. Your company will use cash to generate even more cash as a result of higher profits. The cash flow statement reports your business sources and uses of cash and the beginning and ending values for cash and cash equivalents each year. It also includes the combined total change in cash and cash equivalents from all sources and uses of cash. It is imperative that you, the business owner, be able to successfully prepare a statement of cash flow. This discussion provides a detailed look into the various sections of a cash flow statement. It also describes two methods used to calculate cash flow from operating activities, indirect and direct with examples that will give you an edge when it comes time to prepare a cash flow statement of your own. 11.8 Managing trade payables (creditors) Too often companies believe that managing trade payables involves riding their vendors or (stated more accurately) paying beyond terms. This is often the typical big-company approach -- to pay vendors 15 to 30 days beyond terms. Thirty-day terms become 45 to 60. To keep such businesses as clients, you have to tolerate financing their business through your credit to them. 1Small businesses cant afford to pay their creditors this way, as trade credit is often the least expensive form of credit available. Keeping your trade creditors happy is important and will better serve you in the long run than paying them 15 days late. Having a good record of on-time payment with many vendors also will improve your business credit rating. And having a good business credit rating will in turn lead to better terms and more trade credit. Too often companies believe that managing trade payables involves riding their vendors or (stated more accurately) paying beyond terms. This is often the typical big company approach -- to pay vendors 15 to 30 days beyond terms. Thirty-day terms become 45 to 60. To keep such businesses as clients, you have to tolerate financing their business through your credit to them. Small businesses cant afford to pay their creditors this way, as trade credit is often the least expensive form of credit available. Keeping your trade creditors happy is important and will better serve you in the long run than paying them 15 days late. Having a good record of on-time payment with many vendors also will improve your business credit rating. And having a good business credit rating will in turn lead to better terms and more trade credit. Here are a few creative ways to manage your trade payables by leveraging them without violating your payment agreement terms. 1. Always enter a payable into your accounting system as soon as you receive the invoice. Calculate the due date and plan on paying it as close to the last day possible. 2. Use a company credit card to pay some payables when theyre due. Payables such as utilities, phone, courier services, and other recurring monthly expenses can often be paid with a credit card. Wait until the due date, pay with a credit card, and you can extend the number of days until you have to pay the balance by as many as 25. 3. Use a company credit card instead of a company check to buy materials, supplies, and other items from vendors that dont extend trade credit. A good example would be an office supplies vendor or home improvement store. 4. Ask for dating terms. For your primary trade vendors that sell you merchandise to be resold, dating terms are customary -- particularly when taking on a new line of merchandise. This is also common for seasonal products. Typical dating terms are 30/60/90 days, meaning that you pay one-third of the amount due at 30 days, another third at 60, and the last third at 90 days. Its important to be organized in handling your accounts payable when youre managing to get maximum leverage. Dont pay past the due date; use credit cards to extend certain payables for up to 25 more days; and ask for dating terms when appropriate.

Chapter 12 financing a business 12.1 Introduction Cut through the confusing world of small business finance and put yourself on an equal footing with the finance experts. Use the know how you find on these pages to plan more effectively, to source funding, to negotiate yourself a better deal in all areas of your small business financing, to change the things you measure in your business to improve operations and hence profits, and to make your marketing budget work harder. Our credentials? Im Neil Best, an accountant with over 15 years experience in business finance. I've worked in all areas of industry, from manufacturing to service, banking to technology, and have dealt with rapid growth start ups and mature companies struggling to make a profit. I've worked with companies with just a handful of employees, and those with thousands. Its my personal mission to give you the benefit of this valuable experience with the simple aim of helping you succeed. 12.2 Learning objectives Learning objectives for the undergraduate economics programs in the Department of Economics and Finance are designed to ensure that students receive the skills necessary to begin to formulate the fundamentals for basic solutions to economic problems on the basis of economic theory and analysis. Students receive training in economic theory, quantitative analysis, and different economic fields in their undergraduate work. This training prepares students for beginning management training in business, pursuit of graduate training, or individual entrepreneurial activities. These learning objectives were formulated to capture the essence of the broad training students receive in the field economics. 12.3 Sources of finance A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. When looking at the source of finance, it can usually be divided into three categories, namely traditional sources, ownership capital and non-ownership capital. Sources of finance are where finance comes from. For example, Bank loans Owner's (share) capital Trade credit. Finance - money - is a scarce resource. To obtain it, a business has to compete for it. Individuals, the government and other businesses all seek money to finance their needs. Those with money to lend will lend it provided the rate of return (interest), the risk and flexibility (how quickly the money can be repossessed) are consistent with their expectations. Note: The word 'lend' often implies short-term; the word 'invest' implies long-term. Individuals or organizations that lend money, expect to get their money back, with a fixed annual return in a comparatively short time. Those who invest in a company become part-owners - share holders. They expect regular payment of cash dividends (whose size varies with the company's success) plus an increase in the value of their shares. A major source of finance for many businesses is the retained profit from sales to customers. A business just starting up or one expanding rapidly has to raise its finance from other sources. When sourcing finance, management should consider the following questions: Duration: for how long is the finance required? Cost: which source of finance is the least expensive? Repayment: what level is acceptable? Usually companies will obtain finance from a variety of sources, including: Internal: Owners' capital and retained profits. External: Overdraft, leasing, hire purchase, loans, and mortgages. Duration: Duration depends on the reason the money is needed. No-one would take out a 25 year mortgage to finance the purchase of a personal HiFi. Few people would buy a house with a bank overdraft. Businesses apply the same principles of matching the purpose of finance with the source of finance. This makes sense all round. For the business it ensures that finance is guaranteed as long as it is needed. For the investor it ensures that adequate security is available for the duration of the loan as in the case of a 20 year loan secured against a property that will continue to have value for all the 20 years. Cost: In general, businesses look for the cheapest source of finance. The easiest way to compare the cost of finance is to express the annual payment to lenders/investors as a percentage of the amount of finance provided. Interest on a loan can be expressed in percentage terms. So can the rate of return to shareholders. Return on investment in shares = Dividend per share, share price change

since the start of year The rate of return expected by shareholders becomes the cost to the business of using this form of finance. o Repayment: a business should not get into a position where all of its profits are being swallowed up in interest payments. There is a real danger of borrowing too much. The same applies to individuals. 12.4 Internal sources of financing If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .This can be a very useful source of long term finance, provided the business is generating profit (see section on profit & loss accounts). 12.5 Sources of external finance In this context, 'owners' refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders - the individual or the partners are the owners of the business but do not hold shares. Shares are units of investment in a limited company, whether it is a public or private limited company. 12.6 Gearing and the long term finance decision A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. [1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios. 12.7 Share issues The offering for sale of shares in a business. The capital derived from share issues can be used for investment in the core business or for expansion into new commercial ventures. 12.8 The role of the stock exchange A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. 12.9 Short term sources of external finance This is finance that comes from outside the business. It involves the business owing money to outside individuals or institutions. 12.10 Providing long term finance for the small business Banks and other lending institutions offer a number of SBA guaranteed loan programs to assist small businesses. While SBA itself does not make loans, it does guarantee loans made to small businesses by private and other institutions. Below is an overview of SBAs guaranteed loan programs. For more information, click on the name of the program.