Financial Management For Non-Finance Manager In-House Training PT Newmont Nusa Tenggara

FINANCIAL MANAGEMENT FOR
NON- FINANCE MANAGER

In-house Training PT Newmont
Nusa Tenggara
November 10-11, 2009
November 12-13, 2009
Dr.Wiwiek M.Daryanto, SE-Ak,
MM,CMA
1
Educational Background
Accountant (1981), cum-laude, UGM
Registered Indonesian Accountant:D.2794
Master of Management (1988), College of
Economics and Management, University of the
Philippines
Doctor of Philosophy (2004), IPB
Certified Management Accountant (2000),
Australia
HP: 0811-89-42-73 Phone: 021-8616982

Email:wdaryanto@cbn.net.id
2
CORPORATION
Owner
Owner
Financial Reports:
1. Balance Sheet Independent
Independent
2. Income Statement Party
Party
3. Statement of
External Accountant:
Equity Changes Management Accountant Opinion
4. Statement of Internal (GAAP conformance)
Cash Flow Accountant
Operating
Operating PROJECTS
PROJECTS
3
ORGANIZATION
ORGANIZATION OBJECTIVES
OBJECTIVES
RESOURCES:
RESOURCES:
Man
Man
Material
Material
Machine
Machine
Method
Method
Minute
Minute
Money
Money
To Work Efficiently and Effectively
INFORMATION
INFORMATION
ACCOUNTING
ACCOUNTINGINFORMATION
INFORMATION
Operating
Operating Management Financial
Financial
Management
Accounting Accounting
Accounting
Accounting
4
Objective must be SMART
Specific
Measurable
Attainable
Reasonable
Time Bounded
Comparative Competitive
Advantages Advantages
5
Peter Drucker
Effectiveness:
Do the right things
Efficiency:
Do the things right
6
BASIC
BASIC CONCEPT
CONCEPT
ACCOUNTING
ACCOUNTINGPRINCIPLES
PRINCIPLES
(GAAP)
(GAAP)
METHODS
METHODSAND
ANDPROCEDURES
PROCEDURES
FINANCIAL
FINANCIALSTATEMENTS:
STATEMENTS:
1.1. Balance
BalanceSheet
Sheet
2.2. Income
IncomeStatement
Statement
3.3. Statement
Statementof
ofCash
CashFlows
Flows
4.4. Statement
Statementof
ofEquity
EquityChanges
Changes
7
Balance Sheet
The balance sheet shows the financial
condition of an entity as of a specified moment
in time.
It consists of two sides.
The assets side shows the economic resources

controlled by the entity that are expected to
provide future benefits to it and that were
acquired at objectively measurable amounts.8
Balance Sheet
The equities side shows the liabilities,
which are obligations of the entity, and
the owners’ equity, which is the amount
invested by the owners.
In a corporation, owners’ equity is

subdividedinto paid-in capital and
retained earnings.
9
The Income Statement
The Income Statement summarizes the
revenues and expenses of an entity for
an accounting period.
The usual accounting period is one

year, but many companies prepare
interim income statements on a
monthly or quarterly basis.
10
Statement of Retained Earnings
The income statement and balance
sheet articulate in that a period’s
income statement (an related statement
of retained earnings) explains the
change in retained earnings between
the balance sheets prepared as of the
beginning and the end of the period.
11
The Accounting Basic Concept
1. Monetary Unit
2. Business Entity
3. Going Concern
4. Cost
5. Dual Aspect
6. Accounting Period
7. Conservatism
8. Realization
9. Matching
10. Consistency
11. Materiality, or Disclosure
12
The Basic Concepts of Accounting
1.Money Measurement. Accounting records
only those facts that can be expressed in
monetary terms.
2.Entity. Accounts are kept for entities as
distinguished from the persons associated
with those entities.
3.Going-concern. Accounting assumes that an
entity will continue to exist indefinitely and
that it is not about to be liquidated.
13
4.Cost. An asset is ordinarily entered in the
accounts at the amount paid to acquire it.
This cost, rather than current market value, is
the basis for subsequent accounting for the
asset.
5.Dual Aspect. Every transaction affects at
least two items and preserves the
fundamental equation :
Assets=Liabilities+Owners’ Equity
14
6.Accounting period. Accounting measures
activities for a specified interval of time,
which is usually one year.
7.Conservatism. Revenues are recognized
only when they are reasonably certain,
whereas expenses are recognized as soon as
they are reasonably possible.
8.Realization. The amount recognized as
revenue is the amount that customers are
reasonably certain to pay.
15
9.Matching. When a given event affects both
revenues and expenses, the effect on each
should be recognized in the same accounting
period. Related to the matching concept are
two expenses recognition criteria: (1) costs
associated with activities of the period are
expenses of the period; and (2) costs that
can not be associated with revenues of future
periods are expenses of the current period.
16
10.Consistency. Once an entity has
decided on a certain accounting
method, it will use the same method for
all subsequent events of the same
character unless it has a sound reason
to change methods.
11.Materiality.Insignificant events may
be disregarded, but there must be full
disclosure of all important information.
17
Basic Equation of Accounting
Assets = Liability + Owners’ Equity
100 = 90 + 10
Or:
100 = 50 + 50
18
---------------------------------------------------------------------
Assets = Liability + Owners’ Equity + Revenue – Expenses
(1) (2) (3) (4) (5)
---------------------------------------------------------------------
(1), (2), and (3) = Balance Sheet Accounts (Riel Accounts)
(4) & (5) = P&L Accounts (Temporary Accounts)
19
Assets = Liability + Owners’ Equity + Revenue – Expenses
(1) (2) (3) (4) (5)
Assets + Expenses = Liability + Owners’ Equity + Revenue
20
Assets + Expenses = Liability + Owners ’Equity + Revenue
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
_ _ _ _ + _
+ + + +
Dr = Cr At any time
21
Information
An organization has three types of
accounting information: (1) operating
information, which has to do with the
details of operations; (2) management
accounting information, which is used
internally for planning, implementation, and
control; (3) financial accounting
information, which is used both by
management and by external parties.
22
Generally Accepted Accounting
Principles (GAAP)
Financial accounting is governed by
ground rules that are referred to as
GAAP.
These ground rules may be different
than the reader believes them to be,
based on previous exposure to
accounting information.
23
Information
Information
TYPES OF INFORMATION
Consists of
Non-quantitative
Non-quantitativeInformation
Information Quantitative
QuantitativeInformation
Information
Consists of
Accounting
Accounting Non-accounting
Non-accounting
Information
Information Information
Information
Consists of
Operating
Operating Financial
Financial Management
Management
Information
Information
24
Matching Concept
Costs
Capital or
Investment
Amortization:
Expenditures
1) Depreciation
(CAPEX)
Tangible Assets
2)Depletion
Expenditures
Natural Resources
Operating or
3) Amortization
Revenue
Expenditures Intangible Assets
Cash Payable
(OPEX) or
Expenses
Disbursements
25
Criteria
1. Benefit (less or more than one year ?)
2. Materiality (Quantity and/or Quality)
3. Judgment or Estimation of Management
26
CAPEX or OPEX ?
Capex or
1). Low cost items Opex
2). Repair & Maintenance Opex
3). Betterment/ Improvement Capex
4). Replacement Capex or
Opex
27
Baron Coburg
Once upon a time many, many years ago, there

lived a feudal landlord in a small province of
Western Europe. The landlord, Baron Coburg,
lived in a castle high on the hill.
He was responsible for the well-being of many
peasants who occupied the lands surrounding
his castle.
Each spring, as the snow began to melt, the
Baron would decide how to provide for all his
peasants during the coming year.
28
One spring, the Baron was thinking about the
wheat crop of the coming growing season.
“I believe that 30 acres of my land, being worth
five bushels of wheat per acre, will produce
enough wheat for next winter,” he mused, “
but who should do the farming? I believe I’ll
give Ivan and Frederick the responsibility of
growing the wheat.”
Where upon Ivan and Frederick were
summoned for an audience with Baron Coburg.
29
“Ivan, you will farm on the 20-acre plot of
ground and Frederick will farm the 10-acre
plot,” the Baron began.
“I will give Ivan 20 bushels of wheat for seed
and 2 pounds of fertilizer. (Twenty pounds of
fertilizer are worth two bushels of wheat).
Frederick will get 10 bushels of wheat for
seed and 10 pounds of fertilizer.
I will give each of you an ox to pull a plow,
but you will have to make arrangements with
Feyador the Plowmaker for a plow.
30
The oxen, incidentally, are only three
years old and have never been used for
farming, so they should have a good 10
years of farming ahead of them.
Take good care of them because an ox
is worth 40 bushels of wheat.
Come back next fall and return the
oxen and the plows along with your
harvest.”
Ivan and Frederick genuflected and
withdrew from the Great Hall, taking
with them the things provided by the
Baron. 31
The summer came and went, and after the harvest
Ivan and Frederick returned to Great Hall to account
to their master for the things given them in the spring.
Ivan said, “My Lord, I present you with a slightly used
ox, a plow, broken beyond repair, and 223 bushels of
wheat.
I, unfortunately, owe Feyador the Plowmaker three
bushels of wheat for the plow I got from him last
spring. And, as you might expect, I used all the
fertilizer and seed you gave me last spring.
You will also remember, my Lord, that you took 20
bushels of my harvest for your own personal use.”
32
Frederick spoke next. “Here, my Lord, is a
partially used ox, the plow, for which I gave
Feyador the Plowmaker 3 bushels of wheat
from my harvest, and 105 bushels of wheat.
I, too, used all my seed and fertilizer last
spring.
Also, my Lord, you took 30 bushels of wheat
several days ago for your own table. I believe
the plow is good for two more seasons.”
33
“You did well,” said the Baron. Blessed with this
benediction, the two peasants departed.
After they had taken their leave, the Baron began to
contemplate what had happened. ”Yes,” he thought,
they did well, but I wonder which one did better ?”
Questions :
1. For each farm, prepare balance sheets as of the
beginning and end of the growing season and an
income statement for the seasons. ( Do not be
concerned that you do not have much understanding
of what a balance sheet and income statement are ;
just use your intuition as best you can)
2. Which peasant was the better farmer?
34
Baron Coburg
Baron Coburg (landlord) = 30 acres
Managed by:
Ivan = 20 acres
Frederick = 10 acres
Interval Period : Growing Season
35
First Day Balance Sheet
For Land Managed by: Ivan
(in bushel of wheat)
Assets Liability+Owners’Equity
Land 100 Liability 0
Ox 40
Seed 20
Fertilizer 2 BC’s Equity 162
Total 162 Total162
36
First Day Balance Sheet
For Land Managed by: Frederick
Land 50 Liability 0
Ox 40
Seed 10
Fertilizer 1 BC’s Equity 101
Total 101 Total101
37
Income Statement (bu of wheat)
Period: Growing Season
Revenues 243 100%
Operating Expenses (Opex):
* Seed 20
* Fertilizer 2
* Ox Usage 4
* Plow Usage 3
Total Opex (29)
Net Income 214 88 %
38
Income Statement (bu of wheat)
Revenues 138 100%
Operating Expenses (Opex):
* Seed 10
* Fertilizer 1
* Ox Usage 4
* Plow Usage 1
Total Opex (16)
Net Income 122 88 %
39
Ending Balance Sheet
Land 100 Payable to Feyador 3
Ox 36
Wheat Inventory 223
Plow 0 BC’s Equity 356
Total 359 Total 359
40
Ending Balance Sheet
Land 50
Ox 36
Wheat Inventory 105
Plow 2 BC’s Equity 193
Total 193 Total 193
41
Statement of OE Changes (in bu of wheat)
BC’s Equity,Beg. 162

+/- Profit/Losses 214+
Total 376
- Drawing 20-
BC’s Equity,End 356
42
Statement of OE Changes (in bu of wheat)
BC’s Equity,Beg. 101
+/- Profit/Losses 122+
Total 223
- Drawing 30-
BC’s Equity,End 193
43
Return on Investment
Return on Equity = Net Income/T. O Equity x 100 %
Return on Asset = Net Operating Income x 100 %

Net Operating Asset
IVAN FREDERICK
RoE = 132 % = 121 %
RoA = 132 % = 121 %

44
AUDITOR’S OPINION
1. CLEAN OPINION
2. QUALIFIED OPINION,
1. A LACK OF CONSISTENCY
2. EXISTENCE OF A MAJOR UNCERTAINTY, SUCH AS A
PENDING LAWSUIT
3. DOUBT AS TO THE ENTITY’S ABILITY TO CONTINUE
AS A GOING CONCERN
3. DISCLAIMER OPINION, THE AUDITORS ARE UNABLE TO
EXPRESS AN OPINION DUE TO LIMITATIONS WERE
PLACED ON THE SCOPE OF THE AUDIT BY MANAGEMENT.
4. ADVERSE OPINION, IF THE COMPANY HAS DEPARTED
FROM GAAP OR CLEARLY IS NO LONGER A GOING
CONCERN.
45
Drs. Hadi Sutanto & Rekan
Price Waterhouse
LAPORAN AUDITOR INDEPENDEN

KEPADA DIREKSI, DAN PARA PEMEGANG SAHAM
PT BAT INDONESIA
46
LAPORAN AUDITOR INDEPENDEN (..)
Kami telah mengaudit neraca PT BAT INDONESIA tanggal

31 Desember 1994 dan 1993, serta laporan laba-rugi dan laba
yang tidak/belum dibagikan, dan laporan arus kas untuk
tahun yang berakhir pada tanggal-tanggal tersebut. Laporan
Keuangan adalah tanggung jawab manajemen perusahaan.
Tanggung jawab kami terletak pada pernyataan pendapat
atas laporan keuangan berdasar audit kami.
47
Kami melaksanakan audit berdasarkan standar auditing yang

ditetapkan Ikatan Akuntan Indonesia. Standar tersebut
mengharuskan kami merencanakan dan melaksanakan audit agar
memperoleh keyakinan memadai bahwa laporan keuangan bebas
dari salah saji material. Suatu audit meliputi pemeriksaan, atas
dasar pengujian, bukti-bukti yang mendukung jumlah-jumlah dan
pengungkapan dalam laporan keuangan. Audit juga meliputi
penilaian atas prinsip akuntansi yang digunakan dan estimasi
signifikan yang dibuat oleh manajemen, serta penilaian terhadap
penyajian laporan keuangan secara keseluruhan. Kami yakin
bahwa audit kami memberikan dasar memadai untuk menyatakan
pendapat.
48
Menurut pendapat kami, laporan keuangan yang kami sebut

diatas menyajikan secara wajar, dalam semua hal yang
material, posisi keuangan PT BAT INDONESIA tanggal 31
Desember 1994 dan 1993, dan hasil usaha, serta arus kas
untuk tahun yang berakhir pada tanggal-tanggal tersebut
sesuai dengan prinsip akuntansi yang berlaku umum.
49
The User of Financial Report
Investor
Employee
Creditor
Supplier
Customer
Government
Public
50
CRUCIAL INFORMATION FOR
MERGER & ACQUISITION:
1. Five Years of Audited Financial Reports
2. Management Report (Board of Directors)
3. Market Share & Customer Lists
4. Pending Law Suits
5. CV Of Management Qualifications
6. Bankers & Loan Agreement
7. Contracts
8. Patents & Copyrights
9. Five Years Of Income Tax Returns
10. Environment
51
CRUCIAL INFORMATION FOR
MERGER & ACQUISITION:
11. Pensions
12. Competitors
13. Insurance
14. Union Contract
15. Appraisal Reports
16. Product Literature
17. Related Parties
52
The Structure of Balance Sheet
Asset
Current Asset $
Non Current Asset:

Long-term Investment $
Fixed Asset $
Intangible Asset $
Other Asset $
53
The Structure of Balance Sheet
Liabilities/Debt
Current Liabilities $
Long-term Debt $
Owners Equity
Capital Stock $
Additional Paid-in Capital $
Retained Earnings $
54
The Structure of Income Statement
Sales Rp xx
(-) Cost of Goods Sold - Rp xx
GROSS PROFIT Rp xx
(-) Operating Expenses:

Marketing and General Administration - Rp xx
Net Operating Income (NOI) Rp xx
(+/-) Other Income & Other Expenses Rp xx
55
The Structure of Income Statement (Cont.)
PROFIT/LOSSES BEFORE EXTRA ORDINARY ITEMS Rpxx
(+/-) Extra Ordinary Items Rpxx

(+/-) The Effect of Accounting Principles Changes Rpxx
EARNING BEFORE TAXES (EBT) Rpxx
(-) Corporate Tax Rpxx
NET INCOME/NET LOSSES Rpxx
56
Statement of Retained Earnings
Retained Earnings, Beg. Rpxx
(+/-) Profit/Losses for the Year Rpxx
Available for Dividend Rpxx
(-) Dividend Rpxx
Retained Earnings, End. Rpxx
57
CASH
CASH FLOW
FLOW
Depreciation WORK
WORKIN
IN
PROCESS
PROCESS
Labor Cost
FINISHED
FINISHED
GOODS
GOODS Credit Sales
G & A & Sales Cost
ASSET
FIXEDASSET
MATERIALS
MATERIALS
UPAH,
UPAH, Accounts
(Netto)
Accounts
(Netto)
BIAYA
BIAYAADM.
RAW
ADM. Receivables
RAW
++PENJUALAN Receivables
FIXED
PENJUALAN
Cash Sales
A/R Collections
Buy Fixed Assets Purchases
Sales of Fixed Asset
Borrow
LIABILITY
LIABILITY CASH
CASH OWNER
OWNER
Repayment
of Loan 58
CASH FLOW REPORT
Cash, Begining Rp. xx
+/- : Cash Flow from:
I. Operating Activity Rp. xx
II. Financing Activity Rp. xx
III. Investing Activity Rp. xx
Sum of: I + II + III Rp. xx
Cash, Ending Rp. xx
59
Gross Cash Flows Net Cash Flows
Cash Received Cash Paid for Cash Flow from
Operating
Activities
from Sales of - Operating Goods = Operating
Goods & Services & Services Activities
+ or -
Cash Received Cash Paid for Cash Flow from
Investing from Sales of Acquisition of Investing
Activities Investments & - Investments & = Activities
Property Items Property Items
+ or -
Cash Received Cash Paid for
from Issues of Dividends & Cash Flow from
Financing
Activities
Debt & Capital - Reacquisition of = Financing
Stock Debt & Capital Activities
Stock
=
Net Change in
Cash for the
Period
60
Redwood Café (A)
On March 31, 1991, the partnership that
had been organized to operate the
Redwood Café was dissolved under
unusual circumstances, and in connection
with its dissolution, preparation of a
balance sheet became necessary.
The partnership was formed by Mr. and
Mrs. Henry Antoine and Mrs. Sandra
Landers, who had become acquainted
while working at Portland, Oregon,
restaurant.
61
On November 1, 1990, each of the
three partners contributed $16,000 cash
to the partnership. The Antoines’
contribution represented practically all
of their savings. Mrs.Landers’ payment
was the proceeds of her late husband’s
insurance policy. On that day also the
partnership signed a one-year lease to
the Redwood Café, located in a nearby
recreational area.
62
They monthly rent on the café was
$1,500. This facility attracted the partners
in part because there were living
accommodations on the floor above the
restaurant. One room was occupied by the
Antoines and another by Mrs. Landers.
The partners borrowed $21,000 from a

local bank and used this plus $35,000 of
partnership funds to buy out the previous
operator of the café.
63
Of this amount, $53,200 was for equipment and
$2,800 was for the food and beverages then on hand.
The partnership paid $1,428 on local operating
licenses, good for one year beginning November 1,
and paid $1,400 for a new cash register. The
remainder of the $69,000 was deposited in a checking
account.
Shortly after November 1, the partners opened the

restaurant. Mr. Antoine was the cook, and Mrs.
Antoine and Mrs. Landers waited on customers.
64
Mrs. Antoine also ordered the food, beverages
and supplies, operated the cash register, and
was responsible for the checking account. The
restaurant operated throughout the winter
season of 1990 – 91.
It was not very successful. On the morning of

March 31, 1991, Mrs. Antoine discovered that
Mr. Antoine and Mrs. Landers had
disappeared.
65
Mrs. Landers had taken all her possessions,
but Mr. Antoine had left behind most of his
clothing, presumably because he could not
remove it without warning Mrs. Antoine.
The new cash register and its contents
were also missing. Mrs. Antoine concluded
that the partnership was dissolved.
(The court subsequently affirmed that the
partnership was dissolved as of March 30.)
66
Mrs. Antoine decided to continue
operating the Redwood Café.
She realized that an accounting would
have to be made as of March 30 and
called in Donald Simpson, an
acquaintance who was knowledgeable
about accounting.
67
In response to Mr. Simpson’s questions,
Mrs. Antoine said that the cash register
had contained $311 and that the checking
account balance was $1,030.
Ski instructors who were permitted to
charge their meals had run up account
totaling $870.
(These accounts subsequently were paid
in full). Redwood Café owed supplier
amounts totaling $1,583.
Mr. Simpson estimated that depreciation
on the assets amounted to $2,445.
68
Food and beverages on hand were estimated
to be worth $2,430.
During the period of it’s operation, the
partners drew salaries at agreed-upon
amounts, and these payments were up to
date.
The clothing that Mr. Antoine left behind was
estimated to be worth $750.
The partnership had also repaid $2,100 of
the bank loan.
69
Mr. Simpson explained that in order to
account for the partners’ equity, he
would prepare a balance sheet.
He would list the items that the
partnership owned as of March 30,
subtract the amounts that it owed to
outside parties, and the balance would
be the equity of the three partners.
Each partner would be entitled to one
third of this amount.
70
Questions:
1. Prepare a balance sheet for the

Redwood Café as of November 2,
1990.
2. Prepare a balance sheet as of March
30, 1991.
3. Disregarding the marital
complications, do you suppose that
the partners received the equity
determined in Question 2? Why?
71
Redwood Cafe
Balance Sheet as of November 2, 1990
(in 000 USD)
Assets Liabiities+Owners’Equity
Current Asset Current Liabilities
Cash 10,172 Bank Loan 21,000
F&B Inventory2,800 Owners’ Equity:
Prep.Exp 1,428 Mr.A,Cap. 16,000
Total CA 14,400 Mrs.A,Cap. 16,000
Fixed Assets Mrs.L,Cap 16,000
Equipment 54,600 Total OE 48,000
Total Asset 69,000 Total L+OE 69,000
72
Redwood Cafe
Balance Sheet as of March 30, 1991
(in 000 USD)
Asset Liability+Owners’Equity
Current Asset (CA) Current Liability(CL)
Cash 1,341 Account Payable 1,583
Accounts Receivable870 Bank Loan 18,900
F&B Inventory 2,430 Total CL 20,483

Prep.Exp 833 Owners’ Equity (OE):
Total CA 5,474 Mr.A,Cap 12,382
Fixed Asset (FA) Mrs.A,Cap 12,382
Equipment 54,600 Mrs.L,Cap 12,382
-:Acc.Dep (2,445) Total OE 37,146
Total FA 52,155
Total Asset 57,629 Total Liability+OE 57,629
73
Redwood Café (B)
In addition to preparing the balance
sheet described in Redwood Café (A),
Mr.Simpson, the accountant, agreed to
prepare an income statement. He said
that such a financial statement would
show Mrs.Antoine how profitable
operations had been, and thus help her
to judge whether it was worthwhile to
continue operating the restaurant.
74
In addition to the information given in the (A)
case, Mr. Simpson learned that cash received
from customers through March 30 amounted
to $43,480 and that cash payments were as
follows:
_____________________________________
Monthly payments to partners $23,150
Wages to part-time employees 5,480
Interest 540
Food and beverage suppliers 10,016
Telephone and electricity 3,270
Miscellaneous 255
Rent payments 7,500
75
Questions:
Prepare an income statement for the
period of the café’s operations through
March 30, 1991.
What does this income statement tell
Mrs. Antoine?.
76
Redwood Cafe
Statement of OE Changes
Period: Nov.2,1990 to March 30, 1991
(in 000 Rupiah)
Mrs.A, Cap., Nov.2, 1990 Rp16,000

+/- Profit/Losses for the period ?
?
- Drawing/Withdrawals 0
Mrs.A,Cap., March.30, 1991 Rp12,382
77
Redwood Cafe
Statement of Income, or P/L Statement
Period: Nov.2,1990 to March 30, 1991
(in 000 Rupiah)
I.Sales 44,350 100%
II.Operating Expenses:
Partners Salary 23,150 52%
Part-time Employees Salary 5,480
Food & Beverage Used 11,969
Telephone & Electricity 3,270
Rent Expenses 7,500
Depreciation of Equipment 2,445
Amortization of License 595
Interest Expenses 540
Miscellaneous 255
Total Operating Expenses (55,204)
Operating Losses (10,854)
78
Medieval Adventures Company
Medieval Adventures Company was founded
by Aaron Reinholz to produce a game marketed
under the name “Castles and Unicorns”.Each
”Castles and Unicorns” cost the company $14 to
produce. In addition to these production costs
that varied in direct proportion to volume (so-
called variable costs), the company also
incurred $4,000 monthly “being in business”
costs (so-called fixed costs) irrespective of the
month’s volume.The company sold its product
for $22 each. As of December 31, Reinholz had
been producing “Castles and Unicorns” for three
months using rented facilities.
The balance sheet on that date was as follows 79 :
Balance Sheet
As of December, 31
Assets
Cash $ 58,500
Accounts Receivables 27,500
Inventory 14,000
$ 100,000
Equities
Common Stock $ 100,000
Retained Earnings 0
$ 100,000
80
Reinholz was very pleased to be operating at a
profit in such a short time. December sales had
been 750 units, up from 500 in November, enough
to report a profit for the month and to eliminate the
deficit accumulated in October and November.
Sales were expected to be 1,000 units in January
and Reinholz’s projections showed sales increases of
500 units per month after that. Thus, by May
monthly sales were expected to be 3,000 units. By
September that figure would be 5,000 units.
81
Reinholz was very conscious of developing
good sales channel relationships in order to
increase sales, so “Castles and Unicorns”
deliveries were always prompt. This required
productions schedule 30 day in advance of
predictive sales. For example, Medieval
adventures had produced 1,000 “ Castles
and Unicorns” in December for January
sales, and would produced 1,500 in January
for February’s demand.
82
The company billed its customers with stated
terms of 30 days net, but did not strictly
enforce these credit terms with the result that
customers seemed to be taking and additional
month to pay. All of the company’s cost were
paid in cash in the month in which they were
incurred. Reinholz’s predictions came true. By
March, sales had reached 2,000 “Castles and
Unicorns”, and 2,500 units were produced in
March for April sale. Total profit for the year by
March 31 had reached $ 24,000.
83
Within the week the company’s book
keeper called. Medieval Adventure’s
bank balance was almost zero, so
necessary materials could not be
purchased. Unless Reinholz returned
immediately to raise more cash, the
entire operation would have to shut
down within a few days.
84
Questions :
1. Prepare monthly income statements,
balance sheet, and cash budgets
based on sales increases of 500 units
per month and 30-day advance
production for January through
September. When will the company
need extra funds? How much will be
needed? When can a short-term loan
to cover the need be repaid?
85
2. How it is possible that a company starts with
$100,000 in capital and has profitable sales for
a period of six months and still ends up whit a
zero bank balance? Why did Medieval
Adventures need money in April? How could
this need have been avoided?
3. From your calculations and financial statements

for Question 1, derive cash flow statement for
the months of March, May, and July from each
month’s beginning and ending balance sheets
and income statement. Compare these derived
cash flow statements with the cash budgets
prepared directly in Questions 1.
86
Sales and Production Planning (in unit)
Yr/Month Sales Production
1991
October 500
November 500 750
December 750 1000
1992
January 1000 1500
February 1500 2000
March 2000 2500
April 2500 3000
May 3000 3500
June 3500 4000
87
Medieval Company
Monthly Cash Budget (in 000 $)
Month Jan Feb Mar April May June
1.Cash, beg. 58,5 29 12 0
2.Cash Inflows:
* A/R Collections 11 16,5 22 33 44
* Bank Loan 1 9
Total Cash Inflows 11 16,5 22 34 53
3.Cash, Available 69,5 61 51 46 53
(3=1+2)
4.Cash Outflows:
* FC 4 4 4 4 4
* VC 21 28 35 42 49
* Repayment of Loan
Total Cash Outflows (25) (32) (39) (46) (53)
5.Cash, Ending(3-4) 44,5 29 12 0 0

88
Medieval Company
Projected Income Statement-
Monthly (in 000 $)
Jan Feb March April May
Sales Vol. 1000 1500 2000 2500 3000
Sales Revenue 22 33 44 55 66
VC (14) (21) (28) (35) (42)
Marginal Income 8 12 16 20 24
FC (4) (4) (4) (4) (4)
Profit/Losses 4 8 12 16 20
89
Medieval Company
Projected Balance Sheet-Monthly
(in 000 $)
Jan Feb March April May June July
Assets
Cash 44,5 29 12 0 0
A/R 38,5 55 77 99 121
Inv 21 28 35 42 49
T.Asset 104 112 124 141 170
Liab+ OE
Bank Payable - - - 1 10
Common Stock 100 100 100 100 100
R/E 4 12 24 40 60
T.Liab.+OE 104 112 124 141 170 90
1. THE HIGHEST-LOWEST METHOD

ACTIVITIES
THE THE THE

HIGHEST LOWEST DIFF.
ACTIVITY ACTIVITY ()
(AUG,’85) (FEB,’84)
VOLUME (UNITS) 8,000 6,000 2,000
TOTAL COST (Rp 000) 600,- 500,- 100,-

Var.Cost/unit = Rp 100,000,- : 2000 = Rp 50,-
91
TFC CALCULATION :

THE HIGHEST THE LOWEST
ACTIVITY ACTIVITY
TOTAL COST Rp. 600.000,- Rp. 500.000,-

TOTAL VAR. COST:
8,000 x Rp. 50,- 400.000,- -
6,000 x Rp. 50,- - 300.000,-
Fixed Cost / Month Rp. 200.000,- Rp. 200.000,-
92
2. THE LEAST SQUARE /
LINEAR REGRESSION
TOTAL COST : Y = a + b x
n  xy -  x  y y-bx
b= a=
nx2–(x)2 n
93
COST CLASSIFICATION
BASED ON MAIN FUNCTIONS
Raw
Raw
Material
Material
Exp.
Exp. Primary
Exp.
Direct
Direct
Prod’n
Prod’nExp.
Exp. Labor
LaborExp.
Exp.
Conv.
Factory
Factory Exp.
EXPENSES
EXPENSES Overhead
Overhead
Exp.
Exp.
Marketing
Marketing
Exp.
Exp. Commercial
Gen Expenses
Gen& &Adm
Adm
Exp.
Exp.
94
BREAK EVEN POINT FORMULA
PROFIT = SALES REVENUE – EXPENSES
OR : y = cx – bx – a
y = PROFIT b = VAR. COST/UNIT

c = PRICE / UNIT a = FIXED COST/PERIOD
x = SALES VOL / PERIOD
OR : INCOME ST. FOR A PERIOD
SALES REVENUE $ cx
VARIABLE COST bx -
MARGINAL INCOME
(CONTRIBUTION MARGIN) cx - bx
FIXED COST a -
PROFIT $ y
95
BREAK EVEN POINT FORMULA (..)
BREAK EVEN WILL BE REACHED, IF Y = 0 :
}
0 = cx – bx – a
cx = bx + a a
cx – bx = a XBE = c – b
x (c - b) = a
XBE = SALES VOL. AT BEP LEVEL
* BREAK EVEN AT $ AMOUNT CAN BE FOUND BY MULTIPLYING

THE ABOVE FORMULA W/C
a ac
c (XBE) = c - b . c = c-b :c
a a
BE($) = or =
1 – b/c MIR
96
SCHEMATIC OF CONTRIBUTION
UP
Revenues
UP
C
C
UV
ts
UV
o s Contribution
C
C
l e
UV
b
ria
Va
Fixed Costs Profit
97
The Balanced Scorecard Provides a Framework to
Translate a Strategy into Operational Terms
Financial
“To succeed
es
e
res
tiv
tiv
financially, how
ts
asu
rge
jec
tia
should We
Ini
Ta
Me
Ob
appear to our
shareholders?”
Customer Internal Business Process

“To achieve our “To satisfy our
es
es
e
e
res
res
Vision
tiv
tiv
tiv
tiv
vision, how shareholders
ts
ts
asu
asu
rge
rge
jec
jec
tia
tia
should we and and customers,
Ini
Ini
Ta
Ta
Me
Me
Ob
Ob
appear to our what business
customer”
Strategy processes must
we excel at?”
Learning and Growth

“To achieve our
es
e
res
tiv
tiv
vision, how will
ts
asu
rge
jec
tia
we sustain our
Ini
Ta
Me
Ob
ability to
change and
improve”
Sources: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,”
Harvard Business Review (January-February 1996): 76. Reprinted with permission. 98
OPERATING BUDGET
Sales Budget Production Budgets Other

Other Budgets
Budgets Capital Budgets
Revenue Direct
Direct Labor
Labor General & Adm. Project
Project A
Sales Adm. Direct

Direct Material
Material General
General &
& Adm.
Adm. Project B
Advertising Overhead Controller

Controller Etc. for Each Major
Project
Expenses
Expenses Region
Region A
A Production Staff Treasure
Minor
Minor Capital
Capital
Project
Expenses Region B Department
Department A
A Etc. for other staff
Flexible
Flexible Budget
Budget R
R&&D
D Personnel Budget
Department B
Inventory Budget Purchases Budget
Flexible
Flexible Budget
Budget
Cost & Sales Budget

Etc. for each Production Department
Budgeted Income Statement
CASH BUDGET
BUDGETED BALANCE SHEET

99
Sources of Financing
Creditor
Liability
Company-
ABC
Company’s Asset Owners’Equity

Owner
(Investor)
100
Megashe Engineering Company
Megashe Engineering Company was founded
by two partners. Meredith Gale and Shelley
Yeaton, shortly after they had graduated from
engineering school. Within five years the
partners had built a thriving business,
primarily through the development of a
product line of measuring instruments based
on the laser principle. Success brought with it
the need for new permanent capital. After
careful calculation, the partners placed the
amount of this need at $ 1.2 million. This
would replace a term loan that was about to
mature and provide for plant expansion and
related working capital.
101
At first, they sought a wealthy investor, or
group of investor, who would provide the
$1.2 million in return for an interest in the
partnership. They soon discovered, however,
that although some inverstors were interested
in participating in new ventures,none of them
was willing to participate as partner in an
industrial company because of the risks to
their personal fortunes that were inherent in
such an arrangement. Gale and Yeaton there
fore planned to incorporate the Megashye
Engineering Company in which they would
own all the stock.
102
After further investigation, they learned that Arbor
Capital Corporation, a venture capital firm, might be
interested in providing permanent financing. In
thinking about what they should propose to Arbor,
their first idea was that Arbor would be asked to
provide $1.2 million, of which $1.1 million would be a
long-term loan. For the other $100,000, Arbor would
receive 10 percent of the Megashye common stock
as a “sweetener”. If Arbor would pay $100,000 for 10
percent of the stock, this would mean that the 90
percent that would be owned by Gale and Yeaton
would have a value of $900,000. Although this was
considerably higher than Megashye’s net assets, they
thought that this amount was appropriate in view of
the profitability of the product line that they had
successfully developed.
103
A little calculation convinced them,
however, that this idea (hereafter,
proposal A) was too risky. The resulting
ratio of debt to equity would be greater
than 100 percent, which was
considered unsound for an industrial
company.
104
Their next idea was to change the
debt/equity ratio by using preferred stock in
lieu of most of the debt. Specifically, they
thought of a package consisting of $200,000
debt, $900,000 preferred stock, and $100,000
common stock (proposal B). They learned,
how ever, that Arbor Capital Corporation was
not interested in accepting preferred stock,
even at a dividend that exceeded the interest
rate on debt. Thereupon, they approached
Arbor with a proposal of $600,000 debt and
$600,000 equity, Arbor would receive 6/15
(i.e.,40 percent) of the common stock.
105
Before proceeding further, they decided to
see if they could locate another venture
capital investor who might be interested in
one of the other proposal. In calculating the
implication of these proposals, Gale and
Yeaton assumed an interest cost of debt of
12 percent, which seemed to be the rate for
companies similar to Megashye, and a
dividend rate for preferred stock of 14
percent. They assumed, as a best guess, that
Megashye would earn $300,000 a year after
income tax and before interest costs and the
tax savings thereon. They included their own
common stock equity at $900,000.
106
The Arbor representative was considerably
interested in the Arbor ordinarily did not
participate in a major fiancing of a relatively
new company unless it obtained at least 50
percent equity as part of the deal. They were
interested only in a proposal for $300,000
debt and $900,000 for half of the equity
(proposal D). They debt/equity ratio in this
proposal was attractive, but Gale and Yeaton
were not happy about sharing control of the
company equally with an outside party.
107
They also pessimistic calculations based on
income of $100,000 (instead of $300,000) per
year and optimistic calculations based on
income of $500,000 a year. They realized, of
course, that the $100,000 pessimistic
calculations were not necessarily the
minimum amount of income ; it was posible
that the company would lose money. On the
other hand, $500,000 was about the
maximum amount of income that could be
financed with the $1.2 million. The applicable
income tax rate was 34 percent.
108
Questions
1. For each the four proposals, calculate the return
on common shereholders’ equity (=net income
after preferred dividends : common shareholders’
equity) that would be earned under each of the
three income assumptions. Round calculations to
the nearest $1,000 and 1/10 percent.
2. Calculate the pretax earnings and return on its
$1.2 million investment to Arbor Capital
Corporations under each of the four proposals.
Assume that Arbor receive a dividend equal to its
portion of common stock ownership times
Megashy’s net income after preferred dividends (if
any) ; assume a “negative dividend” if Megashye
has a net loss. 109
3. Were the partners correct in rejecting proposals
A and B.
4. Comment on the likelihold that Megashye
Engineering Company could find a more
attractive financing proposal than proposal D.
5. Assume that proposal D is accepted, that the
net asset (total assets minus liabilities) of the
partnership are $700,000, and that upon
incorporation 180,000 shares of $1 par value
stock are issued, 90,000 to the original
partners and 90,000 to Arbors. Give journal
entries for two ways of recording these
transactions, on recognizing goodwill and the
other not recognizing goodwill. Which way is
preferable?
110
Megashe Engineering
Company
Proposal (000 Rp) A B C D
Long Term Debt 1,100,000 200,000 600,000 300,000
Preferred Stock 0 900,000 0 0
Com. Stock (BOC) 100,000 100,000 600,000 900,000
---------------------------------------------------------------------------------------------------
Total BOC’s Invest 1,200,000 1,200,000 1,200,000 1,200,000
Com. Stock (A&T) 900,000 900,000 900,000 900,000
----------------------------------------------------------------------------------------------------
Total Investment 2,100,000 2,100,000 2,100,000 2,100,000
Total Shreh’s Equi. 1,000,000 1,900,000 1,500,000 1,800,000

Total Com. Stock 1,000,000 1,000,000 1,500,000 1,800,000
D.E.R 110.0% 10.5% 40.0% 16.7%
111
Megashe Engineering
Company
Answer No.1.
Optimistic
Proposal (000 $) A B C D
EBI & Tax Saving 500,000 500,000 500,000 500,000
Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Savings 44,880 8,160 24,480 12,240
--------------------------------------------------------------------------------
Net Income (NI) 412,880 484,160 452,482 476,240
Pref. Stock Div., 14 % 0 126,000 0 0
--------------------------------------------------------------------------------
NI after Pref. Dividends 412,880 358,160 452,480 476,240
Return on Com Stock(%) 41.3% 35.816% 30.2% 26,5%
----------------------------------------------------------------------------------------------------------------
Com.Stock Div. (BOC) 41,288 35,816 180,992 238,120
Com.Stock Div. (A&T) 371,592 322,344 271,488 238,120
112
Megashe Engineering
Company
Moderat
EBI & Tax Saving 300,000 300,000 300,000 300,000

Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Savings 44,880 8,160 24,480 12,240
----------------------------------------------------------------------
Net Income (NI) 212,880 284,160 252,482 276,240
Pref. Stock Div., 14 % 0 126,000 0 0
----------------------------------------------------------------------
NI after Pref. Dividends 212,880 158,160 252,480 276,240
Return on Com. Stock 21.3% 15.8% 16.8% 15.3%
Com.Stock Div. (BOC) 21,288 15,816 100,99 138,120

Com.Stock Div. (A&T) 191,592 142,344 151,488 138,120
113
Megashe Engineering
Company
Pessimistic Assumption

---------------------------------------------------------------------------------------------------
EBI & Tax Saving 100,000 100,000 100,000 100,000
Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Savings 44,880 8,160 24,480 12,240
------------------------------------------------------------------------------------------------------
Net Income (NI) 12,880 84,160 52,482 76,240
Pref. Stock Div., 14 % 0 126,000 0 0
------------------------------------------------------------------------------------------------------
NI after Pref. Dividends 12,880 (41,840) 52,480 76,240
Return on Com. Stock 1.3% (4.2%) 3.5% 4.2%
-----------------------------------------------------------------------------------------------------------------------------
Com.Stock Div. (BOC) 1,288 (4,184) 20,992 38,120
Com.Stock Div. (A&T) 11,592 (37,656) 31,488 38,120
114
Megashe Engineering
Company
ANSWER NO. 2
Optimistic Assumption
Interest on LTD, 12% 132,000 24,000 72,000 36,000

Pref. Stock Div. 14% 0 126,000 0 0
Com. Stock Div. 41,288 35,816 180,992 238,120
----------------------------------------------------------------------
Total Pretax Earnings 173,288 185,816 252,992 274,120
R.O.I 14.4% 15.5% 21.1% 22.8%
115
Name of Ratio Formula State Result as
Overall performance measures:
1. Price/ Earnings ratio Market price per share Times

Net income per share
2. Return on assets Net income + Interest (1 – Tax rate) Percent
Total assets
3. Return on invested capital Net Income + Interest (1 – tax rate) Percent
Long-term liabilities + Shareholders’ equity
4. Return Shareholders’ equity Net Income Percent
Shareholders’ equity
Profitability measures:
5. Gross Margin Percentage Gross Margin Percent

Net sales revenue
6. Profit Margin Net income Percent
Net sales revenue
7. Earnings per share Net income Dollars
No. shares outstanding
116
Name of Ratio Formula State Result as
Test of investment utilization:
8. Asset turnover Sales revenues Times
Total assets
9. Invested capital turnover Sales revenues Times
Long-term liabilities + shareholders’ equity
10. Equity turnover Sales revenue Times
11. Capital intensity Sales revenue Times
Property, plant, and equipment
12. Days’ cash cash_____ Days
Cash expenses ; 365
13. Days receivable (or collection Accounts receivable Days
period) Sales : 365
14. Days inventory Inventory Days
Cash of sales: 365
15. Inventory turnover Cost of sales Times
Inventory
16. Working capital turnover Sales revenues Times
Working capital
117
Name of Ratio Formula State Result
as
Tests of financial condition:
17. current ratio Current assets Ratio

Current liabilities
18. Acid-test (quick) ratio Monetary current assets Ratio
Current liabilities
19. Debt / equity ratio Long-term liabilities Percent
Or
Total liabilities Percent
20. Debt/ capitalization Long-term liabilities _______ Percent
Long-term liabilities + shareholders’ equity
21. Times interest earned Pretax operating profit + interest Times
Interest
22. Cash flow/ debt Cash generated by operations Percent
Total debt
23. Dividend yield Dividends per share Percent
Marked price per share
24. dividend payout Dividends Percent
Net income
118
Du Pont Systems
Net Sales = Vol x Price / u
Weighted NOI $ 8 _ C OGS

Average Profit
Cost of Margin : Opex +
Capital 18% 8% Mktg Exp
Net Sales
+
100 %
Income Gen & Adm Exp
Statement
Approach
Earning
Power 24% X multiplied by
Cash
Balance
Sheet Sales $ 3 Current +
Approach Assets A/ R
+
Assets turn- Inventory
Net Working cap
over - 3 times :
+ Current A/P
Liabilitie +
NOA $ 1 Fixed Assets s
Wages / P
+ +
Intangible Assets Tax payable
119
FINANCIAL CONDITION OF “BUMN”
RATIOS PROFITABILITY LIQUIDITY SOLVENCY TOTAL VALUE

CONDITION
WEIGHT 75% 12.5% 12.5%

1 EXCELLENT
(%) >12 >150 >200 >100
VALUE 75 12.50 12.5
2.GOOD
(%) >8 - 12 >100 – 150 >150 - 200 >68 – 100
VALUE 50 -75 8.33 – 12.5 9.38 – 12.5
3.FAIR % >5 - 8 >75 - 100 >100 – 150 >44 – 68
VALUE 31.25 - 50 6.25 – 8.33 6.25 – 9.38
4.BAD
(%) ≤5 ≤75 ≤100 ≤44
VALUE ≤31.25 ≤6.25 ≤6.25
SOURCE:
Lamp.Kpts. Menteri Keuangan
No : 740 / KMK . 00/ 1989
Tgl : 28 Juni 1989
120
FINANCIAL RATIOS
1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Activity Ratios
121
Maynard Company (A)
Diane Maynard made the following request of a
friend :
My book keeper has quit, and I need to see the
balance sheets of the numbers already entered in
it. Would you be willing to prepare balance sheet
for me? Also, any comments you care to make
about the numbers would be appreciated. The
Cash account is healthy, which is a good sign, and
he has told me that net income in June was
$19,635.
122
The book contained a detailed record of
transactions, and from it the friend was
able to copy off the balances at the
beginning of the month and the end of
the month as shown in Exhibit 1. Diane
Maynard owned all the stock of
Maynard Company.
123
Questions
1. Prepare balance sheet as of June 1 and as of
June 30, in proper format.
2. Make comments about how the financial
condition as of the end of the June compared
with that at the beginning of June.
3. Why do retained earning not increase by the
amount of June net Income?
4. As of June 30, do you feel that Maynard
Company is worth the amount in
Shareholder’s Equity, $619,446? Explain.
124
Account Balance
June 1 June 30
Accounts payable…………………. $ 8,517$ 21,315
Accounts receivable……………… 21,798 26,505
Accrued wages payable………… 1,974 2,202
Accumulated depreciation
on building………………………….. 156,000 157,950
Accumulated depreciation
on equipment……………………… 5,304 5,928
Bank notes payable……………… 8,385 29,250
Building……………………………… 585,000 585,000
Capital stock………………………. 390,000 390,000
Cash…………………………………. 34,983 66,660
Equipment (at cost)……………. 13,260 36,660
Land…………………………………. 89,700 89,700
125
June 1 June 30
Merchandise Inventory………… 29,835 26,520
Note receivable, Diane Maynard 11,700 0
Other noncurrent assets………. 4,857 5,265
Other noncurrent liabilities…… 2,451 2,451
Prepaid insurance……………….. 3,150 2,826
Retained earning………………… 221,511 229,446
Supplies on hand……………….. 5,559 6,630
Taxes payable…………………… 5,700 7,224
126
Maynard Company (B)
Diane Maynard was grateful for the balance
sheets that her friend prepare (see Maynard
Company (A)). In going over the number, she
remarked. “it’s sort of surprising that cash
increased by $31,677, but net income was
only $19,635. Why was that?”.
Her friend prepare, “A partial answer to that
question is to look at an income statement for
June. I think I can find the data I need to
prepare one for you”.
127
In addition to the data given in the (A)
case, her friend found a record of cash
receipts and disbursements, which is
summarized in Exhibit 1. She also
learned that all accounts payable were
to vendors for purchase of merchandise
inventory and that cost of sales was
$39,345 in June.
128
Questions
1. Prepare an income statement for June in
proper format. Explain the derivation of each
item on this statement, including cost of sales.
2. Explain why the change in the cash balance
was greater than the net income.
3. Explain why the following amounts are
incorrect cost of sales amounts for June : (a)
$14,715 and (b) $36,030. Under what
circumstances would these amounts be
correct cost of sales amounts?
129
Cash Receipts and disbursements
Month of June
Cash Receipts Cash Disbursements
Cash sales…………..$ 44,420 Equipment purchased……….. $23,400
Credit customers.... 21,798 Other assets purchased… 408
Diane Maynard………11,700 Payments on accounts payable 8,517
Bank loan………………20,865 Cash purchases of marchandise14,715
Total receipts…. 98,783 Cash purchase of supplies……. 1,671
Dividends…………………………… 11,700
Wages paid………………………… 5,660
Utilities paid……………………….. 900
Miscellaneous payments………. 135
Total disbursements………… $67,106
Reconciliation :
Cash balance, June 1……….. $ 34,983
Receipts………………………….. 98,783
Subtotal………………….. 133,766
Disbursements…………………. 67,106
Cash balance, June 30………. $ 66,660
130
Genmo Corporation
On the night of February 27, 1994, certain
records of the Genmo Corporation were
accidentally destroyed by fire. Two days after
that the principal owner had an appointment
with an invertor to discuss the possible sale
of the company. The owner needed as much
information as could be gathered for this
purpose, recognizing that over a longer
perriod of time a more complete
reconstruction would be possible.
131
On the morning of February 28, the following
were aviable : (1) A balance sheet as of
December 31, 1992, and an income
statement for 1992 (Exhibit 1). (2) Certain
fragmentary data and ratios that had been
calculated from the current financial
statements (Exhibit 2). The statment
themselves had been destroyed in the fire.
(In ratios involving balance sheet amounts,
Genmo used year-end amounts rather than
an average). And (3) the following data (in
thousands) : Revenues 1983 $10,281 and
Current Liability 1983 $ 2,285.
132
EXHIBIT 1
GENMO CORPORATION FINANCIAL STATEMENTS
(thousands of dollars)
)Balance Sheet
As of December 31, 1992
Assets
Current assets :
Cash................................................. $ 18
Marketable securities......................... 494
Account receivable............................ 728
Investories....................................... 972
Prepaid............................................ 214
Total current assets................... 2,426
Investment....................................... 898
Real estate, plant, and equipment...... $4,727
Last:Accumulated depreciation.......... 2,433 2,294
Special tools....................................... 171
Goodwill............................................ 594
Total assets....................................... $6,383
133
Liabilities and Shareholder’s Equity
Current liabilities :
Accounts payable..................................... $ 732
Loans payable.......................................... 266
Accrued liabilities..................................... 1,232
Total current liabilities...................... 2,230
Long-term debt........................................ 250
Other noncurrent liabilities........................ 951
Total liabilities......................................... 3,431
Shereholders equity
Preferred stock....................................... 25
Common stock........................................ 54
Additional paid-in capital......................... 667
Retained earnings................................... 2,206
Total shareholders equity.................. 2,952
Total liabilities and shareholder equity....... $6,383
134
Income Statement, 1992
Total revenues............................................. $9,779
Cost of sales (excluding depreciations........... $8,165
and amortization)
Depreciations.............................................. 278
Amortization of goodwill and special tools..... 343
8,786
Selling, general, and administrative expenses. 430
Provision for income taxes............................ 163
Total cost and expenses............................... 9,379
Net income................................................. $ 400
135
EXHIBIT 2
SELECTED RATIO
1993 1992
Acid-test ratio................................... 0.671 0.556
Current ratio..................................... 1.172 1.088
Investory turnover (times)................. 10.005 8.400
Day’s receivables.............................. 39.66 27.17
Gross margin percentage.................. 15.12 16.50
Profit margin percentage.................. 2.831 4.090
Invested capital turnover (times)...... 2.091 2.355
Debt/equity ratio (percentage)......... 62.15 40.68
Return on shareholders equity.......... ? 13.55
Questions
1. Prepare a balance sheet of December 31, 1993, and income
statement.
2. What was the return on sherholders equity for 1993?
136
GENMO CORPORATION
Balance Sheet as of December 31, 1993
Line Assets
Cash and marketable securities ………………………. $ 416
Accounts receivable ………………………………….. 1,117
Subtotal: quick assets …………………………. 1,533
Inventories ……………………………………………. 872
Prepaid expenses ……………………………………… 273
Total current assets ……………………………. 2,678
Non current assets …………………………………….. 4,524
Total assets ……………………………………. $ 7,202
Liabilities and Equity
Current liabilities ……………………………………... $ 2,285
Non current liabilities ………………………………… $ 1,885
Shareholder’s equity ………………………………….. 3,032
Total invested capital …………………………………. 4,917
Total Liabilities and Shareholder’s Equity …….. $ 7,202
Income Statement, 1993
Revenues ……………………………………………….. $ 10,281
Cost of Sales …………………………………………… 8,727
Gross margin ……………………………………. 1,554
Other expense …………………………………………... 1,263
Net Income ……………………………………… $ 291
Notes
Line
Line 3 – line 2
Revenue (10,281) * days’ receivables (39.66) + 365
Current liabilities (2,285) * quick ratio (0.671)
Cost of sales (line 15) + inventory turnover (10.005)
Line 6 – (line 3 + line 4)
Current liabilities (2,285) * current ratio (1.172)
Line 8 – line 6
Same as line 13
Given
Let debt = X;then X + (4,917 – X) = 0.6215 (debt/equity). Solving, X = 1,885.(The 4,917 comes from line 12)
Line 12 – line 10
Revenues (10,281) + invested capital turnover (2,091)
Line 9 +line 12
Given
Line 14 – line 16
Revenues (10,281) * gross margin percentage (0.1512)
Line 16 – line 18
Revenue (10,281) * profit margin percentage (0.2831)
137
ELEMENTS OF PRODUCT COST
Direct
Labor
Full
Conversion ProductionC
Cost ost (or
+ = Inventory
Cost)
+ = Full Cost
+ =
Overhead Direct
Material
Cost Selling
Cost
Cost
+
General And
Administrative
Cost
138
Cost Behavior
Total Variable Costs change in direct
proportion with volume, whereas unit
variable is a constant.
Total fixed cost do not vary with volume,
but unit fixed cost decreases as volume
increases.
Semi variable costs can be decomposed
into a variable cost and a fixed cost
component
139
Pak Amat
In a night market, Mr. Amat will opens business
for bicycle parking lot. He will rents a place that
can be full of 500 bicycles. It will costs him Rp
1500 per night for that place to rent. And the
prepaid rent of Rp 45000,- per month should be
paid at the beginning of the month.
Mr Amat, will also hires two men to take care of
the bicycles, and each of them will get paid Rp
1000,- plus incentive of Rp 2.5 per bicycle.
The rate of one bicycle per night is Rp 25.
140
Flexible Budget
Sales =
Variable Costs:
Labor Costs:
*2persons*rp2,50=
-------------------------------------------------------------
Contribution Margin
Fixed Costs:
Rent Expenses Rp1.500,-
Labor Costs 2.000,- (3.500,-)
Net Income/Losses
141
Flexible Budget for 500 units
Rp %
Sales = 500*Rp25,-= Rp 12.500,- 100
Variable Costs:
Labor Costs:
500*2persons*rp2,50= (2.500,-) 20
Contribution Margin 10.000,- 80
Fixed Costs:
Rent Expenses Rp1.500,-
Labor Costs 2.000,- (3.500,-) 28
Net Income Rp 6.500,- 52
142
Break Even- Mr. Amat
Fixed Costs/month = a = 2000 + 1500
Variable Costs/unit = b = 5
Price/unit = c = 25
Break Even (in unit) = 3500 / 25 – 5 = 175

units
BE (Rp) = 175 x Rp 25,- = Rp 4375,-
143
SCHEMATIC OF CONTRIBUTION
UP
Revenues
UP
C
C
UV
ts
UV
o s Contribution
C
C
l e
UV
b
r ia
Va
Fixed Costs Profit
144
Cost-Volume-Profit (CVP)- Analysis
Cost/unit Price/unit
+Expected Profit
Demand/
Fixed Cost/u Supply
Production Volume Sales Volume
145
Pricing
Push System
Pull System
146
Price
Function Price
Esteem Price
147
Jackson Thomas
Jackson Thomas was supervisor for an
assembly department in Rogers Electronics
Commpany. In recent weeks, Thomas had
become convinced that a certain component,
number J-42, could be produced more
efficiently if certain changes were made in
assembly methods. Thomas had described
this proposal to company’s industrial
engineer, but the engineering had quickly
dismissed Thomas’s ideas –mainly, Thomas
thought, because the engineer had not
thought of them first.
148
Thomas had frequently thought of starting a
business and felt that the ability to produce the
J-42 component at a lower cost might provide
this opportunity. Rogers’s purchasing agent
asurred Thomas that Roger’s purchasing agent
assured Thomas that Rongers would be willing
to buy J-42s from Thomas if the price were 10-
15 percent below Rongers’s current cost of
$5.20 per unit. Working at home, Thomas
experimented with the new method, which were
based on the use of a new fixture to aid in
assembling each J-42. This experimentation
seemed successful, so Thomas proceeded to
prepare some estimates for large-scale J-42
production. Thomas determined the following :
149
1. A local toolmaker would make the new
fixtures for a price of $1,575 each. One
fixture would be needed for each assembly
worker.
2. Aseembly workers were readily available, on
either a full-time or part time basis, at a
wage of $11.75 per hour. Thomas felt that
another 20 percent of wages would be
necessary for fringe benefits. Thomas
estimated that on the average (including
rest breaks), a worker could assemble, test,
and pack 15 units of the J-42 per hour.
150
3. Purchased components for the J-42
should cost about $2.68per unit over
the next year. Shipping supplies and
delivery cost would amount to
approximately $0.16 per unit.
4. Suitable space was available for
assembly operations at a rental of
$1,900 per month. A 12-month lease
was required.
5. Assembly tables, stools, and other
necessary equipment would cost about
$945 per assembly worker.
151
6. Thomas, as general manager, would receive
a salary of $6,300 per month.
7. A combination office manager-book-keeper
was available for a salary of $2,200 per
month.
8. Miscellaneous costs, including maintenance,
supplies, and utilities, were expected to
average about $1,500 per month.
9. Roger’s Electronics would purchase between
400,000 and 525,000 units of J-42 a year,
with 450,000 being Rogers’s purchasing
agent’s “best guess”. However, Thomas
would have to commit to a price of $4.45 per
unit for the next 12 months.
152
Thomas showed these estimates to a friend
who was a cost analyst in another electronics
firm. This friend said that all of the estimates
appeared reasonable, but told Thomas that in
addition to the required investment in fixtures
and equipment, about $220,000 would be
needed to finance accounts receivable and
inventories. The friend also advised buying
enough fixtures and other equipment to
enable producing the maximum estimated
volume (525,000 units per year) on a one-
shift basis (assuming 2,000 labor-hours per
assembler per year). Thomas thought this
was good advice. 153
Questions
1. What are Thomas’s expected variable
costs per unit? Fixed cost per month?
What would the total costs per year of
Thomas’s business be if volume were
400,000 units? 450,000 units? 525,00
units? (Limit yourself to cash costs :
ignore depreciations of fixtures and
equipment. Also, disregard any
interest costs Thomas might incur on
borrowed funds. )
154
2. What is the average cost per unit of J-42 at
each of these three volumes?
3. Reanswer Questions 1 and 2 assuming that
(a) Thomas wanted to guarantee assembly
workers 2,000 hours of pay per year : (b)
enough workers would be hired to assemble
450,000 unit a year : (c) these workers could
work overtime at a cost (including fringes) of
$21.15 per hours; and (d) no additional fixid
cost would be incurred of overtime were
needed. (Do not use these assumptions for
Question 4.)
155
4. Reanswer Quetions 1 and 2, now
including depreciation as an expense.
Assume the fixtures and other
equipment have a useful life of six
years, and that straight-line
depreciations will be used.
5. Do you think Jackson Thomas should
resign from Rogers Electronics and
establish the proposed enterprise?
156
Case: JACKSON THOMAS (Q 1)
Variable Costs per unit:

- Purchased parts……………… $2.68
- Labor ($11.75*1.2/15)…… .94
- Shipping Costs……………….. .16
- Total VC/unit…………………. $3.78
157
JACKSON THOMAS (Q1)
FIXED COST/MONTH:
Rent……………........... $1,900
GM’s Salary……………. 6,300
Off Mgr’s Salary……… 2,200
Other……………………. 1,500
Total FC/month……… $ 11,900 or
$ 142,800 per year
158
JACKSON THOMAS (Q1&2)
Total Costs = 142,800 + 3.78X
If X = 400,000 TC=1,654,800 AC=$4.14

If X = 450,000 TC=1,843,800 AC=$4.10
If X = 525,000 TC=2,127,300 AC=$4.05
159
JACKSON THOMAS (Q3)
If volume up to 450,000 units per year:
Total Costs =
(142,800 +15 persons (2,000*11.75*1.2) +
(2.68 + .16)X =
TC = 565,800+2.84(X)
160
Jackson Thomas (Q3)
And for volume between 450,000 and
525,000 units per year:
TC= 565,800+2.84(450,000)+(X-450,000)
(2.84+(21.15/15)
= 1,843,800 + (X-450,000)(4.25)
= -68,700 + 4.25X
161
Jackson Thomas (Q3)
Total and average unit costs at the

three volumes are as follows:
X TC Cost/U
400,000 $ 1,701,800 $4.25
450,000 $1,843,800 $4.10
525,000 $ 2,162,550 $4.12
162
Jackson Thomas (Q4)
Number of assemblers required to produce
525,000 units:
(525,000 units/year) / (2,000 hrs/yr) / (15
units/worker/hr)=17.5 workers, or 18 units:
Fixtures: 18@$1,575= $28,350
Other: 18@$945= $17,010
Total $45,360
163
Jackson Thomas (Q4)
Monthly depreciation = $45,360/6*12=$630
Annual depreciation= $ 7,560
Thus,
Monthly FC = $11,900+$630=$12,530
Annual FC = $142,800 + $7,560=$150,360
Variable costs remain unchanged, so we
have:
164
Jackson Thomas (Q 4)
X Total Cost Cost/Unit

400,000 $1,662,360 $4.16
450,000 $1,851,360 $4.11
525,000 $2,134,860 $4.07
165
Jackson Thomas (Q5)
X T Revenue T Costs Profit
400,000 $1,780,000 $1,654,800 $125,200

450,000 $2,002,500 $1,843,800 $158,700
525,000 $2,336,250 $2,127,300 $208,950
Consideration: Profit/year + GM Salary/year

Versus
His salary/year at PT.Roger
166
SUMMARY
COST CONCEPT
THE CLASSIFICATION OF COSTS
DIFFERENT COST FOR DIFFERENT
PURPOSES
THE BEHAVIOR OF COSTS
BREAK EVEN POINT ANALYSIS
167
COST CONCEPTS
Four terms: cost, expenditure, expense, and
disbursement
Cost is a monetary measurement of the
amount of resources used for some purpose.
An expenditure is a decrease in an asset
(usually cash) or an increase in a liability
(often accounts payables) associated with the
incurrence of a cost.
168
COST CONCEPT
The expenditures in an accounting period

equal the cost of all the goods and
services acquired in that period.
An expense is an item of cost applicable to
the current accounting period.
An expense represents resources
consumed by the entity’s earnings
activities during the current period.
169
COST CONCEPTS
When an expenditure is made, the
related cost is either an asset or an
expense.
If the cost benefits future periods, it is
an increase in an asset.
If not, it is an expense – a reduction in
retained earnings – of the current
period.
170
COST CONCEPTS
A disbursement is the payment of cash.
A cash expenditure is a disbursement;
but so is any cash payment, such as
paying an account payable, repaying a
loan, or paying a cash dividend to
shareholders.
171
Matching Concept
Cost Capital
/Investment
Amortization :
Expenditures
CAPEX 1) Depreciation
Tangible FA
2)Depletion
Expenditures Natural resources
Operating /
3) Amortization
Revenue
Cash Expenditures Intangible FA
Payable
OPEX =
Expenses
Disbursement=
Cash Payment
172
CLASSIFICATION OF COST
Concept of Different Cost for Different
Purposes
Classification of Cost, based on:
Nature
Main Functions (Production; Marketing;
General and Administration)
Cost Object (Direct and Indirect Costs)
Behavior of Costs (Fixed & Variable Costs)
173
CLASSIFICATION OF COST
BASED ON MAIN FUNCTIONS
Raw
Raw
Material
Material
Exp.
Exp. Primary
Exp.
Direct
Direct
Prod’n
Prod’nExp.
Exp. Labor
LaborExp.
Exp.
Conv.
Factory
Factory Exp.
EXPENSES
EXPENSES Overhead
Overhead
Exp.
Exp.
Marketing
Marketing
Exp.
Exp. Commercial
Gen Expenses
Gen& &Adm
Adm
Exp.
Exp.
174
Cost Classification
The Overlap of Cost Classification
Approaches
175
Cost Object:
Is the technical name for the product,
project, organizational unit, or other
activity or purpose for which costs are
measured. Some people prefer cost
objective
176
Full Cost
Full cost means all the resources used
for a cost object.
The full cost of a cost object is the sum

of its direct costs plus a fair share of
applicable indirect costs.
177
Direct and Indirect Costs
The direct costs of a cost object are items of costs
that are specifically traced to, or caused by, that cost
object.
Indirect costs are element of costs that are associated
with, or caused by, two or more cost objects jointly
but that are not directly traced to each of them
individually.
The nature of an indirect cost is such that it is not
possible, or at least not feasible, to measure directly
how much of the cost is attributable to a single cost
object.
178
179
Cost Driver
1. Payroll Related. The employer’s share of social security taxes, health
insurance, and other fringe benefits may be allocated on the basis of the
total labor costs. Alternatively, as mentioned above,
fringe benefit costs for direct workers may enter into the calculation of
direct labor costs; if so, they will not appear as overhead costs at all.
2. Headcount Related. Human resource department costs and other costs
associated with the number of employees rather than with the amount
that they are paid may be allocated on the basis of number of employees
(headcount)
3. Material Related. This category of costs typically includes the costs of
purchasing and receiving materials, including counting, weighing, or
inspecting them. These costs may be allocated on the basis of either the
quantity or the costs of direct material used in production cost centers.
Alternatively, they may be excluded from the cost center overhead costs
and instead assigned to product as part of their material cost. For
example, if the material-related cost rate is 10 percent of direct material
cost, then a product with $5 direct material cost will have this cost
“grossed up” to %5.50 so as to include the material-related costs.
180
Cost Driver
4. Space related. Some items of cost are associated with the space that the
cost center occupies, and they are allocated to cost centers on the basis
of the relative floor area or cubic or space or the cost centers. These are
also called facility Related costs.
5. Transaction Related. Some costs are caused by the number of time some
activity is performed rather than by the value of the goods or services
associated with the activity. For example, the cost of preparing a
purchase order is unaffected by the dollar amount of the items on the
order, and the cost of scheduling a job is the same whether it is large job
or a small one. Such drivers are also called Activity Related. If the
activity is performed once for each batch of product that is processed-
such as preparing a set of production document for a job, scheduling the
job, setting up a piece of equipment, or inspecting one items from each
batch produced – the drivers is called a Batch – Level Driver.
6. Product Related. Some cost are caused by the existence of the product it
self. Examples include engineering change order cost for a product, the
cost of tools and dies that are used only for a single product, and the cost
maintaining product-related document such as drawings, bills of
material, and production routings.
181
Cost Driver
7. Overall drivers. As mentioned above, if the pool of cost to be allocated include a
mixture of activities, then a clear-cut causally related driver is difficult to
identify. In these instances, abroad, overall measure such as DLH, DL $,
machine –hours, material cost, prime cost (direct material plus direct labor), or
number of units is used. Because the choice of such a driver often is made only
after the failure to find a driver that more clearly reflects a clear-cut causal
relationship, some people refer to these as default drivers. Note that these
drivers all have something in common; any of them will assign twice a much
cost to two of product as to one unit. This is because two units have twice as
much direct-labor content, machine time, direct material, of prime costs as does
one unit. Drivers with this characteristic are therefore called Unit-level drivers.
Plantwide Overhead Rate. Many companies, although having a
number of production departments, use the same overhead rate for all of them.
This Plantwide overhead rate is calculated by dividing total plant overhead costs
by an overall activity measure, usually DLH or DL $. This is the simplest possible
way to allocate overhead to products; it involves none of the complications
illustrated in the Marker Pen example because there is only one cots center in
the product costing system – the entire plant.
182
ELEMENTS OF PRODUCT COST
Direct
Labor
Full
Conversion ProductionC
Cost ost (or
+ = Inventory
Cost)
+ = Full Cost
+ =
Overhead Direct
Material
Cost Selling
Cost
Cost
+
General And
Administrative
Cost
183
ELEMENTS of PRODUCT COST
The most common cost object of interest in a business is
a product.
This can be either a tangible good, such as a batch of
jeans, or a service, such as a repair job on an
automobile.
The system that accumulates and reports the costs of
product cost objects is called a product costing
system.
Elements of product cost are either material, labor, or
services.
In a product costing system these elements are
customarily recorded in certain categories.
184
Direct Material Cost: “The quantities of
material that can be specifically identified with a
cost object in an economically feasible manner,
priced at the unit price of direct material” are the
direct material cost of a cost object.
These materials, often called raw materials or
just materials, are to be distinguished from
supplies, or indirect materials, which are
materials used in the production process but not
directly traced to individual products.
Examples of supplies include lubricating oil for
factory machinery and spices in a restaurant’s
kitchen.
185
Direct Labor Cost. “The labor quantities
that can be specifically identified with a
cost object in an economically feasible
manner, priced at a unit price of direct
labor” are the direct labor of a cost
object.
Other Direct Costs. Conceptually, any
cost traced to a single product is a direct
cost of that product. Example: energy
costs.
However, most companies classify only
direct material and direct labor costs as
direct production costs.
186
Overhead Cost. All indirect production costs
– all production costs other than direct costs
– are included in overhead cost. One
element of overhead is indirect labor: the
earnings of employees who do not work
directly on a single product but whose efforts
are related to the overall process of
production. Examples include supervisors,
janitors, materials handlers, stockroom
personnel, inspectors, and crane and forklift
operators.
187
Another element of overhead is indirect
material costs, described above.
Overhead also includes such items as

heat, light, power, maintenance,
depreciation, taxes, and insurance related
to assets used in the production process.
188
Conversion Cost. The sum of direct labor
cost and overhead cost is conversion cost.
It includes all production costs needed to
convert direct materials into finished goods.
As factories become automated, direct material
costs tend to become a much more significant
cost element than direct labor; at the same
time the distinction between direct labor and
indirect labor becomes blurred.
As a result, some companies no longer
distinguish between direct labor and overhead
cost; instead, the single category of conversion
cost is used.
189
Full production Cost. The sum of direct material
cost and conversion cost is full production cost.
In a manufacturing firm full production cost often is
called inventory cost because this is the cost at
which completed goods are carried as inventory and
the amount that is reported as cost of sales when the
goods are sold.
The cost at which goods are carried in inventory
includes neither distribution nor selling costs, nor
those general and administrative costs that are
unrelated to production operations.
in a manufacturing firm full production cost includes
only the costs that are incurred “within the four
factory walls”
190
In a financial accounting these full production
cost that flow through inventory accounts are
called product costs to distinguish them
from period cost, which do not flow through
inventory accounts but rather are charged are
expenses of the period in which they are
incurred.
The term inventory cost is more descriptive of
full production costs than product cost
because the full cost a product cost object
also includes nonmanufacturing costs such as
the cost of selling the product.
Nevertheless, referring to inventory cost as
product costs is well established in practice.
191
Non-production cost. Nonproduction cost
(also called period costs) are all costs
incurred in an organization other than
inventory costs.
These include selling costs, research and
development costs, general and
administrative cost, and interest cost.
In a company’s income statement, many of
these cost are reported as a lump sum under
the single caption, selling general and
administrative expense (informally called
SG&A by many businesspersons).
192
In a manufacturing firm selling costs include
both marketing (order-getting) costs and
logistics (order-filling) costs.
The distinction between the two types of
selling cost is that marketing costs are incurred
before a sales order is received whereas
logistics costs are incurred after the goods
have been produced.
Marketing costs include market research,
advertising, point-of-sale promotions, and
sales person’s compensation and travel costs.
Logistics cost include warehousing and delivery
costs as well as the recordkeeping cost
associated with processing an order.
193
General administrative costs include the costs
of service and staff units (such as the human
resource management and public relations
departments) and general corporate costs,
including the compensation of top
management and donations to charitable
organizations.
Interest costs are the costs of using borrowed
funds.
In most companies no attempt is made to
associate interest cost with specific products.
Research and development (R&D) costs are
the costs associated with efforts to find new or
improved products or production processes.
194
Full cost. The full cost of product is
simply the sum of all the cost elements
described above.
Thus full product costs includes both
inventory (full Production) cost and non
production cost.
However, in practice, many accountants
use the term full cost to mean only full
production cost.
This is another example of the lack of
precision in practitioners’ use of cost-
related terms and another reason why one
must “look beyond the label” to be certain
what the user of really term means. 195
The Behavior of Costs
Understanding cost-volume-relationships, how

cost behave as the level of activity changes.
The concepts of fixed and variable costs
Variable costs are items of cost that vary, in
total, directly and proportionately with
volume.
Fixed costs are items of cost that, in total, do
not vary at all with volume.
196
The Classification of Costs
Semi-variable costs are those costs that
include a combination of variable costs and
fixed cost item.
Semi-variable costs are also called semi-

fixed, partly variable, or mixed costs.
197
1. THE HIGHEST-LOWEST METHOD

ACTIVITIES
THE THE THE

HIGHEST LOWEST DIFF.
(AUG,’85) (FEB,’84) ()
VOLUME (UNITS) 8,000 6,000 2,000

TOTAL COST (Rp 000) 600,- 500,- 100,-

*UVC = Rp 100,000,- : 2000 = Rp 50,-
198
TFC CALCULATION :

THE HIGHEST THE LOWEST
ACTIVITY ACTIVITY
TOTAL COST Rp. 600.000,- Rp. 500.000,-

TOTAL VAR. COST:
8,000 x Rp. 50,- 400.000,- -
6,000 x Rp. 50,- - 300.000,-
TFC / MONTH Rp. 200.000,- Rp. 200.000,-
199
2. THE LEAST SQUARE METHOD /
LINEAR REGRESSION
TOTAL COST : Y = a + b x
n  xy -  x  y y-bx
b= a=
nx2–(x)2 n
200
Break-even Volume
At the break-even volume, total costs
equal total revenue.
Total Revenue (TR) = Total Costs (TC)
TR = Price/u * Volume (X)
TC = TFC + (VC/u * X), so
P/u * X = TFC + (VC/u * X)
Break-even Volume=X = TFC / P/u –VC/u
201
Long-Lived Non-monetary
Assets and Their Amortization
Dr. Wiwiek M.Daryanto, SE-Ak, MM, CMA
HP 0811-89-4273
202
•Long-Lived Assets, assets that provide service
for several future years.
•If the benefits are obtained in the current period,

the costs of the goods or services are expenses.
•If the benefits are expected in future periods,

the costs are assets in the current period and the
expenditures are said to be capitalized.
203
•The cost of the goods or services
should be matched with the
revenues that are obtained from the
periods.
•The general name for the matching

process is amortization.
204
Assets Accounts
As benefits are received

Made in future periods
YY
Cash or s Capitalize XX
ye
payable
Entries
Amortization
ZZ
Benefits
Expenditure
beyond this
XX
(cost incurred) Retained Earnings
Period?
no Expense
YY
XX
ZZ
205
Type of Asset Method of Converting

to Expense
Tangible Assets
•Land •Not amortized
•Plant and equipment •Depreciation
•Natural resources •Depletion
206
Types of Long-Lived Assets
and Amortization Methods
Type of Asset Method of Converting

to Expense
Intangible Assets
•Goodwill •Not amortized
•Intangible Assets (other than
goodwill)-limited life •Amortization
•Intangible Assets (other than •Not amortized
goodwill)-indefinite life
•Leasehold improvements
•Amortization
•Deferred charges
•Amortization
•Research and development costs
•Not capitalized 207
CAPEX or OPEX ?
1. Low cost Items : CAPEX or OPEX
2. Repair and Maintenance : OPEX
3. Betterment/Improvement: CAPEX
4. Replacement : CAPEX or OPEX
208
Capital Expenditure Criteria
1. Benefit >or< 1 Year

2. Materiality
3. Judgment
209
• A tangible asset is an asset that has physical
substance, such as a building or a machine.
• An intangible asset, such as patent rights or

copyrights, has no physical substance. Many
such assets are referred to as intellectual
property.
• Long-tangible assets are listed on the B/S

under the heading “property, plant, and
equipment” or “fixed assets”.
210
• The accounting process of converting
the original cost of fixed assets to
expense is called depreciation.
• Natural resources, such as petroleum
and natural gas in the ground are
usually reported as a separate category
(but not after they have been taken out
of the ground and become inventory).
• The accounting process of converting
the cost of the natural resource assets
to expense is called depletion.
211
Plant and Equipment:
Acquisition
• Low-Cost Items, items that have a low
unit cost, such as calculators and hand
tools, are charged immediately as
expenses, even though they may have
a long life. Each company sets its own
criteria for items that are to be
capitalized.
212
Acquisition
• Repair and maintenance is work done to keep
an asset in good operating condition or to
bring it back to good operating condition if it
has broken down.
• Repair and maintenance costs are ordinarily

period costs; they are not added to the
capitalized cost of the asset.
• A betterment is added to the cost of the

asset.
213
Acquisition
• The distinction between maintenance
expenses and betterments is this:
Maintenance keeps the asset in good
condition but in no better condition than
when it was purchased; a betterment
makes the asset better than it was
purchased or extend its useful life beyond
the original estimate of useful life.
• In practice the line between the two is
difficult to draw.
214
Acquisition
• Replacement: may be either assets or
expenses, depending on how the asset
unit is defined.
• The replacement of an entire asset
results in the writing off of the old asset
and the recording of the new asset.
• The replacement of a component part
of an asset is maintenance expense.
215
Items Included in Cost
• The governing principle is that the cost of
an item of property, plant, or equipment
includes all expenditures that are
necessary to make the asset ready for its
intended use.
• Despite the principle, many organizations
do not capitalize all the costs incurred to
make the asset ready to provide service.
• Some capitalize only the purchase price,
because it is simpler and to minimize
property taxes.
216
Items Included in Cost
• Self-Constructed Assets
• The amount of capitalized cost includes
all the costs incurred in construction.
217
PLANT AND EQUIPMENT:
DEPRECIATION
Why is depreciation an expense? The answer
is that the costs of all goods and services
consumed by an entity during an accounting
period are expenses.
The costs of insurance protection provided in
a year is an expense of that year even
though the insurance premium was paid two
or three years previously.
218
DEPRECIATION
Depreciation expenses is conceptually just
like insurance expenses.
The principle difference is that the fraction
of total cost of an item of plant and
equipment that is expense in a given year is
difficult to estimate, whereas the fraction of
the total cost of an insurance policy that is
an expense in a given year can be easily
calculated.
219
DEPRECIATION
The useful life of a tangible long-
lived asset is limited by either
deterioration or obsolescence.
Deterioration is physical process of

wearing out.
220
DEPRECIATION
Obsolescence refers to loss of usefulness because
of the development of improved equipment of
processes, changes in style, or other causes not
related to the physical condition of the asset.
We will refer to the time until an asset wears out
of its physical life, and the time until it becomes
obsolete or is expected to be disposed of as its
service life.
221
DEPRECIATION
Although the word depreciation is some
times used as referring only to physical
deterioration (“wear and tear”), this usage is
incorrect.
In many cases a piece of equipment’s
service life is shorter than its physical life;
computers are a good example.
222
Judgments Required
1. The service life of the asset-the number of
accounting periods over which the asset
will be useful to the specific entity that
owns it.
2. The asset’s residual value at the end of its
service life-any amount eventually
recovered trough sale, trade in, or salvage.
223
Judgments Required
It is this net cost that should be charged as
an expense over the asset’s life, not is
original cost.
In a great many situations, however, the
estimated residual value is so small or
uncertain that it is disregarded.
224
Judgments Required
3. The method of depreciation- the method
that will be used to allocate a fraction of
the asset’s net cost to each of the
accounting periods in which it is expected
to be used.
225
Judgments Required
Accountants, not being clairvoyant, can not
know in advance how long the asset will be
used or what its residual value will be.
Often they have no scientific or strictly
logical way of deciding the best
depreciation method.
226
Judgments Required
The amount of depreciation expense
that results from these judgments is
therefore an estimate-yet another
estimate that effects the amount of
each period’s reported income.
Because of the arithmetic precision of
the calculations that take place after
these judgments are made, the inexact
nature of depreciation expense is
sometimes overlooked.
227
Service Life
The service life of an asset is the period
of time over which is expect to provide
service (i.e. benefits) to the entity that
controls it.
The service life may be shorter than the
physical life because of obsolescence or
because the entity may plan to dispose
of an asset before its physical life ends.
228
Depreciation Methods
Consider a piece of equipment
purchased for $1,000 with an estimated
service life of 10 years and estimated
residual value of zero.
The objective of depreciation accounting

is to charge this net cost of $1,000 as an
expense over the 10 years period.
229
Depreciation Method
How much should be charged as an
expense each year?.
230
Straight-line Method. One concept views a
fixed asset as providing its services in a
level stream.
That is, the service provided (benefit
received) is equal in each year of the
asset’s life, just a three-years insurance
policy provides equal insurance protection
in each of its three years.
231
This concept leads to the straight-line

method, which charges as an expense
an equal fraction of the net cost of the
asset each year.
232
Depreciation Method
For a piece of equipment whose
net cost is $1,000 with an
estimated service life of 10 years,
1/10 of $ 1,000 (=$100) is the
depreciation expense of the first
year, another 1/10 is the
depreciation expense of the second
year, and so on.
233
Expressed another way, the
equipment is said to have a
depreciation rate of 10 percent per
year, the rate being the reciprocal of
the estimated service life.
234
Accelerated Methods. A second concept
recognizes that the stream of benefits
provided by a fixed asset may not be level.
Rather, the benefits provided may be

greatest in the first year of the asset’s
service life and least in the last year.
235
This pattern may occur because the asset’s
mechanical efficiency tends to decline with age,
because maintenance costs tend to increase
with age, or because of the increasing likelihood
that better equipment will become available and
make it obsolete.
Often, when a facility is mot working at capacity,
it is the older equipment that is not used.
236
It is argued, therefore, that when an asset
was purchased, the probability that the
earlier periods would benefit more than the
later periods was taken into account and
that the depreciation method should reflect
this.
237
Such a line a of reasoning leads to

an accelerated method that charges
a larger fraction of the costs an
expense of the early years than of
the later years.
238
Two methods, the double-declining-balance

method and sum-of-the years’ digits (or
simply years’ digit) method are described
below.
The effect of either of these methods is to

write off approximately two-thirds or the
asset’s cost in the first half of its estimated
life, as contrasted with the straight-line
methods under which, of course, half the cost
is written off in each half of the asset’s
estimated life.
239
Depreciation Method
Thus, if an accelerated method is
used, depreciation expense is
greater in the early years and less
in the later years as compared with
the straight-line method.
240
In a declining-balance method each year’s
depreciation is found by applying a rate to
the net book value of the asset as of the
beginning of that year.
(In straight-line method the depreciation
rate is applied to original cost net of
residual value, not to each year’s net book
value).
241
The net book value of an asset at a point in
time is the original acquisition cost less
total depreciation accumulated up to that
time.
With a declining-balance method, the
asset’s estimated residual value, if any, has
no effect on the annual depreciation
charges because residual value is not
included in the calculation of an asset’s net
book value.
242
The declining-balance rate is
stated percentage of the
straight-line rate.
Thus, for an asset with a useful
life of 10 years (straight-line
rate =10 percent), 200 percent
declining balance would use a
rate of 20 percent (200 percent
* 10 percent). 243
Similarly, 150 percent declining balance
would use rate of 15 percent.
The 200 percent declining balance method

is also called the double-declining-
balance method because the
depreciation rate is double the straight-line
rate.
244
After several years the annual depreciation
charge with a declining-balance method
will be lower than the annual charge with
the straight-line method.
The usual practice is to change at that time
from declining-balance to straight-line
depreciation for the remainder of the
asset’s life.
245
In the year’s-Digits methods, the numbers
1,2,3,…., n are added, where n is the
estimated years of useful life.
This sum can be found by the equation

(using 10 years for the example:
SYD = n (n+1 / 2) = 10 (10+1 / 2) = 55
246
The depreciation rate each year is a
fraction in which the denominator is the
sum of these digits and the numerator is,
for the first year, n; for the second year, n
– 1; for the third year, n – 2; and so on.
Thus, for a 10 years asset, the rate 10/55

the first year, 9/10 the second year, 8/10
the third year, and so on.
247
As with the straight-line method, the
rate is applied to the net cost-cost less
residual value-of the asset.
248
Units-of-Production Method
A third concept of depreciation also treats
the assets as consisting of a bundle of
service units; but it does not assume that
these service units will be provided in a
mathematical time-phased pattern, as is
assumed by the straight line an
accelerated methods.
Rather, with this concept a period’s
depreciation is related to the number of
service units provided by the asset during
the period.
249
Comparison of Depreciation Methods
Straight-line Double-Declining-Balance
(10 percent rate) (20 percent rate ) Years’- Digits
Annual Net book Annual Net Book Annual Net Book
Year Depreciation Value, 12/31 Depreciation Value, 12/31 Rate Depreciation Value, 12/31
0 $ 1,000 $ 1,000.00 $ 1,000.00
1 $ 100 900 $ 200,00 800.00 10/ 55 $ 181.82 818.00
2 $ 100 800 160,00 640.00 9/ 55 163.64 654.54
3 $ 100 700 128,00 512.00 8/ 55 145.45 509.09
4 $ 100 600 102,40 409.60 7/ 55 127.27 381.82
5 $ 100 500 81,92 327.68 6/ 55 109.09 272.73
6 $ 100 400 65,54 262.14 5/ 55 90.91 181.82
7 $ 100 300 65,54 196.60 4/ 55 72.73 109.09
8 $ 100 200 65,54 131.06 3/ 55 54.55 54.54
9 $ 100 100 65,54 65.52 2/ 55 36.36 18.18
10 $ 100 0 65,54 0 1/ 55 18.18 0
$ 1,000 65,52 $ 1000.00
$ 1,000,00
250
ANNUAL DEPRECIATION CHARGES
For equipment with Net Cost of $ 1,000 and 10 – Year Service life
200
180
160
Annual Depreciation ( Dollars)
140
120
100
80
60
Years’-Digits
40
Straight-line
20 Double-Declining-Balance
0
1 2 3 4 5 6 7 8 9 10
251
CAPITAL BUDGETING CRITERIA
1. Payback period
2. Average return on investment
3. Net present value
4. Profitability Index
5. Discounted cash flow (Internal Rate of
Return)
6. Discounted Payback Period
252
Hospital Supply, Inc.
Hospital Suppy, Inc. Produced hydraulic
hoists that were used by hospital to
move bedridden patients. The costs of
manufacturing and marketing hydraulic
hoists at the company’s normal volume
of 3,000 units per month are shown in
Exhibit 1.
253
Questions
The following questions refer only to
the data given in Exhibit 1. Unless
otherwise stated, assume there is no
connection betwen the situations
described in the questions; treat each
independently. Unless otherwise states,
assume a reguler selling price of $4,350
per unit. Ignore income taxes and other
cost not mentioned in Exhibit 1 or in a
questios itself.
254
1. What is the brek-even volume in units? In
sales dollars?
2. Market research estimates that monthly
volume could increase to 3,500 units, which
is well within hoist production capacity
limitations, if the price were cut from
$4,350 to $3,850 per unit. Assuming the
cost behavior patterns implied by tha data
in Exhibit 1 are correct, would you
recommend that this action be taken? What
would be the impact on monthly sales, cost,
and income?
255
3. On march 1 a contract offer is made to
Hospital Supplay by the federal government
to supplay 500 units to Veterans
Administration hospital for delivery by March
31. Because of an unusually large number of
rush orders from their regular customers,
Hospital Supplay plans to produce 4,00 units
during March, which will use all available
capacity. If the govenment orders is
accepted, 500 units normally sold to regular
customers would be lost to a competitor. The
contract given by the government would
reimburse the government’s share of March
productions costs, plus pay a fixed fee (profit)
of $275,000. (There would be no variable
marketing cost incurred on the government’s
units.) What impact would accepting the
government contract have on March income?256
4. Hospital Supplay has an opportunity to enter
a foreign market in which price competition is
keen. An attraction of the foreign market is
that demand there is greatest when demend
in the domestic market is quite low; thus, idle
production facilities could be used without
affecting domestic business.
An order for 1,000 units is being sought at
a below-normal price to enter this market.
Shipping cost for this order will amount to
$410 per unit, while total costs of obtaining
the contract (market cost) will be $22,000.
257
Domestic business would be unaffected
by this order. What is the minimum unit
price Hospital Supply should consider
for this order of 1,000 units?
5 An inventory of 200 units of an obsolete
model of the hoist remains in the
stockoom. These must be sold through
reguler channels at reduced price or the
inventory will soon be valueless. What
is the minimum price that would be
acceptable in selling these units?
258
6. A proposal is received from an outside
contractor who will make 1,000 hydraulic
hoist units per month and ship them directly
to Hospital Supply’s sales force. Hospital
Supply’s fixed marketing cost would be
unaffected, but its variable marketing cost
would be cut by 20 percent (to $220 per unit)
for these 1,000 units produced by the
contract. Hospital Supply’s plant would
operate at two-thirds of its normal level, and
total fixid manufacturing cost would be cut by
30 percent (to $1,386,000). What in-house
with the quotations received from the
supplier? Should the proposal be accepted for
a price (i.e.,payment to the contractor) of
$2,475 per units?
259
7. Assume the same facts as above in Question
6 except that the idle facilities would be used
to produce 800 modified hydroulic hoists per
month for use in hospital hydroulic rooms.
These modified hoists could be sold for
$4,950 each, while the variable
manufacturing cost would be $3,025 per unit.
Variable markeing cost would be $550 per
unit. Fixed marketing and manufacturing or
the mix of 2,000 regular hoists plus 800
modified hoists was produced. What is the
maximum purchase price per unit that
Hospital Supply should be willing to pay the
outside contractor? Should the proposal be
accepted for a price of $2,475 per unit to the
contractor?
260
Amerbran Company
Using the 19X1 financial statment in
Amerbran Company (A), Case 11-2, together
with 19X0 income statment shown in Exhibit
1 below, calculate the ratios listed below for
19x0 and 19x1. Use year-end amounts for
ratios that involve balance sheet data. The
company’s interes expense in 19x0 and 19x1
was (in thousands) $105,165 and $102,791
respectively.
261
1. Return on assets.
2. Return on equity.
3. Gross margin percentage.
4. Return on sales.
5. Asset turnover.
6. Day’s cash.
7. Day’s receivables.
8. Day’s inventories.
9. Inventory turnover.
10. Current ratio.
11. Acid-test ratio.
12. Debt/capitalization ratio.
13. Times interest earned.
262
AMERBRAN COMPANY
Income Statement
For the Year Ended December 31, 19x0
(In thousands)
Sales revenue, net........................................ $6,577,480
Cost of sales................................................ 2,573,350
Excise taxes on goods sols............................ 2,354,350
Gross margin................................................ 1,649,780
Selling, general, and administrative
Expenses..................................................... 974,121
Income before income taxes......................... 675,659
Provision for income taxes............................ 296,877
Net income............................................. $ 378,782
263
Questions
1. Comment on Amerbran’s treatment of
excise taxes as part of the calculations
of gross margin.
2. As an outside analyst, what questions
would you want to ask Amerbran’s
management based on the ratios you
have calculated?
264

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FINANCIAL MANAGEMENT FOR

NON- FINANCE MANAGER

HP: 0811-89-42-73 Phone: 021-8616982

To Work Efficiently and Effectively

It consists of two sides.

The assets side shows the economic resources

In a corporation, owners’ equity is

The usual accounting period is one

(4) & (5) = P&L Accounts (Temporary Accounts)

Assets + Expenses = Liability + Owners’ Equity + Revenue

1. Benefit (less or more than one year ?)

2. Materiality (Quantity and/or Quality)

3. Judgment or Estimation of Management

Once upon a time many, many years ago, there

Interval Period : Growing Season

BC’s Equity,Beg. 162

Return on Asset = Net Operating Income x 100 %

RoA = 132 % = 121 %

LAPORAN AUDITOR INDEPENDEN

Kami telah mengaudit neraca PT BAT INDONESIA tanggal

Kami melaksanakan audit berdasarkan standar auditing yang

Menurut pendapat kami, laporan keuangan yang kami sebut

Non Current Asset:

(-) Operating Expenses:

Net Operating Income (NOI) Rp xx

(+/-) Other Income & Other Expenses Rp xx

(+/-) Extra Ordinary Items Rpxx

EARNING BEFORE TAXES (EBT) Rpxx

(-) Corporate Tax Rpxx

NET INCOME/NET LOSSES Rpxx

Retained Earnings, Beg. Rpxx

(+/-) Profit/Losses for the Year Rpxx

Available for Dividend Rpxx

(-) Dividend Rpxx

Retained Earnings, End. Rpxx

Buy Fixed Assets Purchases

Sales of Fixed Asset

Cash, Begining Rp. xx

+/- : Cash Flow from:

I. Operating Activity Rp. xx

II. Financing Activity Rp. xx

III. Investing Activity Rp. xx

Sum of: I + II + III Rp. xx

Cash, Ending Rp. xx

The partners borrowed $21,000 from a

Shortly after November 1, the partners opened the

It was not very successful. On the morning of

1. Prepare a balance sheet for the

F&B Inventory 2,430 Total CL 20,483

Mrs.A, Cap., Nov.2, 1990 Rp16,000

3. From your calculations and financial statements

5.Cash, Ending(3-4) 44,5 29 12 0 0

THE THE THE

TOTAL COST Rp. 600.000,- Rp. 500.000,-

Fixed Cost / Month Rp. 200.000,- Rp. 200.000,-

y = PROFIT b = VAR. COST/UNIT

OR : INCOME ST. FOR A PERIOD

XBE = SALES VOL. AT BEP LEVEL

* BREAK EVEN AT $ AMOUNT CAN BE FOUND BY MULTIPLYING

Customer Internal Business Process

Learning and Growth

Sales Budget Production Budgets Other

Sales Adm. Direct