Accounting for Managers 2 nd Edition Steven M. Bragg
Chapter 1 The Need for Accounting Information... 1 Learning Objectives... 1 Introduction... 1 The Accountancy Concept... 1 Financial and Managerial Accounting... 2 Decisions Requiring Accounting Information... 3 The Structure of this Book... 4 Summary... 5 Review Questions... 6 Review Answers... 7 Chapter 2 Introduction to Accounting... 9 Learning Objectives... 9 Introduction... 9 Accounting Frameworks... 9 Accounting Principles... 10 The Accounting Cycle... 11 Accounting Transactions... 12 Source Documents... 12 Double Entry Accounting... 13 The Ledger Concept... 14 The General Ledger... 15 Accounts Receivable Ledger... 16 Purchase Ledger... 17 Journal Entries... 17 Major Journal Entries... 18 The Accruals Concept... 19 The Realization Concept... 20 The Trial Balance... 20 Accrual Basis of Accounting... 21 Cash Basis of Accounting... 22 Summary... 22 Review Questions... 24 Review Answers... 25 Chapter 3 The Financial Statements... 27 Learning Objectives... 27 Introduction... 27 The Income Statement... 27 Income Statement Overview... 27 The Single-Step Income Statement... 29 The Multi-Step Income Statement... 30 The Condensed Income Statement... 31 The Contribution Margin Income Statement... 31 The Multi-Period Income Statement... 32 The Balance Sheet... 33 Overview of the Balance Sheet... 33 The Common Size Balance Sheet... 35 The Comparative Balance Sheet... 36 The Statement of Cash Flows... 37 Overview of the Statement of Cash Flows... 37 The Direct Method... 38 The Indirect Method... 39 The Statement of Retained Earnings... 40
Overview of the Statement of Retained Earnings... 40 Financial Statement Footnotes... 41 Consolidated Financial Statements... 42 Interim Financial Statements... 42 Pro Forma Financial Statements... 43 Financial Statement Audits, Reviews, and Compilations... 44 Summary... 45 Review Questions... 46 Review Answers... 47 Chapter 4 Interpretation of Financial Statements... 49 Learning Objectives... 49 Introduction... 49 Interpretation of Financial Statements... 49 Horizontal Analysis... 50 Vertical Analysis... 51 Cash Coverage Ratio... 52 Current Ratio... 53 Quick Ratio... 54 Liquidity Index... 54 Accounts Payable Turnover Ratio... 55 Accounts Receivable Turnover Ratio... 56 Inventory Turnover Ratio... 56 Fixed Asset Turnover Ratio... 57 Sales to Working Capital Ratio... 57 Debt to Equity Ratio... 58 Fixed Charge Coverage... 59 Breakeven Point... 59 Gross Profit Ratio... 60 Net Profit Ratio... 60 Return on Net Assets... 61 Return on Equity... 61 Limitations of Ratio Analysis... 63 Effect of the Number of Days in a Month... 64 Summary... 65 Review Questions... 66 Review Answers... 67 Chapter 5 Evaluation of Responsibility Centers... 69 Learning Objectives... 69 Introduction... 69 Responsibility Reporting... 69 Functional Organizational Structure... 70 Divisional Organizational Structure... 71 The Structure of the Chart of Accounts... 72 Three-Digit Chart of Accounts... 73 Five-Digit Chart of Accounts... 74 Seven-Digit Chart of Accounts... 75 Responsibility Center Information Reporting... 78 Transfer Pricing... 80 Market Price Basis... 81 Adjusted Market Price Basis... 82 Negotiated Basis... 82 Contribution Margin Basis... 82 Cost Plus Basis... 83 Cost Anomalies in a Cost-Based Transfer Price... 83 Pricing Problems Caused by Transfer Pricing... 84 ii
Tax Impact of Transfer Prices... 84 Accounting Issues Related to Responsibility Centers... 86 Summary... 86 Review Questions... 87 Review Answers... 88 Chapter 6 Overview of Selected Accounting Standards... 89 Learning Objectives... 89 Introduction... 89 Accounting Changes and Error Corrections... 89 Advertising... 90 Capitalized Interest... 91 Compensated Absences... 92 Contingencies... 93 Deferred Compensation... 93 Fixed Assets... 94 Inventory... 95 First In, First Out Method... 96 Last In, First Out Method... 97 Weighted Average Method... 98 Specific Identification Method... 99 Research and Development... 99 Subsequent Events... 100 Stock-Based Compensation... 100 Taxes... 103 Summary... 105 Review Questions... 106 Review Answers... 107 Chapter 7 Sales and Marketing Decisions... 109 Learning Objectives... 109 Introduction... 109 Contribution Margin... 109 Breakeven Point... 110 Margin of Safety... 113 Cost-Volume-Profit Analysis... 113 Sales Mix... 115 Accounting Inputs to Price Formulation... 116 Cost Plus Pricing... 116 Time and Materials Pricing... 117 Breakeven Pricing... 118 Price Elasticity of Demand... 120 Cross Price Elasticity of Demand... 121 Non-Price Determinants of Demand... 121 Summary... 122 Review Questions... 123 Review Answers... 124 Chapter 8 Human Resources Decisions... 125 Learning Objectives... 125 Introduction... 125 Payroll Cycles... 125 Time Tracking Issues... 127 Time Tracking Scope... 127 Employee Exclusions... 127 Data Collection Scope... 128 Payroll Deduction Issues... 129 iii
Payroll Tax Remittance Issues... 130 Definition of an Employee... 131 Accrued Bonuses... 133 The Common Paymaster Rule... 134 Unemployment Insurance Issues... 135 The Employee Cost Object... 136 The True Variability of Direct Labor... 137 Compensation Cost Reduction... 138 Proactive Hiring Solutions... 138 Temporary Cost Reductions... 139 Permanent Cost Reductions... 140 Summary... 141 Review Questions... 142 Review Answers... 143 Chapter 9 Investment Decisions... 145 Learning Objectives... 145 Introduction... 145 The Investment Decision... 145 Payback Analysis... 146 Discounted Payback... 147 Accounting Rate of Return... 147 Time Value of Money... 148 Present and Future Value Tables... 149 Net Present Value... 151 Internal Rate of Return... 152 Incremental Internal Rate of Return... 153 Terminal Value... 153 Real Options... 154 Complex Systems Analysis... 155 Research and Development Funding Analysis... 155 Accounting Issues Related to Investment Decisions... 156 Impairment of Fixed Assets... 156 Impairment of Securities... 157 Impairment of Investments in Other Entities... 158 Summary... 159 Review Questions... 161 Review Answers... 162 Chapter 10 Acquisition Decisions... 163 Learning Objectives... 163 Introduction... 163 Accounting Due Diligence... 163 Impact on Earnings per Share... 165 Tax Issues in an Acquisition... 165 Tax Issues for the Seller... 166 Tax Issues for the Acquirer... 166 Issues with Stock Purchases... 166 General IRS Requirements to Avoid Gain Recognition... 167 The Type A Acquisition... 167 The Type B Acquisition... 168 The Type C Acquisition... 168 The Type D Acquisition... 169 Triangular Mergers... 169 The Triangular Merger... 170 The Reverse Triangular Merger... 170 The Asset Acquisition... 170 iv
Impact of the Acquiree Organizational Form... 171 Summary of Legal Structures... 172 Accounting Integration... 172 Summary... 176 Review Questions... 177 Review Answers... 178 Chapter 11 Cost Accounting Tools and Concepts... 179 Learning Objectives... 179 Introduction... 179 Direct Costing... 179 Direct Costing as a Managerial Tool... 180 Automation Investments... 180 Cost Reporting... 181 Customer Profitability... 182 Profit-Volume Relationship... 182 Outsourcing... 183 Direct Costing Pitfalls... 184 The Problem With Overhead Allocation... 186 Activity-Based Costing... 188 Activity-Based Management... 192 Summary... 193 Review Questions... 194 Review Answers... 195 Chapter 12 Target Costing... 197 Learning Objectives... 197 Introduction... 197 The Basic Steps of Target Costing... 197 Value Engineering Considerations... 198 The Cost Reduction Program... 199 The Milestone Review Process... 199 Problems with Target Costing... 200 The Members of a Design Team... 201 The Role of Accounting in Target Costing... 201 Data Sources for Target Costing... 202 The Product Life Cycle and Target Costing... 203 Summary... 203 Review Questions... 204 Review Answers... 205 Chapter 13 Constraint Analysis... 207 Learning Objectives... 207 Introduction... 207 Constraint Analysis Operational Terminology... 207 Overview of Constraint Analysis... 208 The Cost of the Bottleneck... 209 Local Optimization... 210 Constraint Analysis Financial Terminology... 211 Constraint Analysis from a Financial Perspective... 211 The Constraint Analysis Model... 211 The Decision to Sell at a Lower Price... 213 The Decision to Outsource Production... 214 The Capital Investment Decision... 215 The Decision to Cancel a Product... 216 Summary... 217 Review Questions... 218 Review Answers... 219 v
Chapter 14 Budgeting Concepts... 221 Learning Objectives... 221 Introduction... 221 The System of Budgets... 221 The Reasons for Budget Iterations... 224 Overview of the Revenue Budget... 225 The Ending Finished Goods Inventory Budget... 227 The Production Budget... 229 Production Budgeting for Multiple Products... 230 The Direct Materials Budget (Roll up Method)... 231 The Direct Materials Budget (Historical Method)... 232 The Direct Labor Budget... 233 The Manufacturing Overhead Budget... 234 The Sales and Marketing Budget... 235 Diminishing Returns Analysis... 236 The Research and Development Budget... 237 The Administration Budget... 239 The Compensation Budget... 240 The Budgeted Income Statement... 243 The Budgeted Balance Sheet... 243 Accounts Receivable... 244 Inventory... 245 Fixed Assets... 246 Accounts Payable... 246 Additional Estimation Elements... 247 The Cash Line Item... 248 The Financing Budget... 248 The Compiled Balance Sheet... 250 Summary... 251 Review Questions... 252 Review Answers... 253 Chapter 15 Budgetary Control... 255 Learning Objectives... 255 Introduction... 255 General Reporting Format... 255 Revenue Reporting... 257 Sales Volume Variance... 257 Overview of Cost of Goods Sold Variance Reporting... 258 The Purchase Price Variance... 259 Material Yield Variance... 260 Labor Rate Variance... 261 Labor Efficiency Variance... 261 Variable Overhead Spending Variance... 262 Variable Overhead Efficiency Variance... 263 Fixed Overhead Spending Variance... 263 Problems with Variance Analysis... 264 Which Variances to Report... 264 Summary... 265 Review Questions... 266 Review Answers... 267 Glossary... 269 Index... 273 vi