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Overview of Accounting: EGR 403 Capital Allocation Theory
Overview of Accounting: EGR 403 Capital Allocation Theory
Introduction
Engineers need to understand accounting to fully understand the language of middle and upper management Performance evaluations of engineers often based on accounting data (e.g., budgeting) It is difficult to interpret information and find accounting mistakes without some accounting background
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Introduction (contd)
Accounting courses for engineers: IME 239 or take courses in an MBA program Engineering projects are undertaken based largely on their ability to generate Profit. Profit is an accounting term. Profit = Revenue - Expenses
Revenue (money in) is a.k.a. income or sales Expenses (money out) are a.k.a. costs
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Introduction (contd)
Manufacturing is cost driven
Products/processes designed to use least $$ Manufacturing costs need to be controlled Continuous Improvement programs reduce cost
EGR 403 will concentrate on the financial aspects of economic decision making.
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Financial Statements
Balance Sheet (General Accounting)
Snap shot of what the company owns and how much they owe. Discloses information to investors.
Accounting Concepts
Cigar Box Accounting Method - Revenue goes into the cigar box. Expenses go out. What is left is your profit. Accrual Accounting - Expenses are matched with revenue so that profit reflects actual activity and expenses in the time period. The matching principle is necessary for taxation and reporting performance.
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Capital Expenditures - $ spend on improvements or additions with useful life greater than one year (e.g., machinery, buildings, furniture, etc.).
Depreciation - allocation of the cost of capital expenditures so that revenue is matched with expenses for items that will last more than one year (Land is not depreciable).
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Depreciation Example
You purchase a $50,000 CNC machine. Useful life = 5 years. Salvage value = 0. If you deduct the entire $50K as an expense the first year, you are not matching the revenue since there are 4 years of life left. Straight line depreciation = $50,000/5 years = $10,000/year. Depreciation expense = $10,000/year for 5 years. This matches revenue with expenses.
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Dividends are considered personal income for shareholders and therefore taxed again (double taxation). So the majority of corporate profits go to taxes.
(note to those listening to narrative: go to slide 12 when retained earnings are mentioned)
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