This chapter explores absorption and activity-based costing. It notes the importance of overheads when costing products. The chapter uses equations to calculate a simple blanket overhead rate and a simple activity-based cost. It uses absorption costing methods to fully cost out a range of products. The chapter also cites the limitations of traditional costing methods. It includes the under recovery and over recovery of overheads costs which are indirect costs to a business that cannot be linked directly with a product. Towards the end, the chapter includes the process of going through costs being collected by manufacturing departments by referencing cost allocation, apportion, and reapportion of indirect costs.
Chapter
Absorption and Activity-Based Costing
Sam’s Cost Conundrum
Book
Mary Carey and Cathy Knowles
Accounting is made up of two main parts. Part One covers financial accounting. It starts off by looking at the cash budget. It then moves on to the statement of profit or loss. It also looks at balancing the basics. It then turns to company finance and accounts. It also considers the capital structure and investment ratios. The second part is about management accounting. This part discusses costs and break-even analysis, absorption and activity-based costing, and budgeting. It also examines pricing and costs, short-term decision making, investment appraisal techniques, and measuring and reporting performance.
Chapter
Accounting Basics
This chapter describes the basics of the financial accounting system. It examines the principles underlying the three most important outputs of the system: the statement of financial position, the statement of comprehensive income, and the statement of cash flows. The chapter also looks at the internal dynamics of the accounting system—double-entry bookkeeping and year-end procedures—to facilitate understanding of these financial statements. Assets, liabilities, equity, income, and expense are the five elements of an accounting system. The chapter then introduces an imaginary business, the Pizza Business, as an example. It accounts for fourteen basic transactions and other events in the financial statements of the Pizza Business using the accounting equation, the terminology of debits and credits, and numerous explanations of key principles.
Book
Peter Scott
Accounting for Business contains two parts. Part One is about financial accounting. Chapters include examinations on the statement of financial position, the income statement, cash flows, and ratio analysis. Part Two looks at cost and management accounting. This part includes chapters on costing, relevant costs, marginal costing, decision-making, budgeting, and capital investment appraisal.
Book
Peter Scott
Accounting for Business is designed to be used as an introduction to the practice and techniques of accounting in the business world. This e-book and the associated materials shows why a knowledge of accounting and its integral role in all organizations are of vital importance to a career in business. It is aimed specifically at a non-specialist studying an introductory accounting module as part of a degree in a business related subject. The book provides careful step-by-step guides on how to construct and evaluate various accounting statements. Further opportunities are then given to apply what has been learnt with a view to enhancing users’ understanding and ability to produce and interpret accounting information. Accounting for Business contains two parts. Part One addresses financial accounting. Chapters include examination of the statement of financial position, the statement of profit or loss and the statement of cash flows and ratio analysis. Part Two looks at cost and management accounting. This part includes chapters on costing, relevant costs, marginal costing, decision making, budgeting and capital investment appraisal. A final chapter presents an introduction to corporate governance and sustainability.
Chapter
Accounting for Depreciation and Bad Debts
Smart Sports is Called to Account
This chapter explores accounting for depreciation and bad debts. It highlights the importance of depreciating non-current assets through the straight-line and the reducing-balance methods of providing. Next, the chapter explains the need for providing for bad and doubtful debts. It describes the process of a final adjusted statement of profit or loss and a statement of financial position. The chapter also points out the limits of a statement of financial position by citing historical costs, estimates, judgements, and mining assets. It looks into key accounting concepts such as the entity concept, the money measurement concept, the matching concept, the prudence concept, and the consistency concept.
Chapter
Assets
This chapter focuses on assets. Businesses have all sorts of assets: buildings, shop fittings, trademarks, shares in other businesses, inventory, receivables, cash, etc. To qualify as an asset, a resource must meet the three key requirements of the asset definition: it must give rise to a right, the right should have the potential to produce economic benefits, and the business must control the resource. To be recognised as an asset on the business's statement of financial position, an asset must meet the recognition criteria of relevance and faithful representation. Many intangible assets are not recognised as assets because they do not satisfy the recognition criteria. As a result, the statements of financial position of businesses with large investments in intellectual property generally omit their biggest assets. This is a challenge for financial analysts and other users of the financial statements.
Chapter
Associates, joint arrangements and statements of cash flow
This chapter examines the accounting methods required when an investor exerts partial influence over its investee company. It considers the techniques of accounting for associates and joint ventures in the consolidated statement of profit or loss, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, and the consolidated statement of financial position by the equity method. The accounting for other joint operations is also discussed. In addition, the techniques for the preparation of a consolidated statement of cash flows are included to complete the consolidated financial statements. The chapter also discusses the equity method of accounting and its future.
Chapter
Balancing the Basics
Getting a ‘Snapshot’ of Smart Sports
This chapter looks into balancing the basics of financial statements. It defines the statement of profit or loss, the statement of financial position, and the statement of cash flows as the three financial statements that make a set of accounts. Then, the chapter discusses the layout of the statement of financial position which shows the finance of a business's assets and liabilities. It includes the payment options recorded on a trial balance. This is called accrual and prepayment. The chapter highlights how the historic cost concept is indisputable since it requires transactions to be recorded at their original cost to the business. The going concern concept, as the chapter argues, raises the assumption that the business will continue operations in the foreseeable future.
Chapter
Budgeting
This chapter offers a detailed look at budgeting and shows how the use of budgets and the comparison of outcomes with expectations enable an entity to control its operations, to enhance positive trends, and to take action to correct problems as they arise. It discusses how budgets involve planning, communicating, coordinating, motivating, and controlling. The chapter presents the preparation of budgeted monthly statements, month-by-month cash budgets, and budgeted statements of financial position at the end of a projected accounting period. Towards the end of the chapter, the text explains how to compare budgeted and actual income and expenditure with actual financial performance and how to conduct sensitivity analysis.
Chapter
Budgeting
Sam Makes a Smart Plan
This chapter highlights the significance of budgeting. It describes the process of preparing a budget, citing benefits such as planning, coordination, communication, and authorization. The chapter explains that an incremental budget is calculated by taking the previous year's actual figures and adjusting for changes like price inflation, while zero-based budgets calculate every number from scratch. The chapter also outlines a criticism of top down budgets and bottom up budgets. It also looks into the purpose of simple variance analysis. Next, the chapter mentions how budgeting is conducted to monitor the performance of variance and flexible budgeting. It cites the principles of variance analysis.
Chapter
Budgeting
This chapter examines budgeting in detail and looks at how the use of budgets and the comparison of outcomes with expectations enable an entity to control its operations, to enhance positive trends, and to take action to correct problems as they arise. It explores the ways in which budgets perform planning, communicating, coordinating, motivating, and control functions. The chapter shows the preparation of a budgeted monthly statement of profit or loss, month-by-month cash budget, and a budgeted statement of financial position at the end of a projected accounting period. It also considers the comparisons between budgeted and actual income and expenditure to highlight variances in expected and actual financial performance. Sensitivity analysis to assess the effect that any changes in budget assumptions will have is discussed.
Chapter
Budgeting
This chapter examines budgeting in detail and looks at how the use of budgets and the comparison of actual outcomes with budgeted expectations enables an entity to control its operations, to enhance positive trends and to take action to correct problems as they arise. It explores the ways in which budgets perform planning, communicating, coordinating, motivating and control functions. The chapter shows the preparation of a budgeted monthly statement of profit or loss, month-by-month cash budget and a budgeted statement of financial position at the end of a projected accounting period. It also considers the comparison between budgeted and actual income and expenditure to highlight variances in expected and actual financial performance. Sensitivity analysis to assess the effect that any changes in budget assumptions will have is also discussed.
Chapter
Business organizations and the financing of business
This chapter deals with the different features of each type of business organization and the advantages and disadvantages of each format. It presents the different methods each type adopts in order to finance their operations and the requirements that each different financing method imposes. The chapter also considers the features of ordinary and preference share capital and how cash is raised from issuing shares of stock. Moreover, it shows how bonus issues and rights issues work. Finally, it examines how limited companies make dividend distributions and whether they have the capacity to make such distributions.
Chapter
Business organizations and the financing of business
This chapter deals with the different features of each type of business organization and the advantages and disadvantages of each format. It presents the different methods of finance available to each type of business and the obligations that each different financing method imposes. The chapter also considers the features of ordinary and preference share capital, how cash is raised from issuing shares and the features of bonus issues and rights issues. Finally, it examines how limited companies make dividend distributions and whether they have the capacity to make such distributions.
Chapter
Business Valuations
This chapter identifies three different ways of thinking about a business' value, looking at book value, market value, and intrinsic value. A business's book value is usually a poor measure of what a business is worth. Meanwhile, a listed company's market value is its market capitalisation, which is the result of multiplying its share price by the number of shares outstanding. The intrinsic value of a business is what it is really worth; it is this figure which a business valuation seeks to identify. A business valuation which uses the discounted cash flow model (DCF) is a fundamental valuation, in the sense that it aims to measure the intrinsic value directly, by calculating the present value of the future cash flows of the business. The chapter then considers the steps involved in a DCF valuation and valuation multiples.
Chapter
Capital Investment Appraisal
This chapter focuses on capital investment appraisal, which is essential when considering investments in new projects or in new assets. The chapter explores why businesses undertake capital investment appraisal when making long-term investment decisions. The chapter also presents the four main capital investment appraisal techniques and how they work. Importantly, the chapter illustrates the application of these capital investment appraisal techniques to capital investment decisions.
Chapter
Capital investment appraisal
This chapter discusses capital investment appraisal, or the determination as to whether new investments will be worthwhile, and whether they will generate more cash than they originally cost. It starts by defining capital investment and explains why businesses undertake capital investment appraisal when making long-term investment decisions. The chapter then introduces the four main capital investment appraisal techniques and their application to capital investment decisions. Moreover, it likewise explores the advantages and limitations of each of the four main capital investment appraisal techniques. At the end of the chapter, the concept of the time value of money is expounded.
Chapter
Capital investment appraisal
This chapter discusses capital investment appraisal as a means to determine whether new investments will be worthwhile and whether they will generate more cash than they originally cost. It starts by defining capital investment and explains why businesses undertake capital investment appraisal when making long-term investment decisions. The chapter then introduces the four main capital investment appraisal techniques and their application to capital investment decisions. It explores the advantages and limitations of each of the four main capital investment appraisal techniques. The chapter explains the concept of the time value of money.
Chapter
Capital Structure and Investment Ratios
Sam Gears Up
This chapter discusses capital structure and investment ratios. It notes how capital structure ratios consider the origin of the long-term funds of the business, while investment ratios look at how company shares are performing and how they are returned. The chapter explains the advantages and disadvantages of gearing and interest cover which are the key ratios of capital structures. It also explores the equations for dividend yield, price to earnings ratio, and earnings per share dividend cover. Next, the chapter looks into the limitations of ratio analysis in line with the nature of the business and broader economic environment.
