Accounting and Finance for the NonFinancial Executive: An Integrated Resource Management Guide for the 21st Century

by Shim; Jae K.

• ISBN13: 9781574442878
• ISBN10: 1574442872
• Edition: 1st
• Format: Hardcover
• Copyright: 2000-06-22
• Publisher: CRC Press

Summary

Have you recently been promoted? Are you starting a new business? Do you suddenly find that you need to know more about finances than you ever expected, but have no time for formal training? If so, you need Accounting and Finance for the Non-Financial Executive. Whether you are a newly promoted middle manager or executive, a marketing manager of a small company, an entrepreneur, or own your own business, your results will be measured in dollars and cents. You need to know the basics of finance and accounting to make sound business decisions and become successful. Shim shows you the strategies for evaluating investment decisions such as return on investment analysis. You will see what you need to know, what to ask, which tools are important, what to look for, what to do, and how to do it. Easy to read and useful, the book presents many practical examples, illustrations, guidelines, measures, rules of thumb, graphs, diagrams, and tables that make comprehending the subject easy. Accounting and Finance for the Non-Financial Executive prepares you for additional managerial responsibilities. You will be better equipped to prepare, appraise, evaluate, and approve plans to accomplish departmental objectives. You will be able to back up your recommendations with carefully prepared financial support. Whether they are based on marketing, production, or personnel, by learning how to think in terms of finance and accounting you can intelligently express your ideas.

Author Biography

Jae K. Shim is Professor of Accountancy and Finance at California State University, Long Beach.

Table of Contents

Part I Thinking Finance
Financial Decision Making and Analysis	3	(12)
The Nonfinancial Manager's Concern with Finance	3	(2)
What Are the Scope and Role of Finance?	5	(1)
The Importance of Finance	5	(5)
The What and Why of Finance	5	(1)
What Are Financial Managers Supposed to Do?	6	(1)
What Is the Relationship Between Accounting and Finance?	6	(4)
Financial and Operating Environment	10	(4)
What Should You Know About Financial Institutions and Markets?	10	(1)
Financial Assets vs. Real Assets	10	(1)
Basic Forms of Business Organizations	11	(1)
Sole Proprietorship	11	(1)
Partnership	12	(1)
Corporation	12	(2)
Conclusion	14	(1)
What Can You Do About Your Departmental Costs?	15	(8)
Importance of Cost Data	15	(1)
Types of Costs	15	(2)
Costs by Function	15	(1)
Costs by Ease of Traceability	16	(1)
Costs by Timing of Charges Against Revenue	16	(1)
Costs by Behavior	16	(1)
Costs by Averaging	17	(1)
Costs by Controllability	17	(1)
Other Important Cost Concepts Useful for Planning, Control, and Decision Making	17	(1)
How Do Your Costs Behave?	18	(2)
Costs by Behavior	18	(2)
Segregating Fixed Cost and Variable Cost	20	(1)
Cost Allocation	20	(1)
Cost Analysis	20	(1)
What You Can Learn from the Japanese	21	(1)
Conclusion	21	(2)
How You Can Use Contribution Margin Analysis	23	(6)
Should You Accept a Special Order?	24	(1)
How Do You Determine a Bid Price?	25	(1)
Determining Profit from Year to Year	26	(2)
Are You Utilizing Capacity?	28	(1)
Conclusion	28	(1)
Are You Breaking Even?	29	(10)
What Is Cost-Volume-Profit (CVP) Analysis?	29	(1)
What and Why of Break-Even Sales	29	(4)
What Is Margin of Safety?	33	(1)
Cash Break-Even Point	33	(1)
What Is Operating Leverage?	34	(2)
Sales Mix Analysis	36	(1)
Conclusion	37	(2)
How to Make Short-Term, Nonroutine Decisions	39	(10)
What Costs Are Relevant to You?	39	(1)
Accepting or Rejecting a Special Order	40	(1)
Pricing Standard Products	41	(2)
Analyzing the Make-or-Buy Decision	43	(1)
Determining Whether to Sell or Process Further	44	(1)
Adding or Dropping a Product Line	44	(1)
Utilizing Scarce Resources	45	(1)
Do Not Forget the Qualitative Factors	46	(1)
Conclusion	47	(2)
Financial Forecasting and Budgeting	49	(18)
What Is a Forecast?	49	(1)
How Can You Use Forecasts?	49	(1)
How Do You Prepare a Financial Forecast?	50	(1)
Percent-of-Sales Method of Financial Forecasting	50	(2)
What Is a Budget?	52	(3)
What Assumptions Must Be Made?	55	(1)
What Is the Structure of the Budget?	55	(10)
The Sales Budget	57	(1)
The Production Budget	58	(1)
The Direct Material Budget	58	(1)
The Direct Labor Budget	59	(1)
The Factory Overhead Budget	60	(1)
The Ending Inventory	60	(1)
The Selling and Administrative Expense Budget	61	(1)
The Case Budget	61	(2)
The Budgeted Income Statement	63	(1)
The Budgeted Balance Sheet	64	(1)
Is There a Shortcut Approach to Formulating the Budget?	65	(1)
Can You Use an Electronic Spreadsheet to Develop a Budget Plan?	65	(1)
Computer-Based Models for Financial Planning and Budgeting	65	(1)
Conclusion	66	(1)
Using Variance Analysis as a Financial Tool	67	(18)
Defining a Standard	68	(1)
The Usefulness of Variance Analysis	68	(1)
Setting Standards	69	(1)
Determining and Evaluating Sales Variances	70	(1)
Cost Variances	71	(1)
Materials Variances	71	(2)
Labor Variances	73	(1)
Overhead Variances	74	(2)
The Use of Flexible Budgets in Performance Reports	76	(2)
Standards and Variances in Marketing	78	(2)
Sales Standards	78	(1)
Analyzing Salesperson Variances	79	(1)
Variances in Warehousing Costs	80	(1)
Conclusion	81	(4)
Part II Critical Asset Management Issues
Working Capital and Cash Management	85	(12)
Working Capital	85	(1)
Financing Assets	85	(1)
Managing Cash Properly	86	(2)
Getting Money Faster	88	(4)
Delaying Cash Payments	92	(2)
Opportunity Cost of Foregoing a Cash Discount	94	(1)
Volume Discounts	94	(1)
Conclusion	95	(2)
How to Manage Your Accounts Receivable	97	(8)
Credit References	97	(1)
Credit Policy	98	(1)
Analyzing Accounts Receivable	99	(4)
Conclusion	103	(2)
How to Manage Inventory	105	(12)
Inventory Management Considerations	105	(2)
Inventory Analysis	107	(1)
Determining the Carrying and Ordering Costs	108	(1)
The Economic Order Quantity (EOQ)	109	(1)
Avoiding Stockouts	110	(1)
Determining the Reorder Point or Economic Order Point (EOP)	111	(1)
The ABC Inventory Control Method	112	(2)
Conclusion	114	(3)
Part III Financial Decision Making for Managers
Understanding the Concept of Time Value	117	(18)
Future Values --- How Money Grows	117	(1)
Intrayear Compounding	118	(1)
Future Value of an Annuity	119	(1)
Present Value --- How Much Is Money Worth Now?	120	(1)
Present Value of Mixed Streams of Cash Flows	121	(1)
Present Value of an Annuity	122	(1)
Perpetuities	122	(1)
Applications of Future Values and Present Values	123	(1)
Deposits to Accumulate a Future Sum (or Sinking Fund)	123	(1)
Amortized Loans	124	(1)
Annual Percentage Rate (APR)	125	(1)
Rates of Growth	126	(1)
Compound Annual Rate of Interest	126	(1)
Bond Values	127	(1)
Use of Financial Calculators and Spreadsheet Programs	128	(1)
Conclusion	128	(7)
Capital Investment Decisions	135	(16)
What Are the Types of Investment Projects?	135	(1)
What Are the Features of Investment Projects?	136	(1)
How Do You Measure Investment Worth?	136	(4)
Payback Period	136	(1)
Accounting Rate of Return (ARR)	137	(1)
Net Present Value (NPV)	138	(1)
Internal Rate of Return (IRR)	139	(1)
Profitability Index	140	(1)
How to Select the Best Mix of Projects with a Limited Budget	140	(1)
How Do Income Taxes Affect Investment Decisions?	141	(2)
Types of Depreciation Methods	143	(2)
Straight-Line Method	143	(1)
Sum-of-the-Years'-Digits (SYD) Method	143	(1)
Double-Declining-Balance (DDB) Method	144	(1)
How does MACRS Affect Investment Decisions?	145	(2)
What to Know About the Cost of Capital	147	(3)
Cost of Debt and Preferred Stock	148	(1)
Cost of Common Stock	148	(1)
Cost of Retained Earnings	149	(1)
Measuring the Overall Cost of Capital	149	(1)
Conclusion	150	(1)
How to Analyze and Improve Management Performance	151	(10)
What is Return on Investment (ROI)?	151	(1)
What Does ROI Consist of? --- Du Pont Formula	152	(1)
ROI and Profit Objective	153	(1)
ROI and Profit Planning	154	(2)
ROI and Return on Equity (ROE)	156	(3)
A Word of Caution	159	(1)
Conclusion	160	(1)
How to Evaluate Your Segment's Performance	161	(18)
Appraising Manager Performance	161	(1)
Responsibility Center	162	(15)
Revenue Center	162	(3)
Cost Center	165	(1)
Profit Center	166	(3)
Transfer Pricing	169	(4)
Investment Center	173	(1)
Return on Investment (ROI)	173	(2)
Residual Income (RI)	175	(1)
Decisions Under ROI and RI	176	(1)
Conclusion	177	(2)
How Taxes Affect Business Decisions	179	(10)
Tax Strategies and Planning	179	(1)
Tax Computation	180	(5)
Interest and Dividend Income	181	(1)
Interest and Dividends Paid	182	(1)
Operating Loss Carryback and Carryforward	182	(1)
Capital Gains and Losses	183	(1)
Modified Accelerated Cost Recovery System (MACRS).	184	(1)
Alternative ``Pass Through'' Tax Entities	184	(1)
S Corporations	185	(1)
Limited Liability Companies	185	(1)
Foreign Tax Credit	185	(1)
Conclusion	185	(4)
Part IV Obtaining Funds
What to Know About Short-Term Financing	189	(16)
How to Use Trade Credit	189	(1)
Cash Discounts	190	(1)
When Are Bank Loans Advisable?	190	(6)
Are You Eligible for an Unsecured Loan?	192	(1)
What Will You Give to Obtain a Secured Loan?	192	(1)
What Line of Credit Can You Get?	192	(1)
What Is an Installment Loan?	193	(1)
How Do You Compute Interest?	194	(2)
What Should You Know When Dealing With a Banker?	196	(1)
What Are Banker's Acceptances?	196	(1)
Are You Forced to Take Out a Commercial Finance Company Loan?	197	(1)
Are You Financially Strong Enough to Be Able to Issue Commercial Paper?	197	(1)
Should Receivables Be Used for Financing?	197	(2)
Should Inventories Be Used for Financing?	199	(2)
What Other Assets May Be Used for Financing?	201	(1)
Conclusion	201	(4)
Looking at Term Loans and Leasing	205	(6)
Intermediate-Term Bank Loans	205	(2)
Using Revolving Credit	207	(1)
Insurance Company Term Loans	207	(1)
Financing with Equipment	207	(1)
Leasing	207	(3)
Lease-Purchase Decision	210	(1)
Conclusion	210	(1)
Deciding on Long-Term Financing	211	(32)
Investment Banking	211	(1)
Publicly and Privately Placed Securities	212	(1)
Going Public --- About an Initial Public Offering (IPO)	213	(7)
How Does Going Public Work?	214	(1)
The Pros of Going Public	214	(1)
The Cons of Going Public	215	(2)
How to Avoid the Drawbacks of Going Public	217	(1)
What Is the Process of Going Public?	218	(1)
Alternatives to Going Public	219	(1)
Venture Capital Funding	220	(2)
Types of Long-Term Debt and Their Usefulness	222	(6)
Mortgages	222	(1)
Bonds	222	(1)
Computing Interest	222	(1)
Types of Bonds	223	(1)
Bond Ratings	224	(1)
The Advantages and Disadvantages of Debt Financing	225	(2)
Bond Refunding	227	(1)
Equity Securities	228	(7)
Preferred Stock	228	(2)
Common Stock Features	230	(4)
Stock Rights	234	(1)
How Should You Finance?	235	(5)
Working a Loan Online	238	(1)
Raising Equity and Venture Capital Online	239	(1)
Conclusion	240	(3)
Part V Dissecting Financial Statement Information
Understanding Financial Statements	243	(8)
The Income Statement and Balance Sheet	243	(4)
Revenue	243	(1)
Expenses	243	(1)
Net Income (Loss)	244	(1)
Assets	244	(1)
Liabilities	245	(1)
Equity	245	(2)
The Statement of Cash Flows	247	(3)
FASB Requirements	248	(1)
Accrual Basis of Accounting	248	(1)
Operating Activities	249	(1)
Investment Activities	249	(1)
Financing Activities	249	(1)
Conclusion	250	(1)
Recording Financial Information and Accounting Conventions	251	(10)
Double Entry and the Accounting Equation	251	(8)
The Accounting Equation	251	(5)
The Account	256	(1)
Ledger	256	(1)
A Chart of Accounts	256	(2)
The System of Debits and Credits	258	(1)
The ``How and Why'' of Debits and Credits	259	(1)
Journals	259	(1)
Conclusion	259	(2)
Analyzing Financial Statements	261	(18)
What and Why of Financial Statement Analysis	261	(1)
Horizontal and Vertical Analysis	262	(2)
Working with Financial Ratios	264	(11)
Liquidity	265	(1)
Asset Utilization	266	(3)
Solvency (Leverage and Debt Service)	269	(1)
Profitability	270	(1)
Market Value	271	(4)
An Overall Evaluation --- Summary of Financial Ratios	275	(3)
Conclusion	278	(1)
Index	279