Accounting
Lecture 1 – cost terms and concepts
Accounting: the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information.
Income statement Balance sheet
Costs: sacrifices of assets which are unavoidable, measurable and foreseeable
More precise: a monetary measure of the resources sacrificed or forgone to achieve a
specific objective
Cost price: costs per unit output
Data gathering for decision-making:
- Long run decisions: integral cost price, but also in relation to strategy
- Short run decisions: differential or variable costs
Decision-making process
1. Identify objectives
o Create profit
o Create employment
o Market position
o Continuity
o Environment
2. Search for alternative courses of action
3. Select appropriate course of action
4. Implement decisions
5. Compare actual and planned outcomes
6. Respond to divergences from the plan
Purposes of management accounting:
, - Profit measurement and inventory valuation
- Decision making
- Planning, control of performance
Cost object: any activity for which a separate measurement of cost is require
Cost collection system accounts for costs in 2 broad stages:
1. Accumulates costs by classifying them into categories, such as type of expense or by
cost behaviour
2. It then assigns costs to cost objects
Different costs for different purposes!
- Direct and indirect costs
o Direct costs can be specifically and exclusively identified with a given cost
object
o Indirect costs (sometimes ‘overheads’) cannot be specifically and exclusively
identified with a given cost object, they are assigned to cost objects on the basis
of cost allocations
▪ Cost allocation: the process of assigning costs to cost objects where a
direct measure of the resources consumed by these cost objects does
not exist
- Period and product costs
o Product cost: everything that relates to the particular product that we are
producing
o Period cost: throughout a period a cost that was made, but not particularly for a
specific product
o Valuation of completed unsold products and partly completed products or
services is a problem for profit measurement and inventory valuation
o In merchandising organisations all costs except of the costs of the goods
purchased are regarded as period cost
, - Fixed and variable costs
o Fixed costs: remain the same independent of how many units you produce
o Variable costs: do change
o Important to predict costs/revenues at different activity levels
o Semi-variable costs include both a fixed and a variable component
- Relevant and irrelevant costs
o Relevant: future costs and revenues that will be changed by a decision
o Irrelevant: costs and revenues will not be changed by a decision
- Avoidable and unavoidable costs
o Avoidable: those costs that can be saved by not adopting a given alternative
o Unavoidable costs: cannot be saved
o Sometimes used instead of relevant and irrelevant costs
Sunk costs: costs of resources already acquired and are unaffected by the choice between the
various alternatives
- Are irrelevant for decision making, but irrelevant costs are not sunk costs
Opportunity costs: a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative is given up
- Exist if resources have alternative use and are scarce
- Are not recorded in the accounting system since they do not involve cash outlays
Incremental (differential): additional costs and revenues from the production or sale of a group
of additional units
Marginal costs and revenues are similar in principle, the main difference now is we only
consider one additional unit
Lecture 2 – financial statements and analysis
Balance sheet
, - An accountant’s snapshot of the firm’s accounting value as of a particular date
- The balance sheet of a firm states what the firm owns (assets) and how it is financed
(liabilities and stockholder’s equity)
- The balance sheet identity is
o Assets = liabilities + stockholder’s equity
When analysing a balance sheet, the financial manager should be aware of 3 concerns:
1. Accounting liquidity: the ease and quickness with which assets can be converted to
cast
o Current assets are the most liquid and include cash and those assets that will be
turned into cash within one year
o Some fixed assets are intangible
o Current liabilities are dents that are due within one year
o The more liquid a firm’s assets, the less likely the firm is to experience problems
meeting short-term obligations
o Liquid assets frequently have lower rates of return than fixed assets
2. Debt vs equity: when a firm borrows it gives the bondholders first claim on the firm’s
cash flow
o Therefore, shareholder’s equity is the residual difference between assets and
liabilities
3. Value vs cost
o Under GAAP (generally accepted accounting) audited financial statements of
firms carry assets at cost
o Market value is a complete different concept (more variable, yet sometimes
more realistic)
Net working capital (NWC)
NWC = current assets – current liabilities
- NWC is a measure of liquidity
- NWC is usually growing with size of the firm
Lecture 1 – cost terms and concepts
Accounting: the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information.
Income statement Balance sheet
Costs: sacrifices of assets which are unavoidable, measurable and foreseeable
More precise: a monetary measure of the resources sacrificed or forgone to achieve a
specific objective
Cost price: costs per unit output
Data gathering for decision-making:
- Long run decisions: integral cost price, but also in relation to strategy
- Short run decisions: differential or variable costs
Decision-making process
1. Identify objectives
o Create profit
o Create employment
o Market position
o Continuity
o Environment
2. Search for alternative courses of action
3. Select appropriate course of action
4. Implement decisions
5. Compare actual and planned outcomes
6. Respond to divergences from the plan
Purposes of management accounting:
, - Profit measurement and inventory valuation
- Decision making
- Planning, control of performance
Cost object: any activity for which a separate measurement of cost is require
Cost collection system accounts for costs in 2 broad stages:
1. Accumulates costs by classifying them into categories, such as type of expense or by
cost behaviour
2. It then assigns costs to cost objects
Different costs for different purposes!
- Direct and indirect costs
o Direct costs can be specifically and exclusively identified with a given cost
object
o Indirect costs (sometimes ‘overheads’) cannot be specifically and exclusively
identified with a given cost object, they are assigned to cost objects on the basis
of cost allocations
▪ Cost allocation: the process of assigning costs to cost objects where a
direct measure of the resources consumed by these cost objects does
not exist
- Period and product costs
o Product cost: everything that relates to the particular product that we are
producing
o Period cost: throughout a period a cost that was made, but not particularly for a
specific product
o Valuation of completed unsold products and partly completed products or
services is a problem for profit measurement and inventory valuation
o In merchandising organisations all costs except of the costs of the goods
purchased are regarded as period cost
, - Fixed and variable costs
o Fixed costs: remain the same independent of how many units you produce
o Variable costs: do change
o Important to predict costs/revenues at different activity levels
o Semi-variable costs include both a fixed and a variable component
- Relevant and irrelevant costs
o Relevant: future costs and revenues that will be changed by a decision
o Irrelevant: costs and revenues will not be changed by a decision
- Avoidable and unavoidable costs
o Avoidable: those costs that can be saved by not adopting a given alternative
o Unavoidable costs: cannot be saved
o Sometimes used instead of relevant and irrelevant costs
Sunk costs: costs of resources already acquired and are unaffected by the choice between the
various alternatives
- Are irrelevant for decision making, but irrelevant costs are not sunk costs
Opportunity costs: a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative is given up
- Exist if resources have alternative use and are scarce
- Are not recorded in the accounting system since they do not involve cash outlays
Incremental (differential): additional costs and revenues from the production or sale of a group
of additional units
Marginal costs and revenues are similar in principle, the main difference now is we only
consider one additional unit
Lecture 2 – financial statements and analysis
Balance sheet
, - An accountant’s snapshot of the firm’s accounting value as of a particular date
- The balance sheet of a firm states what the firm owns (assets) and how it is financed
(liabilities and stockholder’s equity)
- The balance sheet identity is
o Assets = liabilities + stockholder’s equity
When analysing a balance sheet, the financial manager should be aware of 3 concerns:
1. Accounting liquidity: the ease and quickness with which assets can be converted to
cast
o Current assets are the most liquid and include cash and those assets that will be
turned into cash within one year
o Some fixed assets are intangible
o Current liabilities are dents that are due within one year
o The more liquid a firm’s assets, the less likely the firm is to experience problems
meeting short-term obligations
o Liquid assets frequently have lower rates of return than fixed assets
2. Debt vs equity: when a firm borrows it gives the bondholders first claim on the firm’s
cash flow
o Therefore, shareholder’s equity is the residual difference between assets and
liabilities
3. Value vs cost
o Under GAAP (generally accepted accounting) audited financial statements of
firms carry assets at cost
o Market value is a complete different concept (more variable, yet sometimes
more realistic)
Net working capital (NWC)
NWC = current assets – current liabilities
- NWC is a measure of liquidity
- NWC is usually growing with size of the firm
