Accounting summary session 2; Creating MFD
*this is only a summary of the video’s and the slides, not the book
Indifference point: comparing two alternatives to find the point at which you are indifferent (=it
doesn’t matter which alternative you choose at this point from a financial point of view). This instead
of comparing “doing something” with doing nothing.
Spending money on something that can be used several year productively. It has future value: asset
(machine). Assets are all the resources a company owns and have a future value.
Spending money on something that is consumed immediately: expense (salary). Employees time is
consumed while she works, you also needs to pay salary if you want her to continue working. The
expense has no future value.
Cost: the value of a resource. It can be the value of raw materials or value of production equipment.
Expenses: resources fully consumed in a period. They have no future value.
Depreciation: periodically record a percentage of the price as an expense. Reflect the value of an
asset that is lost over time and usage. Assets become expenses through depreciation.
Scrap value: value that is left after all depreciation. Many times this is 0.
Death spiral: dividing fixed cost by volume, this leads to costs per unit that are too high. This will lead
to higher prices and that will lead to lower volume. You will be priced out of the market. Avoid it by
dividing the fixed costs by the practical capacity instead of the realised volume.
Realized volumes fluctuate each period, so fixed costs will be divided by a fluctuating volume which
means that fixed costs per unit will also fluctuate. This directly causes the death spiral because prices
per unit will have to increase because of (potential) higher fixed costs per unit. These fixed costs per
unit have to be consistent.
Costs systems give you the full costs of producing a product or service. The full costs reflect the value
of all the resources used to produce. (all variable costs + proportion of fixed costs)
Cost system traces, assigns and allocates costs. Cost system: variable costs of a unit, fixed cost per
unit,
Accounting Summary Session 3
Product costs: costs of resources related to manufacturing
,Period costs: all other costs than costs of resources related to manufacturing
Costs can be fixed or variable, and period or product costs.
Three types of inventory: raw materials, work in progress and finished product
Gross profit = revenues – COGS
Current and fixed assets
Fixed assets become product costs through depreciation. Non-manufacturing fixed assets become
period costs through depreciation.
Cash in hand (instead of long term assets) is good for the flexibility of the firm. Cash is not an
indicator for profitability, look at the income statement.
3 fundamental financial statements:
- Balance sheet
- Income statement
- Cash flow statement (cash going in and out via operating, investing and financing activities)
Income statement
describes how profits are made over a period. It begins with revenues for the period (recognized
when the invoice is sent to customer and product is delivered). – then COGS are subtracted (you now
have the gross profit). – then operation expenses are subtracted (result is the operating income) –
take into account other revenues/expenses (you have income before tax) – now subtract taxes.
Revenues - COGS =
Gross profit
Gross profit – operation expenses =
Operating income
Operating income – other revenues/expenses =
Income before tax
Income before tax – taxes +
Net income
It explains changes in equity. Describes how much value the company generates for its owners. It
explains the change in the balance sheet over a period of time.
Cash flow statement
, You don’t want to have too little cash, but you also don’t want to much cash because that means that
you could use it more wisely by e.g. investing.
Cash flow from operations: direct vs indirect method
Direct method Indirect method
Cash received by customers Net profit
- +/-
Cash paid for expenses Non cash revenues and expenses
+ cash flow received from investing
(cash received or paid for non-current assets)
+ cash flow from financing
(cash flow received or paid from financing activities)
A company needs profit AND cash flow
Balance sheet
What your company owns and how we financed our ownings, information is given for a certain point
in time.
Assets – liabilities = net worth of the company (= equity)
ROI (return on investment): profit / investment
ROA (return on assets): profit before interest expenses / total assets
ROE (return on equity): net profit / equity
These performance indicators can be used to be compared to other companies.
Residual income: profit – (investment * cost of capital)
Cost of capital: rate of return an investor undergoes. The opportunity costs of investing in similar
companies. > second best alternative. How much would the investor have made if they had invested
somewhere else?
Accounting Summary Session 4
*only a summary of the clips, not the lessons or powerpoints.
Products and services are the main performance objects of a company.
Performance objects: it is through the sale of these that the company generates revenues. Managers
need to focus on these objects to meet business goals. What are the most or least profitable objects?
(e.g. in MFD, the jackets were the performance objects).
*this is only a summary of the video’s and the slides, not the book
Indifference point: comparing two alternatives to find the point at which you are indifferent (=it
doesn’t matter which alternative you choose at this point from a financial point of view). This instead
of comparing “doing something” with doing nothing.
Spending money on something that can be used several year productively. It has future value: asset
(machine). Assets are all the resources a company owns and have a future value.
Spending money on something that is consumed immediately: expense (salary). Employees time is
consumed while she works, you also needs to pay salary if you want her to continue working. The
expense has no future value.
Cost: the value of a resource. It can be the value of raw materials or value of production equipment.
Expenses: resources fully consumed in a period. They have no future value.
Depreciation: periodically record a percentage of the price as an expense. Reflect the value of an
asset that is lost over time and usage. Assets become expenses through depreciation.
Scrap value: value that is left after all depreciation. Many times this is 0.
Death spiral: dividing fixed cost by volume, this leads to costs per unit that are too high. This will lead
to higher prices and that will lead to lower volume. You will be priced out of the market. Avoid it by
dividing the fixed costs by the practical capacity instead of the realised volume.
Realized volumes fluctuate each period, so fixed costs will be divided by a fluctuating volume which
means that fixed costs per unit will also fluctuate. This directly causes the death spiral because prices
per unit will have to increase because of (potential) higher fixed costs per unit. These fixed costs per
unit have to be consistent.
Costs systems give you the full costs of producing a product or service. The full costs reflect the value
of all the resources used to produce. (all variable costs + proportion of fixed costs)
Cost system traces, assigns and allocates costs. Cost system: variable costs of a unit, fixed cost per
unit,
Accounting Summary Session 3
Product costs: costs of resources related to manufacturing
,Period costs: all other costs than costs of resources related to manufacturing
Costs can be fixed or variable, and period or product costs.
Three types of inventory: raw materials, work in progress and finished product
Gross profit = revenues – COGS
Current and fixed assets
Fixed assets become product costs through depreciation. Non-manufacturing fixed assets become
period costs through depreciation.
Cash in hand (instead of long term assets) is good for the flexibility of the firm. Cash is not an
indicator for profitability, look at the income statement.
3 fundamental financial statements:
- Balance sheet
- Income statement
- Cash flow statement (cash going in and out via operating, investing and financing activities)
Income statement
describes how profits are made over a period. It begins with revenues for the period (recognized
when the invoice is sent to customer and product is delivered). – then COGS are subtracted (you now
have the gross profit). – then operation expenses are subtracted (result is the operating income) –
take into account other revenues/expenses (you have income before tax) – now subtract taxes.
Revenues - COGS =
Gross profit
Gross profit – operation expenses =
Operating income
Operating income – other revenues/expenses =
Income before tax
Income before tax – taxes +
Net income
It explains changes in equity. Describes how much value the company generates for its owners. It
explains the change in the balance sheet over a period of time.
Cash flow statement
, You don’t want to have too little cash, but you also don’t want to much cash because that means that
you could use it more wisely by e.g. investing.
Cash flow from operations: direct vs indirect method
Direct method Indirect method
Cash received by customers Net profit
- +/-
Cash paid for expenses Non cash revenues and expenses
+ cash flow received from investing
(cash received or paid for non-current assets)
+ cash flow from financing
(cash flow received or paid from financing activities)
A company needs profit AND cash flow
Balance sheet
What your company owns and how we financed our ownings, information is given for a certain point
in time.
Assets – liabilities = net worth of the company (= equity)
ROI (return on investment): profit / investment
ROA (return on assets): profit before interest expenses / total assets
ROE (return on equity): net profit / equity
These performance indicators can be used to be compared to other companies.
Residual income: profit – (investment * cost of capital)
Cost of capital: rate of return an investor undergoes. The opportunity costs of investing in similar
companies. > second best alternative. How much would the investor have made if they had invested
somewhere else?
Accounting Summary Session 4
*only a summary of the clips, not the lessons or powerpoints.
Products and services are the main performance objects of a company.
Performance objects: it is through the sale of these that the company generates revenues. Managers
need to focus on these objects to meet business goals. What are the most or least profitable objects?
(e.g. in MFD, the jackets were the performance objects).
