Engineering Economic

Mentor: Usman Khalid

Course Outline

Cost and Asset Accounting

OUTLINE OF ACCOUNTING PROCEDURE

BASIC RELATIONSHIPS IN ACCOUNTING

THE BALANCESHEET

THE INCOME STATEMENT

Cost Estimation

Interest and Investment Costs

Taxes and Insurance

Depreciation

Course Outline

Costing and Project Evaluation

Introduction

Accuracy and purpose of capital cost estimates

Fixed and working capital

Cost escalation (inflation)

Rapid capital cost estimating methods

Historical costs

Step counting methods

The factorial method of cost estimation

Lang factors

Detailed factorial estimates

FORMAL FINANCIAL STATEMENTS

Income statement

Statement of stockholders equity

Retained earnings

Balance sheet

Statement of cash flows

INCOME STATEMENT:
Statement of Earnings

Report on the operations of the entity

Listing of Revenues, Gains, Expenses, & Losses

Covers a period of time

STATEMENT OF STOCKHOLDERS EQUITY

Retained earnings

Report on the changes in Retained Earnings

Covers a period of time

Link between the Balance Sheet & Income Statement

STATEMENT OF FINANCIAL
POSITION
Balance
Report onSheet
the financial position of the entity

Listing of Assets, Liabilities, & Owners Equity items

A specific point in time

STATEMENT OF CASH FLOWS

Report on financial activities of the entity

Shows the changes in cash (and cash equivalents)

Covers a period of time

BASIC ACCOUNTING EQUATION

[Corporation]
Assets = Liabilities + Stockholders Equity
Contributed (Paid-in)
Capital

Net Income (+)

Revenues & Gains (+)

Retained
Earnings

Dividends (-)
Expenses & Losses (-)

RELATIONSHIP OF FINANCIAL STATEMENTS

Balance Sheet
12-31-x1
Assets
Liabilities
Owners equity

Income Statement
For Year 2

Balance Sheet
12-31-x2

Revenues - Expenses
=
Net Income (or Loss)

Statement of Retained Earnings

For Year 2
Balance 1-1-x2
(+/-) Net income or loss
- Dividends
=
Balance 12-31-x2

Assets
Liabilities
Owners equity

ELEMENTS OF FINANCIAL
STATEMENTS
Assets

Revenues
Expenses

Liabilities

Gains
Losses

Equity
(Owners)
Investments by
Owners
Distributions to
Owners

Comprehensive
Income

BALANCE SHEET

Claims
Claimsagainst
againstresources
resources
(Liabilities)
(Liabilities)

Resources
Resources
(Assets)
(Assets)

Remaining
Remainingclaims
claimsaccruing
accruingto
to
owners
owners(Owners
(OwnersEquity)
Equity)

BALANCE SHEET ELEMENTS

Assets
Economic resources with probable future value
Controlled by management
Resulting from past transactions
Liabilities
Probable future sacrifices of economic benefits
(debts/obligations)
Require transfer of assets
Terms of obligations are specified
Result from past transactions
Equity
Residual interest in the assets of the entity
Net assets
Represents the investment by owners

14

BALANCE SHEET
CLASSIFICATIONS
Assets

Liabilities

Current Assets

Current Liabilities

Long-term
Investments

Long-term
Liabilities

Property, Plant,
and Equipment
Intangible
Assets
Other Assets

Stockholders
Equity
Contributed Capital
Retained Earnings
Other Items

15

BALANCE SHEET
Liquidity - length of time until assets are
converted to cash or until a
liability must be paid
Solvency the ability of a firm to meet its
debts as they come due
Financial flexibility - ability of company
to
manage its cash flows (deal
with

16

THE INCOME STATEMENT

Describes a
companys
operating
performance for a
specified period of
time

INCOME STATEMENT
Multiple-Step

Operations section

Gross margin (Sales - Cost of goods sold)

Operating expenses

Other items (nonoperating)

Special items

Net income - the bottom line

Earnings per share

18

INCOME STATEMENT
Multiple-Step
Items within Income from
continuing operations
Unusual

OR

infrequent gains and losses

Below Income from continuing

operations
Discontinued Operations
Extraordinary items (unusual

AND

infrequent)

Cumulative effect of Changes in Accounting

Principles

Income Statement (Multiple-Step)

19

Operations

Other

Special
items

Expense Classification

Direct
Period
Allocated

EXPENDITURES vs. EXPENSES

Expenditures
during 2003

Assets as of
Jan. 1, 2003

Direct
association
with
revenue

Expenses of 2003
Yes
Example: Cost of goods sold

No

Association
with
activities

Yes

Example: Office expenses

No
Yes
Assets as of
12-31-03

Association
with
future

No
Example: Obsolete merchandise

22

BUSINESS CYCLE
Collect cash
from customer
Customer
receives item

Purchase materials

Convert materials
into finished product

Ship product
& invoice customer

Receive order
from customer

Inspect product
Store product
in warehouse