ENCE 661 PROJECT COST ACCOUNTING & FINANCE

TONIGHTS CLASS
NO CLASS NEXT WEEK!!! Sign-in Sheet (every week) Syllabus What is Accounting?
learning how to speak the language the financial statements

Next weeks assignment

SYLLABUS
?Lecture, activities, discussion PARTICIPATE! ?Preparation Do your homework and readings BEFORE class. It will be a significant help to you. ?Class Website All info. Can be located there (lecture notes in powerpoint and .pdf formats a week before the lecture, case studies, HW assignments and solutions, announcements, etc). Has anyone had a problem finding it? ?Grading ?based on comprehension and mastery of the material. ?class participation/homework turned in (15%) ? case studies (25%) ?mid-term exam (30%) ?final exam (30%).

SYLLABUS

SYLLABUS
?Attendance will count towards the participation portion of your grade (not to mention, greatly help in the mastery of the material) ?Honor System

HOW TO MAKE THIS CLASS WORTHWHILE

Read material before class
Including directed readings & cases

Think about concepts

what do they mean in real life terms?

Answer review questions / problems In class

PARTICIPATE! - ask questions - offer comments Take me in the direction you want to go

WHAT IS ACCOUNTING?
The language of business The medium through which financial and business transactions are recorded and through which statements on the status of accounts are prepared Organizes and summarizes economic information so that decision makers can use it.

DECISION MAKERS
INVESTORS MANAGERS BANKERS WHO ELSE?

TYPES OF ACCOUNTING
FINANCIAL ACCOUNTING COST / MANAGERIAL ACCOUNTING TAX ACCOUNTING

METHODS OF ACCOUNTING
ACCRUAL BASIS CASH BASIS OTHER (such as TAX BASIS)

THE ACCRUAL BASIS

RECOGNIZES REVENUE WHEN EARNED RECOGNIZES EXPENSE WHEN INCURRED MORE MEANINGFUL FINANCIAL STATEMENTS

THE CASH BASIS

REVENUE IS RECOGNIZED WHEN RECEIVED EXPENSE IS RECOGNIZED WHEN PAID MORE SIMPLISTIC APPROACH ALSO USEFUL FOR TAX PURPOSES

KEY PRINCIPALS OF ACCOUNTING

EXISTENCE (aka GOING CONCERN) MATCHING CONSERVATISM DISCLOSURE CONSISTENCY

GOING CONCERN
THIS BASICALLY IS THE INHERENT ASSUMPTION THAT FIRM WILL GO ON INDEFINITELY INTO THE FUTURE WHY WOULD YOU BE EVALUATING FINANCIAL STATEMENTS OF A FIRM THAT WILL BE GONE IN A MONTH?

**MATCHING**
REVENUES SHOULD BE MATCHED AGAINST THE EXPENSES THAT HELPED TO GENERATE THEM COMPARING APPLES TO APPLES CLOSELY ASSOCIATED CONCEPT OF THE ACCRUAL BASIS

**CONSERVATISM**
WHEN IN DOUBT, REPORT/BUDGET AS IF THE WORST CASE WERE TRUE MY VERY FAVORITE PRINCIPAL!! ALL SURPRISES ARE GOOD SURPRISES!!!

DISCLOSURE
ALL SIGNIFICANT FACTORS HAVE BEEN COMMUNICATED FOOTNOTES

CONSISTENCY
REPORTS AND STATEMENTS SHOULD BE PREPARED IN A CONSISTENT FASHION FROM PERIOD TO PERIOD What is an accounting period???? ONCE AGAIN - APPLES TO APPLES

CLASS ACTIVITY
Which of the following Key Accounting Principles do the following demonstrate? 1. XYZ Engineers made a change in their accounting policies in 2001. Their Cash balance had been made up of not only their operating cash account, but also their investment funds held in a separate bank for planned equipment replacement over the next several years. They decided that the investment amount would properly be considered a non -current asset on their balance sheet. So they removed it from their Cash Account and created a new account called Long-term investments, which is now shown as a noncurrent asset on their balance sheet. Accordingly, they restated their 2000 balance sheet to reflect this reclassification as well.

WHAT IS A TRANSACTION?
A TRANSACTION IS. AN EVENT. THAT AFFECTS THE FINANCIAL POSITION OF A BUSINESS AND CAN BE RECORDED IN MONETARY TERMS

2.

ABC Engineers is the defendant in a major professional liability lawsuit that arose this year. They anticipate the chance of an unfavorable outcome to be minimal so no liability was placed on their balance sheet to record this occurrence. They did, however, include a footnote to their financial statements describing the lawsuit and its amount.

3.

The two owners of W&W Engineers plan to retire in the 2002. As they had procrastinated over the years with regards to their ownership transition planning, they simply plan to shut down their firm at that time. Dave Jones is the project manager on XYZ Engineers newest project. Although he has estimated the project will take 100 hours to complete, he budgeted 20 extra hours of time for unexpected delays.

4.

WHAT IS AN ACCOUNT?
AN ACCOUNT IS. A SUMMARY RECORD. OF ALL OF THE TRANSACTIONS IN A PARTICULAR ASSET, LIABILITY OR OWNERS EQUITY

COMPUTERS ACCOUNT
COMPUTERS ARE EQUIPMENT.AN ASSET IF WE BUY ONE COMPUTER ( a transaction) FOR $3,000 OUR COMPUTERS ACCOUNT BALANCE INCREASES TO.. $3,000 IF WE BUY ANOTHER ( another transaction) FOR THE SAME PRICE, OUR COMPUTERS ACCOUNT BALANCE IS $6,000Not really that tough, is it?

TYPES OF ACCOUNTS
ASSETS (current vs. non-current) LIABILITIES (current vs. non-current) CAPITAL (a.k.a. OWNERS EQUITY)
BOOK VALUE, NET WORTH, ETC... REVENUES & EXPENSES

ASSETS
What the firm owns Current Assets - convertible into cash within one year Fixed Assets - equipment, other tangible property (these are long-term) Other Non-current Assets - non fixed assets for which we expect it will take longer than one year to turn them into cash

LIABILITIES
What the firm owes Current - payable within one years time Noncurrent

OWNERS EQUITY
Whats left over (ASSETS - LIABILITIES) If this is a negative number, its not too good, is it? Typical Accounts include Common Stock, Partners or Owners Equity (depending upon the legal form of an organization) Retained Earnings (re-investment) Book Value

CLASS ACTIVITY
LETS SEE WHAT YOU ALL KNOW.. WITHOUT LOOKING AHEAD
What types of accounts would you typically find on the Balance Sheet of a typical firm in the design industry? Current Assets:

TYPICAL CURRENT ASSETS IN PROFESSIONAL FIRMS

Cash and Short-term investments Accounts Receivable Work - in - Process (WIP) Prepaid Expenses Other Current Assets

Non-current Assets:

Current Liabilities:

Non-current Liabilities:

Equity:

TYPICAL LONG-TERM ASSETS IN DESIGN FIRMS

Equipment Furniture Buildings, property, or leasehold improvements Accumulated depreciation Loans to shareholders, partners, or other third parties

TYPICAL DESIGN FIRM LIABILITIES

Accounts Payable Accrued Payroll (or salaries payable) Accrued Vacation and Benefits Payable Unearned Deposits Notes or Loans Payable to Lenders

TYPICAL DESIGN FIRM EQUITY ACCOUNTS

COMMON STOCK PAID IN CAPITAL RETAINED EARNINGS
INCOME ACCOUNTS (REVENUE AND EXPENSES)

WHAT ACCOUNTS DO WE USE IN OUR BUSINESS?

CHART OF ACCOUNTS
A list of all of the business account titles Sub-accounts ACEC chart of account guideline sample Do we need an account called Trucks? Would we ever?

THE GENERAL LEDGER

1120 Accounts Receivable (Summary control account for all outstanding billings to clients. Record further breakdowns when this information is pertinent.) Accounts ReceivableProfessional Fees (Record here that portion of billings which include labor, overhead and profit when these elements can be distinguished.) Accounts ReceivableReimbursable (record here that portion of billings for reimbursable expenses plus markup if any, when di stinguishable

1121

1122

THE GENERAL LEDGER IS. THE COLLECTION OF ACCOUNTS THAT ACCUMULATES AMOUNTS REPORTED INTO FINANCIAL STATEMENTS AND REPORTS

THE GENERAL LEDGER

THE GENERAL LEDGER TRANSACTION >>>>>>>>>>>>>> >>>>>>> FINANCIAL STATEMENTS TRANSACTION >>>>>>>>>>>>>> TRANSACTION >>>>>>>>>>>>>> ACCOUNTS >>>>>>> OTHER REPORTS

THE PRIMARY FINANCIAL STATEMENTS

THE BALANCE SHEET THE STATEMENT OF RETAINED EARNINGS THE INCOME STATEMENT THE STATEMENT OF CASH FLOWS FOOTNOTES

XYZ ENGINEERS

THE BALANCE SHEET

ASSETS

BALANCE SHEET
As of 12/31/05 LIABILITIES Current liabilities 105,000.00 874,500.00 156,000.00 34,500.00 34,500.00 1,204,500.00 Long-term liabilities Long-term debt Other long-term liabilities 184,500.00 18,000.00 93,000.00 295,500.00 STOCKHOLDER'S EQUITY Total assets 1,500,000.00 Equity capital Retained earnings Total stockholder's equity Total liabilities and stockholder's equity 91,500.00 588,000.00 679,500.00 1,500,000.00 Total long-term liabilities Total liabilities Total other assets 141,000.00 31,500.00 172,500.00 820,500.00 Accounts payable Deferred taxes Current portion of long-term debt Other current liabilities Total current liabilities Total current assets Other assets Furniture, fixtures & equipment Real estate Other assets 207,000.00 91,500.00 87,000.00 262,500.00 648,000.00 As of 12/31/05

Shows the financial status of a company at A POINT IN TIME. All other financial statements show results over a period of time Shows what the firm owns, owes, and hopefully has left over at the end of the day Two counter-balancing sections Assets = Liabilities + Owners Equity

Current assets Cash & cash equivalents Accounts receivable Work In progress Prepaid expenses Other current assets

BALANCE SHEET 12/31/00

BALANCE SHEET 12/31/01

BALANCE SHEET 12/31/02

BALANCE SHEET 12/31/03

Rolls Forward the balance for retained earnings from balance sheet to balance sheet (i.e. OVER A PERIOD OF TIME) Basically shows two things to the user 1. net income brought in by firm operations 2. Dividends or distributions taken out by firm owners

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

XYZ ENGINEERS

XYZ ENGINEERS STATEMENT OF RETAINED EARNINGS

For the year ended 12/31/05 BEGINNING BALANCE, Retained Earnings 371,000.00 Net Income 269,250.00 Dividends (distributions) paid (52,250.00) ENDING BALANCE, Retained Earnings 588,000.00
ASSETS Current assets Cash & cash equivalents Accounts receivable Work In progress Prepaid expenses Other current assets Total current assets Other assets Furniture, fixtures & equipment Real estate Other assets Total other assets Total assets

BALANCE SHEET
As of 12/31/05 LIABILITIES Current liabilities 105,000.00 874,500.00 156,000.00 34,500.00 34,500.00 1,204,500.00 Long-term liabilities Long-term debt Other long-term liabilities 184,500.00 18,000.00 93,000.00 295,500.00 STOCKHOLDER'S EQUITY 1,500,000.00 Equity capital Retained earnings Total stockholder's equity Total liabilities and stockholder's equity 91,500.00 588,000.00 679,500.00 1,500,000.00 Total long-term liabilities Total liabilities 141,000.00 31,500.00 172,500.00 820,500.00 Accounts payable Deferred taxes Current portion of long-term debt Other current liabilities Total current liabilities 207,000.00 91,500.00 87,000.00 262,500.00 648,000.00 As of 12/31/05

BALANCE SHEET 12/31/04

STATEMENT OF RETAINED EARNINGS

XYZ ENGINEERS STATEMENT OF RETAINED EARNINGS

For the year ended 12/31/05 BEGINNING BALANCE, Retained Earnings 371,000.00 Net Income 269,250.00 Dividends (distributions) paid (52,250.00) ENDING BALANCE, Retained Earnings 588,000.00

XYZ ENGINEERS STATEMENT OF RETAINED EARNINGS

For the year ended 12/31/05 BEGINNING BALANCE, Retained Earnings 371,000.00 Net Income 269,250.00 Dividends (distributions) paid (52,250.00) ENDING BALANCE, Retained Earnings 588,000.00

Who can tell me. What would our balance sheet dated 12/31/02 Show as our balance in Retained Earnings?

$371,000

BALANCE SHEET 12/31/00

BALANCE SHEET 12/31/01

BALANCE SHEET 12/31/02

BALANCE SHEET 12/31/03

Shows financial performance of day to day operations over A PERIOD OF TIME REVENUES - EXPENSES = NET INCOME Design firms expand this formula to present more meaningful information Ties to the Balance Sheet by way of the Statement of Retained Earnings

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

XYZ ENGINEERS

INCOME STATEMENT
Shows financial performance of day to day operations over A PERIOD OF TIME REVENUES - EXPENSES = NET INCOME Design firms expand this formula to present more meaningful information Ties to the Balance Sheet by way of the Statement of Retained Earnings
Gross revenue

INCOME STATEMENT
For the year ended 38,717.00 6,410,000.00 (1,115,000.00) (295,000.00) 5,000,000.00 (1,705,000.00) (85,000.00) 3,210,000.00 (750,000.00) (1,805,000.00) 655,000.00 (253,750.00) 401,250.00 (132,000.00) 269,250.00

Less subcontractors, outside services Less expenses reimburses by clients Net service revenue Less direct labor Less other direct costs Gross Profit Less total indirect payroll expenses Less total general & administrative overhead Pre-tax, pre-bonus profit Bonuses Pre-tax profit Taxes Net profit (net income)

BALANCE SHEET 12/31/04

INCOME STATEMENT

INCOME STATEMENT
Shows financial performance of day to day operations over A PERIOD OF TIME REVENUES - EXPENSES = NET INCOME Design firms expand this formula to present more meaningful information Ties to the Balance Sheet by way of the Statement of Retained Earnings

XYZ ENGINEERS STATEMENT OF RETAINED EARNINGS

For the year ended 12/31/05 BEGINNING BALANCE, Retained Earnings 371,000.00 Net Income 269,250.00 Dividends (distributions) paid (52,250.00) ENDING BALANCE, Retained Earnings 588,000.00

BALANCE SHEET 12/31/00

BALANCE SHEET 12/31/01

BALANCE SHEET 12/31/02

BALANCE SHEET 12/31/03

PERIOD OF TIME Shows where the cash came from and where it went Three activity categories - operating, investing, financing This is very important in our industry!!!! CASH BASIS INFO! Ties to the Balance Sheet via the Cash Account

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

STATEMENT OF RETAINED EARNINGS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

INCOME STATEMENT INCOME STATEMENT STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS

For the year ended 12/31/05

THE STATEMENT OF CASH FLOWS

PERIOD OF TIME Shows where the cash came from and where it went Three activity categories - operating, investing, financing This is very important in our industry!!!! Ties to the Balance Sheet via the Cash Account

Cash flows from operating activities: Gross receipts Salaries and wages Rent Payroll taxes Licenses and registrations Consultant services Reimbursable expenses Telephone and communications Supplies, publications & library Marketing Licenses and registrations Insurance Other Net cash flows from operating activities Cash flows from investing activities: Equipment purchases Leasehold improvements Net cash from investing activities Cash flows from financing activities: Cash paid for dividends Cash received from sales of stock Cash paid for payment of debt principal Draws on lines of credit and other loans Net cash from financing activities Increase (decrease) in cash Cash, beginning of period Cash, end of period

6,007,000.00 (2,950,000.00) (248,000.00) (265,500.00) (26,980.00) (1,117,010.00) (250,000.00) (42,100.00) (250,000.00) (480,560.00) (9,600.00) (120,000.00) (100,000.00) 147,250.00

(106,500.00) (40,000.00) (146,500.00)

(52,250.00) 56,000.00 (20,000.00) 59,500.00 43,250.00 44,000.00 61,000.00 105,000.00

BALANCE SHEET 12/31/04

THE STATEMENT OF CASH FLOWS

For the year ended 12/31/05

THE STATEMENT OF CASH FLOWS

PERIOD OF TIME Shows where the cash came from and where it went Three activity categories - operating, investing, financing This is very important in our industry!!!! Ties to the Balance Sheet via the Cash Account

Cash flows from operating activities: Gross receipts Salaries and wages Rent Payroll taxes Licenses and registrations Consultant services Reimbursable expenses Telephone and communications Supplies, publications & library Marketing Licenses and registrations Insurance Other Net cash flows from operating activities Cash flows from investing activities: Equipment purchases Leasehold improvements Net cash from investing activities Cash flows from financing activities: Cash paid for dividends Cash received from sales of stock Cash paid for payment of debt principal Draws on lines of credit and other loans Net cash from financing activities Increase (decrease) in cash Cash, beginning of period Cash, end of period

6,007,000.00 (2,950,000.00) (248,000.00) (265,500.00) (26,980.00) (1,117,010.00) (250,000.00) (42,100.00) (250,000.00) (480,560.00) (9,600.00) (120,000.00) (100,000.00) 147,250.00

(106,500.00) (40,000.00) (146,500.00)

(52,250.00) 56,000.00 (20,000.00) 59,500.00 43,250.00 44,000.00 61,000.00

105,000.00

XYZ ENGINEERS BALANCE SHEET

As of 12/31/05 ASSETS Current assets Cash & cash equivalents Accounts receivable Work In progress Prepaid expenses Other current assets Total current assets Other assets Furniture, fixtures & equipment Real estate Other assets Total other assets Total assets 184,500.00 18,000.00 93,000.00 295,500.00 STOCKHOLDER'S EQUITY 1,500,000.00 Equity capital Retained earnings Total stockholder's equity Total liabilities and stockholder's equity 91,500.00 588,000.00 679,500.00 1,500,000.00 LIABILITIES Current liabilities As of 12/31/05

HOMEWORK
READING ASSIGNMENT Chapters 3 in An Architects Guide to Financial Management Understanding Financial Statements Chapter 1 of Introduction to Financial Accounting Accounting: The Language of Business
207,000.00 91,500.00 87,000.00 262,500.00 648,000.00

105,000.00
874,500.00 156,000.00 34,500.00 34,500.00 1,204,500.00

Accounts payable Deferred taxes Current portion of long-term debt Other current liabilities Total current liabilities Long-term liabilities Long-term debt Other long-term liabilities Total long-term liabilities Total liabilities

141,000.00 31,500.00 172,500.00 820,500.00

HOMEWORK
SUMMARY PROBLEMS FOR YOUR REVIEW PROBLEM ONE Analyze the following additional transactions of Biwheels Company (from Introduction to Financial Accounting Chapter 1). Begin with the balances shown for January 12, 19X2, in Exhibit 1-2 on page 12. Prepare an ending balance sheet for Biwheels Company (say, on January 16 after these additional transactions). i. Biwheels pays $10,000 on the bank loan (ignore interest). ii. Smith buys furniture for his home for $5,000, using his fami ly charge account at Macy's. iii. Biwheels buys merchandise inventory for $50,000. Half the amount is paid in cash, and half is owed on open account. iv. Biwheelscollects $200 more from its business debtor.

HOMEWORK
PROBLEM TWO "If I purchase 100 shares of the outstanding stock of General Mo tors Corporation (or Biwheels Company), I invest my money directly in that corporation. General Motors must record that event." Do you agree? Explain.

PROBLEM THREE "One individual can be an owner, an employee, and a creditor of a corporation." Do you agree? Explain. PROBLEM FOUR Albany Corporation's balance sheet at March 30, 19X1, contained only the following items (arranged here in random order):

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HOMEWORK
Cash Accounts payable Notes payable Furniture end fixtures Merchandise inventory Long-term debt payable Paid-in capital Building Land Notes receivable Accounts receivable Machinery and equipment $11,000 $8,000 $10,000 $3,000 $40,000 $12,000 $81,000 $20,000 $6,000 $2,000 $14,000 $15,000

HOMEWORK
On March 31, 19X1, these transactions and events took place: 1. Purchased merchandise on account, $3,000. 2. Sold at cost for $1,000 cash some furniture that was not needed. 3. Issued additional capital stock for machinery and equipment valued at $12,000. 4. Purchased land for $25,000, of which $5,000 was paid in cash, the remaining being represented by a five-year note (long-term debt). 5. The building was valued by professional appraisers at $45,000. Prepare in good form a balance sheet for March 31, 19X1, showing supporting computations for all new amounts.

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