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$79.7 million for other services, and JPMorgan Chase paid PricewaterhouseCoopers $21.3 million for audit work plus $84.2 million for other services. 6 From the Journal of Accountancy, official journal of the American Institute of Certified Public Accountants, January 2007, 33. 7 See www.heritage.org/Research/features/issues/pdfs/Budget.pdf. For Further Reading Anand, Sanjay, Sarbanes-Oxley Guide for Finance and Information Technology Professionals (Hoboken, NJ: John Wiley & Sons, 2006). Jackson, Pegg M., Nonprofit Strategic Planning: Leveraging Sarbanes-Oxley Best Practices (Hoboken, NJ: John Wiley & Sons, 2007). Livingstone, Les, A Practical Framework for Ethical Decision-Making (Freeload Press, 2007). A free e-book download after you register at www.textbookmedia.com/. Ramos, Michael J., How to Comply with Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control (Hoboken, NJ: John Wiley & Sons, 2008). Part IV Management Accounting 11 Forecasts and Budgeting Robert F. Halsey The Concept of Budgeting Budgets serve a critical role in managing any business, from the smallest sole proprietor to the largest multinational corporation. Businesses cannot operate effectively without estimating the financial implications of their strategic plans and monitoring their progress throughout the year. During preparation, budgets require managers to make resource allocation decisions and, as a result, to
eaffirm their core operating strategy by requiring each business unit to justify its part of the overall business plan. During the subsequent year, variances of actual results from expectations serve to direct management to the areas that may deserve a greater allocation of capital and those that may need adjustments to retain their viability. A budget is a comprehensive, formal plan, expressed in quantitative terms, describing the expected operations of an organization over some future time period. As you can see, the characteristics of a budget are that it deals with a specific entity, covers a specific future time period, and is expressed in quantitative terms. This chapter describes the essential features of a budget and includes a comprehensive example of the preparation of a monthly budget for a small business. Although the focus of the chapter is on budgeting from a business perspective, many of the principles can be applied to an individual‟s personal financial planning. Functions of Budgeting Planning and control are the two basic functions of budgeting. Planning encompasses the entire process of preparing the budget, from initial strategic direction through preparation of expected financial results. Planning is the process that most people think of when the term budgeting is mentioned. The majority of the time and effort devoted to budgeting is expended in the planning stage. Careful planning provides the framework for the second function of budgeting, control. Control is the comparison of actual results with budgeted data, evaluation of the differences, and then the taking of corrective actions when necessary. The comparison of budget and actual data can occur only after a period is over and actual accounting data are available. For example, April manufacturing cost data are necessary to compare with the April production budget to measure the difference between planned and actual results for the month of April. The comparison of actual results with budget expectations is called performance reporting. The budget acts as a gauge against which managers compare actual financial results. Reasons for Budgeting Budgeting is a time-consuming and costly process. Managers and employees are asked to contribute information and time in preparing the budget and in responding to performance reports and other control-phase budgeting activities. Is it all worth it? Do firms get their money‟s worth from their budgeting systems? The answer to those questions cannot be generalized for all firms. Some firms receive far more value than others do for the dollars they spend on budgeting. Budgets do, however, provide a wealth of value for many firms that effectively operate their budgeting systems. I now discuss some of the reasons for investing in formal budgeting systems. In the next section of this chapter I discuss issues that contribute to effective budgeting.
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
Page 36 and 37:
Downloadable Resources for this cha
Page 38 and 39:
Next, we explain each of these thre
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liquidity. Or, more simply, achievi
Page 42 and 43:
If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
Page 50 and 51:
Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
Page 58 and 59:
More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
Page 122 and 123:
To solve using Excel, open your Exc
Page 124 and 125:
As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
Page 148 and 149:
Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
Page 158 and 159:
The formula tells us that, to begin
Page 160 and 161:
for the entire market of stocks sin
Page 162 and 163:
The dividend per share for preferre
Page 164 and 165:
If you are able to determine the cu
Page 166 and 167:
Debt finance is the lower-cost meth
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We don‟t observe many firms whose
Page 170 and 171:
Capital Structure in Practice Finan
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are able to observe regularities in
Page 174 and 175:
dividends and capital gains. We wil
Page 176 and 177:
where EBIT is earnings before inter
Page 178 and 179:
Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
Page 256 and 257: form, even at the risk of some unli
Page 258 and 259: likely that our consultants will be
Page 260 and 261: Thus, the corporation and LLC, with
Page 264 and 265: It is not possible to fully describ
Page 266 and 267: usiness corporation for all purpose
Page 268 and 269: a cash-basis taxpayer to be taxed a
Page 270 and 271: The Tax Reform Act of 1986 substant
Page 272 and 273: limit is the product of the value o
Page 274 and 275: he would have spent anyway. In fact
Page 276 and 277: protect Brad from the scenario of h
Page 278 and 279: paying for the privilege. If the st
Page 280 and 281: The second tax scenario attaches to
Page 282 and 283: include that nullity in his taxable
Page 284 and 285: then the capital gain to be taxed h
Page 286 and 287: Most relevant to Morris is Section
Page 288 and 289: To begin with, the ESOP will have t
Page 290 and 291: general partner of a limited partne
Page 292 and 293: small businesses) is also subject t
Page 294 and 295: oth Lisa and Brad would be free to
Page 296 and 297: Assume that a limited liability com
Page 298 and 299: corporations, and had been audited
Page 300 and 301: There is plenty of blame from the c
Page 302 and 303: • An important study about top ma
Page 304 and 305: • The federal government made at
Page 308 and 309: Budgets offer a variety of benefits
Page 310 and 311: determine the impact of specific pr
Page 312 and 313: Exhibit 11.2 Budget variance report
Page 314 and 315: udget, we just add more to it next
Page 316: income statement. The financial bud
Page 319 and 320: For a manufacturing company, cost o
Page 321 and 322: C&G‟s Gift Shop has a policy to m
Page 323 and 324: Meeting cash obligations as they co
Page 325 and 326: was unusually low, say, due to the
Page 327 and 328: A fixed budget, sometimes called a
Page 329 and 330: A large part of the budget selling
Page 331 and 332: • Centralized resource allocation
Page 333: Merewitz, Leonard, and Stephen H. S
Page 337 and 338: This chapter starts with a discussi
Page 339 and 340: Interestingly the numbers for quart
Page 341 and 342: Exhibit 12.4 Scenarion analysis.
Page 343 and 344: Pitfalls Although this analytic tec
Page 345 and 346: Exhibit 12.6 Variable cost element
Page 347 and 348: Variable Cost as a Function of Outp
Page 349 and 350: If scenario 2 yields a lower profit
Page 351 and 352: Microsoft certainly does not price
Page 353 and 354: If it is determined that dumping ha
Page 357 and 358:
Leaving government agencies and not
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transaction processing. Each proces
Page 361 and 362:
Exhibit 13.3 E-commerce transaction
Page 363 and 364:
To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
Page 407 and 408:
Leeson bet and lost. Japanese stock
Page 409 and 410:
Between February and April 1994, Da
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LTCM could be picky when it came to
Page 413 and 414:
An investor who wished to invest in
Page 415 and 416:
Similarly, the swaps market has rev
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speculator would suffer losses equa
Page 419 and 420:
American manufacturer will suffer l
Page 421 and 422:
The ease with which futures facilit
Page 423 and 424:
Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
Page 427 and 428:
Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
Page 433 and 434:
Finally, the last step is to choose
Page 435:
3 Fischer Black, who co-invented th
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not include assets that the firm ha
Page 441 and 442:
Thus, a business valuation will usu
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Negative • Acme is highly depende
Page 445 and 446:
Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448:
Profitability ratios reflect the re
Page 449 and 450:
When we talk about the value of a b
Page 451 and 452:
This example illustrates that with
Page 453 and 454:
Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458:
Victoria explains that the second p
Page 459 and 460:
Victoria analyzes Acme‟s audited
Page 461 and 462:
In summary, the discounted cash flo
Page 463 and 464:
Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
Page 471 and 472:
The subject of this chapter is grow
Page 473 and 474:
Finally, an acquisition can be effe
Page 475 and 476:
M&A activity has been the focus of
Page 477 and 478:
companies continue to make the same
Page 479 and 480:
equals was taking on a distinctive
Page 481 and 482:
Anatomy of a Successful Acquirer: T
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employees kept their original jobs
Page 485 and 486:
where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
Page 489 and 490:
The following example summarizes th
Page 491 and 492:
make sure that you are at least awa
Page 493 and 494:
acquisition, there is no immediate
Page 495 and 496:
its vascular business, which was so
Page 497 and 498:
While all employees should be part
Page 499 and 500:
makes strategic and financial sense
Page 501 and 502:
Bhagat, Sanjai, Ming Dong, David Hi
Page 505 and 506:
The 2008 financial crisis underscor
Page 507 and 508:
Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
Page 511 and 512:
Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
Page 515 and 516:
• Results of meetings with vendor
Page 517 and 518:
• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
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The answer is: profits. The company
Page 523:
19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
Page 531 and 532:
Random-Access Memory (RAM) Random-a
Page 533 and 534:
On laptop computers and PDAs, the s
Page 535 and 536:
Operating System An operating syste
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the spreadsheet software together w
Page 539 and 540:
Exhibit 19.5 Pro forma sales and in
Page 541 and 542:
Database Software A database is a c
Page 543 and 544:
Internet e-mail addresses often con
Page 545 and 546:
Personal Finance Software There are
Page 547 and 548:
There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
Page 553 and 554:
industrial revolution, and has occu
Page 555:
Dummies Inc. has a series of books
Page 559 and 560:
organization. This chapter is desig
Page 561 and 562:
As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
Page 565 and 566:
Most of the focus of the investor c
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Data Access and OLAP Before the lat
Page 569 and 570:
Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
Page 573 and 574:
Client-server technology is based o
Page 575 and 576:
Today, most programmers write in C+
Page 577 and 578:
Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
Page 581 and 582:
Online analytical processing (OLAP)
Page 583 and 584:
server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
Page 650 and 651:
Cell Center for Research in Securit
Page 652 and 653:
Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
Page 660 and 661:
Askin Capital Management Barings Ba
Page 662 and 663:
market approach publicly traded gui
Page 664 and 665:
Electronic data interchange (EDI) E
Page 666 and 667:
Extensible markup language (XML) Ex
Page 668 and 669:
short term liquidity users and uses
Page 670 and 671:
Fourth generation programming (4GL)
Page 672 and 673:
Going private Going private transac
Page 674 and 675:
Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
Page 682 and 683:
Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
Page 690 and 691:
Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
Page 700 and 701:
Relevant range Relevant range assum
Page 702 and 703:
Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
Page 706 and 707:
Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
Page 710 and 711:
acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
Page 716 and 717:
discounting with discount rate form
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