Chapter 4 COST ACCOUNTING Introduction Analysis of Cost and Profit --- Important for Design Engineer ---for Investment

t Decision Investment records --- should be maintained --helpful in comparing actual financial results Accountant maintain and interpret all these records Cost predictions by accountant & design engineer different --- if different cost factors are used Purpose of Accounting --- record and analyze any financial transactions influencing utility of capital Contents of Records--- accounts of expenses, accounts of income, accounts of assets & accounts of liabilities Account records --- useful in finding errors in past estimates & getting useful information for future evaluation Design engineer--- should have basic knowledge of accounting Outline of Accounting Procedure Accounting Procedure--- starts with recording original business transactions & proceeding to final preparation of summarizing balance sheets & income statements
1 Compiled by Prof. Prasad Parulekar

 Day-by-day business transactions---recorded in Journal Small business --- all entries in single journal; Large business concern different journals for different entries Assembling journal entries in appropriate account heading --- Ledger Posting --- transferring daily journal entries to ledger Financial conditions of business --- shown by periodic statements i.e. Balance-sheets & Income Statement Balance sheet --- shows financial condition of business at particular time Income statement ---shows financial gain or loss over a given period of time Fig. 4.1 Diagram of Accounting Procedure

Compiled by Prof. Prasad Parulekar

BUSINESS TRANSACTIONS

JOURNAL CASH JOURNAL SALES JOURNAL PURCHASE JOURNAL GENERAL JOURNAL

LEDGER

FINANCIAL STATEMENTS BALANCE SHEET INCOME STATEMENT

Basic Relationships In Accounting Asset --- anything that has value e.g. cash, land, building, equipments, raw material, finished products, any other property, etc.
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 Monetary value --- at any instant, business concern has certain monetary value due to its asset Equity --- many different persons, have a just claim to ownership of concerns asset Creditors have just a claim of partial ownership; Owners would have some claim to ownership Assets = Equities ------ (4.1) Equities --1. Proprietorship --- claims of concern or person owning the asset; sometimes referred as Net worth or Ownership or Capital 2. Liabilities ---- claims of anyone other than owner Assets = Liabilities + Proprietorship --- (4.2) At any instant, assets can be balanced against equities with help of equation, 4.2 Total Income = Costs + Profits --- (4.3) The Balance Sheet Based on equation, 4.1 & 4.2 for any industrial concern Shows financial condition on any given date Amount of details varies depending on purpose Consolidated balance sheet---based on last day of fiscal year--- included in annual report of corporation---reports distributed to stockholders Presents pertinent information---not include individual asset & equity in detail Assets --4 Compiled by Prof. Prasad Parulekar

1. Current Asset: capital readily convertible to cash e.g. accounts receivable, inventories, cash, marketable securities --- Liquid Assets 2. Fixed Asset: capital not immediately convertible to cash e.g. land, buildings, equipments 3. Miscellaneous Asset: deferred charges, other investments, notes, accounts due after 1 year Modern balance sheets use word, Liabilities in place of Equities Current Liabilitiesaccounts payable, debts, tax accruals due within 12 months of the balance sheet date; grouped together Net Working Capital = (Current Assets) (Current Liabilities)(4.4)

Other liabilities long term debts, deferred credits, reserves On Equity side --- other than liabilities includes --proprietorship, stockholders equity, capital stock, surplus Consolidated balance sheet--- assets listed on LHS and Liabilities with Proprietorship on RHS Value of property --- land, building, equipments--reported as value of asset at time of purchase Depreciation reserves are also indicated Book value = difference between original property cost & depreciation reserves
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 Depreciation accounting -- separate records showing accumulation in depreciation reserves Customary account reserve for depreciation not actually a separate fund Current Ratio = (Total Current Assets) / (Total Current Liabilities)---(4.5) Cash Ratio = (Immediately available Cash) / (Total Current Liabilities) (4.6) Immediately available cash --- cash + government & other marketable securities Current & Cash Ratios --- important in determining the ability to meet financial obligations ; examined by banks & other loan concerns before credit is extended Fig 4.2. Consolidated Balance Sheet for ABC Petroleum Company

Compiled by Prof. Prasad Parulekar

ASSETS

LIABILITIES & STOCKHOLDERS EQUITY

Component
Current Assets Cash Notes & accounts receivable Inventories Crude oil, petroleum products & merchandise Material & supplies (at cost & condition values) Total current asset Investments & long term receivable(at cost) Properties, plant & equipments (at cost) Production Manufacturing Transportation

Value
93,879,000
219,374,000 152,021,000 25,524,000 490,798,000 309,249,000

Component
Current Liabilities

Value

Accounts payable 160,307,000 Short term debts (due 3,514,000 within 1 year) Accrued taxes 58,938,000 Other accruals 20,796,000 Total Current 243,555,000 Liabilities Long term debts 333,738,000 Deferred credits Federal income taxes 86,845,000 45,579,000 132,424,000 24,197,000 172,330,000

1,390,688,000 Other 669,915,000 Total deferred credits 195,255,000 Reserve for contingencies Marketing 188,405,000 Stockholders equity Others 79,823,000 Common stock, $5 par 2,524,086,000 value authorized Less reserves for 1,315,416,000 Shares 50,000,000 depreciation, depletion, Shares issued 34,465,956 amortization Total 1,208,670,000 Capital in excess of par value of common stock Prepaid & deferred 20,347,000 Earnings employed in the
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264,238,000 918,165,000

Compiled by Prof. Prasad Parulekar

charges Total Asset

business 1,354,733,000 2,029,064,000 Less treasury stock (at 59,583,000 cost) 1,096,627 shares Total stockholders 1,295,150,000 equity Total liabilities & 2,029,064,000 stockholders equity

Compiled by Prof. Prasad Parulekar