The Portable MBA

Kenneth M. Eades, Timothy M. Laseter, Ian Skurnik, Peter L. Rodriguez, Lynn A. Isabella, Paul J. Simko

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470627273
• Edition: 5
• Topic: Business
• Subtopic: Gestione
• Index: Business

A totally revised new edition of the bestselling guide to business school basics

The bestselling book that invented the "MBA in a book" category, The Portable MBA Fifth Edition is a reliable and information-packed guide to the business school curriculum and experience. For years, professionals who need MBA-level information and insight-but don't need the hassle of business school-have turned to the Portable MBA series for the very best, most up-to-date coverage of the business basics.

This new revised and expanded edition continues that long tradition with practical, real-world business insight from faculty members from the prestigious Darden School at the University of Virginia. With 50 percent new material, including new chapters on such topics as emerging economies, enterprise risk management, consumer behavior, managing teams, and up-to-date career advice, this is the best Portable MBA ever.

• Covers all the core topics you'd learn in business school, including finance, accounting, marketing, economics, ethics, operations management, management and leadership, and strategy.
• Every chapter is totally updated and seven new chapters have been added on vital business topics
• Includes case studies and interactive web-based examples

Whether you own your own small business or work in a major corporate office, The Portable MBA gives you the comprehensive information and rich understanding of the business world that you need.

1
Accounting Principles

Graduate business students will virtually always begin their programs of study with an introduction to accounting principles. The reason for this is simple: Accounting provides quantitative information that enables managers to make informed business decisions. Without a basic understanding of financial statements, accounting methods, and accounting measurement issues, much of the data analysis and interpretation required of business problems would not be possible. Accounting is often called “the language of business,” and for good reason. It provides a structural framework and a quantitative vocabulary with which most business issues and their solutions may be expressed. Managers, investors, and countless others would find themselves virtually paralyzed without the information provided by the accounting process. With such information the foundation can be built for understanding most business issues.

The significant demand for relevant, reliable, and timely financial information by capital markets, managers, regulators, and others makes the understanding of the accounting process of critical importance to business. Accounting today is a highly developed field, complete with codified rules, regulatory bodies, and professional certifications that signify degrees of individual expertise. At its core, however, understanding the subject starts with understanding the end objectives of the output it generates: the financial statements. It continues with appreciating the myriad of measurement bases that can exist across accounts included on these statements. Only then can it conclude with the various forms of analysis and decision making that render knowledge of the subject so powerful.

With this in mind, this chapter has five overarching objectives. First, it provides an introduction to the framework of financial accounting. An emphasis on the balance sheet equation is taken, as from this equation the key relationships across the financial statements reported by most companies can be emphasized. Second, the chapter explores the notion of accrual accounting, particularly how the methods, estimates, and assumptions made in the preparation of the financial statements affect interpretation. Third, it offers a step-by-step guide to reading the annual report, the most commonly used document from the accounting process. Fourth, it introduces a systematic approach to analyzing financial statements, including the basics of how to assess the financial health of a company. Finally, it deals with the field of managerial accounting, particularly how variance analysis of a project or business unit can yield valuable insights for the operating manager.

The Framework of Accounting: The Balance Sheet Equation

The foundation, or building block, of accounting rests with this fundamental concept: The resources available to a firm are bound by the claims made on those resources. This concept mirrors what should be economic intuition about the firm: Those providing capital investments to the firm (i.e., investors) have claims equivalent to the assets standing behind those investments. In this sense there must be balance—a balance that can be expressed as assets equal liabilities plus owners’ equity.

Consider the basic power of this equation. Increases in a firm’s assets must be financed by increases in liabilities (e.g., a bank loan) or in equity (e.g., a sale of stock), or by creating value through operations. Decreases in assets (such as a debt payment or a dividend payment) must be offset with decreases in that corresponding type of capital (e.g., liabilities or owners’ equity, respectively). Changes (or Δ) in an element of the accounting system must likewise be balanced out:

ΔAssets = ΔLiabilities + ΔOwners’ Equity

To illustrate, consider what happens when the firm borrows capital from a bank. The cash received represents a new asset to the firm, but there is now a new claim against the firm that must be recorded as a liability. So assets increase by the amount borrowed (i.e., cash), and so do liabilities, and together these changes force a balance of the fundamental accounting equation. As another illustration, consider what happens on the other side of this transaction—that is, from the bank’s perspective. The bank has given up cash, but has a new asset that would be labeled as a receivable. The reduction of one asset, cash, is exactly offset by the creation of another, a receivable.

From the balance sheet equation and these two examples, one can readily see that even the simplest transaction must have at least two sides, for a minimum of two accounting effects necessary to capture the nature of balancing. Perhaps you have heard of the term double-entry accounting system. The previous balancing equation is the basis for that system.

The financial statements are the primary output from the accounting process. How these statements relate to the balancing equation is also not that complex. Consider the context of your own personal financial scorecards. Three very basic questions one would ask about personal wealth would be the following: How much does one have? How much does one earn? How well does one manage one’s money? The answer to the first question would come from a balance sheet, the answer to the second from an income statement, and the answer to the third from a statement of cash flows. In a sense, then, these three main statements, found in virtually every firm’s financial reports, have as objectives tackling three very fundamental financial scorecard objectives. Here are some more specifics about what each financial statement attempts to capture:

• Balance sheet. This financial report presents a snapshot of the assets of the firm, and the claims upon those assets, at a particular point in time (i.e., the end of the fiscal year). The balance sheet is grounded in the balancing equation summarized earlier and attempts to provide detail regarding the firm’s assets, liabilities, and owners’ equity.
• Income statement. This financial report is a measure of the flows of business over a period of time expressed in terms of profit and loss. Profits are expressed in terms of total revenue activities of the firm, reduced by the costs incurred to generate those revenues. Some of these flows must be adjusted (or matched) across periods to correspond with other flows that are economically related. The activity captured in an income statement is reflected as certain changes on the balance sheet. Because net profit belongs to the owners of the firm, it is in the owners’ equity section of the balance sheet that profit will be reported. The individual account capturing profit and loss is commonly referred to as retained earnings.
• Statement of cash flows. Because the income statement and the balance sheet result from accruals and allocations made by accountants, it can be difficult to tell what really happened to the firm in terms of the actual flows of cash. Did the firm generate more cash this year than last? The statement of cash flows helps answer this question. It recasts the performance of the firm into cash-based accounting and helps the reader understand the changes in cash and the causes. This statement is also often viewed as supplemental, as it merely specifies in detail how the cash on the balance sheet changes from period to period. It further segregates these changes as those relating to operations, to investing, and to financing activities.

Contained within each of these statements is a series of accounts, into which the transactions within the firm are recorded. Individual accounts therefore only provide additional detail about the fundamental accounting equation that is expressed in terms of assets, liabilities, and owners’ equity, as described earlier. Remember this basic use of accounts as we review the financial statements for PepsiCo later in this chapter.

Accrual Accounting

The notion of reporting over distinct periods of time is an important feature of financial accounting. Because financial statement users desire to evaluate performance over time, the accounting process must be closed as of a specific date (quarter- or year-end), and adjustments to some accounts become necessary. Consider that for all practical purposes the accounting process follows predictable mechanical cycles each period. This process entails two distinct activities: the everyday recording of transactions during the period, and adjustments of certain key financial statement accounts after the period has ended. For the former, management sets accounting policies and procedures, and chooses accounting methods consistent with required standards—generally accepted accounting principles (GAAP)—that govern how each identifiable event will be recorded. There are choices here, such as whether to depreciate equipment uniformly or use accelerated depreciation, but the decision should bemade with an eye toward accurately reflecting the underlying economics of the activity under measurement. For the latter, the accounting cycle is structured such that many estimates and ju...