1. Accounting and Financial Decisions
Engineering Economics

2. Objective of the Company
Increase the market value of the company
Market value – stock price reflected in the financial market
Market values of some of well known U.S. firms
Company
Stock Price
Market Value (mil) 2010
Market Value (mil) 2014
Google
$581.13 $
$344,458.8
Apple
$102.64
$295,886.3
$560,337.4
Microsoft
$46.56
$238,784.5
Wal-Mart
$75.60
$200.68B
$256,322.8
Exxon Mobile
$96.03
$368,711.5
$432,357.3

3. Factors that Affect Market Value
How is the company doing at a particular time?
What is happening to other stock prices, that is, how are the competitors doing?
How do investors expect the company to perform in the future – Decisions to invest in various projects and the actual performance of these projects

4. A. Why Engineers need to understand the financial statements?

5. Understanding Financial Statements
Accounting: The Basis of Decision-Making
Financial Statements: Financial Status for Businesses
Financial Ratios: Using Ratios to Make Business Decisions

6. Accounting – The Language of Business

7. Methods of Reporting Income
Cash Basis method
Income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.
Transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid
Accrual Basis method

8. Financial Status for Business

9. B. Understanding the Balance Sheet
The basic accounting equation and the definition of capital
How to instantly determine liquidity and too much debt
How the firm gets equity: only two ways

10. The Basic Accounting Equation
For the Balance Sheet Presentation
For the Financial Analysis
Assets = Liabilities + Owners’ Equity
Assets - Liabilities = Owners’ Equity

11. The Balance Sheet Statement for RIM, Ltd.

12. Using the Four Quadrants of the Balance Sheet and Why?
ASSETS
LIABILITIES
Current Liabilities
Current Assets =
Long-Term Liabilities
Long-Term Assets
Equity
Owner Contributions
Retained Earnings

13. How to Instantly Determine Liquidity and Too Much Debt?
Debt To Equity Ratio

14. Liquidity – Current Ratio
ASSETS
LIABILITIES
Current Liabilities
Current Assets
Long-Term Liabilities
Long-Term Assets
Equity
Owner Contributions
Retained Earnings

15. Too Much Debt? – Debt to Equity Ratio
ASSETS
LIABILITIES
Current Liabilities
Current Assets
Debt
Long-Term Liabilities
Long-Term Assets
Equity
Equity
Owner Contributions
Retained Earnings

16. How the Firm Gets Equity: Only Two Ways
Owners’ Contributions
By issuing stocks through financial markets
Retained Earnings
By retaining operating profits instead of paying

17. C. Using the Income Statement to Manage a Business
How to use profit check points
Why gross margin is the critical measure for engineers?
How does inventory production impact profit?

18. Basic Income Statement Equation
Revenue -
Expenses
Net Income (Loss)

19. Why Gross Margin is a Critical Measure for Engineers?
Sales
Cost of Goods Sold
Gross Margin

20. How Inventory Production Impacts Profit
Calculating the Cost of Goods Sold
Beginning Inventory
+ Additions to Inventory
Ending Inventory
Cost of Goods Sold

21. Statement of Operations (Year Ended December 31, 20xx)
How to Use Profit Check Points
ABC Company, Inc.
Statement of Operations (Year Ended December 31, 20xx)
Sales
$5,000,000
100.0%
Less: Cost of Goods Sold
3,250,000
65.0%
Gross Profit (margin)
1,750,000
35.0%
Less: Selling, G&A Expenses
1,000,000
20.0%
Operating Profit (margin)
750,000
15.0%
Less: Interest
250,000
5.0%
Net Income Before Taxes (NIBT)
500,000
10.0%
Less: Taxes
175,000
3.5%
Net Income (margin)
$325,000
6.5%
Bottom line

22. The Income Statement – Research In Motion Ltd.
FY 2009
100.00%
Revenue
46.07%
Gross margin
Operating margin
24.60%
17.10%
Net margin

23. Relationship Between Balance Sheets and Income Statement
Balance Sheet (12/31/09)
Income Statement
Balance Sheet (12/31/10)
(01/01/ /31/10)
Assets
Net sales
300,000
Current assets
74,300
Cost of Goods Sold
208,000
76,400
Fixed assets
95,000
Gross Profit
92,000
84,000
Total
169,300
O&M Expenses
58,720
160,400
Net Operating profit
33,280
Liabilities & Equities
Non-operating Profit
5,200
Current liabilities
44,500
Taxable Income
28,080
28,000
Other liabilities
32,000
Income Taxes
8,424
30,000
76,500
Net Income
19,656
58,000
Preferred stock
10,000
Cash Dividends
10,056
Common stock
40,000
Capital surplus
Retained earnings
9,600
32,800
42,400

24. D. Understanding the Statement of Cash Flows
The business operating cycle: How a business earns its cash
Sources and Uses of Cash
The engineer’s focus on the investing section: Capital Budgeting

25. Cash Flow Transactions within Business
Shareholders
Fixed Assets
Debt holders
Inventory
Government
Customers
CASH
From cash sales
To pay taxes
From credit
sales
To pay labor,
materials, and
overhead
To pay interest
and principal
From sale
of debt
To purchase
To pay dividend,
To purchase back
shares
of shares

26. The Cash Flow – Business Cycle
Pay taxes
Pay interest
Pay dividends
Changes in equity
Changes in liabilities
Cash
Collection of
receivable
Cash
Sales
Accounts
receivable
Production
Credit
Sales
Labor
Materials
Overhead
Inventory
Depreciation
Investment
Fixed assets

27. The Cash Flow Statement – Research In Motion, Ltd.
Operating Activities
Financing Activities
Investing Activities

28. Sources and Uses of Cash
Statement of
Changes in
Financial Position
Financial
position
Financial
position
Balance Sheet
Feb. 28, 2009
Balance Sheet
March 1, 2010
Sources and
Uses of Funds
Sources
Uses
Increase in equity
Decrease in assets
Increase in liabilities
Decrease in equity
Increase in assets
Decrease in liabilities

29. The Engineer’s focus on the Investing Section: Capital Budgeting
Cash from Operations
Cash from Investments
Cash from Financing
Cash from operations (profit)
Cash spent on Property, Plant, Equip.
Cash received from bonds and stocks

30. What is Capital Budgeting?
Capital: fixed assets used in production
Budget: a plan which details projected cash flows during some future period
Capital Budgeting: a process of analyzing projects and deciding whether they should be included in the capital budget

31. Capital Budgeting Framework
Investment Decision
Dividend Decision
Financing Decision

32. Major Investment Decision
Project
Balance Sheet
Income Statement
Retained Earnings Statement
Funds Flow Statement