The Power of Accounting : What the Numbers Mean and How to Use Them

The Power of Accounting: What the Numbers Mean and How to Use Them provides a highly readable text for non-financial managers. It explores accounting’s uses and limitations in the management process. The text is intended for users of accounting information as opposed to preparers. It focuses on aiding the reader in understanding what accounting numbers mean, what they do not mean, when and how they can be used for decision making and planning and when they cannot. The book discusses the importance of accounting information in the economy and the fact that accounting numbers are often the result of estimates and arbitrary allocations. It also includes a cautionary word about the imprecise use of terminology often found in accounting and financial literature. Front Cover 1 The Power of Accounting 3 Copyright Page 4 Contents 6 Acknowledgments 9 Introduction 11 Terminology 15 Financial versus Managerial Accounting 16 Summary 17 1. The Basics 19 Chapter Overview 19 Accrual Accounting 22 Cash Accounting 23 Equations 23 Income Statement 24 Balance Sheet 26 Source and Use of Funds Statement 35 Footnotes to Financial Statements 39 Summary 40 Exercises 41 2. Costs, Cost Behavior and Cost Analysis 43 Chapter Overview 43 Cost Classifications 44 Summary 49 Exercises 50 3. Cost-Volume-Profit Analysis 51 Chapter Overview 51 Contribution Margin versus Traditional Income Statements 52 Some Basic Math 53 Cost-Volume-Profit Analysis Illustrated 55 Assumptions 60 Sensitivity Analysis 61 Operating Leverage 62 Summary 63 Exercises 64 4. Decision Making I: The Basics 67 Chapter Overview 67 Basic Decision Model 68 Reliable and Relevant Information 69 Opportunity Costs 71 Examples 72 Summary 78 Exercises 78 5. Decision Making II: Capital Budgeting Decisions 81 Chapter Overview 81 Short Term versus Long Term 82 Capital Budgeting Decisions 82 The Time Value of Money 83 Estimating Future Cash Flows 84 Present Value 86 Capital Investment Decision Models 88 Summary 96 Exercises 96 6. Planning and Budgeting 101 Chapter Overview 101 Developing the Operating Budget 104 Pro Forma Income Statement 105 Pro Forma Balance Sheet 107 Illustration of Budgeting Process 113 Summary 118 Exercises 118 7. Control 121 Chapter Overview 121 Flexible Budgets 123 Different Layers of Analysis 123 Summary 131 Exercises 132 8. Allocation 134 Chapter Overview 134 Necessity of Allocations 136 Approaches to Allocation 137 Allocating Overhead 138 Summary 150 Exercises 150 9. Financial Statement Analysis 153 Chapter Overview 153 Liquidity Ratios 156 Financial Leverage Ratios 159 Activity Ratios 161 Profitability Ratios 163 Summary 167 Exercises 168 Appendix A – Portions of Columbia Sportswear’s 2009 10-k Report 169 Appendix B – Glossary 220 Appendix C – Answers to End-of-Chapter Exercises 235 Index 251 "The Power of Accounting: What the Numbers Mean and How to Use Them provides a highly readable text for non-financial managers. It explores accounting's uses and limitations in the management process. The text is intended for users of accounting information as opposed to preparers. It focuses on aiding the reader in understanding what accounting numbers mean, what they do not mean, when and how they can be used for decision making and planning and when they cannot."--Provided by the publisher