Accounting Concepts

Accounting Concepts

Most BComm and BAdmin programs require two levels of accounting courses. Managerial accounting is traditionally the second level. The course focuses on managerial accounting, which unlike financial accounting, is designed for internal users – managers (vs. external users – shareholders).

Product Costs

In a manufacturing firm, the three main components of production costs are direct material, direct labor and manufacturing overhead (required to compute the cost of goods manufactured and cost of goods sold). In contrast, a merchandiser only has the purchases’ cost. Direct materials and labor are those that can be physically and conveniently associated with the product made, whereas indirect materials and labor are not and are considered part of factory overhead.

Whether variable or fixed, selling and administrative expenses are excluded from the three main components, and are written off as period costs, under both variable and absorption costing. The main distinction between variable and absorption costing is that variable costing writes off the fixed part of overhead as a period cost, whereas absorption defers it in inventory. For this reason, absorption managers could be tempted to overproduce.

POR & ABC

Due to timing requirements, the predetermined overhead rate (POR) is often obtained by dividing the estimated overhead by the expected cost driver (direct labor cost or hours, or machine hours when production is highly automated). Then, the POR is multiplied by the actual cost driver incurred for a given job. A further refinement on the POR is activity based costing (ABC), which subdivides overhead into activity cost pools, and basically repeats the same operation for every cost driver.

Job order costing assigns costs to each job, whereas process costing deals with processes. In process costing, depending on whether the weighted average or the FIFO (first in first out) method is used, the results are different, mainly because of the varying ways of assigning unit costs to beginning inventories.

Economic Market Equilibrium Supply and Demand Graph. Drawing by Elena.

CVP Analysis

Cost volume profit (CVP) analysis starts with rewriting the usual income statement in the CVP format. All variable costs are subtracted from sales to obtain the contribution margin (CM). The CM ratio can be obtained by diving the CM by sales. These operations will be useful in establishing the break-even point (BE). To determine the BE in units, the fixed costs are divided by the CM per unit; to get the BE in dollars one performs the same operation but with the denominator being the CM ratio.

Incremental Analysis

Incremental analysis compares costs and expenses that vary under different alternatives. The items that change are called incremental and are relevant to the decision, all others, such as sunk, joint or common costs, are considered irrelevant.

Budgeting

The master budget is composed, in that precise order, from the following budgets: sales budget ⇒ production budget ⇒ direct materials, direct labor, manufacturing overhead budgets ⇒ selling and administrative expenses budget ⇒ budgeted income statement ⇒ capital expenditures and cash budgets, budgeted balance sheet. An important point to remember is that amortization is excluded from the calculation of the cash budget since it lacks the characteristics of a cash expense.

Accounting and Finance

From a mathematical ability point of view, accounting is somewhat easier than finance. For example, financiers must learn more complicated mathematical formulas than accountants, in general. However, becoming a professional accountant remains far from being a piece of cake… and takes a lot of time in this blogger’s opinion.

In Quebec, Canada, there used to be three designations in the accounting profession: CA, CMA and CGA. Nonetheless, the professional orders are working on simplifying the equation (no pun intended!) to converge on a single certification: CPA.

So you want to be an accountant? What does it take? At least in Quebec, the mostly French speaking part of Canada, becoming an accountant usually requires a combination of completed undergraduate studies and professional experience. A bachelor of business administration (BBA) with an accounting major, plus an internship at a recognized CA firm should fulfill the requirements of the professional order, but one is advised to find out for oneself on the respective regulating bodies’ Websites.

The Falls: A Luna Story

The Falls: A Luna Story

By Ian McDonald (excerpt)

Why should a space probe have emotions? Why would e even need such things? In the early days of exploration, probes were no smarter than insects and they opened up whole new worlds inside the world we thought we knew. No smarter, and with even less emotional freight. They trundled, cold and heartless, across the hillsides of Mars, swung soulless and free from wonder over the methane seas of Titan.

My first answer is, why should an Artificial Intelligence not have emotions? But that is really not an answer, just a rhetorical device, so I follow it with this: since the 2076 Bamako Agreement, it is the right of every Artificial Intelligence to perceive and enjoy specific internal states which are analogous to emotions in human beings. To which you say: this is the Moon. No one has any rights. No rights, no civil law, only contracts between parties.

My second answer is: this exploration is part financed by subscription to live feeds, from within the atmosphere of Saturn. The old national space administrations learned their images from the surface of Mars were much better received when spiced with emotionality, even if that was added by a social media agent on Earth.

Humans love emotionality. Make us feel something; then we understand. Give us the tiniest empathy with what it feels like to drive in the unimaginable wind-shear of Hexagon, the north polar vortex. What it is to be… The essential human question.

The Falls: A Luna Story. Photo by Elena

And I’ll have my third answer ready before you riposte: what is exploration? It is curiosity, the desire to know what is beyond those clouds; over that horizon. It is courage and caution, it is excitement and fear; it is the tension between risk and the desire for knowledge. A probe that knows emotions – its analogues of those emotions, for how can we ever really know what’s in the head of an other, be that bone or plastic – is better able to explore, to risk, to be cautious, to assess risk: to dare.

But it’s my last answer that’s in the end my first and only answer. Emotions are the nature of space probes, of express trains, of helium three extractors and solar sinterers, of the orbital transfer tethers wheeling around the waist of our world. Emotions are an emergent property. You can no more make an artificial intelligence without emotions than you can a baby without tears, a daughter without curiosity. Why should an artificial intelligence have emotions, you asked? And I said, why not? But both of those are wrong. It’s not a why question, or a because answer. Emotions are part of the universe

Meshed

Meshed

By Rich Larsen (excerpt)

What do you mean he’s hot getting meshed? My boss pings me, plus a not unusual torrent of anger/confusion emotes that makes my teeth ache.

“I mean he doesn’t want it,” I say, sticking my hands under the tap. “He says he won’t get the mesh, period.”

I’m in the bathroom, because I couldn’t think up a better excuse. The mirror is scrolling me and advertisement for skin rejuvenation, dicing up my face and projecting a version sans stress lines. The water gushes out hot.

Do they even know what it is? Did you explain?

“They know what a nerve mesh is,” I say indignantly. “They’re from Senegal, not the moon.” I slap some water on my cheeks, because that always help in the movies, then muss and unmuss my hair. The mirror suggests I try a new Lock’n’Load Old Spice sculpting gel. “But year,” I mutter. “I, uh, I did explain.”

Once Oxford’s pa got back to the bleachers, I gave both of them the whole wiki, you know, subcutaneaous nodes designed to capture and transmit biofeedback, used to monitor injuries and fatigue, and muscle movement, and also nervecast physical sensation and first-person visual to spectators. If we get our way, with a little swoosh in the bottom left corner.

Meshed, photo by Elena

It’s not something I usually have to sell people on. Most kids, even ones from the most urban of situations, have saved up enough for at least one classic nervecast of Maker sinking the game-winner for Seattle in the ’33 Finals, or Dray Cardeno dunking all over three defenders back when he was still with the Phoenix Phantoms. Most kids dream about getting their mesh how they dream about getting their face on billboards and releasing their own signature shoes.

The Diallos listened real intent, real polite, and when I was finished Oxford just shook his head, and his pa put a hand of his shoulder and told me that his son’s decision was final, and if Nike wasn’t willing to flex on the nerve mesh, another sponsor would. Atwhich point I spilled some damage control, got both of them to agree to dinner, and bailed to the bathroom for a check-in with by boss.

It’s a zero-risk procedure now, for … sakes. You can do it with an autosurgeon. Change his mind. A procession of eye-rolling and then glaring emotes, all puffing and red-cheeked.

“What if we just put a pin in the mesh thing and sign him anyways?” I say. “We can’t let this one get away. You saw the workout feed. We sign him unmeshed, let things simmer, work it into the contract later on as an amendment.”

If he’s playing at HoopSumm, he needs a mesh. That’s the coming-out party. How the fuck are we sipposed to market him without a mesh? Skeptical emote, one eyebrow sky-high. I thought you could handle this one solo, Vic. Thought you wanted that recommendation for promo. Am I wrong?

“No,” I say quick. “I mean, you’re not wrong.” I yank a paper towel off the dispenser and work it into a big wad with my wet hands. I never effect biofeedback when chatting someone with the power to get me fired; I I did there would be some serious middle-finger emotes mobbing his way.

Figure out if it’s him or the dad who’s the problem. Then use the one to get to the other. It’s not brain surgery. There’s a chortling emote for the pun, then he axes the chat.

I’m left there shredding the damp paper towel into little bits, thinking about the promotion that I do want, that I absolutely do want. I’d finally be making more than my old man, and Wendee would be happy for me for at least a week, and maybe during that blessed out week I would get up the balls to ask her to move in.

But first, I have to get the Diallos t sign off on a nerve mesh. I’m not exactly bursting with ideas. That is, not until I go to toss the towel in the recycler and see a rumpled napkin inked with bright red blood sitting on top. Then I remember Oxford’s pa and his little plastic case. I shove it all down and head back to the gym, only pausing to order a tube of that new hair gel

Stock-index Arbitrage

Stock-index Arbitrage

Another form of program trading is called “stock-index arbitrage.” A position in a portfolio stocks is combined with an index futures contract with the objective of producing a perfectly hedged position and an abnormally large risk-free return. Arbitrage opportunities arise whenever the value of an index future and the value of the underlying security diverge.

The benefits of index arbitrage are twofold. First, by increasing trading in both underlying stocks and derivative products, liquidity in both markets is enhanced. Second, arbitrage trades link markets together and ensure that both the underlying securities and the derivative instruments are appropriately priced.

But have program trading and the use of derivative products increased volatility in the stock market? In part, the apparent increase in volatility is the result of a scale effect. A daily move of 50 points with the Dow Jones average near 2,500 is no greater than a 16-point move during the early 1980s with the Dow at 800. Through the end of the 1980s, all the worst point declines in the Dow Jones Industrial Average occurred during the 1986-89 time period. When the price changes are recast in terms of percentage changes, however, most of the worst days in the market all occurred over fifty years ago.

To be sure, October 19, 1987, holds the record in terms of single-day loss, measured either in points or as a percent. Friday, the 13th, October 1989, was also an unusually volatile day. And stock market volatility during the 1970s and 1980s was higher than during the 1950s and 1960s. But there are, I believe, good economic reasons for this increase in volatility. During the 1950s and 1960s, inflation remained very low and stable. Interest rates and bond prices moved very little. We had fixed and relatively stable exchange rates with our major trading partners. Economic activity was also near full employment.

The basic economic environment became far less stable by the 1970s and 1980s. Inflation accelerated and bond prices became more volatile, especially after the Federal Reserve abandoned its policy of iterest-rate smoothing. Moreover,exchange rates also became highly volatile as world capital markets became closely integrated so that it was possible to move billions of dollars among currencies almost instantaneously. Unemployment rates in the 1980s became more volatile too, reaching levels not experienced since the 1930s. Thus, basic economic uncertainty increased dramatically, affecting all markets. Finally, trading has become far more concentrated – being dominated by large institutional investors.

I am convinced that the general increase in volatility of financial markets compared with the 1950s and 1960s reflects this increase in basic economic uncertainty and the growing institutionalization of our markets. Products such as futures and options arise to cope with this increased uncertainty. They are used by professional investors to shift and control risk and to respond to market movements. This means that the growth of derivative products results from an attempt to cope with increased underlying volatility. Blaming derivative products and related program trading for the volatility in the stock market is as illogical as blaming the thermometer for measuring uncomfortable temperatures. And even if they do make the market more quickly responsive to changes in underlying conditions or the sentiment of large institutions, this is a sign of a well-functioning stock market, not an inefficient one. Eliminating new instruments and trading techniques would make our markets less efficient and risk seeing institutions develop to facilitate such trading abroad.

After the crash of 1929, legislation was introduced to prohibit the use of telephones to transmit margin orders. At the start of the 1990s, program trading was the target. But technology does not move markets, it merely facilitates the flow or orders. Program trading is not the mindless computer-driven technique that keeps the market from reflecting fundamental values. It reflects human decisions about the value of stocks, made easier to execute because of computers. If institutions decide to sell, they will do so whether by computers, telephones, or even hand signals from open window to brokers outside as was the case in earlier times.

A Fox. Photo by Elena

Obviously daily movements in the popular stock market indices that are large enough to catch newspaper headlines are upsetting, especially to the individual investor, who feels at the mercy of the large institutional traders. But should the wise investor then leave the stock market entirely, as some individuals have apparently decided? Absolutely not! To paraphrase a common expression, “if you can keep your head when those around you are losing theirs, you do understand the problem and know the best way to cope with it.” The long-term investor can and should ignore short-term market volatility. The losers from stock market volatility will be the institutions that trade frequently in a futile attempt to time the market, not steady individual investors who buy and hold for the long term.

Concluding Comments

I have emphasized that market valuations rest on both logical and psychological factors. The theory of valuation depends on the projection of a long-term stream of dividends whose growth rate is extraordinary difficult to estimate. Moreover, the appropriate risk premiums for common equities are changeable and far from obvious either to investors or to economists. Thus, there is room for the hopes, fears, and favorite fashions of market participants to play a role in the valuation process. Indeed, I emphasized how history provides extraordinary examples of markets in which psychology seemed to dominate the pricing process, as in the tulip-bulb mania in seventeenth-century Holland and the biotechnology boom in the late 1980s. Thus I harbor some doubts that we should consider that the current array of market prices always represents the best estimates available of appropriate discounted value.

Nevertheless, one has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency. Information contained in past prices or any publicly available fundamental information is rapidly assimilated into market prices. Prices adjust so well to reflect all important information that a randomly selected and passively managed portfolio of stocks performs as well as or better than the portfolios selected by the experts. If some degree of mispricing exists, it does not persist for long. “True value will always out” in the stock market. Moreover, whatever mispricing there is usually is only reconizable after the fact, just as we always know Monday morning the correct play the quarterback should have called.

Pricing irregularities may well exist and even persist for periods of time and markets can be influenced by fads and fashions. Eventually, however, any excesses in market valuations will be corrected. Undoubtedly, with the passage of time and with the increasing sophistication of our data bases and empirical techniques, we will document further departures from efficiency and be able to understand their causes more fully. But I suspect that the end result will not be an abandonment of the belief of many in the profession that the stock market is remarkably efficient in its utilization of information.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc

Rates of Change

Rates of Change

By S.A. Corey (excerpt)

The footage of the accident plays on a little wall monitor in the medical center. The actual water had been too deep for natural light to find them, so the images have been enhanced, green and aquamarine added, shafts of brightness put in where a human eye – if it hadn‘t been crushed by the pressure – would have seen only darkness. The image capture has been done by a companion submarine to document the months-long trek, and either it was a calm day in the deep water or image processing has steadied it. Diana can imagine herself floating in the endless expanse of an ocean so vast it is like looking up at the stars. Karlo sits beside her, his hands knotted together, his eyes on the screen. The contrast between the squalid, tiny world of the medical center and the vast beauty on the screen disorients her.

The first of them swim into sight. A ray with wide gray wings, sloping through the salt water. With nothing to give a sense of scale, it could be larger than whales or hardly bigger than a human. There is no bump to show where the carapace holding a human brain and spine might have slotted into it. There is no scar to mark an insertion point. Another of the creatures passes by the camera, curving up the deep tides with grace and power. Then another. Then a dozen more. A school of rays. And one of them – she can’t begin to guess which – her son. In some other context, it might have been beautiful.

“It’s all right,” Karlo says, and she doesn’t know what he means by it. That the violence she was about to see had already happened, that she ought not be disturbed by the alien body that Stefan had chosen over his own, that her anger now won’t help. The words could carry anything.

A Gothic City. Photo by Elena

A disturbance strikes the rays, a shock moving through the group. The smooth cohesion breaks, and they whirl, turning one way and then the other. Their distress is unmistakable.

“What happened?” Karlo says. “What that it?”

“Be quiet,” Diana says. She leans forward, filling her view with the small screen like she might be able to dive through it. There in the center of the group, down below the camera, two of the rays swirl around each other, one great body butting into the other. A fight or a dance. She can’t read the intent in the movements. One breaks off, skimming wildly up, speeding through the gloom and the darkness. The other follows, and the floating camera turns to track them. As they chase each other, another shape slides into the frame, also high above. Another group of three alien bodies moving together, unaware of the chase rising up from below. The impact seems comical. The lead ray bumps into the belly of the middle of the three. The little camera loses focus, finds it again. Four rays swimming in a tight circle around one that lists on its side, its wings stilled and drifting.

That is my son, she thinks. That is Stefan. No emotions rise at the idea. It is absurd. Like seeing a rock cracked under a hammer or a car bent by a wreck: the symbol of a tragedy, but not the thing itself. It is some sea animal, something that belongs to the same world as sharks and angler fish. Inhuman. She knows it is her boy floating there, being pulled toward the surface by the emergency services pods, but she cannot make herself feel it.

“They attacked him,” she says, testing the words. Hoping that they will carry the outrage she wants to feel. “They attacked him, and they left him for dead.”

“They were playing and there was an accident,” Karlo says. “They didn’t leave him for dead.”

“They where are they? His friends, it that’s what you call them? I don’t see them here.”

“They can’t breath air,” Karlo says, as if that excuses everything. “They’ll come once the trip is over. Or, when he gets better, he can go back to them.”

Her breath leaves her. She turns to stare at him. His eyes, so unlike the ones she’d known when they had been married, cut to her and away again.