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Accounting for engineers topics

 

Note

Personal Notes, not for distribution

(I) Financial Statements

  • Accounting is Measurement
    • Measures:
    • What I have at hand (Balance)
    • How it flows (P&L)
    • Conservation of Money (as Energy, Momentum, Mass, …)
    • Inputs + Outputs = Change in Content (with appropriate signs)
    • Discrete Events: Transactions
    • Timestamp, Type, Amount ($)
  • Key (non-financial) transactions in business
    • Buy & Sell → Ignore for now, not needed (!!)
    • Deliver & Receive Goods/Services (accruing/incurring)
    • Pay & Collect Cash
  • Measurements
    • Balance = set of Net Assets, Deliveries, Receipts at a point in time
    • P&L = set Deliveries, Receipts during a period
    • Measurement taken at the end of the P&L period
  • Application of Business Transactions:
    • Deliver: Add transaction to Deliveries
    • Collect: Remove Transaction from Deliveries and Add to Net Assets
    • Receive: Add transaction to Receipts
    • Pay: Remove Transaction from Receipts and Add to Net Assets
  • Calculations for Business Transactions:
    • Always Summation on the set (Balance of P&L)
      • Transaction Signs:
      • Deliver, Collect: Positive
      • Receive, Pay: Negative
  • What does “closing the books” mean:
    • Pick a time.
    • Do all the calculations for Balance and P&L
    • Write down the timestamped results
    • Add the result of the P&L (earnings) to the NetAssets as its own transaction
    • Reset the P&L set to empty.
  • What about Buy & Sell: Not official accounting, but good to manage the business.
    • Not for “Legal” accounting
    • Needed for managing the business
    • Usually called “bookings” of “forecast”
    • Can be considered as a “wrapper” around legal accounting.
  • What is “The Goal”
    • P&L as high as possible
    • Subject to NetAssets > 0
    • Over the long run (multiple periods)
  • Any other tricks?
    • Borrowing and Lending
    • Taxes
    • Capital
    • “Balancing” the books: Balance at closing books always == 0
  • Is that it?
    • Pretty Much
    • Intra-Company Transactions, Chart of Accounts
    • Double Entry: Rules to not mess up the Balance and P&L sets

(II) Cost Accounting

  • Engineers Know:
    • Multivariate Calculus
    • Set theory
    • Linear approximations (Taylor series expansion)
  • Cost Accounting is Measurement
    • How much does it cost me to <…>
    • How can I expect it to vary
  • The Underlying object to measure: Producing and delivering a given amount of goods/services
  • As simple as a derivative
    • If we know the total cost as a function of the production volume
    • The cost per unit is simply the derivative of the total cost.
  • But derivatives and higher order functions are not quite taught in Biz School, so…
    • We take a linear approximation: Y = a + bX
    • Cost = Fixed + UnitCost * Volume
  • Cost Variances demystified through Partial Derivatives
    • Unit Cost Variance: dC = V*dUC
    • dUC = dLabor + dMaterial
    • Volume Variance: dC = UC*dV
    • Fixed Cost Variance: dC = dF