+ - ... -.. - .-.-. ........-.-The Balance Sheet
assets. Also, with transactions, one business event may lead to another-all of which need
to be.accounted for. Consider, for example, the process of selling a robot or bulldozer.This
simple act involves several related transactions: (1) equipment released from inventory,
(2) equipment shipped to the purchaser, (3) invoicing the purchaser, and finally (4) collect-
ing from the purchaser.
Transaction accountinginvolvesmore thanjustreporting: it includes finding,synthesiz-
ing, summarizing,and analyzingdata. For the engineering economist,historical data housed
in the accounting function are the foundation for estimates of future costs and revenues.
Most accounting is done in nominal orstabledollars. Higher market values and costs
due to inflationare less objective than cost data, and with a going concern, accountants have
decided that objectivity should be maintained. Similarly, most assets are valued at their
acquisition cost adjusted for depreciation and improvements. To be conservative, when
market value is lower than this adjusted cost, the lower value is used. This restrains the
interests of management in maXimizinga firm's apparent value. If a firm must be liquidated,
then current market value must be estimated.
The accounting function provides data forgeneral accountingandcost accounting.
This chapter's presentation begins with the balance sheet and income statement, which are
the two key summaries of financial transactions for general accounting. This discussion
includes some of the basic financial ratios used for short- and long-term evaluations. The
chapter concludes with a key topic in cost accounting-allocating indirect expenses.::BALANCESHEET
The primary accounting statements are the balance sheet and income statement. The
balance sheet describes the firm's financial condition at a specific time, while the income
statement describes the firm's performance over a period of time-usually a year.
The balance sheet lists the firm's assets, liabilities, and equity on a specifieddate. This
is a picture of the organization's financial health or a snap shot in time. Usually, balance
sheets are taken at the end of the quarter and fiscal year. The balance sheet is based on the
fundamental accounting equation:Assets=Liabilities + Equity (18-1)
Figure 18-2 illustrates the basic format of the balance sheet.Notice in the balance sheet,
as in Equation 18-1, that assets are listed on the left-hand side and liabilities and equity
are on the right-hand side. The fact that the firm's resources arebalancedby the sources of
funds is the basis for the name of the balance sheet.Assets
In Equation 18-1 and Figure 18-2 assets are owned by the firm and have monetary value.
Liabilities are the dollar claims against the firm. Equity represents funding from the firm
and its owners (the shareholders). In Equation 18-1 assets are always balanced by the sum
of the liabilities and the equity. Retained earnings are set so that equity equals assets minus
liabilities.
On a balance sheet, assets are listed in order of decreasing liquidity, that is, according
to how quickly each one can be converted to cash. Thus,current assetsare listed first, and