Engineering Economic Analysis

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Traditional Cost Accounting

the year.To find the change in retained earnings (RE), one must also subtract any dividends

distribp.tedto the owners and add the value of any new capital stock sold:

REbeg+ Net income/Loss + New stock- Dividends=REend

When capital equipment is purchased, the balance sheet changes, but the income state-

ment does not. If cash is paid, then the cash asset account decrease equals the capital

equipment account increase-no change in total assets. If a loan is used, then the capital

equipment account increases, and so does the liability item for loans. In both cases the

equity accounts and the income statement are unchanged.

The depreciation of capital equipment is shown as a line on the income statement.

The depreciation for that year equals the change in accumulated depreciation between the

beginning and the end of the year-after subtraction of the accumulated depreciation for

any asset that is sold or disposed of during that year.

Example 18-1 applies these relationships to with the data in Figures 18-1 and 18-2.

For simplicity,assume that Engineered Industries will not pay dividendsin 2005 and did not sell

any capital equipment. It did purchase $4 million in capital equipment. What can be said about

the values on the balance sheet at the end of 2005, using the linkagesjust described?

SOLUTION;

First, the net profit of $7,310,000 will be added to the retained earnings from the end of 2004 to

find the new retained earnings at the end of 2005:

RE12l3112005= $7,310,000+ $8,745,000== $16,055,000

Second, the fixed assets shown at the end of 2005 would increase from $6,500,000 to

I $10,500,000.(Note:This is a major investment of the retained earnings in the finn's physical

tassets.)_
I fhird,the accumulated depreciation would increase by the $1,850,000"in depreciation shown
in the 2005 income statement from the $2,350,000 shown in the 2004 balance sheet. The new
accumulated depreciation on the 2005 balance sheet would be $4,200,000. Combined with the
change in the amount of capital equipment, the new fixed asset total for 2005 would equal:

$335,000 +$10,500,000 - $4,200,000 = $6,635,000

TIONAL COST ACCOUNTING

A finn'scost-accounting systemcollects, analyzes, and reports operational perfonnance

data (costs, utilization rates, etc.). Cost-accounting data are used to developproduct costs,

to determine the mix of labor, materials, and other costs in a production setting, and to

evaluate instances of outsourcing or subcontracting.

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