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Lecture Engineering economics - Chapter 3: The accounting equation – Depreciation, inventory and ratios

After studying this chapter you will be able to: Accounting equation entries applied to capital costs and expenses and their impact on financial statements; depreciation methods, calculating depreciation and book value of assets and the affect on profit, taxes and cash flow; inventory management and the affect on the accounting equation; financial statement ratios and their use for economic decision making. | Chapter 3 - Unit 1 The Accounting Equation -Depreciation Inventory and Ratios IET 35000 Engineering Economics 1 Learning Objectives - Chapter 3 Upon completion of this chapter you should understand Accounting equation entries applied to capital costs and expenses and their impact on financial statements. Depreciation methods calculating depreciation and book value of assets and the affect on profit taxes and cash flow. Inventory management and the affect on the accounting equation. Financial statement ratios and their use for economic decision making. 2 Learning Objectives - Unit 1 Upon completion of this unit you should understand Accounting equation entries applied to capital costs and expenses and their impact on financial statements. Depreciation methods calculating depreciation and book value of assets and the affect on profit taxes and cash flow. Inventory management and the affect on the accounting equation. Financial statement ratios and their use for economic decision making. 1 Cash Outflows Organizations spend money cash outflow for a variety of needs including Product or service related items such as materials wages and overhead. Administration related items such as wages supplies marketing and overhead. Financial related items such as debt payments dividends and financial securities. Permanent equipment land and facilities. 4 1 Cash Outflows Cash outflows are categorized as Expenses - includes cash outflows for items that are used within a short time period such as supplies and raw materials or for services such as labor wages and utilities. Capital -includes cash outflows for items that are permanent or will be used over an extended time period such as equipment buildings and land. Also business startup costs and cost of improvements are capitalized. 5 1 Cash Outflows Expense Entire cash outflow is included as a cost or expense on the income statement during the time period in which the transaction occurs. Expensing is the term for an expenditure that