Managerial Accounting

Managerial Accounting - Objective of managing Maximize...

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Objective of managing Maximize value ( what are we worth today?) Value = NPV [E(future cash flow)] E= expectation, forecast, prediction Future cash flow= forward looking Worried mainly on cash flow- never know if it is going to be good or bad NPV= net present value Net= inflows – outflows Time horizon: for firms it is infinite Present value: means today Investment today of I0 Interest rate is r I 1 = I 0 + rI 0 I 2 = I 0 (1+r) 2 I 1 = one period from now What is this worth today? I 0 = I 1 /91+r) < I 1 , I 2 “Discounting” Idea is Dollar today is worth more than a dollar tom. Criticism: charitable contributions, sporting events, etc. Point missed: More attractive communities Attracts and retains good employees Marketing aspect- gets name out w/o use of TV, radio, etc. Objective: learn to use acct. to max value Firm? 1) Legal fiction- true but doesn’t help understand 2) Collection of contracts (nexus = intersection) Types of contracts 1) Explicit written contracts Min. requirements for valid contract
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i. offer ii. accepted iii. consideration (something of value) Rare: costly to negotiate and employ (lawyers and accts. involved) Used for $ Acct Sports/entertainment stars Senior executives Major contracts among firms Benefit: easier to enforce 2) Explicit oral contracts Cheaper to set up and harder to enforce 3) Implicit contracts Arise when 2 parties do business w/o formalizing the arrangement Most contracts that ever exist are implicit contracts Example 1: Fast Food Offer: Place your order Acceptance: accept your order Consideration: food and cash Example 2: Most Employment Contracts No formal contract, everything is implicit Other implicit terms: Warranty? Merchantable quality “is satisfactory” a. food won’t poison you b. toaster won’t electrocute you 4) Acct is significant in many contracts a. Legal system- creates firms and enforces contracts. EFFICIENT b. Friends and Family- contract with people you trust Downside: cumbersome Not very efficient c. Chaos- Russia, Central/South Am., Most of Africa Get this when you have corruption, bribery, organized crime Efficient: legal system OK: friends and family Ugly: nothing Industry Contracts Film (movie) Writers, actors, producers, directors, studio, distribution “Participation contracts”: some ppl share rev or profit of
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Immediately saying acct is in the contract Have to define rev and profit in contract Without acct, make is difficult to work Oil and Gas 1. Exploration and production Royalties (usually to gouts) 2. Pipelines and shipping 3. Refineries 4. Distribution (gas stations) -Majors (BP, ExxonMobil, etc.) Franchises Restaurants chains Muffler/Brake shops (Midas) Transmissions (Aamco) Overall “owner”- Franchiser Locally owned outlets- Franchisee Typically rev/prof sharing - can’t work w/o accounting 1.23.06 Firm Objective: Max Value Write contracts Need acct numbers Conflict example: > Budgets (forecast) reveal knowledge (sales forecast) > Like forecast to be unbiased (Decision making)
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Managerial Accounting - Objective of managing Maximize...

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