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AS65 AA
Copyright 1994
by South-Western PublishingCo.
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ISBN: 0-5 38-83310-6
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Printed in the United Statesof America
Library of CongressCatalog-in-Publication Data
Bruns, William J.
Accountingfor managers: textand cases/William J. Bruns, Jr.
p. cm.
ISBN 0-5 38-83310-6
1. Managerial accountitig.
2. Managerial accountingCase studies.
I. Title.
HF5 65 7.4.B78
1994
65 8.15 '11--dc20
93-85 21
CIP
SponsoringEditor: Mark R. Hubble
Senior Developmental Editor: Ken Martin
Production Editor/Trainer: Leslie Kauffman
Production Editor I: Crystal Chapin
Cover and Interior Designer: Tom Hubbard
Cover Photograph: Comstock, Inc.
MarketingManager: Martin W. Lewis
SponsoringRepresentative: Lynne Riesinger
Table of Contents
Table of Key Tercos
vi
Preface
ix
Acknowledgements
xi
Reviewers
xiii
Introduction
xiv
P AR T 1
AN OVER VIEW OF ACCOUNTING AND FINANCIAL R EP OR TING
The AccountingFramework, Financial Statements, and Some
AccountingConcepts
1-2
Clu',nalite, Inc.
1-16
Introduction to AccountingRecords
1-20
Titwnbs-Up Video, Inc.
1-29
Hanson Ski Products
1-32
Wrn. Wri1cy Jr. Conipany
1-42
Introduction to Financial Ratiosand Financial StatementAnalysis
1-49
Idlctttify fue industries
1-67
General Milis, Inc., 1992: Analijzing an Annual Report
1-69
P AR T 2 HOW ACCOUNTANTS MEASUR E AND R EP OR T
Accountingfor CurrentAssets
2-2
L11 C) or FIFO? T1uat Is Nre Question
2-14
Swnzmit Distributors (A)
2-26
Dani
e
l Dobbins Distillery, Inc.
2-36
iv Table of Contents
RecognizingRevenuesand Expenses: When IsIncome Earned?
2-44
R. J. Reynolds Tobacco Company 2-49
Accountingfor Property, Plant, Equipmentand Other Assets
2-67
Depreciation at Delta and Pan Am 2-78
Kansas City Zephyrs Baseball Club Inc.
2-86
Buying Time 2-98
Esperanto for Accountants
2-104
WPP Group and Its Acquisitions
2-107
Liabilitiesand Time
2-127
Laurinburg Precision Engineering
2-143
Belgrave Corporation
2-147
U.S. Windpower, Inc.: Company Background
2-15 1
U.S. Windpower, Inc. (B)
2-157
International Paper (A)
2-168
Accounting for Frequent Fliers
2-179
Taxing Situations
2-187
Introduction to Owners'Equity
2-192
FMC Corporation
2-200
Understandingthe Statementof Cash Flows 2-211
Statements of Cash Flows: Three Examples
2-225
Crystal Meadows of Tahoe, Inc.
2-234
P AR T 3 MANAGING FINANCIAL R EP OR TING
Diversity in AccountingPrincipies: AProblem, aStrategic
Imperative, or aStrategic Opportunity?
3-2
Circuit City Stores, Inc. (A)
3-15
First National Bank Corporation (A)
3-27
Roosevelt Financial Group, Inc.
3-51
Harnischfeger Corporation
3-68
Table of Contents
v
P AR T 4 P R ODUCT COSTING AND AN INTR ODUCTION TO COST MANAGEMENT
A Brief Introduction to Cost Accounting
4-2
1 ti//oit Mrztritfactoriu'Cnrrrpamrmi
4-9
Accounting f or Indirect Costs
4-17
L3ridtctoti lrtdirst ir's f 1rito)notiz'e
Componcrzt & Fabricatiot Plarit 4-21
Seli
,
i rrznt, tic.: El ctroiiic Testiti Operatiotrs
429
ActivityAccounting
Another Way to Measure Costs
4-40
Detiri Brass 1'rui1acts Cr.
4-43
One Cost System Isn't Enough
4-57
Sieiu
e
,is ElectricMotor Works (A): Procc
e
ss Oriente
e
d Costinl
Z
4-68
Standard Costs and Variances
4-78
Walthanr Motoors Divishu 4-88
Mile FIigh Cycle
4-92
P AR T 5 MEASUR EMENTS FOR MANAGEMENT
R esponsibility Centers and P erformance Measurement
5-2
1 eoria Il'iig ite Plan! (A)
5-7
Scovill tic.: Nutone Housng Group J-38
Poli/sar 1.irriitcd 5-57
The Balanced ScorecardMeasures That Drive P erformance
5-74
Alliaant He
e
altlr St/stt
e
ni: A Vision nf Iota! Qualiti
5-87
Analog Dez
v
ices: TlicHalf-Life Systeur
5-122
Ti'ias Eastnian Conrpariii
5-752
Table of Kev Terms
A
accountingentity, 1-2
accountingequation, 1-2
accountingframework, 1-2
accountingperiod concept, 1-8
accounts, 1-20
accountspayable, 2-128
accountsreceivable, 2-3, 1-5
accrual basisfor accounting, 2-44
accrual concept, 1-9
accumulated depreciation, 2-68
acid testratio, 1-5 7
activity ratios, 1-5 3
activity-based costssystems, 4-40
allowance for bad debts, 2-3
allowance for doubtful accounts, 2-3
amortization of bond discount, 2-132
amortization of bond premium, 2-132
amortized, 2-67
assetturnovers, 1-5 3
assets, 1-3
average-costmethod, 2-5
B
bad debts, 2-3
balance sheet, 1-5
bonds, 2-130
bookkeepingcycle, 1-24
burden, 4-6
C
capital stock, 2-195 ,1-6
capital surplus, 2-195
capitalizingretained earnings, 2-196
cash, 1-5
cash and temporary investments, 2-2
cash basisfor accounting, 2-44
cash discount, 2-3.
cash equivalents, 1-5
chunky costs, 4-5
conditional liability, 2-133
conservatism concept, 1-10, 2-45
consistency concept, 1-11
contraasset, 2-68
contribution margin, 4-3
control account, 1-23
corporation, 2-192
costaccounting, 2-7
costcenter, 5 -2
costconcept, 1-10
costdrivers, 4-7
costmethod, 2-71
costobjects, 4-7
costof goodssold, 1-7
costof sales, 1-7
costpools, 4-7
credit, 1-21
currentassets, 2-2, 1-5
currentliabilities, 1-6, 2-127
currentportion of long-term debt, 2-129
currentratio, 1-5 6
D
days'receivables, 1-5 4
debit, 1-21
debtratio, 1-5 7
m
E
earningsper share, 1-5 2
effective interestrate, 2-131
entity concept, 1-10
EPS, 1-5 2
equities, 1-3
equity method, 2-71
esperanto, 2-104
expense center, 5 -2
F
FIFO, 2-5
financial performance center,
first-in, first-out, 2-5
fixed assets, 2-67
foreign currency translation,
G
GAAP, 1-5
general ledger, 1-20
generally accepted accounting
principies, 1-5
goingconcern, 1-10
goodwill, 1-6, 2-72
grossmargin, 4-3
journal, 1-20
L
last-in, first-out, 2-5
ledger, 1-20
lessee, 2-133
lessor, 2-133
leverage, 1-5 7
leveraged buyout, 2-198
liabilities, 1-6
liability, 2-127
currentand noncurrent, 2-127
LIFO, 2-5
long-term debt, 2-129
long-term debts, 1-6
vii
Table of Key Terms
decliningbalance depreciation, 2-69
deferred credits, 2-128
deferred taxes, 2-135
depletion, 2-67
depreciable cost, 2-68
depreciation, 2-67
directcosts, 4-6
discount, 2-131
dividend payout, 1-60
dividend yield ratio, 1-5 9
double entry, 1-20
du Pontmodel, 1-60
M
marketable securities, 1-5
matchingconcept, 1-9, 2-44, 2-67
materiality concept, 1-11
mergers, 2-197
minority interestin subsidiaries, 2-71
money measurementconcept, 1-9
5 -3 N
netearnings, 1-8
netincome, 1-8
2-197
noncurrentliability, 2-127
nonvariable costs, 4-5
normal operatingcycle, 1-5
notesreceivable, 1-5
0
operatingexpenses, 1-7
. operatingincome, 1-7
overhead cost, 4-6
p
paid-in-capital in excessof par, 2-195
partnership, 2-192
PE, 1-5 9
percentage-of-completion method, 2-47
postretirementbenefits, 2-134
2-5
premium, 2-131
2-5
prepaid expenses, 1-6, 2-7
2-5
prevailingmarketinterestrate, 2-131
price earningsratio, 1-5 9
productguarantees, 2-134
profitcenter, 5 -3
1
income statement, 1-7
indirectcosts, 4-6
insolvent, 1-5 6
inventory, 2-4, 1-5
average-costmethod,
first-in, first-out(FIFO),
last-in, first-out(LIFO),
inventory costflows, 2-4
inventory turnover, 1-5 5
investmentcenters, 5 -3
Vi Table of Key Terms
profitmargin, 1-5 3
profitability ratios, 1-5 0
proprietorship, 2-192
proven, 1-22
Q
quick assets, 1-5 7
R
realization concept, 1-9, 2-44
realized, 2-46
recognition concepts, 1-9
reconciliations, 2-213
residual income, 5 -3
responsibility centers, 4-3
retained earnings, 1-6
return on assets, 1-5 0
return on equity, 1-5 2
return on invested capital, 1-5 1
return on investment, 1-5 0
revenue recognition, 2-45
revenue recognitiop rule, 2-46
revenues, 1-7
ROA, 1-5 0
ROE, 1-5 2
ROI, 1-5 0
ROIC, 1-5 1
S
salvage value, 2-68
semivariable costs, 4-5
solvency ratios, 1-5 6
special journal, 1-22
specific identification system, 2-4
stated value, 2-195
statementof cash flows, 1-4, 1-8, 2-211
statementof changesin financial
position, 2-219
statementof earnings, 1-4
statementof financial position, 1-4
statementof income, 1-4
step-function costs, 4-5
stock distribution, 2-196
stock dividends, 2-196
stock splits, 2-196
stockholder'sequity, 1-6
straight-line depreciation, 2-68
subsidiary ledger, 1-23
sum-of-years'digitsmethod, 2-69
T
taccount, 1-22
takeovers, 2-197
timesinterestearned, 1-5 8
treasury stock, 2-196, 1-7
trial balance, 1-22
u
unearned revenue, 2-128
V
variable costs, 4-5
variances, 4-3
W
workingcapital turnover, 1-5 6
Y
yield, 2-131
e
P reface
ccountingsystems, information, and reportshave the potential to
provide managerswith critical dataand information abouttheir organizations
and those of customersand competitors. Unfortunately, however, many man-
agersnever learn how to use and exploitthatpotential. The complexity of
modere accountingsystemsand standardscan be dauntingin spite of the ap-
parentsimplicity of basic accountingframeworks. Untrained in the complexi-
ties, many managersretreatfrom accounting, contentto letthe accountantsdo
the accounting, and never to admittheir uneasinesswith accountinginforma-
tion and reports.
Accountingfor Managers
waswritten with the belief thatmanagersmust
learn to work with accountingand accountants, butthey do notneed to learn
how to be accountantsthemselves. Managersneed to know whataccountants
do and whatthey do notdo. They need to know the vocabulary, perspectives,
and biasthatunderlie accountingprocessesand reports. Managersneed to
know how to ask accountantsfor dataand information they want, and they
need to know how to use accountingasastrategic tool. Butmanagersdo not
need to become accountantsthemselves.
In 1989, the faculty of the Harvard BusinessSchool established anew re-
quired course titled Financial Reportingand ManagementAccounting. Al-
though the charter and objectivesfor the course were vague, the mandato was
to create an accountingcourse thatwould focuson whataccountantsdo and
why they do it, rather than how they do it. The course wasto focuson how
managerscould manage better because of whataccountantsdo, and how
managerscould use accountingreports, systems, and information aseffec-
tively aspossible.
Case studiesare an ideal way to achieve these objectivesbecause they il-
lustrate and describe whataccountantsdo and provide abasisfor discussions
aboutalternativesand implicationsof accountingstandards, procedures, and
reports. Casesallow the reader to understand thataccountantsmake choices
Ix
i
x Prcface
thatdetermine whaiinformation managersaswell asoutsiderswill see and
the form itwill Cake. If the manager needsother information or wantsto pie
senaaother accountingpicture, the manager needsto Interviene and to pro-
vide direction through questionsor requests. By doingso, the manager uses
accountingasatool to accomplish hisor her objectives.
Sor ie of the case studiesin Accountingfor Managers look deceptn ely
easy, while otherslook iinpossibly difficult. The formen are usually more com-
plex than thev. look because of the nuancesthatunderlie any accounting. The
latter can usually be broken finto casy-to-understand partsbecause of the
power of the basic accountinginodelsthatunderlie financial reporting, prod
uctcostitlg, and measurementsfor control. The majority of casesare based on
information gathered from actual organizationsand presentreal problems
rxianagershad to solve.
Mostcase studiescontain ainbiguitiesand complexitiesthatprecld.e any
yy
single correctanswer. Individual study of casesisbestfollowed by small
group and classdiscussions. In these exchanges, learningisenhanced. The
role of the instructor or discussion leader isto assure thatalternative analyses
and conclusionsare carefully considerad alongwith their imphcations. The
goal for everyone in acase discussion shold:be to improve hisor her ability
to approach, analyze, asid reach conclsionsaboutthe nextnewspaper or
magazine storv aboutaccounting, or the nextcase or problem he or she will
encounter.
Accountingistoo importantto managers, organizations, and societiesto
.: Y
L
rP3
be leftto accountantsalone. Accountinginformation isoften abasisfor deci-
sions. Accountingreportsare often the basison which the effectivenessof
stewardship, decisions, and actionsare evaluated. Effective managersare al-
waysaware of thc potentialsand problemsthataccountantsand accouulting
nroc ,sescan create. Ynur studv of thistextand the case situationshrein
^, kan <
Acknowledgements
any people have helped to create and improve
Accounting for
Managers.
More than 4,000 studentsin the MBAClassesof 1990, 1991, 1992,
1993and 1994have commented, made suggestions, and corrected errorsin
many of the casesand chaptersthatcomprise thisbook.
The colleagueswith whom I have been privileged to teach thismaterial in
agroup-teaching, file-sharingenvironmenthave contributed much and have
helped to improve it. These include Mary Barth, Chuck Christenson, Julie Her-
tenstein, Sharon McKinnon, Ken Merchant, Amy Sweeney, Pete Wilson and
Karen Wruck (all of whom also authored material included in
Accountingfor
Managers),
aswell asMarc Epstein, Dave Hawkins, Gerald Holtz, Dick Nolan
and Kiran V erma.
Other faculty contributorsto thisbook include Bob Anthony, Robin Coo-
per, Bob Kaplan, Jane Linder, KrishnaPalepu, John Shank, Bob Simons, Peter
Turney, and Dave Wilson. 1 appreciate their allowingme to include some of
their casesand notes.
Five research associatescontributed greatly to thisproject, and 1 acknow-
ledge the greatcontributionsof Dave Ellison, Susan Harmeling, Terry Nichols,
Eric Petro and Marc Zablatsky.
The Harvard BusinessSchool and Dean John H. McArthur provided sup-
portand aconducive environmentfor whathasbeen one of the mostsatisfy-
ingteachingassignmentsof my career.
Forbesand the Harvard Business
Review each agreed to allow me to reprintarticles.
Finally, special thanksare due to the group who helped to putthis
material together. The staff of the Word ProcessingCenter atthe Harvard
BusinessSchool provided invaluable help in makingthe casesand notes
readable, and their service wentbeyond thatwhich I had any rightto
expect. My assistant, Patty Powers, keptthe projecton schedule. Her
cheerful acceptance of unreasonable demandsfor countlessdraftsre-
vised on tightdeadlineswill notbe forgotten. AtSouth-Western Pub-
xi
xi
Acknowkdgements
_
lishing, thecontribution of Ken Martin and Crystal Chapin also de-
serve special mention.
Finally, my wife, Shay, supported thisprojectwith affection, help, and
needed criticism. She read drafts, improved presentations, contributed
ideas, and taughtseveral casesto her studentsbefore makingsuggestions
abouthow they could be iznpro ed. Her ideasare to be found throughout
thisbook.
y
William j. Brun
S,
Jr
Boston, Massachusetts
f
,S
y
i
3

^ I 's" 1
..
r
1, 1 }
L y F i F 1
1
Reviewers
The followingfaculty used the manuscriptfor thistextin their
coursesand provided valuable feedback:
G. Peter Wilson (Harvard)
Mary E. Barth (Harvard)
Amy P Sweeney (Harvard)
Marc Epstein (Harvard)
David F. Hawkins(Harvard)
Sharon M. McKinnon (Northeastem)
Kenneth Merchant(University of Southern California)
Kiran V erma(University of MassachusettsBoston)
Gerald Holtz (Boston University)
Julie H. Hertenstein (Northeastern)
xiii
Introduction
Accountingfor Managers is atextfor managerswho wantto make
the mostof accountinginformation in the businessenvironment. Itisnota
comprehensive accountingtext, and readersare broadly exposed to the way in
which accountantscontribute to organizationsand some of the thingsthat
every manager should know accountantsdo.
WHY MANAGER S NEED TO KNOW WHAT ACCOUNTANTS DO
Accountantsare the scorekeeperswho observe, measure, and reporton the
economic aspectsof organizations. Usingthe rulesand proceduresthathave
been developed over many years, they measure the effectsof economic activi-
ties. Managershave played importantrolesin the developmentof these rules
and procedures, and they will continue to do so asthose principiesand prac-
ticesevolve in the future. Managerswho know somethingaboutthe status
and use of accountingstandardswill be more effective in tellingtheir story
and in gettingthe information they really need.
Account;ngisalso alanguage system thatfacilitatesefficientcommunica-
tion abouteconomic aspectsof organizationsbetween managers. Standardized
terminology developed and used by accountantsfacilitatesdiscussion of complex
aspectsof economic conditionsand the performance of organizations. Timan-
agersdo nothave some ideaof the vocabulary and accountingmethodology,
communication in the organization becomesmore awkward and inefficient. In
turn, the possibility of confusion or mistakesgrowslarger.
Copyright 1992 by the Presidentand Fellowsof Harvard College. Harvard BusinessSchool
case 192-15 2.
Introduction x v
Accountantsmaintain recordsthatcan become the basisfor financial re-
ports. Such reportscan summarize the financial statusof the organization at
one or more pointsin time, and they may describe how the financial structure
and strength of the organization haschanged over aperiod of time.
Financial reportsare importantto managersfor two reasons. First,
they allow
managersto evaluate how their strategiesand decisionsare affectingthe eco-
nomic statusand viability of their organization. By comparingthe expected re-
sultsto those thathave been reported by accountants, managerscan judge their
own successand decide whether changesin strategy or decisionsare appropriate
for the future. Second, sine external partiesoften have interestsin the financial
statusand successof organizations, financial statementsare commonly used to
reprton those interests. Managersneed abasic understandingof the way in
which accountantssurnmarize economic activitiesand prepare financial reports,
so they can assesshow their actionswill appear to othersboth inside and outside
of the organization.
The structure of financial reportsispartof the language thataccounting
bringsfinto an organization. Asmanagerstry to anticipate how their decisions
mightaffectthe organization, the framework provided by financial reportsisoften
auseful way of summarizingthe possible effectsand consequencesof actions.
Accountingrecordsare often the mostcomprehensive recordsthatany or-
ganization maintains. Asaresult, those recordscan ften provide information
thatisuseful to managersin tryingto solve problemsor in decidingbetween al-
ternative decisionsor coursesof action they mighttake. By knowingwhatkind of
information iskeptin accountingrecordsand by knowingwhere itwould likely
be maintained, managerscan much more efficiently requestneeded information
and understand the proper use of thatinformation for decisionsathand.
AN OVER VIEW OF THE TEXT
Accountingfor Managers hasfive parts:
Part
I providesan overview of accountingand financial reporting. The ac-
countingframework and some accountingconceptsare introduced so that
managerscan immediately begin workingwith financial statements.
Part II
isconcerned with how accountantsmeasure and reporton assets,
liabilities, and the equitiesdifferentpartieshave in an organization. In this
part, classificationsand elementsof financial statementsare examined sepa-
rately to give managersan understandingof some of the difficultiesthatboth
managersand accountantshave in measuringand describingthe economic
substance of an organization.
Part III
introducesthe ideathatmanagerscan choose areportingstrategy
in presentingtheir organization to those who may requestand use financial
statements. Acombination of accountingpoliciesthatunderlie asetof finan-

xvi Introduction
cial statementscan be desc ribed asconservative or aggressive. By takingan
active role in the financial reportingprocess, managerscan minimize the risk
thattheir strategic directionswill be misunderstood by outsiderswho seek to
understand and appraise an organization based on financial statementsalone.
Part IV isconcerned with proceduresaccountantsuse in estimatingprod-
uctcostsand providesan introduction to costmanagement. Accountingfor
costsisprimarily an activity thattakesplace for the benefitof managers. Prod-
uctcostsare useful for pricingand productline decisions. In addition, meas-
urementsof productcostscan be compared againstexpectationsin determin-
ingwhether or notplanned efficiencieshave been attained.
Part V continuesthe emphasisbegun in PartIV on useful measurements
for managers. Because of their expertise, accountantsare often called upon by
managersto make measurements, to communicate, to motivate, and to pro-
vide abasisof evaluation of partsof an organization and the productsor serv-
icesthatitprovides. The case studiesin PartV illustrate how some organiza-
tionshave soughtto improve their intemal measurementand management
systemsto benefitfrom their knowledge thatwhatgetsmeasured matters.
A BRIEF SUMMARY OF TEXT OBJECTIVES
Six objectiveshave guided the developmentand selection of the textand case
studiesthatcomprise Accounting for Managers. When you have finished this
text, you sho?.ild:
Be familiar with the accountingframework and how itisused in evaluating
economic conditionsand successand in decision makingin organizations.
Have asense for the conceptual basisof accountingasitiscarried outin
organizationstoday.
Be familiar with financial statements, accountingreports, and the vocabu-
lary found within them.
Have asense for how managersuse areportingstrategy in communicat-
ingwith each other and with partiesextemal to their organization.
Understand the complexity of determiningand usinginformation on the
costof pioductsand servicesproduced by an organization.
Understand the power of measurementsin coordinating, motivatingand evalu-
atingthe activitiesof employeesand managersin modem organizations.
Some of the case studiesare based on situationswhere managersare try-
ingto solve ene or more complex problemsthatmay nothave asolution that
will satisfy tiie objectivesand needsof all the affected parties. In other cases,
complex problemshave been greatly simplified usinghypothetical situations
and descript
;
onsto allow studentsto discover why problemsin accounting
often demand extensive examination and discussion.
^^4
r