Pink Gurlz

ASSETS
In financial accounting, assets are economic resources. Anything tangible or intangible that is
capable of being owned or controlled to produce value and that is held to have positive economic
value is considered an asset. Simply stated, assets represent ownership of value that can be
converted into cash (although cash itself is also considered an asset).[1]
The balance sheet of a firm records the monetary[2] value of the assets owned by the firm. It is money
and other valuables belonging to an individual or business.[1] Two major asset classes are tangible
assets and intangible assets. Tangible assets contain various subclasses, including current assets
and fixed assets.[3] Current assets include inventory, while fixed assets include such items
as buildings and equipment.[4]
Intangible assets are nonphysical resources and rights that have a value to the firm because they give
the firm some kind of advantage in the market place. Examples of intangible assets
are goodwill, copyrights, trademarks, patents and computer programs,[4] and financial assets,
including such items asaccounts receivable, bonds and stocks.
 An asset is a resource controlled by the entity as a result of past

events and from which future economic benefits are expected to
flow to the entity
Asset characteristics
It should be noted that - other than software companies and the like -
employees are not considered as assets, like machinery is, even
though they are capable of producing value.
 The probable present benefit involves a capacity, singly or in

combination with other assets, in the case of profit oriented
enterprises, to contribute directly or indirectly to future net cash
flows, and, in the case of not-for-profit organizations, to provide
services;
 The entity can control access to the benefit;
 The transaction or event giving rise to the entity's right to, or
control of, the benefit has already occurred.
In the financial accounting sense of the term, it is not necessary to be
able to legally enforce the asset's benefit for qualifying a resource as
being an asset, provided the entity can control its use by other means.
It is important to understand that in an accounting sense an asset is
not the same as ownership. Assets are equal to "equity" plus
"liabilities."
The accounting equation relates assets, liabilities, and owner's equity:
Assets = Liabilities +Stockholder's Equity (Owner's Equity)
The accounting equation is the mathematical structure of
the balance sheet.
Assets are listed on the balance sheet. Similarly, in economics an
asset is any form in which wealth can be held.
Probably the most accepted accounting definition of asset is the
one used by the International Accounting Standards Board .[6] The
following is a quotation from the IFRS Framework: "An asset is a
resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to
the enterprise."[7]
Assets are formally controlled and managed within larger
organizations via the use of asset tracking tools. These monitor
the purchasing, upgrading, servicing, licensing, disposal etc., of
both physical and non-physical assets.[clarification needed] In a
company's balance sheet certain divisions are required
by generally accepted accounting principles (GAAP), which vary
from country to country.[8]
[edit]Current assets
Current asset
Current assets are cash and other assets expected to be
converted to cash, sold, or consumed either in a year or in the
operating cycle (whichever is longer), without disturbing the
normal operations of a business. These assets are continually
turned over in the course of a business during normal business
activity. There are 5 major items included into current assets:
1. Cash and cash equivalents — it is the most liquid
asset, which includes currency, deposit accounts,
and negotiable instruments (e.g., money orders, cheque,
bank drafts).
2. Short-term investments — include securities
bought and held for sale in the near future to generate
income on short-term price differences (trading securities).
3. Receivables — usually reported as net of allowance
for uncollectable accounts.
4. Inventory — trading these assets is a normal
business of a company. The inventory value reported on
the balance sheet is usually the historical cost or fair market
value, whichever is lower. This is known as the "lower of
cost or market" rule.
5. Prepaid expenses — these are expenses paid in
cash and recorded as assets before they are used or
consumed (a common example is insurance). See
also adjusting entries.
The phrase net current assets (also called working capital) is often
used and refers to the total of current assets less the total of
current liabilities.
Long-term investments
Often referred to simply as "investments". Long-term investments
are to be held for many years and are not intended to be disposed
of in the near future. This group usually consists of four types of
investments:
1. Investments in securities such as bonds, common

stock, or long-term notes.
2. Investments in fixed assets not used in operations
(e.g., land held for sale).
3. Investments in special funds (e.g. sinking funds or
pension funds).
Different forms of insurance may also be treated as long term

investments.
Fixed assets
Also referred to as PPE (property, plant, and equipment), these
are purchased for continued and long-term use in earning profit in
a business. This group includes as an
asset land, buildings,machinery, furniture, tools, and certain
wasting resources e.g., timberland and minerals. They are written
off against profits over their anticipated life by
charging depreciation expenses (with exception of land assets).
Accumulated depreciation is shown in the face of the balance
sheet or in the notes.
These are also called capital assets in management accounting.
Intangible assets
Main article: Intangible asset
Intangible assets lack physical substance and usually are very
hard to evaluate. They
include patents, copyrights, franchises, goodwill, trademarks, trad
e names, etc. These assets are (according to US GAAP)
amortized to expense over 5 to 40 years with the exception of
goodwill.
Websites are treated differently in different countries and may fall
under either tangible or intangible assets.
Tangible assets
Tangible assets are those that have a physical substance and can
be touched, such as currencies, buildings, real
estate, vehicles, inventories, equipment, and precious metals.
Bookkeeping
Bookkeeping is the recording of financial transactions. Transactions include

sales, purchases, income, and payments by an individual or organization.
Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be
confused with accounting. The accounting process is usually performed by
an accountant. The accountant creates reports from the recorded financial
transactions recorded by the bookkeeper and files forms with government
agencies. There are some common methods of bookkeeping such as
the Single-entry bookkeeping system and the Double-entry bookkeeping
system. But while these systems may be seen as "real" bookkeeping, any
process that involves the recording of financial transactions is a bookkeeping
process.
A bookkeeper (or book-keeper), also known as an accounting clerk or

accounting technician, is a person who records the day-to-day financial
transactions of an organization. A bookkeeper is usually responsible for writing
the "daybooks." The daybooks consist of purchases, sales, receipts, and
payments. The bookkeeper is responsible for ensuring all transactions are
recorded in the correct day book, suppliers ledger, customer ledger and general
ledger. The bookkeeper brings the books to the trial balance stage. An
accountant may prepare the income statement and balance sheet using the trial
balance and ledgers prepared by the bookkeeper
Single-entry system
The primary bookkeeping record in single-entry bookkeeping is the cash book, which
is similar to a checking (cheque) account register but allocates the income and
expenses to various income and expense accounts. Separate account records are
maintained for petty cash, accounts payable and receivable, and other relevant
transactions such as inventory and travel expenses. These days, single entry
bookkeeping can be done with DIY bookkeeping software to speed up manual
calculations.
Sample revenue and expense journal for single-entry bookkeeping[1
Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial
transactions also called a book of original entry. The daybook's details must be entered formally into
journals to enable posting to ledgers. Daybooks include:
 Sales daybook, for recording all the sales invoices.

 Sales credits daybook, for recording all the sales credit notes.
 Purchases daybook, for recording all the purchase invoices.
 Purchases credits daybook, for recording all the purchase credit notes.
 Cash daybook, usually known as the cash book, for recording all money received as well as
money paid out. It may be split into two daybooks: receipts daybook for money received in, and
payments daybook for money paid out.
]Petty cash book

A petty cash book is a record of small value purchases usually controlled by imprest system. Items
such as coffee, tea, birthday cards for employees, a few dollars if you're short on postage, are listed
down in the petty cash book.
]Journals
A journal is a formal and chronological record of financial transactions before their values are
accounted for in the general ledger as debits and credits. A company can maintain one journal for all
transactions, or keep several journals based on similar activity (i.e. sales, cash receipts, revenue, etc.)
making transactions easier to summarize and reference later. For every debit journal entry recorded
there must be an equivalent credit journal entry to maintain a balanced accounting equation [2].
[edit]Ledgers
A ledger is a record of accounts, these accounts are recorded separately showing their
beginning/ending balance. Unlike the journal, which lists financial transactions in chronological order
without showing their balance but showing how much is going to be charged in each account. The
ledger takes each financial transactions from the journal and records them into the right account for
every transaction listed. The ledger also sums up the total of every account which is transferred into
the balance sheet and income statement. There are 3 different kinds of ledgers that deal with book-
keeping. Ledgers include:
 Sales ledger, which deals mostly with the Accounts Receivable account. This ledger consists
of the financial transactions made by customers to the business.
 Purchase ledger is a ledger that goes hand and hand with the Accounts Payable account.
This is the purchasing transaction a company does.
 General ledger representing the original 5 main accounts: assets, liabilities, equity, income,
and expenses
Chart of accounts
A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or
alphanumeric codes allowing the account to be located in the general ledger.
Computerized bookkeeping
Computerized bookkeeping removes many of the paper "books" that are used to record transactions
and usually enforces double entry bookkeeping.
Online bookkeeping
Online bookkeeping, or remote bookkeeping, allows source documents and data to reside in web-
based applications which allow remote access for bookkeepers and accountants. All entries made into
the online software are recorded and stored in a remote location. The online software can be
accessed from any location in the world and permit the bookkeeper or data entry person to work from
any location with a suitable data communications link.
Cost of goods sold
Cost of goods sold (COGS) refers to the inventory costs of those goods a business has sold during a
particular period. Costs are associated with particular goods using one of several formulas, including
specific identification, first-in first-out (FIFO), or average cost. Costs include all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.
Costs of goods made by the business include material, labor, and allocated overhead. The costs of those
goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
Overview
Many businesses sell goods that they have bought or made/produced. When the goods are bought or
made, the costs associated with such goods are capitalized as part of inventory (or stock) of goods.
[1]
These costs are treated as an expense in the period the business recognizes income from sale of
the goods.[2]
Determining costs requires keeping records of goods or materials purchased and any discounts on
such purchase. In addition, if the goods are modified,[3] the business must determine the costs
incurred in modifying the goods. Such modification costs include labor, supplies or additional material,
supervision, quality control, use of equipment, and other overhead costs. Principles for determining
costs may be easily stated, but application in practice is often difficult due to a variety of consideration
in the allocation of costs.[4]
Cost of goods sold may also reflect adjustments. Among the potential adjustments are decline in
value of the goods (i.e., lower market value than cost), obsolescence, damage, etc.
When multiple goods are bought or made, it may be necessary to identify which costs relate to which
particular goods sold. This may be done using an identification convention, such as specific
identification of the goods, first-in-first-out (FIFO), or average cost. Alternative systems may be used
in some countries, such as last-in-first-out (LIFO), gross profit method, retail method, or combinations
of these.
Cost of goods sold may be the same or different for accounting and tax purposes, depending on the
rules of the particular jurisdiction.
Debits and credits

From Wikipedia, the free encyclopedia
This article uses terms related to the American system of accounting know
as GAAP (Generally Accepted Accounting Principles). The article still applies
when working with the European accounting system known
as IFRS (International Financial Reporting Standards).
Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental
concepts in accounting, representing the two sides of each individual transaction recorded in any
accounting system. A debit transaction can be used to reduce a credit balance or increase a debit
balance. A credit transaction can be used to decrease a debit balance or increase a credit balance.
To understand which accounts are debited or credited in order to either increase or decrease their
amounts, there are five fundamental accounts in accounting. The following are the five fundamental
elements of any financial statement namely: Assets, Liabilities, Equity, Income and Expenses. Debits
and credits form the basis of the double-entry bookkeeping system (as opposed to the Single-entry
bookkeeping system); for every debit transaction there must be a corresponding credit transaction
and vice versa. Every debit and credit value is initially recorded in Journals and from these journals
transferred to ledgers and finally from these ledgers financial reports can then be prepared.
Introduction
Debits and credits are a system of notation used in bookkeeping

to determine how and where to record any financial transaction. In
bookkeeping, instead of using addition '+' and subtraction '-'
symbols, a transaction uses the symbols "dr" (Debit) or "cr"
(Credit). The words "debits" and "credits" do not necessarily
represent decreases or increases in an account, as they have
different functions depending on the five different financial
statement elements. In double-entry bookkeeping debit is used
for increases in asset and expense transactions and credit is
used for increases in a liability, income (gain) or equity
transaction.
For bank transactions, money received in is treated as a debit
transaction and money paid out is treated as a credit transaction.
Traditionally, transactions are recorded in two columns of numbers:
debits in the left hand column and credits in the right hand column.
Keeping the debits and credits in separate columns allows each to be
recorded and totalled independently. Where the total of the debit
value amounts is lower than the total of the credit value amounts, a
balancing debit value is posted to that nominal ledger account. That
nominal ledger account is now "balanced". An account can have
either a credit value balance or a debit value balance but not both.
A debit can also be used to reduce the balance on a liability, income
(gain) and equity account. This has the effect of reducing a credit
balance by the value of the debit transaction. The balance in a
nominal that is normally expected to hold a debit balance may change
from a debit balance to a credit balance.
A credit can also be used to reduce the balance on an asset or
expense account. This has the effect of reducing a debit balance by
the value of the credit transaction. The balance in a nominal that is
normally expected to hold a credit balance may change from a credit
balance to a debit balance.
In some cases such as fixed assets, all debit transactions will be
recorded in one nominal account and all credit transactions will be
recorded in a contra nominal account, with the exception when an
asset is disposed of. The purchase of an asset will be recorded in a
fixed asset account (debit transaction) and the depreciation of the
fixed asset (credit transaction) will be recorded in a contra nominal
ledger account, fixed asset depreciation.
The term "debit and credit" in accounting
According to dictionary debit means 1. "a written note on bank

account or a other financial record of a sum of money owed or
spent', 2. 'a sum of money taken from a bank account". On the other
hand credit means "liability, money in bank and so on."
If you are a student of accounting this concept of general
dictionary will, certainly, misguide you.
Why?
In the accounting term debit means "left side of account" and credit
means " right side of account". This is the eternal definition
of "debit and credit" in accounting.
The five accounting elements and how they are affected

The five accounting elements[2] are all affected in either a positive or
negative way. Note: A credit transaction does not always dictate a
positive value or increase in a transaction. An asset for example is
usually a debit transaction, where, when an asset has been acquired
in a business the transaction will affect the debit side of an asset
account i.e. an asset will increase on the debit side. For example:
Asset
Debits (dr) Credits (cr)
Where "X" denotes the effect of a transaction on the asset account.

Therefore with all of the indicated accounts (Assets, Liability, Equity,
Income and Expenses), the accounts will all increase on the debit or
credit side denoted by the "X". Therefore the reverse will be true for all
the accounts if they are decreased i.e. to decrease an asset account,
the asset account must be credited.
Standard increasing attributes for the other four accounts are as
follows:
Liability

X
Income
Expenses
Equity
Debit and Credit principle

Each transaction consists of debits and credits, and for every
transaction they must be equal.
For Every Transaction: The Value of Debits = The Value of
Credits
The extended accounting equation must also balance: 'A + E = L +
OE + R'
(where A = Assets, E = Expenses, L = Liabilities, OE =
Owner's Equity and R = Revenue)
So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'
Debits are on the left and increase a debit account and decrease a
credit account.
Credits are on the right and increase a credit account and decrease a
debit account.
In all accounting operations there is always an effect on the
accounting formula:
A=E+L
When a transaction takes place, traditionally the transaction would be
recorded in a ledger or "T" account. A "T" account represents any
account that is opened e.g. "Bank" that can be effected with either a
debit or credit transaction. In accounting a debit (dr) is recognized on
the left side of the T-account and the Credit (cr) is recognized on the
right-hand side. In accounting it is acceptable to draw-up a ledger
account in the following manner for representation purposes:
Bank
Examples of accounts pertaining to the five accounting elements:
 Asset accounts: Bank, Receivables, Inventory etc...

 Liability accounts: Payables, Loans, Bank overdrafts etc...
 Equity accounts: Capital, Drawings etc...
 Income accounts: Services rendered, interest income etc...
 Expense accounts: Telephone, Electricity, Repairs, Salaries
etc...
There are numerous accounts related to the five accounting elements

which should be reviewed before understanding the following
example:
Worked example: Quick Services business purchases a computer for
₤500 for the receptionist, on credit, from ABC Computers. Recognize
the following transaction for Quick Services in a ledger account (T-
account):
Equipment (Asset)
(dr) (cr)
500
To balance the accounting equation the corresponding account is

created:
Payables (Liability)
(dr) (cr)
500
The above example can be written in journal form:
Equipment 500
ABC Computers (Payable) 500
Note the indentation of "ABC Computers" to indicate that this is
the credit transaction. It is accepted accounting practice
to indent credit transactions recorded within a journal.
In the accounting equation form:
A=E+L
500 = 0 + 500 (The accounting equation is therefore balanced)
[edit]Further Examples
1. A business pays rent with cash: you increase rent

(expense) by recording a debit transaction, and decrease
cash (asset) by recording a credit transaction.
2. A business receives cash for a sale: you increase
cash (asset) by recording a debit transaction, and increase
sales (revenue) by recording a credit transaction.
3. A business buys equipment with cash: You increase
equipment (asset) by recording a debit transaction, and
decrease cash (asset) by recording a credit transaction.
4. A business borrows with a cash loan: You increase
cash (asset) by recording a debit transaction, and increase
loan (liability) by recording a credit transaction.
5. A business pays salaries with cash: you
increase salary (expenses) by recording a debit transaction,
and decrease cash (asset) by recording a credit transaction.
6. The totals show the net effect on the accounting
equation and the double-entry principle where, the
transactions are balanced.
Account Debit Credit
1
Rent 100
.
Bank 100
2
Bank 50
.
Sale 50
3
Equip. 5200
.
Bank 5200
4
Bank 11000
.
Loan 11000
5
Salary 5000
.
Bank 5000
6
Total (Dr) 21350
.
Total (Cr) 21350
[edit]'T' Accounts
The process of using debits and credits creates a ledger format
that resembles the letter 'T'.[3] The term 'T' account is commonly
used when discussing bookkeeping. Debits are placed on the left
and credits on the right.
Debits Credits
TYPE DEBIT CREDIT
Asset + −
Liability − +
Income − +
Expense + −
Equity − +
Therefore, if an Asset account is debited, the Asset amount

(value) is increased. Same with an Expense account. If a Liability
or an Income account is debited, the numerical figure will
decrease, etc. If a particular account is credited, there must be a
corresponding Debit in another account in order to balance the
transaction.
Debit cards and credit cards are creative terms used by the
banking industry to market and identify each card. These account
names do not refer to the accounting terms: debts and credits.[4]
Double-entry bookkeeping system

A double-entry bookkeeping system is a set of rules for recording financial
information in a financial accounting system in which every transaction or event
changes at least two different nominal ledger accounts.
The name derives from the fact that financial information used to be recorded in
books - hence "bookkeeping" (whereas now it's recorded mainly in computer
systems) and that these books were called ledgers (hence nominal ledger, etc) - and
that each transaction was recorded twice (hence "double-entry"), with the two
transactions being called a "debit" and a "credit".
It was first codified in the 15th century. In modern accounting this is done
using debits and credits within the accounting equation: Equity = Assets -Liabilities.
The accounting equation serves as an error detection system: if at any point the sum
of debits does not equal the corresponding sum of credits, an error has occurred. It
follows that the sum of debits and credits must be zero.
Double-entry bookkeeping is not a guarantee that no errors have been made - for
example, the wrong nominal ledger account may have been debited or credited.
Timeline
Century Development Stage
Later there are traces of the double-entry system in the accounting of the Islamic world from at least
12th
the 12th century.[1]
The earliest extant records that follow the modern double-entry form are those of Amatino Manucci,
13th
a Florentine merchant at the end of the 13th century.[2]
Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in
14th
the 14th century.
By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca
Pacioli, a monk and collaborator of Leonardo da Vinci, first codified the system in
amathematics textbook of 1494.[3] Pacioli is often called the "father of accounting" because he was the
15th first to publish a detailed description of the double-entry system, thus enabling others to study and use
it.[4][5] There is however controversy among scholars lately that Benedikt Kotruljević wrote the first
manual on a double-entry bookkeeping system in his 1458 treatise Della mercatura e del mercante
perfetto.[6][7][8][9][10][11]
Significance
Double-entry bookkeeping has been considered a fundamental

innovation and a cornerstone of Capitalism by such thinkers
as Werner Sombart and Max Weber, Sombart writing in "Medieval
and Modern Commercial Enterprise" that
"The very concept of capital is derived from this way of looking at
things; one can say that capital, as a category, did not exist before
double-entry bookkeeping. Capital can be defined as that amount of
wealth which is used in making profits and which enters into the
accounts."
Accounts
An accounting system records, retains and reproduces financial
information relating to financial transaction flows and financial
position. Financial Transaction Flows encompass primarily inflows on
account of incomes and outflows on account of expenses. Elements
of financial position, including property, money received, or money
spent, are assigned to one of the primary groups i.e. assets,liabilities,
and equity.[13]
Within these primary groups each distinctive asset, liability, income
and expense is represented by its respective "account". An account is
simply a record of financial inflows and outflows in relation to the
respective asset, liability, income or expense. Income and expense
accounts are considered temporary accounts, since they represent
only the inflows and outflows absorbed in the financial-position
elements on completion of the time period.
Account types (nature)
Type Represent Examples
Tangibles - Plant and Machinery, Furniture

Physically tangible things in the real
and Fixtures, Computers and Information
Real world and certain intangible things not
Processing Equipment etc. Intangibles
having any physical existence
- Goodwill, Patents and Copyrights
Individuals, Partnership
Firms, Corporate entities, Non-Profit
Person
Business and Legal Entities Organizations, any local orstatutory
al
bodies including governments at country,
state or local levels
Temporary Income and Expenditure

Accounts for recognition of the
Nomin
implications of the financial Sales, Purchases, Electricity Charges
al
transactions during each fiscal year till
finalisation of accounts at the end
Example: A sales account is opened for recording the sales of goods

or services and at the end of the financial period the total sales are
transferred to the revenue statement account (Profit and Loss
Account or Income and Expenditure Account).
Similarly expenses during the financial period are recorded using the
respective Expense accounts, which are also transferred to the
revenue statement account. The net positive or negative balance
(profit or loss) of the revenue statement account is transferred to
reserves or capital account as the case may be.
[edit]Account types (periodicity of flow)
The classification of accounts into real, personal and nominal is based
on their nature i.e. physical asset, liability, juristic entity or financial
transaction.
The further classification of accounts is based on the periodicity of
their inflows or outflows in the context of the fiscal year.
Income is immediate inflow during the fiscal year.
Expense is the immediate outflow during the fiscal year.
An asset is a long-term inflow with implications extending beyond the
financial period and by the traditional view could represent unclaimed
income. Alternatively, an asset could be valued at the present value of
its future inflows.
Liability is long term outflow with implications extending beyond the
financial period and by the traditional view could represent
unamortised expense. Alternatively, a liability could be valued at the
present value of future outflows.
Type of Long term Long term Short term Short term

accounts inflows outflows inflows outflows
Real accounts Assets
Personal
Assets Liability
accounts
Nominal
Incomes Expenses
accounts
Items in accounts are classified into five broad groups, also known as
the elements of the accounts:
[14]
Asset, Liability, Equity, Revenue, Expense.
The classification of Equity as a distinctive element for classification of
accounts is disputable on account of the "Entity concept", since for the
objective analysis of the financial results of any entity the external
liabilities of the entity should not be distinguished from any
contribution by the shareholders.
[edit]Accounting entries
 The double-entry accounting system records financial
transactions in relation to asset, liability, income or expense related
to it through accounting entries.
 Any accounting entry in the double-entry accounting system will
result in the recording of equal debit and credit amounts; that is,
debits must equal credits.
 If the accounting entries are recorded without error, at any point
in time the aggregate balance of all accounts having positive
balances will be equal to the aggregate balance of all accounts
having negative balances.
 The double-entry bookkeeping system ensures that the financial
transaction has equal and opposite effects in at least two different
accounts.
 Accounting entries use terms such as debit and credit to avoid
confusion regarding the opposite effect of the accounting entry e.g.
If an accounting entry debits a particular account, the opposite
account will be credited and vice versa.
 The rules for formulating accounting entries are known as
"Golden Rules of Accounting".
 The accounting entries are recorded in the "Books of Accounts".
 Regardless of which accounts and how many are impacted by a
given transaction, the fundamental accounting equation A = L + OE
will hold.
[edit]Books of accounts
It does this by ensuring that each individual financial transaction is
recorded in at least two different nominal ledger accounts within the
financial accounting system. The two entries have equal amounts and
opposite signs, so that when all entries in the accounts are summed,
the total is exactly the same: the accounts balance. This is a partial
check that each and every transaction has been correctly recorded.
The transaction is recorded as a "debit record" (Dr.) in one account,
and a "credit record" (Cr.) entry in the other account. The debit entry
will be recorded on the debit side (left-hand side) of a General ledger
and the credit entry will be recorded on the credit side (right-hand
side) of a General ledger account. A General ledger has a Debit (left)
side and a Credit (right) side. If the total of the entries on the debit
side is greater than the total on the credit side of the nominal ledger
account, that account is said to have a debit balance..
Double entry is used only in nominal ledgers. It is not used in
daybooks, which normally do not form part of the nominal ledger
system. The information from the daybooks will be used in the
nominal ledger and it is the nominal ledgers that will ensure the
integrity of the resulting financial information created from the
daybooks (provided that the information recorded in the daybooks is
correct).
(The reason for this is to limit the number of entries in the nominal
ledger: entries in the daybooks can be totalled before they are entered
in the nominal ledger. If there are only a relatively small number of
transactions it may be simpler instead to treat the daybooks as an
integral part of the nominal ledger and thus of the double-entry
system.)
However as can be seen from the examples of daybooks shown
below, it is still necessary to check, within each daybook, that the
postings from the daybook balance.
The double entry system uses nominal ledger accounts. From these
nominal ledger accounts a trial balance can be created. The trial
balance lists all the nominal ledger account balances. The list is split
into two columns, with debit balances placed in the left hand column
and credit balances placed in the right hand column. Another column
will contain the name of the nominal ledger account describing what
each value is for. The total of the debit column must equal the total of
the credit column.
[edit]Bookkeeping process
The bookkeeping process refers primarily to recording the financial
effects of financial transactions only into accounts. The variation
between manual and any electronic accounting system stems from
the latency [disambiguation needed] between the recording of the financial
transaction and its posting in the relevant account. This delay, absent
in electronic accounting systems due to instantaneous posting into
relevant accounts, is not replicated in manual systems, thus giving
rise to primary books of accounts such as Sales Book, Cash Book,
Bank Book, Purchase Book for recording the immediate effect of the
financial transaction.
In the normal course of business, a document is produced each time
a transaction occurs. Sales and purchases usually
have invoices or receipts. Deposit slips are produced when
lodgements (deposits) are made to a bank account. Cheques are
written to pay money out of the account. Bookkeeping involves, first of
all, recording the details of all of these source documents into multi-
columnjournals (also known as a books of first entry or daybooks). For
example, all credit sales are recorded in the Sales Journal, all Cash
Payments are recorded in the Cash Payments Journal. Each column
in a journal normally corresponds to an account. In the single entry
system, each transaction is recorded only once. Most individuals who
balance their cheque-book each month are using such a system, and
most personal finance software follows this approach.
After a certain period, typically a month, the columns in
each journal are each totaled to give a summary for the period. Using
the rules of double entry, these journal summaries are then
transferred to their respective accounts in the ledger, or book of
accounts. For example the entries in the Sales Journal are taken and
a debit entry is made in each customer's account (showing that the
customer now owes us money) and a credit entry might be made in
the account for "Sale of Class 2 Widgets" (showing that this activity
has generated revenue for us). This process of transferring
summaries or individual transactions to the ledger is called posting.
Once the posting process is complete, accounts kept using the "T"
format undergo balancing, which is simply a process to arrive at the
balance of the account.
As a partial check that the posting process was done correctly, a
working document called an unadjusted trial balance is created. In its
simplest form, this is a three column list. The first column contains the
names of those accounts in the ledger which have a non-zero
balance. If an account has a debit balance, the balance amount is
copied into column two (the debit column). If an account has a credit
balance, the amount is copied into column three (the credit column).
The debit column is then totalled and then the credit column is
totalled. The two totals must agree - this agreement is not by chance -
because under the double-entry rules, whenever there is a posting,
the debits of the posting equal the credits of the posting. If the two
totals do not agree, an error has been made either in the journals or
during the posting process. The error must be located and rectified
and the totals of debit column and credit column recalculated to check
for agreement before any further processing can take place.
Once the accounts balance, the accountant makes a number of
adjustments and changes the balance amounts of some of the
accounts. These adjustments must still obey the double-entry rule.
For example, the "inventory" account asset account might be changed
to bring them into line with the actual numbers counted during a stock
take. At the same time, the expense account associated with usage of
inventory is adjusted by an equal and opposite amount. Other
adjustments such as posting depreciation and prepayments are also
done at this time. This results in a listing called theadjusted trial
balance. It is the accounts in this list and their corresponding debit or
credit balances that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which
may include:
 the income statement, also known as the statement of financial

results, profit and loss account, or P&L
 the balance sheet, also known as the statement of financial
position
 the cash flow statement
 the statement of retained earnings, also known as the statement
of total recognised gains and losses or statement of changes in
equity
]Abbreviations used in bookkeeping
 A/C - Account
 A/R - Accounts Receivable
 A/P - Accounts Payable
 B/S - Balance Sheet
 c/d - Carried down
 b/d - Brought down
 c/f - Carried forward
 b/f - Brought forward
 Dr - Debit record
 Cr - Credit record
 G/L - General Ledger; (or N/L - Nominal Ledger)
 P&L - Profit & Loss; (or I/S - Income Statement)
 PP&E - Property, Plant and Equipment
 TB - Trial Balance
 GST - Goods and Services Tax
 VAT - Value Added Tax
 CST - Central Sale Tax
 TDS - Tax Deducted at Source
 AMT - Alternate Minimum Tax
 EBITDA - Earnings before Interest,Taxes, Depreciation and
Amortisation.
 EBDTA - Earnings before Depreciation, Taxes and Amortisation.
 EBT - Earnings before Taxes.
 EAT - Earnings after Tax.
 PAT - Profit after tax
 PBT - Profit before tax
 Depr - Depreciation
[edit]Debits and credits

Main article: Debits and credits
Double-entry bookkeeping is governed by the accounting equation. If
revenue equals expenses, the following (basic) equation must be true:
assets = liabilities + equity
For the accounts to remain in balance, a change in one account
must be matched with a change in another account. These
changes are made by debits and credits to the accounts. Note that
the usage of these terms in accounting is not identical to their
everyday usage. Whether one uses a debit or credit to increase or
decrease an account depends on the normal balance of the
account. Assets, Expenses, and Drawings accounts (on the left
side of the equation) have a normal balance of debit. Liability,
Revenue, and Capital accounts (on the right side of the equation)
have a normal balance of credit. On a general ledger, debits are
recorded on the left side and credits on the right side for each
account. Since the accounts must always balance, for each
transaction there will be a debit made to one or several accounts
and a credit made to one or several accounts. The sum of all
debits made in any transaction must equal the sum of all credits
made. After a series of transactions, therefore, the sum of all the
accounts with a debit balance will equal the sum of all the
accounts with a credit balance.
Debits and credits are then defined as follows:
 Debit: A debit is recorded on the left hand side of a T

account. it can also be defined as increase in asset and
expenses while decrease in liability, revenue and capital.
 Credit: A credit balance is recorded on the right hand side
of a 'T' account Credit can also be defined as increase in
liability, revenue and capital and decrease in assets and
expenses.
 Debit accounts = Asset and Expenses (also debit money
received into bank accounts)
 Credit accounts = Gains (income) and Liabilities (also
credit money paid out of bank accounts)
[edit]Double entry example 1

In this example the following will be used:
Books of prime entry (Books of original entry)
 Sales Invoice Daybook (records customer Invoice

Daybook)
 Bank Receipts Daybook (records customer & non
customer receipts)
 Purchase Invoice Daybook (records supplier Invoice
Daybook)
 Bank Payments Daybook (records supplier & non supplier
payments)
The books of prime entry are where transactions are first

recorded. They are not part of the Double-entry system.
Ledger Cards
 Customer Ledger Cards

 Supplier Ledger Cards
 General Ledger (Nominal Ledger)
 Bank Account Ledger
 Trade Creditors Ledger
 Trade Debtors Ledger
[edit]Purchase invoice daybook
Purchase Invoice Daybook
Referen Electric Widge

Date Supplier Name Amount
ce ity ts
10 July Electricity
PI1 1000 1000
2006 Company
12 July Widget
PI2 1600 1600
2006 Company
------- ------- -------
Total 2600 1000 1600
==== ==== ====
Credit Debit Debit
Electrici Widget
Trade
ty s
Creditors G/L G/L
control
a/c a/c
a/c
Each individual line is posted as follows:
 The amount value is posted as a credit to the

individual supplier's ledger a/c
 The analysis amount is posted as a debit to the
relevant general ledger a/c
From example above:
 Line 1 - Amount value 1000 is posted as a credit to

the Supplier's ledger a/c ELE01-Electricity Company
 Line 2 - Amount value 1600 is posted as a credit to
the Supplier's ledger a/c WID01-Widget Company
The totals of each column are posted as follows:
 Amount total value 2600 posted as a credit to the Trade

creditors control a/c
 Electricity total value 1000 posted as a debit to
the Electricity General Ledger a/c
 Widget total value 1600 posted as a debit to the Widgets
General Ledger a/c
Double-entry has been observed because Dr = 2600 and Cr =

2600.
[edit]Bank payments daybook
The payments book is not part of the double-entry system.
Bank Payments Daybook
Referen Amou Supplier

Date Supplier Name Wages
ce nt s
17 July Electricity
BP701 1000 1000
2006 Company
19 July Widget
BP702 900 900
2006 Company
28 July
Owner's Wages BP703 400 400
2006
------- ------- -------
Total 2300 1900 400
==== ==== ====
Credit Debit Debit
Bank Trade Wages
Accou control
Creditors
nt a/c
control
a/c
Keys: PI = Purchase Invoice, BP = Bank Payment

 The amount value is posted as a debit to the

individual supplier's ledger a/c.
 The analysis amount is posted as a credit to the
relevant general ledger a/c.
From example above:
 Line 1 - Amount value 1000 is posted as a debit to

the Supplier's ledger a/c ELE01-Electricity Company.
the Supplier's ledger a/c WID01-Widget Company.

 Amount total value 2300 posted as a credit to the Bank
Account.
 Trade Creditors total value 1900 posted as a debit to
the Trade creditors control a/c.
 Other total value 400 posted as a debit to the Wages
control a/c.

2300.
The daybooks are the key documents (books) to the double entry
system. From these daybooks we create the ledger accounts.
Each transaction will be recorded in at least two ledger accounts.
[edit]Supplier ledger cards
Supplier Ledger Cards
A/c Code: ELE01 - Electricity Company
Referen Amou Referen Amou

Date Details Date Details
ce nt ce nt
17 July Bank Payments 10 July

BP701 1000 Invoice PI1 1000
2006 Daybook 2006
31 July
Balance c/d 0
2006
------- -------
1000 1000
==== ====
1 August Balance
0
2006 b/d
A/c Code: WID01 - Widget Company

ce nt ce nt

BP702 900 Invoice PI2 1600
2006 Daybook 2006
31 July
Balance c/d 700
2006
------- -------
1600 1600
==== ====
1 August Balance
700
2006 b/d
[edit]Sales/customers
[edit]Sales daybook
Sales Invoice Daybook
Customer Referen Part Servi

Date Amount
Name ce s ce
JJ
2 July
Manufacturin SI1 2500 2500
2006
g
JJ
29 July
Manufacturin SI2 3200 3200
2006
g
------- ------- -------

Total 5700 2500 3200
===
==== ====
=
Cred Credi
Debit
it t
Trade Sales Sales
Servic
debtors Parts
e
control
a/c a/c
a/c
 The amount value is posted as a debit to the

individual customer's ledger a/c.
 The analysis amount is posted as a credit to the
relevant general ledger a/c.
From example above:

the Customer's ledger a/c JJM01-JJ Manufacturing.
the Customer's ledger a/c JJM01-JJ Manufacturing.
 Amount total value 5700 posted as a debit to the Trade

debtors control a/c.
 Sales-parts total value 2500 posted as a credit to
the Sales parts a/c.
 Sales-service total value 3200 posted as a credit to
the Sales service a/c.
5700.
[edit]Customer ledger cards
Customer Ledger cards are not part of the Double-entry system.
They are for memorandum purposes only. They allow you to know
the total amount an individual customer owes you.
CUSTOMER LEDGER CARDS
A/c Code: JJM01 - JJ Manufacturing

ce nt ce nt
2 July Sales invoice 20 July Bank receipts

SI1 2500 BR1 2500
2006 daybook 2006 daybook
29 July Sales invoice 31 July

SI2 3200 balance c/d 3200
2006 daybook 2006
------- -------
5700 5700
==== ====
1 August
Balance b/d 3200
2006
[edit]General (nominal) ledger
GENERAL (NOMINAL) LEDGER
Sales parts

ce nt ce nt
31 July 2 July Sales invoice
Balance c/d 2500 SDB 2500
2006 2006 daybook
------- -------
2500 2500
==== ====
1
August Balance b/d 2500
2006
Sales service

ce nt ce nt
31 May 29 July Sales invoice

Balance c/d 3200 SDB 3200
2006 2006 daybook
------- -------
3200 3200
==== ====
1 June
Balance b/d 3200
2010
Electricity

ce nt ce nt
10 May Electricity Co. PDB 1000 30 May Balance c/d 1000

2010 2010
------- -------
1000 1000
==== ====
1 June
Balance b/d 1000
2010
Water

ce nt ce nt
12 May 31 May
water Co. Pdb 1600 Balance c/d 1600
2010 2010
------- -------
1600 1600
==== ====
1
2010
Other a/c

ce nt ce nt
28 July 31 July
Owner's Wages BPDB 400 Balance c/d 400
2006 2006
------- -------
400 400
==== ====
1
2006
Bank Control A/c

ce nt ce nt
Bank
31 July Bank receipts 31 July
BRDB 2500 payments BPDB 2300
2006 daybook 2006
daybook
31 July
Balance c/d 200
2006
------- -------
2500 2500
==== ====
1
2006
Trade Debtors Control A/c

ce nt ce nt
1 July 31 July Bank receipts

Balance b/d 0 BRDB 2500
2006 2006 daybook
31 July Sales Invoice 31 July

SDB 5700 Balance c/d 3200
2006 Daybook 2006
------- -------
5700 5700
==== ====
1
2006
Trade Creditors Control A/c

ce nt ce nt

BPDB 1900 Balance b/d 0
2006 Daybook 2006
31 July 31 July Purchase

Balance c/d 700 PDB 2600
2006 2006 Daybook
------- -------
2600 2600
==== ====
1
2006
The customers ledger cards shows the breakdown of how the

trade debtors control a/c is made up. The trade debtors control a/c
is the total of outstanding debtors and the customer ledger cards
shows the amount due for each individual customer. The total of
each individual customer account added together should equal the
total in the trade debtors control a/c.
The supplier ledger cards shows the breakdown of how the trade
creditors control a/c is made up. The trade creditors control a/c is
the total of outstanding creditors and the suppliers ledger cards
shows the amount due for each individual supplier. The total of
each individual supplier account added together should equal the
total in the trade creditors control a/c.
Each Bank a/c shows all the money in and out through a bank. If
you have more than one bank account for your company you will
have to maintain separate bank account ledger in order to
complete bank reconciliation statements and be able to see how
much is left in each account.
[edit]Bank account
Bank A/c
Detail Referen Amou Referen Amou

Date Date Details
s ce nt ce nt
1 July Balan 17 July Bank Payments

b/d 0 BP701 1000
2006 ce 2006 Daybook
28 July Bank Payments

BP703 400
2006 Daybook
31 July
Balance c/d 200
2006
------- -------
2500 2300
==== ====
1 August Balan
b/d 200
2006 ce
[edit]Unadjusted trial balance
Trial balance as at 31 July 2006
Debi Cred
A/c description
t it
Sales-parts 2500
Sales-service 3200
Widgets 1600
Electricity 1000
Other 400
Bank 200
Trade Debtors Control

3200
A/c
Trade Creditors
700
Control A/c
------- -------
6400 6400
=== ===
== ==
Both sides must have the same

overall total
Debits = Credits.
The individual customer accounts are not to be listed in the trial

balance, as the Trade debtors control a/c is the summary of each
individual customer a/c......
The individual supplier accounts are not to be listed in the trial
balance, as the Trade creditors control a/c is the summary of each
individual supplier a/c.
Important note: this example is designed to show double entry.
There are methods of creating a trial balance that significantly
reduce the time it takes to record entries in the general ledger and
trial balance.
[edit]Profit-and-loss statement and balance sheet
Profit and loss

statement
for the month ending 31

July 2006
Dr
x Sales
x Sales-parts 2500
x Sales-service 3200
x -------
x 5700
x Widgets 1600
x -------
x Gross Profit 4100
x Less expenses
x Electricity 1000
x Other 400
x -------
x 1400
x -------
x Net Profit 2700
x ====
Balance sheet
as at 31 July 2006
Dr
x Current Assets
x Bank A/c 200
x Trade Debtors 3200
x -------
x 3400
Current
x
Liabilities
x Trade Creditors 700
x -------
x 700
x -------
x Net Current Assets 2700
===
x
=
Capital &
x
Reserves
Revenue 270
x
Reserves a/c 0
x -------
x 2700
===
x
=
[edit]Double Entry Example 2

[edit]Transactions
XYZ Company is closing its books for the end of the month. Each
of the daily journals has been summarized and the amounts are
ready to be transferred to the general ledger. The amounts to be
transferred are:
 Purchase raw materials on trade credit: 500,000

 Pay workers from cash in bank to make goods: 1,500,000
 Pay sales force from cash in bank to sell goods: 1,000,000
 Sell goods for cash: 3,500,000
To close the books for the month, we will adjust expenses and
revenue to zero by appropriately crediting and debiting the income
summary and then closing the income summary to retained
earnings(part of equity).
These items are entered in the ledger below; each matching credit
and debit have been numbered to make finding them in the ledger
easier.
[edit]Ledgers
General Ledger (in 000s)
Debi Cred Balan

Transaction
t it ce
Expenses
Balance forward -
1 Raw materials 500 500

2 Labor 1500 2000
3 Sales costs 1000 3000
5 Income
3000 -
summary
Total 3000 3000
Revenue
Balance forward -
4 Revenue from
3500 3500
sales
6 Income
3500 -
summary
Total 3500 3500
Cash
Balance forward 11000
2 Labor 1500 9500
3 Sales costs 1000 8500
4 Revenue from
3500 12000
sales
Total 3500 2500

Accounts Payable
1 Raw materials 500 1500
Total - 500
Income summary
Balance forward -
5 Expense 3000 3000
6 Revenue 3500 500
7 Retained
500 -
earnings
Total 3500 3500
Retained earnings
7 Income
500 10500
summary
Total - 500
Total all 1350 1350

accounts: 0 0
The amount in equity (in the form of retained earnings) has
changed with a net credit of 500,000. Since equity has a normal
balance of credit, this means there is now 500,000 more in equity
than at the beginning of the month.
Mark-to-market accounting
Accountancy
Key concepts
Accountant · Accounting period ·Bookkeeping · Cash and
accrual basis ·Constant Item Purchasing Power
Accounting ·Cost of goods sold · Debits and credits ·Double-
entry system · Fair value accounting · FIFO &
LIFO · GAAP /International Financial Reporting
Standards ·General ledger · Historical cost · Matching
principle · Revenue recognition · Trial balance
Fields of accounting
Cost · Financial · Forensic · Fund ·Management · Tax
Financial statements
Statement of Financial Position · Statement of cash
flows · Statement of changes in equity ·Statement of
comprehensive income · Notes ·MD&A · XBRL
Auditing
Auditor's report · Financial audit · GAAS / ISA ·Internal
audit · Sarbanes–Oxley Act
Accounting qualifications
CA · CCA · CGA · CMA · CPA · CGFM

This box: view · talk · edit
Mark-to-market accounting
Mark-to-market or fair value accounting refers to accounting for the value of an asset or liability based
on the current market price of the asset or liability, or for similar assets and liabilities, or based on another
objectively assessed "fair" value. Fair value accounting has been a part of the U.S. Generally Accepted
Accounting Principles (GAAP) since the early 1990s, and has been used increasingly since then.
Mark-to-market accounting can make values on the balance sheet change frequently, as market conditions
change. In contrast, book value, based on the original cost/price of an asset or liability, is more stable but
can become outdated and inaccurate. Mark-to-market accounting can also become inaccurate if market
prices deviate from the "fundamental" values of assets and liabilities. Buyers and sellers may claim a
number of specific instances when this is the case, including inability to accurately collectively value the
future income from assets and expenses from liabilities, possibly due to incorrect information or over-
optimistic and over-pessimistic expectations.
History and development

The practice of mark to market as an accounting device first
developed among traders on futures exchanges in the 20th century. It
was not until the 1980s that the practice spread to big banks and
corporations far from the traditional exchange trading pits, and
beginning in the 1990s, mark-to-market accounting began to give rise
to scandals.
To understand the original practice, consider that a futures trader,
when taking a position, deposits money with the exchange, called a
"margin". This is intended to protect the exchange against loss. At the
end of every trading day, the contract is marked to its present market
value. If the trader is on the winning side of a deal, his contract has
increased in value that day, and the exchange pays this profit into his
account. On the other hand, if the market price of his contract has
declined, the exchange charges his account that holds the deposited
margin. If the balance of this accounts falls below the deposit required
to maintain the position, the trader must immediately pay additional
margin into the account to maintain his position (a "margin call"). As
an example, the Chicago Mercantile Exchange, taking the process
one step further, marks positions to market twice a day, at 10:00 am
and 2:00 pm.[1]
Over-the-counter (OTC) derivatives on the other hand are formula-
based financial contracts between buyers and sellers, and are not
traded on exchanges, so their market prices are not established by
any active, regulated market trading. Market values are, therefore, not
objectively determined or readily available (purchasers of derivative
contracts are customarily furnished computer programs which
compute market values based upon data input from the active
markets and the provided formulas). During their early development,
OTC derivatives such as interest rate swaps were not marked to
market frequently. Deals were monitored on a quarterly or annual
basis, when gains or losses would be acknowledged or payments
exchanged.
As the practice of marking to market caught on in corporations and
banks, some of them seem to have discovered that this was a
tempting way to commit accounting fraud, especially when the market
price could not be objectively determined (because there was no real
day-to-day market available or the asset value was derived from other
traded commodities, such as crude oil futures), so assets were
being 'marked to model' in a hypothetical or synthetic manner using
estimated valuations derived from financial modeling, and sometimes
marked in a manipulative way to achieve spurious
valuations. See Enron and the Enron scandal.
Internal Revenue Code Section 475 contains the mark to market
accounting method rule for taxation. Section 475 provides that
qualified securities dealers that elect mark to market treatment shall
recognize gain or loss as if the property were sold for its fair market
value on the last business day of the year, and any gain or loss shall
be taken into account in that year. The section also provides that
dealers in commodities can elect mark to market treatment for any
commodity (or their derivatives) which is actively traded (i.e., for which
there is an established financial market that provides a reasonable
basis to determine fair market value by disseminating price quotes
from broker/dealers or actual prices from recent transactions).
[edit]FAS 115
Accounting for Certain Investments in Debt and Equity Securities
(Issued May 1993)
This Statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values and for all investments in debt securities. Those investments
are to be classified in three categories and accounted for as follows:
 Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost less impairment.
 Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized
gains and losses included in earnings.
 Debt and equity securities not classified as either held-to-

maturity securities or trading securities are classified as available-
for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported in a separate
component of shareholders' equity (Other Comprehensive Income).
[edit]FAS 157
This article needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may
be challenged and removed. (July 2010)
Statements of Financial Accounting Standards No. 157, Fair Value

Measurements, commonly known as "FAS 157", is
an accounting standard issued in September 2006 by the Financial
Accounting Standards Board (FASB) which became effective for
entities with fiscal years beginning after November 15, 2007.[2][3]
FAS Statement 157 includes the following:
 Clarity on the definition of fair value;
 A fair value hierarchy used to classify the source of information
used in fair value measurements (i.e. market based or non-market
based);
 Expanded disclosure requirements for assets and liabilities
measured at fair value; and
 A modification of the long-standing accounting presumption that
a measurement date-specific transaction price of an asset or
liability equals its same measurement date-specific fair value.
 Clarification that changes in credit risk (both that of the
counterparty and the company's own credit rating) must be
included in the valuation.
FAS 157 defines "fair value" as: “The price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.”
FAS 157 only applies when another accounting rule requires or
permits a fair value measure for that item. While FAS 157 does not
introduce any new requirements mandating the use of fair value, the
definition as outlined does introduce certain key differences.
First, it is based on the exit price (for an asset, the price at which it
would be sold (bid price)) rather than an entry price (for an asset, the
price at which it would be bought (ask price)), regardless of whether
the entity plans to hold the asset for investment or resell it later.
Second, FAS 157 emphasizes that fair value is market-based rather
than entity-specific. Thus, the optimism that often characterizes an
asset acquirer must be replaced with the skepticism that typically
characterizes a dispassionate, risk-averse buyer.
FAS 157’s fair value hierarchy underpins the concepts of the
standard. The hierarchy ranks the quality and reliability of information
used to determine fair values, with level 1 inputs being the most
reliable and level 3 inputs being the least reliable. Information based
on direct observations of transactions (e.g., quoted prices) involving
the same assets and liabilities, not assumptions, offers superior
reliability; whereas, inputs based on unobservable data or a reporting
entity’s own assumptions about the assumptions market participants
would use are the least reliable. A typical example of the latter is
shares of a privately held company whose value is based on projected
cash flows.
Problems can arise when the market-based measurement does not
accurately reflect the underlying asset's true value. This can occur
when a company is forced to calculate the selling price of these
assets or liabilities during unfavorable or volatile times, such as a
financial crisis. For example, if the liquidity is low or investors are
fearful, the current selling price of a bank's assets could be much
lower than the value under normal liquidity conditions. The result
would be a lowered shareholders' equity. This issue was seen during
the financial crisis of 2008/09 where many securities held on banks'
balance sheets could not be valued efficiently as the markets had
disappeared from them. In April 2009, however, the Financial
Accounting Standards Board (FASB) voted on and approved new
guidelines that would allow for the valuation to be based on a price
that would be received in an orderly market rather than a forced
liquidation, starting in the first quarter of 2009.
Although FAS 157 does not require fair value to be used on any new
classes of assets, it does apply to assets and liabilities that are carried
at fair value in accordance with other applicable rules. The accounting
rules for which assets and liabilities are held at fair value are complex.
Mutual funds and securities firms have carried their assets and some
liabilities at fair value for decades in accordance with securities
regulations and other accounting guidance. For commercial banks
and other types of financial services firms, some asset classes are
required to be carried at fair value, such as derivatives and
marketable equity securities. For other types of assets, such as loan
receivables and debt securities, it depends on whether the assets are
held for trading (active buying and selling) or for investment. All
trading assets are carried at fair value. Loans and debt securities that
are held for investment or to maturity are carried at amortized cost,
unless they are deemed to be impaired (in which case, a loss is
recognized). However, if they are available for sale or held for sale,
they are required to be carried at fair value or the lower of cost or fair
value, respectively. (FAS 65 and FAS 114 cover the accounting for
loans, and FAS 115 covers the accounting for securities.)
Notwithstanding the above, companies are permitted to account for
almost any financial instrument at fair value, which they might elect to
do in lieu of historical cost accounting (see FAS 159, "The Fair Value
Option").
Thus, FAS 157 applies in the cases above where a company is
required or elects to carry an asset or liability at fair value.
The rule requires a mark to "market," rather than to some theoretical
price calculated by a computer — a system often criticized as “mark to
make-believe.” (Occasionally, for certain types of assets, the rule
allows for using a model)
Sometimes, there is a thin market for assets, which trade relatively
infrequently - often during an economic crisis. In these periods, there
are few, if any buyers for such products. This complicates the marking
process. In the absence of market information, an entity is allowed to
use its own assumptions, but the objective is still the same: what
would be the current value in a sale to a willing buyer. In developing
its own assumptions, the entity can not ignore any available market
data, such as interest rates, default rates, prepayment speeds, etc.
FAS 157 makes no distinction between non cash-generating assets,
i.e., broken equipment, which can theoretically have zero value if
nobody will buy them in the market – and cash-generating assets, like
securities, which are still worth something for as long as they earn
some income from their underlying assets. The latter cannot be
marked down indefinitely, or at some point, can create incentives for
company insiders to buy them out from the company at the under-
valued prices. Insiders are in the best position to determine the
creditworthiness of such securities going forward. In theory, this price
pressure should balance market prices to accurately reflect the "fair
value" of a particular asset. Purchasers of distressed assets should
step in to buy undervalued securities, thus moving prices higher,
allowing other Companies to consequently mark up their similar
holdings.
Also new in FAS 157 is the idea of nonperformance risk. FAS 157
requires that in valuing a liability, an entity should consider the
nonperformance risk. If FAS 157 simply required that fair value be
recorded as an exit price, then nonperformance risk would be
extinguished upon exit. However, FAS 157 defines fair value as the
price at which you would transfer a liability. In other words, the
nonperformance that must be valued should incorporate the correct
discount rate for an ongoing contract. An example would be to apply
higher discount rate to the future cash flows to account for the credit
risk above the stated interest rate. The Basis for Conclusions section
has an extensive explanation of what was intended by the original
statement with regards to nonperformance risk (paragraphs C40-
C49).
In response to the rapid developments of the financial crisis of 2007–
2008, the FASB is fast tracking the issuance of the proposed FAS
157-d, Determining the Fair Value of a Financial Asset in a Market
That Is Not Active.[4]
[edit]Simple example
Example: If an investor owns 10 shares of a stock purchased for $4
per share, and that stock now trades at $6, the "mark-to-market" value
of the shares is equal to (10 shares * $6), or $60, whereas the book
value might (depending on the accounting principles used) only equal
$40.
Similarly, if the stock falls to $3, the mark-to-market value is $30 and
the investor has lost $10 of the original investment. If the stock was
purchased on margin, this might trigger a margin call and the investor
would have to come up with an amount sufficient to meet the margin
requirements for his account.
[edit]Marking-to-market a derivatives position
In marking-to-market a derivatives position, at pre-determined periodic
intervals, each counterparty exchanges the change in the market
value of their position in cash. For OTC derivatives, when one
counterparty defaults, the sequence of events that follows is governed
by an ISDA contract. When using models to calculate the ongoing
exposure, FAS 157 requires that the entity consider the default risk
("nonperformance risk") of the counterparty and make a necessary
adjustment to its calculations.
For exchange traded derivatives, if one of the counterparties defaults
in this periodic exchange, that counterparty's position is immediately
closed by the exchange and the clearing house is substituted for that
counterparty's position. Marking-to-market virtually eliminates credit
risk, but it requires the use of monitoring systems that usually only
large institutions can afford.[5]
[edit]Use by brokers
Stock brokers allow their clients to access credit via margin accounts.
These accounts allow clients to borrow funds to buy securities.
Therefore, the amount of funds available is more than the value of
cash (or equivalents). The credit is provided by charging a rate of
interest, in a similar way as banks provide loans. Even though the
value of securities (stocks or other financial instruments such
asoptions) fluctuates in the market, the value of accounts is not
calculated in real time. Marking-to-market is performed typically at the
end of the trading day, and if the account value falls below a given
threshold, (typically a predefined ratio by the broker), the broker
issues a margin call that requires the client to deposit more funds or
liquidate his account.
[edit]Effect
on subprime crisis and Emergency Economic Stabilization
Act of 2008
Former FDIC Chair William Isaac placed much of the blame for
the subprime mortgage crisis on the Securities and Exchange
Commission and its fair-value accounting rules, especially the
requirement for banks to mark their assets to market, particularly
mortgage-backed securities.[6] Whether or not this is true has been the
subject of ongoing debate.[7][8]
The debate arises because this accounting rule requires companies to
adjust the value of marketable securities (such as the mortgage-
backed securities (MBS) at the center of the crisis) to their market
value. The intent of the standard is to help investors understand the
value of these assets at a point in time, rather than just their historical
purchase price. Because the market for these assets is distressed, it
is difficult to sell many MBS at other than prices which may (or may
not) be reflective of market stresses, which may be below the value
that the mortgage cash flow related to the MBS would merit. As
initially interpreted by companies and their auditors, the typically lower
sale value was used as the market value rather than the cash flow
value. Many large financial institutions recognized significant losses
during 2007 and 2008 as a result of marking-down MBS asset prices
to market value.
For some institutions, this also triggered a margin call, where lenders
that had provided the funds using the MBS as collateral had
contractual rights to get their money back.[9] This resulted in further
forced sales of MBS and emergency efforts to obtain cash (liquidity) to
pay off the margin call. Markdowns may also reduce the value of bank
regulatory capital, requiring additional capital raising and creating
uncertainty regarding the health of the bank.[10]
It is the combination of the extensive use of financial leverage (i.e.,
borrowing to invest, leaving limited room in the event of a downturn),
margin calls and large reported losses that may have exacerbated the
crisis.[11] If cash flow-derived value — which excludes market
judgment as to default risk but may also more accurately reflect
'actual' value if the market is sufficiently distressed — is used (rather
than sale value), the size of market-value adjustments under the
accounting standard would typically be reduced. One might question
why banks or GSEs (Fannie Mae and Freddie Mac) are allowed to
use high-risk, difficult-to-value assets like MBS or deferred tax assets
as part of their regulatory capital base. Whether a margin call is
involved is not part of the accounting standard itself; it is part of the
contracts negotiated between lender and borrower.
Critics charge that claims that this had happened are akin to claiming
"the problem, in short, is not that the banks acted irresponsibly in
creating financial instruments that blew up, or in making loans that
could never be repaid. It is that someone is forcing them to fess up. If
only the banks could pretend the assets were valuable, then the
system would be safe."[12]
On September 30, 2008, the SEC and the FASB issued a joint
clarification regarding the implementation of fair value accounting in
cases where a market is disorderly or inactive. This guidance clarifies
that forced liquidations are not indicative of fair value, as this is not an
"orderly" transaction. Further, it clarifies that estimates of fair value
can be made using the expected cash flows from such instruments,
provided that the estimates reflect adjustments that a willing buyer
would make, such as adjustments for default and liquidity risks.[13]
Section 132 of the Emergency Economic Stabilization Act of 2008,
titled "Authority to Suspend Mark-to-Market Accounting" restates
the Securities and Exchange Commission’s authority to suspend the
application of FAS 157 if the SEC determines that it is in the public
interest and protects investors.
Section 133 of the Act, titled "Study on Mark-to-Market Accounting,"
requires the SEC, in consultation with the Federal Reserve Board and
the Department of the Treasury, to conduct a study on mark-to-market
accounting standards as provided in FAS 157, including its effects on
balance sheets, impact on the quality of financial information, and
other matters, and to report to Congress within 90 days on its findings.
[14]
The Emergency Economic Stabilization Act of 2008 was passed and

signed into law on October 3, 2008. On October 7, 2008, the SEC
began to conduct a study on "mark-to-market" accounting, as
authorized by Sec. 133 of the Emergency Economic Stabilization Act
of 2008.[15]
On October 10, 2008, the FASB issued further guidance to provide an
example of how to estimate fair value in cases where the market for
that asset is not active at a reporting date.[16]
On December 30, 2008, the SEC issued its report under Sec. 133 and
decided not to suspend mark-to-market accounting.[17]
On March 9, 2009, In remarks made in the Council on Foreign
Relations in Washington, Federal Reserve Chairman Ben
Bernanke said, "We should review regulatory policies and accounting
rules to ensure that they do not induce excessive (swings in the
financial system and economy)". Although he doesn't support the full
suspension of basic proposition of Mark to Market principles, he is
open to improving it and provide "guidance" on reasonable ways to
value assets to reduce their pro- cyclical effects.[18]
On March 16, 2009, FASB proposed allowing companies to use more
leeway in valuing their assets under "mark-to-market" accounting, a
move that could ease balance-sheet pressures many companies say
they are feeling during the economic crisis. On April 2, 2009, after a
15-day public comment period, FASB eased the mark-to-market rules.
Financial institutions are still required by the rules to mark
transactions to market prices but more so in a steady market and less
so when the market is inactive. To proponents of the rules, this
removes the unnecessary "positive feedback loop" that can result in a
deeply weakened economy.[19]
On April 9, 2009, FASB issued the official update to FAS 157[20] that
eases the mark-to-market rules when the market is unsteady or
inactive. Early adopters were allowed to apply the ruling as of March
15, 2009, and the rest as of June 15, 2009. It was anticipated that
these changes could significantly boost banks' statements of earnings
and allow them to defer reporting losses.[21] The changes, however,
affected accounting standards applicable to a broad range
of derivatives, not just banks holding mortgage-backed securities.
Opponents argue that the implications for investors are that the
valuation of assets underlying such securities will be increasingly
difficult to analyze, not less so. An example would be determining a
company's actual assets, equity and earnings, which will be
overstated if the assets are not allowed to be marked down
appropriately.[citation needed][22][23]
In January 2010, Adair Turner, Chairman of the UK's Financial
Services Authority, said that marking to market had been a cause of
inflated bankers' bonuses. This is because it produces a self-
reinforcing cycle during a rising market that feeds into banks' profit
estimates.
Imaginary Numbers
Recipient of the 2002 Ig Nobel Prize in Economics "for adapting the
mathematical concept of imaginary numbers for use in the business
world" can be found at List_of_Ig_Nobel_Prize_winners#2002
Comparison of Cash Method and Accrual Method of

accounting
The two primary accounting methods of the cash and the accruals basis (the
difference being primarily one of timing) are used to calculate US public debt,[1] as
well as taxable income for U.S. federal income taxes and other income taxes.
According to the Internal Revenue Code, a taxpayer may compute taxable income
by:
1. the cash receipts and disbursements method;
2. an accrual method;
3. any other method permitted by the chapter; or
4. any combination of the foregoing methods permitted under regulations
prescribed by the Secretary.[2]
As a general rule, a taxpayer must compute taxable income using the same
accounting method he / she uses to compute income in keeping his / her books.
[3]
Also, the taxpayer must maintain a consistent method of accounting from year to
year. Should he / she change from the cash basis to the accrual basis (or vice
versa), he / she must notify and secure the consent of the Secretary.[4]
Cash basis
Cash basis tax payers include income when it is received, and claim deductions when
expenses are paid.[5] A cash basis taxpayer can look to the doctrine of constructive
receipt and the doctrine of cash equivalence to help determine when income is received.
Most individuals start as cash basis taxpayers. There are four types of taxpayers that cannot
use the cash basis: (1) corporations with over $5,000,000 in gross receipts;
(2) partnerships with at least one C corporation partner; (3) tax shelters;[6] and (4) taxpayers
required to keep inventory (retail, wholesale, manufacturer etc...)[7] Exceptions (1) Farming
Businesses (2) Qualified PSC's (3) Entities with gross receipts of not more than
$7,000,000 [8]
Similar definition of cash basis accounting is true for financial accounting purposes.[9
Accrual basis
Accrual basis taxpayers include items when they are earned and
claim deductions when expenses are incurred.[10] An accrual basis
taxpayer looks to the “all-events test” and “earlier-of test” to determine
when income is earned.[11] Under the all-events test, an accrual basis
taxpayer generally must include income "for the taxable year when all
the events have occurred that fix the right to receive income and the
amount of the income can be determined with reasonable
accuracy."[12] Under the "earlier-of test", an accrual basis taxpayer
receives income when (1) the required performance occurs, (2)
payment therefore is due, or (3) payment therefore is made,
whichever happens earliest.[13] Under the earlier of test outlined in
Revenue Ruling 74-607, an accrual basis taxpayer may be treated, as
a cash basis taxpayer, when payment is received before the required
performance and before the payment is actually due. An accrual basis
taxpayer generally can claim a deduction “in the taxable year in which
all the events have occurred that establish the fact of the liability, the
amount of the liability can be determined with reasonable accuracy,
and economic performance has occurred with respect to the
liability.”[14]
Similar definition of accrual basis accounting is true for financial
accounting purposes, except that revenue can't be recognized until it's
earned even if a cash payment has already been received.[9]
History
Originally, federal law required all taxpayers to use the cash basis
accounting.[15] However, many businesses used the accrual basis, as
most generally accepted accounting principles ("GAAP") were based
thereon, and objected to the new law.[16] Less than a year after the
1913 Revenue Act, the IRS allowed use of the accrual basis for
deductions, then for income, and in 1916, Congress formally adopted
the accrual basis accounting into U.S. tax law.[17]
FIFO and LIFO accounting

FIFO and LIFO Methods are accounting techniques used in
managing inventory and financial matters involving the amount of
money a company has tied up within inventory of produced goods,
raw materials, parts, components, or feed stocks.
FIFO stands for first-in, first-out, meaning that the oldest inventory
items are recorded as sold first but do not necessarily mean that the
exact newest physical object has been tracked and sold; this is just an
inventory technique.
LIFO stands for last-in, first-out, meaning that the most recently
produced items are recorded as sold first. Since the 1970s, U.S.
companies have tended to use LIFO, which reduces their income
taxes in times of inflation.
The difference between the cost of an inventory calculated under the
FIFO and LIFO methods is called the LIFO reserve. This reserve is
essentially the amount by which an entity's taxable income has been
deferred by using the LIFO method.
LIFO liquidation
Notwithstanding its deferred tax advantage, a LIFO inventory system can lead to
LIFO liquidation, a situation where in the absence of new replacement inventory or a
search for increased profits, older inventory is increasingly liquidated (or sold). If
prices have been rising, for example through inflation, this older inventory will have a
lower cost, and its liquidation leads to the recognition of higher net income and the
payment of higher taxes, thus reversing the deferred tax advantage that initially
encouraged the adoption of a LIFO system. Some companies who use LIFO have
decades-old inventory recorded on their books at a very low cost. For these
companies a LIFO liquidation results in an inflated net income (and higher tax
payments). Companies can use liquidations to manage their earnings.
Also mobile telecom operators either use FIFO or LIFO to allocate remaining call
credit a customer did not fully use in a billing period. In telecom terms FIFO is good
for the customers while LIFO is good for the telecom operator. With small amount of
carry over duration, call credit is to be lost sooner with LIFO than with FIFO as a
customer first uses his old call credit( that he had left from previous month) rather
than first needing to use all the new credit before using the old call credit.
Inventory
the goods and materials themselves, especially those held available in stock by
a business; and this has become the primary meaning of the term in North American
English, equivalent to the term "stock" in British English. In accounting, inventory or
stock is considered an asset.
Inventory management is primarily about specifying the size and placement of

stocked goods. Inventory management is required at different locations within a
facility or within multiple locations of a supply network to protect the regular and
planned course of production against the random disturbance of running out of
materials or goods. The scope of inventory management also concerns the fine lines
between replenishment lead time, carrying costs of inventory, asset management,
inventory forecasting, inventory valuation, inventory visibility, future inventory price
forecasting, physical inventory, available physical space for inventory, quality
management, replenishment, returns and defective goods and demand forecasting.
Balancing these competing requirements leads to optimal inventory levels, which is
an on-going process as the business needs shift and react to the wider environment.
Inventory management involves a retailer seeking to acquire and maintain a proper
merchandise assortment while ordering, shipping, handling, and related costs are
kept in check. Systems and processes that identify inventory requirements, set
targets, provide replenishment techniques and report actual and projected inventory
status. Handles all functions related to the tracking and management of material.
This would include the monitoring of material moved into and out of stockroom
locations and the reconciling of the inventory balances. Also may include ABC
analysis, lot tracking, cycle counting support etc. Management of the inventories,
with the primary objective of determining/controlling stock levels within the physical
distribution function to balance the need for product availability against the need for
minimizing stock holding and handling costs. See inventory proportionality.
Business inventory
[edit]The reasons for keeping stock
There are three basic reasons for keeping an inventory:
1. Time - The time lags present in the supply chain, from

supplier to user at every stage, requires that you maintain
certain amounts of inventory to use in this "lead time."
2. Uncertainty - Inventories are maintained as buffers to meet
uncertainties in demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time
at a place where a user needs it, when he needs it" principle
tends to incur lots of costs in terms of logistics. So bulk buying,
movement and storing brings in economies of scale, thus
inventory.
All these stock reasons can apply to any owner or product stage.
 Buffer stock is held in individual workstations against the

possibility that the upstream workstation may be a little delayed in
long setup or change over time. This stock is then used while that
changeover is happening. This stock can be eliminated by tools
like SMED.
These classifications apply along the whole Supply chain, not just
within a facility or plant.
Where these stocks contain the same or similar items, it is often the
work practice to hold all these stocks mixed together before or after
the sub-process to which they relate. This 'reduces' costs. Because
they are mixed up together there is no visual reminder to operators of
the adjacent sub-processes or line management of the stock, which is
due to a particular cause and should be a particular individual's
responsibility with inevitable consequences. Some plants have
centralized stock holding across sub-processes, which makes the
situation even more acute.
[edit]Special terms used in dealing with inventory
 Stock Keeping Unit (SKU) is a unique combination of all the

components that are assembled into the purchasable item.
Therefore, any change in the packaging or product is a new SKU.
This level of detailed specification assists in managing inventory.
[1]
 Stockout means running out of the inventory of an SKU.
 "New old stock" (sometimes abbreviated NOS) is a term used in
business to refer to merchandise being offered for sale that was
manufactured long ago but that has never been used. Such
merchandise may not be produced anymore, and the new old stock
may represent the only market source of a particular item at the
present time.
[edit]Typology
1. Buffer/safety stock
2. Cycle stock (Used in batch processes, it is the available
inventory, excluding buffer stock)
3. De-coupling (Buffer stock that is held by both the supplier
and the user)
4. Anticipation stock (Building up extra stock for periods of
increased demand - e.g. ice cream for summer)
5. Pipeline stock (Goods still in transit or in the process of
distribution - have left the factory but not arrived at the customer
yet)
Inventory examples
While accountants often discuss inventory in terms of goods for sale,
organizations - manufacturers, service-providers and not-for-profits -
also have inventories (fixtures, furniture, supplies, ...) that they do not
intend to sell. Manufacturers', distributors', and wholesalers' inventory
tends to cluster in warehouses. Retailers' inventory may exist in a
warehouse or in a shop or store accessible to customers. Inventories
not intended for sale to customers or to clients may be held in any
premises an organization uses. Stock ties up cash and, if
uncontrolled, it will be impossible to know the actual level of stocks
and therefore impossible to control them.
While the reasons for holding stock were covered earlier, most
manufacturing organizations usually divide their "goods for sale"
inventory into:
 Raw materials - materials and components scheduled for use in

making a product.
 Work in process, WIP - materials and components that have
begun their transformation to finished goods.
 Finished goods - goods ready for sale to customers.
 Goods for resale - returned goods that are salable.
For example:
Manufacturing
A canned food manufacturer's materials inventory includes the
ingredients to form the foods to be canned, empty cans and their lids
(or coils of steel or aluminum for constructing those components),
labels, and anything else (solder, glue, ...) that will form part of a
finished can. The firm's work in process includes those materials from
the time of release to the work floor until they become complete and
ready for sale to wholesale or retail customers. This may be vats of
prepared food, filled cans not yet labeled or sub-assemblies of food
components. It may also include finished cans that are not yet
packaged into cartons or pallets. Its finished good inventory consists
of all the filled and labeled cans of food in its warehouse that it has
manufactured and wishes to sell to food distributors (wholesalers), to
grocery stores (retailers), and even perhaps to consumers through
arrangements like factory stores and outlet centers.
Examples of case studies are very revealing, and consistently show
that the improvement of inventory management has two parts: the
capability of the organisation to manage inventory, and the way in
which it chooses to do so. For example, a company may wish to
install a complex inventory system, but unless there is a good
understanding of the role of inventory and its parameters, and an
effective business process to support that, the system cannot bring
the necessary benefits to the organisation in isolation.
Typical Inventory Management techniques include Pareto Curve ABC
Classification[2] and Economic Order Quantity Management. A more
sophisticated method takes these two techniques further, combining
certain aspects of each to create The K Curve Methodology.[3] A case
study of k-curve[4] benefits to one company shows a successful
implementation.
Unnecessary inventory adds enormously to the working capital tied up
in the business, as well as the complexity of the supply chain.
Reduction and elimination of these inventory 'wait' states is a key
concept in Lean.[5] Too big an inventory reduction too quickly can
cause a business to be anorexic. There are well-proven processes
and techniques to assist in inventory planning and strategy, both at
the business overview and part number level. Many of the big
MRP/and ERP systems do not offer the necessary inventory planning
tools within their integrated planning applications.
[edit]Principle of inventory proportionality
[edit]Purpose
Inventory proportionality is the goal of demand-driven inventory

management. The primary optimal outcome is to have the same
number of days' (or hours', etc.) worth of inventory on hand across all
products so that the time of runout of all products would be
simultaneous. In such a case, there is no "excess inventory," that is,
inventory that would be left over of another product when the first
product runs out. Excess inventory is sub-optimal because the money
spent to obtain it could have been utilized better elsewhere, i.e. to the
product that just ran out.
The secondary goal of inventory proportionality is inventory
minimization. By integrating accurate demand forecasting with
inventory management, replenishment inventories can be scheduled
to arrive just in time to replenish the product destined to run out first,
while at the same time balancing out the inventory supply of all
products to make their inventories more proportional, and thereby
closer to achieving the primary goal. Accurate demand forecasting
also allows the desired inventory proportions to be dynamic by
determining expected sales out into the future; this allows for
inventory to be in proportion to expected short-term sales or
consumption rather than to past averages, a much more accurate and
optimal outcome.
Integrating demand forecasting into inventory management in this way
also allows for the prediction of the "can fit" point when inventory
storage is limited on a per-product basis.
[edit]Applications
The technique of inventory proportionality is most appropriate for

inventories that remain unseen by the consumer. As opposed to "keep
full" systems where a retail consumer would like to see full shelves of
the product they are buying so as not to think they are buying
something old, unwanted or stale; and differentiated from the "trigger
point" systems where product is reordered when it hits a certain level;
inventory proportionality is used effectively by just-in-time
manufacturing processes and retail applications where the product is
hidden from view.
One early example of inventory proportionality used in a retail
application in the United States is for motor fuel. Motor fuel (e.g.
gasoline) is generally stored in underground storage tanks. The
motorists do not know whether they are buying gasoline off the top or
bottom of the tank, nor need they care. Additionally, these storage
tanks have a maximum capacity and cannot be overfilled. Finally, the
product is expensive. Inventory proportionality is used to balance the
inventories of the different grades of motor fuel, each stored in
dedicated tanks, in proportion to the sales of each grade. Excess
inventory is not seen or valued by the consumer, so it is simply cash
sunk (literally) into the ground. Inventory proportionality minimizes the
amount of excess inventory carried in underground storage tanks.
This application for motor fuel was first developed and implemented
by Petrolsoft Corporation in 1990 for Chevron Products Company.
Most major oil companies use such systems today.[6]
Roots
The use of inventory proportionality in the United States is thought to
have been inspired by Japanese just-in-time parts inventory
management made famous by Toyota Motors in the 1980s.[3]
High-level inventory management
It seems that around 1880[7] there was a change in manufacturing
practice from companies with relatively homogeneous lines of
products to vertically integrated companies with unprecedented
diversity in processes and products. Those companies (especially in
metalworking) attempted to achieve success through economies of
scope - the gains of jointly producing two or more products in one
facility. The managers now needed information on the effect of
product-mix decisions on overall profits and therefore needed
accurate product-cost information. A variety of attempts to achieve
this were unsuccessful due to the huge overhead of the information
processing of the time. However, the burgeoning need for financial
reporting after 1900 created unavoidable pressure for financial
accounting of stock and the management need to cost manage
products became overshadowed. In particular, it was the need for
audited accounts that sealed the fate of managerial cost accounting.
The dominance of financial reporting accounting over management
accounting remains to this day with few exceptions, and the financial
reporting definitions of 'cost' have distorted effective management
'cost' accounting since that time. This is particularly true of inventory.
Hence, high-level financial inventory has these two basic formulas,
which relate to the accounting period:
1. Cost of Beginning Inventory at the start of the period +

inventory purchases within the period + cost of production within
the period = cost of goods available
2. Cost of goods available − cost of ending inventory at the
end of the period = cost of goods sold
The benefit of these formulae is that the first absorbs all overheads of
production and raw material costs into a value of inventory for
reporting. The second formula then creates the new start point for the
next period and gives a figure to be subtracted from the sales price to
determine some form of sales-margin figure.
Manufacturing management is more interested in inventory turnover
ratio or average days to sell inventory since it tells them something
about relative inventory levels.
Inventory turnover ratio (also known as inventory turns) = cost of
goods sold / Average Inventory = Cost of Goods Sold /
((Beginning Inventory + Ending Inventory) / 2)
and its inverse
Average Days to Sell Inventory = Number of Days a Year /
Inventory Turnover Ratio = 365 days a year / Inventory Turnover
Ratio
This ratio estimates how many times the inventory turns over a
year. This number tells how much cash/goods are tied up
waiting for the process and is a critical measure of process
reliability and effectiveness. So a factory with two inventory
turns has six months stock on hand, which is generally not a
good figure (depending upon the industry), whereas a factory
that moves from six turns to twelve turns has probably
improved effectiveness by 100%. This improvement will have
some negative results in the financial reporting, since the
'value' now stored in the factory as inventory is reduced.
While these accounting measures of inventory are very useful
because of their simplicity, they are also fraught with the
danger of their own assumptions. There are, in fact, so many
things that can vary hidden under this appearance of simplicity
that a variety of 'adjusting' assumptions may be used. These
include:
 Specific
Identification
 Weighted Average Cost
 Moving-Average Cost
 FIFO and LIFO.
Inventory Turn is a financial accounting tool for evaluating

inventory and it is not necessarily a management tool.
Inventory management should be forward looking. The
methodology applied is based on historical cost of goods sold.
The ratio may not be able to reflect the usability of future
production demand, as well as customer demand.
Business models, including Just in Time (JIT) Inventory,
Vendor Managed Inventory (VMI) and Customer Managed
Inventory (CMI), attempt to minimize on-hand inventory and
increase inventory turns. VMI and CMI have gained
considerable attention due to the success of third-party
vendors who offer added expertise and knowledge that
organizations may not possess.
Accounting for inventory
Each country has its own rules about accounting for inventory
that fit with their financial-reporting rules.
For example, organizations in the U.S. define inventory to suit
their needs within US Generally Accepted Accounting
Practices (GAAP), the rules defined by the Financial
Accounting Standards Board (FASB) (and others) and
enforced by the U.S. Securities and Exchange
Commission (SEC) and other federal and state agencies.
Other countries often have similar arrangements but with their
own GAAP and national agencies instead.
It is intentional that financial accounting uses standards that
allow the public to compare firms' performance, cost
accounting functions internally to an organization and
potentially with much greater flexibility. A discussion of
inventory from standard and Theory of Constraints-based
(throughput) cost accounting perspective follows some
examples and a discussion of inventory from a financial
accounting perspective.
The internal costing/valuation of inventory can be complex.
Whereas in the past most enterprises ran simple, one-process
factories, such enterprises are quite probably in the minority in
the 21st century. Where 'one process' factories exist, there is a
market for the goods created, which establishes an
independent market value for the good. Today, with
multistage-process companies, there is much inventory that
would once have been finished goods which is now held as
'work in process' (WIP). This needs to be valued in the
accounts, but the valuation is a management decision since
there is no market for the partially finished product. This
somewhat arbitrary 'valuation' of WIP combined with the
allocation of overheads to it has led to some unintended and
undesirable results.
Financial accounting
An organization's inventory can appear a mixed blessing,
since it counts as an asset on the balance sheet, but it also
ties up money that could serve for other purposes and requires
additional expense for its protection. Inventory may also cause
significant tax expenses, depending on particular countries'
laws regarding depreciation of inventory, as in Thor Power
Tool Company v. Commissioner.
Inventory appears as a current asset on an organization's
balance sheet because the organization can, in principle, turn
it into cash by selling it. Some organizations hold larger
inventories than their operations require in order to inflate their
apparent asset value and their perceived profitability.
In addition to the money tied up by acquiring inventory,
inventory also brings associated costs for warehouse space,
for utilities, and for insurance to cover staff to handle and
protect it from fire and other disasters, obsolescence,
shrinkage (theft and errors), and others. Such holding
costs can mount up: between a third and a half of its
acquisition value per year.
Businesses that stock too little inventory cannot take
advantage of large orders from customers if they cannot
deliver. The conflicting objectives of cost control and customer
service often pit an organization's financial and operating
managers against its sales and marketing departments.
Salespeople, in particular, often receive sales-commission
payments, so unavailable goods may reduce their potential
personal income. This conflict can be minimised by reducing
production time to being near or less than customers'
expected delivery time. This effort, known as "Lean
production" will significantly reduce working capital tied up in
inventory and reduce manufacturing costs (See the Toyota
Production System).
Role of inventory accounting
By helping the organization to make better decisions, the
accountants can help the public sector to change in a very
positive way that delivers increased value for the taxpayer’s
investment. It can also help to incentivise progress and to
ensure that reforms are sustainable and effective in the long
term, by ensuring that success is appropriately recognized in
both the formal and informal reward systems of the
organization.
To say that they have a key role to play is an understatement.
Finance is connected to most, if not all, of the key business
processes within the organization. It should be steering the
stewardship and accountability systems that ensure that the
organization is conducting its business in an appropriate,
ethical manner. It is critical that these foundations are firmly
laid. So often they are the litmus test by which public
confidence in the institution is either won or lost.
Finance should also be providing the information, analysis and
advice to enable the organizations’ service managers to
operate effectively. This goes beyond the traditional
preoccupation with budgets – how much have we spent so far,
how much do we have left to spend? It is about helping the
organization to better understand its own performance. That
means making the connections and understanding the
relationships between given inputs – the resources brought to
bear – and the outputs and outcomes that they achieve. It is
also about understanding and actively managing risks within
the organization and its activities.
[edit]FIFO vs. LIFO accounting
Main article: FIFO and LIFO accounting
When a merchant buys goods from inventory, the value of the
inventory account is reduced by the cost of goods
sold (COGS). This is simple where the CoG has not varied
across those held in stock; but where it has, then an agreed
method must be derived to evaluate it. For commodity items
that one cannot track individually, accountants must choose a
method that fits the nature of the sale. Two popular methods
that normally exist are: FIFO and LIFO accounting (first in -
first out, last in - first out). FIFO regards the first unit that
arrived in inventory as the first one sold. LIFO considers the
last unit arriving in inventory as the first one sold. Which
method an accountant selects can have a significant effect on
net income and book value and, in turn, on taxation. Using
LIFO accounting for inventory, a company generally reports
lower net income and lower book value, due to the effects of
inflation. This generally results in lower taxation. Due to LIFO's
potential to skew inventory value, UK GAAP and IAS have
effectively banned LIFO inventory accounting.
[edit]Standard cost accounting
Standard cost accounting uses ratios called efficiencies that
compare the labour and materials actually used to produce a
good with those that the same goods would have required
under "standard" conditions. As long as similar actual and
standard conditions obtain, few problems arise. Unfortunately,
standard cost accounting methods developed about 100 years
ago, when labor comprised the most important cost in
manufactured goods. Standard methods continue to
emphasize labor efficiency even though that resource now
constitutes a (very) small part of cost in most cases.
Standard cost accounting can hurt managers, workers, and
firms in several ways. For example, a policy decision to
increase inventory can harm a manufacturing
manager's performance evaluation. Increasing inventory
requires increased production, which means that processes
must operate at higher rates. When (not if) something goes
wrong, the process takes longer and uses more than the
standard labor time. The manager appears responsible for the
excess, even though s/he has no control over the production
requirement or the problem.
In adverse economic times, firms use the same efficiencies to
downsize, rightsize, or otherwise reduce their labor force.
Workers laid off under those circumstances have even less
control over excess inventory and cost efficiencies than their
managers.
Many financial and cost accountants have agreed for many
years on the desirability of replacing standard cost accounting.
They have not, however, found a successor.
Theory of constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in
part to address the cost-accounting problems in what he calls
the "cost world." He offers a substitute, called throughput
accounting, that uses throughput (money for goods sold to
customers) in place of output (goods produced that may sell or
may boost inventory) and considers labor as a fixed rather
than as a variable cost. He defines inventory simply as
everything the organization owns that it plans to sell, including
buildings, machinery, and many other things in addition to the
categories listed here. Throughput accounting recognizes only
one class of variable costs: the truly variable costs, like
materials and components, which vary directly with the
quantity produced.
Finished goods inventories remain balance-sheet assets, but
labor-efficiency ratios no longer evaluate managers and
workers. Instead of an incentive to reduce labor cost,
throughput accounting focuses attention on the relationships
between throughput (revenue or income) on one hand and
controllable operating expenses and changes in inventory on
the other. Those relationships direct attention to the
constraints or bottlenecks that prevent the system from
producing more throughput, rather than to people - who have
little or no control over their situations.
National accounts
Inventories also play an important role in national
accounts and the analysis of the business cycle. Some short-
term macroeconomic fluctuations are attributed to the
]Distressed inventory
Also known as distressed or expired stock, distressed
inventory is inventory whose potential to be sold at a
normal cost has passed or will soon pass. In certain industries
it could also mean that the stock is or will soon be impossible
to sell. Examples of distressed inventory include products that
have reached their expiry date, or have reached a date in
advance of expiry at which the planned market will no longer
purchase them (e.g. 3 months left to expiry), clothing that is
defective or out of fashion, and old newspapers or magazines.
It also includes computer or consumer-electronic equipment
that is obsolete or discontinued and whose manufacturer is
unable to support it. One current example of distressed
inventory is the VHS format.[8]
In 2001, Cisco wrote off inventory worth US $2.25 billion due
to duplicate orders.[9] This is one of the biggest inventory write-
offs in business history.
Inventory credit
Inventory credit refers to the use of stock, or inventory,

as collateral to raise finance. Where banks may be reluctant to
accept traditional collateral, for example in developing
countries where land titlemay be lacking, inventory credit is a
potentially important way of overcoming financing constraints.
This is not a new concept; archaeological evidence suggests
that it was practiced in Ancient Rome. Obtaining finance
against stocks of a wide range of products held in a bonded
warehouse is common in much of the world. It is, for example,
used with Parmesan cheese in Italy.[10] Inventory credit on the
basis of stored agricultural produce is widely used in Latin
American countries and in some Asian countries.[11] A
precondition for such credit is that banks must be confident
that the stored product will be available if they need to call on
the collateral; this implies the existence of a reliable network of
certified warehouses. Banks also face problems in valuing the
inventory. The possibility of sudden falls in commodity prices
means that they are usually reluctant to lend more than about
60% of the value of the inventory at the time of the loan.
Average cost method
Under the average cost method, it is assumed that the cost of inventory is based
on the average cost of the goods available for sale during the period.
The average cost is computed by dividing the total cost of goods available for sale by
the total units available for sale. This gives a weighted-average unit cost that is
applied to the units in the ending inventory.
There are two commonly used average cost methods: Simple Weighted-average
cost method and moving-average cost method.
Weighted Average Cost
Weighted Average Cost is a method of calculating Ending
Inventory cost. It is also known as AVCO
It takes Cost of Goods Available for Sale and divides it by the total
amount of goods from Beginning Inventory and Purchases. This gives
a Weighted Average Cost per Unit. A physical count is then
performed on the ending inventory to determine the amount of goods
left. Finally, this amount is multiplied by Weighted Average Cost per
Unit to give an estimate of ending inventory cost.
Moving-Average Cost
Moving-Average (Unit) Cost is a method of calculating Ending

Inventory cost.
Assume that both Beginning Inventory and beginning inventory cost

are known. From them the Cost per Unit of Beginning Inventory can
be calculated. During the year, multiple purchases were made. Each
time, purchase costs are added to beginning inventory cost to
get Cost of Current Inventory. Similarly, the number of units bought is
added to beginning inventory to get Current Goods Available for Sale.
After each purchase, Cost of Current Inventory is divided by Current
Goods Available for Sale to get Current Cost per Unit on Goods. Also
during the year, multiple sales happened.
The Current Goods Available for Sale is deducted by the amount of

goods sold, and the Cost of Current Inventory is deducted by the
amount of goods sold times the latest (before this sale) Current Cost
per Unit on Goods. This deducted amount is added to Cost of Goods
Sold.
At the end of the year, the last Cost per Unit on Goods, along with a
physical count, is used to determine ending inventory cost.
Cash conversion cycle

In management accounting, the Cash Conversion Cycle (CCC) measures how long a firm will be deprived
of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of
the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could
even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict
collections and lax payments is not always sustainable.
Definition
CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit
of operations.
Inventory conversion
= + Receivables conversion period – Payables conversion period
period
Avg. Inventory Avg. Accounts Receivable Avg. Accounts Payable

= + –
COGS / 365 Credit Sales / 365 COGS / 365
Derivation
Cashflows insufficient. The term "cash conversion cycle" refers to
the timespan between a firm's disbursing and collecting cash.
However, the CCC cannot be directly observed in cashflows, because
these are also influenced by investment and financing activities; it
must be derived from Statement of Financial Position data associated
with the firm's operations.
Equation describes retailer. Although the term "cash conversion
cycle" technically applies to a firm in any industry, the equation is
generically formulated to apply specifically to a retailer. Since a
retailer's operations consist in buying and selling inventory, the
equation models the time between
(1) disbursing cash to satisfy the accounts payable created by
sale of a unit of inventory, and
(2) collecting cash to satisfy the accounts receivable generated
by that sale.
Equation describes a firm that buys & sells on account. Also,
the equation is written to accommodate a firm that buys and sells
on account. For a cash-only firm, the equation would only need
data from sales operations (e.g. changes in inventory),
because disbursing cash would be directly measurable
as purchase of inventory, and collecting cash would be directly
measurable as sale of inventory. However, no such 1:1
correspondence exists for a firm that buys and sells on account:
Increases and decreases in inventory do not occasion cashflows
but accounting vehicles (receivables and payables, respectively);
increases and decreases in cash will remove these accounting
vehicles (receivables and payables, respectively) from the books.
Thus, the CCC must be calculated by tracing a change in cash
through its effect upon receivables, inventory, payables, and finally
back to cash—thus, the term cash conversion cycle, and the
observation that these four accounts "articulate" with one another.
Accounting (use different accounting

Label Transaction vehicles if the transactions occur in a
different order)
 Operations (increasing
Suppliers (agree to) deliver inventory by $X)
inventory
A
→Create accounting vehicle
→Firm owes $X cash
(increasing accounts payable by
(debt) to suppliers
$X)
B
Customers (agree to)  Operations
acquire that (decreasing
inventory inventory by $X)
→Firm is owed $Y
→Create accounting vehicles
cash (credit) from (booking "COGS" expense of $X;
customers accruing revenue and increasing
accounts receivable of $Y)
 Cashflo
Firm ws
disburse (decreasi
s $X ng
cash to cash by
C
supplier $X)
s
→Remove accounting vehicle
→Firm removes its
(decreasing accounts payable by
debts to its suppliers
$X)

Fir
as
m
hfl
col
ow
lec
s
ts
(
$Y
cre
cas
asi
h
D ng
fro
ca
m
sh
cus
by
to
$Y
me
)
rs
→Firm removes its →Remove accounting vehicle

credit from its (decreasing accounts
customers. receivable by $Y.)
Taking these four transactions in pairs, analysts draw attention

to five important intervals, referred to as conversion
cycles (or conversion periods):
 the Cash Conversion Cycle emerges as interval C→D

(i.e. disbursing cash→collecting cash).
 the payables conversion period (or "Days payables
outstanding") emerges as interval A→C (i.e. owing
cash→disbursing cash)
 the operating cycle emerges as interval A→D (i.e. owing
cash→collecting cash)
 the inventory conversion period or "Days inventory

outstanding" emerges as interval A→B (i.e. owing
cash→being owed cash)
 the receivables conversion period (or "Days sales
outstanding") emerges as interval B→D (i.e.being owed
cash→collecting cash
Knowledge of any three of these conversion cycles permits

derivation of the fourth (leaving aside the operating cycle,
which is just the sum of the inventory conversion
period and the receivables conversion period.)
Hence,
interval {C →
= interval {A → B} + interval {B → D} – interval {A → C}
D}
Inventory conversion Receivables conversion Payables conversion
CCC (in days) = + –
period period period
In calculating each of these three constituent

Conversion Cycles, we use the equation TIME
=LEVEL/RATE (since each interval roughly equals the
TIME needed for its LEVEL to be achieved at its
corresponding RATE).
 We estimate its LEVEL "during the period in

question" as the average of its levels in the two
balance-sheets that surround the period: (Lt1+Lt2)/2.
 To estimate its RATE, we note that Accounts
Receivable grows only when revenue is accrued;
and Inventory shrinks and Accounts Payable grows
by an amount equal to the COGS expense (in the
long run, since COGS actually accrues sometime
after the inventory delivery, when the customers
acquire it).
 Payables conversion period: Rate = [inventory increase
+ COGS], since these are the items for the period that can
increase "trade accounts payables," i.e. the ones that grew its
inventory.
NOTICE that we make an exception when calculating this

interval: although we use a period average for the LEVEL of
inventory, we also consider any increase in inventory as
contributing to its RATE of change. This is because the purpose
of the CCC is to measure the effects of inventory growth on cash
outlays. If inventory grew during the period, we want to know
about it.
 Inventory conversion period: Rate = COGS, since

this is the item that (eventually) shrinks inventory.
 Receivables conversion period: Rate = revenue,
since this is the item that can grow receivables (sales).
Working capital
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a
business, organization, or other entity, including governmental entity. Along with fixed assets such as plant
and equipment, working capital is considered a part of operating capital. Net working capital is calculated
as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in
valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current
liabilities, an entity has a working capital deficiency, also called a working capital deficit.
Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities
Equity Working Capital = Current Assets − Current Liabilities − Long-
term Debt
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be
converted into cash. Positive working capital is required to ensure that a firm is able to continue its
operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing inventories, accounts
receivable and payable, and cash
Calculation
Current assets and current liabilities include three accounts which are of special importance.
These accounts represent the areas of the business where managers have the most direct impact:
 accounts receivable (current asset)

 inventory (current assets), and
 accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a short-term
claim to current assets and is often secured by long term assets. Common types of short-term debt
are bank loans and lines of credit.
An increase in working capital indicates that the business has either increased current assets (that is
has increased its receivables, or other current assets) or has decreased current liabilities, for
example has paid off some short-term creditors.
Implications on M&A: The common commercial definition of working capital for the purpose of a
working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in
a sale and purchase agreement) is equal to:
Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus
assets and/or deposit balances.
Cash balance items often attract a one-for-one purchase price adjustment.
Working capital management

Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing
the relationship between a firm'sshort-term assets and its short-term
liabilities. The goal of working capital management is to ensure that
the firm is able to continue its operations and that it has sufficient cash
flow to satisfy both maturing short-term debt and upcoming
operational expenses.
Decision criteria
By definition, working capital management entails short term
decisions - generally, relating to the next one year period - which are
"reversible". These decisions are therefore not taken on the same
basis as Capital Investment Decisions (NPV or related, as above)
rather they will be based on cash flows and / or profitability.
 One measure of cash flow is provided by the cash conversion

cycle - the net number of days from the outlay of cash for raw
material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter-relatedness
of decisions relating to inventories, accounts receivable and
payable, and cash. Because this number effectively corresponds to
the time that the firm's cash is tied up in operations and unavailable
for other activities, management generally aims at a low net count.
 In this context, the most useful measure of profitability is Return

on capital (ROC). The result is shown as a percentage, determined
by dividing relevant income for the 12 months by capital
employed; Return on equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on
capital, which results from working capital management, exceeds
the cost of capital, which results from capital investment decisions
as above. ROC measures are therefore useful as a management
tool, in that they link short-term policy with long-term decision
making. See Economic value added (EVA).
Management of working capital

Guided by the above criteria, management will use a combination of
policies and techniques for the management of working capital. These
policies aim at managing thecurrent assets (generally cash and cash
equivalents, inventories and debtors) and the short term financing,
such that cash flows and returns are acceptable.
 Cash management. Identify the cash balance which allows for

the business to meet day to day expenses, but reduces cash
holding costs.
 Inventory management. Identify the level of inventory which
allows for uninterrupted production but reduces the investment in
raw materials - and minimizes reordering costs - and hence
increases cash flow. Besides this, the lead times in production
should be lowered to reduce Work in Progress (WIP) and similarly,
theFinished Goods should be kept on as low level as possible to
avoid over production - see Supply chain management; Just In
Time (JIT); Economic order quantity(EOQ); Economic quantity
 Debtors management. Identify the appropriate credit policy, i.e.
credit terms which will attract customers, such that any impact on
cash flows and the cash conversion cycle will be offset by
increased revenue and hence Return on Capital (or vice versa);
see Discounts and allowances.
 Short term financing. Identify the appropriate source of
financing, given the cash conversion cycle: the inventory is ideally
financed by credit granted by the supplier; however, it may be
necessary to utilize a bank loan (or overdraft), or to "convert
debtors to cash" through "factoring".
Days sales outstanding

In accountancy, Days Sales Outstanding (also called Days
Receivables) is a calculation used by a company to estimate their
average collection period. A low number of days indicates that the
company collects its outstanding receivables quickly. Typically, Days
sales outstanding is calculated monthly. The days sales outstanding
(DSO) figure is an index of the relationship between outstanding
receivables and credit account sales achieved over a given period.
The Days sales outstanding analysis provides general information
about the number of days on average that customers take to pay
invoices.
Days sales outstanding is considered an important tool in measuring
liquidity. Days sales outstanding tends to increase as a company
becomes less risk averse. Higher Days sales outstanding can also be
an indication of poor follow up on delinquencies, or higher DSO might
be the result of inadequate analysis of applicants for open account
credit terms. An increase in DSO can result in cash flow problems,
and may result in a decision to increase the creditor company's bad
debt reserve.
Days Sales Outstanding, or DSO, is calculated as: Total Outstanding
Receivables at the end of the period analyzed divided by Total Credit
Sales for the period analyzed (typically 90 or 365 days), times the
number of days in the period analyzed. That is,
DSO = (Receivables/Sales) * Days in Period (can use average
receivables as a more conservative estimate)
Days sales outstanding can vary from month to month, and over
the course of a year with a company's seasonal business cycle. Of
interest when analyzing the performance of a company is the
trend in DSO. If DSO is getting longer, customers are taking
longer to pay their bills, which may be a warning that customers
are dissatisfied with the company's product or service, or that
sales are being made to customers that are less credit-worthy, or
that salespeople have to offer longer payment terms in order to
generate sales. It could also mean that the company has an
inefficient or overburdened credit and collections department.
Many financial reports will state Receivables Turnover defined
as Net Credit Account Sales / Trade Receivables; divide this
value into the time period in Days to get DSO.
However, Days sales outstanding is not the most accurate
indication of the efficiency of accounts receivable department.
Changes in sales volume influence the outcome of the days sales
outstanding calculation. For example, even if the overdue balance
stays the same, an increase of sales can result in a lower DSO. A
better way to measure the performance of credit and collection
function is by looking at the total overdue balance in proportion of
the total accounts receivable balance (total AR = Current +
Overdue), which is sometimes calculated using the Days
Delinquent Sales Outstanding (DDSO) formula.
Days payable outstanding

Days payable outstanding (DPO) is an efficiency ratio that measures the average
number of days a company takes to pay its suppliers.
The formula for DPO is:
where ending A/P is the accounts payable balance at the end of the accounting period
being considered and COGS/day is calculated by dividing the total cost of goods sold
per year by 365 days
Days in inventory
Days in inventory(DII) is an efficiency ratio that measures the average number of days the company holds
its inventory before selling it.
The formula for DII is:
where the average inventory is the average of inventory levels at the beginning and end of an accounting
period, and COGS/day is calculated by dividing the total cost of goods sold per year by 365 days.[1]
Overtrading
Overtrading is a term in financial statement analysis. Overtrading often occurs when
companies expand its own operations too quickly (aggressively) [1]. Overtraded
companies enter a negative cycle, where increase in interest expenses negatively
impact net profit leads to lesser working capital leads to increase borrowings leads to
more interest expense and the cycles continues. Overtraded companies eventually
face liquidity problems and/or running out of working capital.
Conditions
 Rapid growth in business development and sales.

 Lesser net profit.
 The business running a business with limited knowledge.
 Cash flow problem or short of working capital.
 Bad cash budget or unrealistic.
 Having large amount of unpaid vendors.
 High amount of financial interest expenditure.
 High gearing ratio.
 Keen market competition.
 Overstock or slow movement of inventory.
Consignment stock
Consignment stock is stock legally owned by one party, but held by another.
Ownership
Ownership of consignment stock is passed only when the stock is
used (issued). Unused stock in a warehouse may be returned to
the manufacturer.
Accounting
As ownership of consignment stock is not transferred until use, invoicing is not immediate. To account
for a replenishment of consignment stock at a customer site, a manufacturer
must creditinventory and debit customer consignment stock. Only after a customer actually uses
the consignment stock may an accounts payable be created
Manufacturing
Part of a series of articles on
Industry
Manufacturing methods
Batch production • Job production
Continuous production
Improvement methods
LM • TPM • QRM • VDM
TOC • Six Sigma • RCM
Information & communication
ISA-88 • ISA-95 • ERP
SAP • IEC 62264 • B2MML
Process control
PLC • DCS
Assembly of Section 41 of a Boeing 787 Dreamliner.
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may
refer to a range of human activity, from handicraft to high tech, but is most commonly applied
to industrial production, in which raw materials are transformed into finished goods on a large scale. Such
finished goods may be used for manufacturing other, more complex products, such as aircraft, household
appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell them to
end users – the "consumers".
Manufacturing takes turns under all types of economic systems. In a free market economy, manufacturing
is usually directed toward themass production of products for sale to consumers at a profit. In a collectivist
economy, manufacturing is more frequently directed by the state to supply a centrally planned economy. In
free market economies, manufacturing occurs under some degree of governmentregulation.
Modern manufacturing includes all intermediate processes required for the production and integration of a
product's components. Some industries, such as semiconductor and steel manufacturers use the
term fabrication instead.
The manufacturing sector is closely connected with engineering and industrial design. Examples of major
manufacturers in the North America include General Motors Corporation, General Electric, and Pfizer.
Examples in Europe include Volkswagen Group, Siemens, andMichelin. Examples in Asia
include Toyota, Samsung, and Bridgestone.
History and development
 In its earliest form, manufacturing was usually carried out by a

single skilled artisan with assistants. Training was
by apprenticeship. In much of the pre-industrial world
the guild system protected the privileges and trade secrets of urban
artisans.
 Before the Industrial Revolution, most manufacturing occurred in
rural areas, where household-based manufacturing served as a
supplemental subsistence strategy to agriculture (and continues to
do so in places). Entrepreneurs organized a number of
manufacturing households into a single enterprise through
the putting-out system.
 Toil manufacturing is an arrangement whereby a first firm with
specialized equipment processes raw materials or semi-finished
goods for a second firm.
[edit]Manufacturing systems: The changing methods of manufacturing
 Craft or Guild system

 Putting-out system
 English system of manufacturing
 American system of manufacturing
 Soviet collectivism in manufacturing
 Mass production
 Just In Time manufacturing
 Lean manufacturing
 Flexible manufacturing
 Mass customization
 Agile manufacturing
 Rapid manufacturing
 Prefabrication
 Packaging and labeling
 Ownership
 Fabrication
 Publication
[edit]Economics of manufacturing
According to some economists, manufacturing is a wealth-producing
sector of an economy, whereas a service sector tends to be wealth-
consuming.[1][2] Emerging technologies have provided some new
growth in advanced manufacturing employment opportunities in
the Manufacturing Belt in the United States. Manufacturing provides
important material support for national infrastructure and fornational
defense.
On the other hand, most manufacturing may involve significant social
and environmental costs. The clean-up costs of hazardous waste, for
example, may outweigh the benefits of a product that creates it.
Hazardous materials may expose workers to health risks. Developed
countries regulate manufacturing activity with labor
laws and environmental laws. In the U.S, manufacturers are subject to
regulations by the Occupational Safety and Health Administration and
the United States Environmental Protection Agency. In Europe,
pollution taxes to offset environmental costs are another form of
regulation on manufacturing activity. Labor Unions and craft
guilds have played a historic role in the negotiation of worker rights
and wages. Environment laws and labor protections that are available
in developed nations may not be available in the third world. Tort
law and product liability impose additional costs on manufacturing.
Manufacturing requires huge amounts of fossil fuels. The construction
of a single car in the United States requires, on average, at least 20
barrels of oil.[3]
[edit]Manufacturing and investment around the world
Surveys and analyses of trends and issues in manufacturing and
investment around the world focus on such things as:
 the nature and sources of the considerable variations that occur

cross-nationally in levels of manufacturing and wider industrial-
economic growth;
 competitiveness; and
 attractiveness to foreign direct investors.
In addition to general overviews, researchers have examined the

features and factors affecting particular key aspects of manufacturing
development. They have compared production and investment in a
range of Western and non-Western countries and presented case
studies of growth and performance in important individual industries
and market-economic sectors.[4][5]
On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for
the United States to increase its manufacturing base employment to
20% of the workforce, commenting that the U.S. has outsourced too
much in some areas and can no longer rely on the financial sector
and consumer spending to drive demand.[6] A total of 3.2 million – one
in six U.S. manufacturing jobs – have disappeared between 2000 and
2007.[7]
[edit]Taxonomy of manufacturing processes
 Taxonomy of manufacturing processes

 Manufacturing Process Management
[edit]Manufacturing categories
 Chemical industry
 Pharmaceutical
 Construction
 Electronics
 Semiconductor
 Engineering
 Manufacturing engineering
 Production engineering
 Process Engineering
 Industrial Engineering
 Biotechnology
 Emerging technologies
 Nanotechnology
 Synthetic biology, Bioengineering
 Energy industry
 Food and Beverage
 Agribusiness
 Brewing industry
 Food processing
 Industrial design
 Interchangeable parts
 Metalworking
 Smith
 Machinist
 Machine tools
 Cutting tools (metalworking)
 Free machining
 Tool and die maker
 Global steel industry trends
 Steel production
 Metalcasting
 Plastics
 Telecommunications
 Textile manufacturing
 Clothing industry
 Sailmaker
 Tentmaking
 Transportation
 Aerospace manufacturing
 Automotive industry
 Bus manufacturing
 Tire manufacturing
[edit]Theories
 Taylorism
 Fordism
 Scientific management
[edit]Control
 Management
 List of management topics
 Total Quality Management
 Quality control
 Six Sigma
Distribution (business)
Product distribution (or place) is one of the four elements of the marketing mix. An
organization or set of organizations (go-betweens) involved in the process of making
a product or service available for use or consumption by a consumer or business
user.
The other three parts of the marketing mix are product, pricing, and promotion.
The distribution channel

Distribution is also a very important component of Logistics & Supply chain management. Distribution
in supply chain management refers to the distribution of a good from one business to another. It can
be factory to supplier, supplier to retailer, or retailer to end customer. It is defined as a chain of
intermediaries, each passing the product down the chain to the next organization, before it finally
reaches the consumer or end-user. This process is known as the 'distribution chain' or the 'channel.'
Each of the elements in these chains will have their own specific needs, which the producer must take
into account, along with those of the all-important end-user.
Channels
A number of alternate 'channels' of distribution may be available:
 Distributor, who sells to retailers,

 Retailer (also called dealer or reseller), who sells to end
customers
 Advertisement typically used for consumption goods
Distribution channels may not be restricted to physical products alice

from producer to consumer in certain sectors, since both direct and
indirect channels may be used. Hotels, for example, may sell their
services (typically rooms) directly or through travel agents, tour
operators, airlines, tourist boards, centralized reservation systems,
etc. process of transfer the products or services from Producer to
Customer or end user.
There have also been some innovations in the distribution of services.
For example, there has been an increase in franchising and in rental
services - the latter offering anything from televisions through tools.
There has also been some evidence of service integration, with
services linking together, particularly in the travel and tourism sectors.
For example, links now exist between airlines, hotels and car rental
services. In addition, there has been a significant increase in retail
outlets for the service sector. Outlets such as estate agencies and
building society offices are crowding out traditional grocers from major
shopping areas.
[edit]Channel decisions
Channel Sales is nothing but a chain for to market a product through
different sources.
 Channel strategy
 Gravity & Gravity
 Push and Pull strategy
 Product (or service)
 Cost
 Consumer location
[edit]Managerial concerns
The channel decision is very important. In theory at least, there is a
form of trade-off: the cost of using intermediaries to achieve wider
distribution is supposedly lower. Indeed, most consumer goods
manufacturers could never justify the cost of selling direct to their
consumers, except by mail order. Many suppliers seem to assume
that once their product has been sold into the channel, into the
beginning of the distribution chain, their job is finished. Yet that
distribution chain is merely assuming a part of the supplier's
responsibility; and, if they have any aspirations to be market-oriented,
their job should really be extended to managing all the processes
involved in that chain, until the product or service arrives with the end-
user. This may involve a number of decisions on the part of the
supplier:
 Channel membership
 Channel motivation
 Monitoring and managing channels
[edit]Type of marketing channel
1. Intensive distribution - Where the majority of resellers

stock the 'product' (with convenience products, for example, and
particularly the brand leaders in consumer goods markets) price
competition may be evident.
2. Selective distribution - This is the normal pattern (in both
consumer and industrial markets) where 'suitable' resellers
stock the product.
3. Exclusive distribution - Only specially selected resellers
or authorized dealers (typically only one per geographical area)
are allowed to sell the 'product'.
[edit]Channel motivation
It is difficult enough to motivate direct employees to provide the
necessary sales and service support. Motivating the owners and
employees of the independent organizations in a distribution chain
requires even greater effort. There are many devices for achieving
such motivation. Perhaps the most usual is `incentive': the supplier
offers a better margin, to tempt the owners in the channel to push the
product rather than its competitors; or a compensation is offered to
the distributors' sales personnel, so that they are tempted to push the
product. Julian Dent defines this incentive as a Channel Value
Proposition or business case, with which the supplier sells the
channel member on the commercial merits of doing business
together. He describes this as selling business models not products.
Monitoring and managing channels
In much the same way that the organization's own sales and
distribution activities need to be monitored and managed, so will those
of the distribution chain.
In practice, many organizations use a mix of different channels; in
particular, they may complement a direct salesforce, calling on the
larger accounts, with agents, covering the smaller customers and
prospects. These channels show marketing strategies of an
organization. Effective management of distribution channel requires
making and implementing decision in these areas.
Marketing
Marketing is an organizational function and a set of processes for creating,
communicating, and delivering value to customers and for managing customer
relationships in ways that benefit the organization and its stakeholders.[1] It generates
the strategy that underlies sales techniques, business communication, and business
developments.[2] It is an integrated process through which companies build
strong customer relationships and create value for their customers and for
themselves.[2]
Marketing is used to identify the customer, satisfy the customer, and keep the
customer. With the customer as the focus of its activities, it can be concluded
that marketing management is one of the major components of business
management. Marketing evolved to meet the stasis in developing new markets
caused by mature markets and overcapacities in the last 2-3 centuries.[citation needed]The
adoption of marketing strategies requires businesses to shift their focus
from production to the perceived needs and wants of their customers as the means
of staying profitable.[citation needed]
The term marketing concept holds that achieving organizational goals depends on
knowing the needs and wants of target markets and delivering the desired
satisfactions.[3] It proposes that in order to satisfy its organizational objectives, an
organization should anticipate the needs and wants of consumers and satisfy these
more effectively than competitors.[3]
Further definitions
Marketing is further defined by the American Marketing Association
(AMA) as "the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value
for customers, clients, partners, and society at large. Marketing is a
product or service selling related overall activities. [4] The term
developed from an original meaning which referred literally to going to
a market to buy or sell goods or services. Seen from a systems point
of view, sales process engineering marketing is "a set of processes
that are interconnected and interdependent with other functions,
[5]
whose methods can be improved using a variety of relatively new
approaches."
The Chartered Institute of Marketing defines marketing as "the
management process responsible for identifying, anticipating and
satisfying customer requirements profitably."[6] A different concept is
the value-based marketing which states the role of marketing to
contribute to increasing shareholder value.[7] In this context, marketing
is defined as "the management process that seeks to maximise
returns to shareholders by developing relationships with valued
customers and creating a competitive advantage."[7]
Marketing practice tended to be seen as a creative industry in the
past, which included advertising, distribution and selling. However,
because the academic study of marketing makes extensive use
ofsocial
sciences, psychology, sociology, mathematics, economics, anthropolo
gy and neuroscience, the profession is now widely recognized as a
science, allowing numerous universities to offer Master-of-Science
(MSc) programmes. The overall process starts with marketing
research and goes through market segmentation, business planning
and execution, ending with pre- and post-sales promotional activities.
It is also related to many of the creative arts. The marketing literature
is also adept at re-inventing itself and its vocabulary according to the
times and the culture.
[edit]Evolution of marketing
Main article: History of marketing
An orientation, in the marketing context, related to a perception or
attitude a firm holds towards its product or service, essentially
concerning consumers and end-users. Throughout history, marketing
has changed considerably in conjunction with consumer tastes.[8]
[edit]Earlier approaches
The marketing orientation evolved from earlier orientations, namely,
the production orientation, the product orientation and the selling
orientation.[8][9]
Western
Europea
Orientati Profit
n Description
on driver
timefra
me
A firm focusing on a production orientation specializes

in producing as much as possible of a given product or
service. Thus, this signifies a firm exploiting economies
Productio Production until the of scale until the minimum efficient scale is reached. A
n[9] methods 1950s production orientation may be deployed when a high
demand for a product or service exists, coupled with a
good certainty that consumer tastes will not rapidly
alter (similar to the sales orientation).
A firm employing a product orientation is chiefly

concerned with the quality of its own product. A firm
Quality of until the
Product[9] would also assume that as long as its product was of a
the product 1960s
high standard, people would buy and consume the
product.
Selling[9] Selling 1950s A firm using a sales orientation focuses primarily on the
methods and selling/promotion of a particular product, and not
1960s determining new consumer desires as such.
Consequently, this entails simply selling an already
existing product, and using promotion techniques to
attain the highest sales possible.
Such an orientation may suit scenarios in which a firm holds dead

stock, or otherwise sells a product that is in high demand, with little
likelihood of changes in consumer tastes that would diminish
demand.
The 'marketing orientation' is perhaps the most

common orientation used in contemporary marketing.
It involves a firm essentially basing its marketing plans
around the marketing concept, and thus supplying
Needs and 1970 to
Marketin products to suit new consumer tastes. As an example,
wants of present
g[9] a firm would employ market research to gauge
customers day
consumer desires, use R&D to develop a product
attuned to the revealed information, and then utilize
promotion techniques to ensure persons know the
product exists.
[edit]Contemporary approaches
Recent approaches in marketing include relationship marketing with
focus on the customer, business marketing or industrial
marketing with focus on an organization or institution and social
marketingwith focus on benefits to society.[10] New forms of marketing
also use the internet and are therefore called internet marketing or
more generally e-marketing, online marketing, search engine
marketing,desktop advertising or affiliate marketing. It attempts to
perfect the segmentation strategy used in traditional marketing. It
targets its audience more precisely, and is sometimes
called personalized marketing or one-to-one marketing. Internet
marketing is sometimes considered to be broad in scope, because it
not only refers to marketing on the Internet, but also includes
marketing done via e-mail and wireless media.
Western
Europea
Orientation Profit driver n Description
timefra
me
Emphasis is placed on the whole

Relationship
Building and 1960s to relationship between suppliers and
marketing /Relatio
keeping good present customers. The aim is to provide the
nship
customer relations day best possible customer service and
management[10]
build customer loyalty.
Business Building and 1980s to In this context, marketing takes place

marketing /Indust keeping present between businesses or organizations.
The product focus lies on industrial
goods or capital goodsrather than
relationships consumer products or end products.
rial marketing betweenorganizati day Different forms of marketing activities,
ons such as promotion, advertising and
communication to the customer are
used.
Similar characteristics as marketing

orientation but with the added proviso
1990s to
Social that there will be a curtailment of any
Benefit to society present
marketing[10] harmful activities to society, in either
day
product, production, or selling
methods.
In this context, "branding" is the main

2000s to
company philosophy and marketing is
Branding Brand value present
considered an instrument of branding
day
philosophy.
[edit]Customer orientation
Constructive criticism helps marketers adapt offerings to meet changing customer needs.
A firm in the market economy survives by producing goods that

persons are willing and able to buy. Consequently,
ascertaining consumer demand is vital for a firm's future viability and
even existence as a going concern. Many companies today have a
customer focus (or market orientation). This implies that the company
focuses its activities and products on consumer demands. Generally,
there are three ways of doing this: the customer-driven approach, the
market change identification approach and the product innovation
approach.
In the consumer-driven approach, consumer wants are the drivers of
all strategic marketing decisions. No strategy is pursued until it passes
the test of consumer research. Every aspect of a market offering,
including the nature of the product itself, is driven by the needs of
potential consumers. The starting point is always the consumer. The
rationale for this approach is that there is no reason to spend R&D
funds developing products that people will not buy. History attests to
many products that were commercial failures in spite of being
technological breakthroughs.[11]
A formal approach to this customer-focused marketing is known
as SIVA[12] (Solution, Information, Value, Access). This system is
basically the four Ps renamed and reworded to provide a customer
focus. The SIVA Model provides a demand/customer-centric
alternative to the well-known 4Ps supply side model (product, price,
placement, promotion) of marketing management.
Product → Solution
Price → Value
Place → Access
Promotio Informati
→
n on
If any of the 4Ps were problematic or were not in the marketing factor
of the business, the business could be in trouble and so other
companies may appear in the surroundings of the company, so the
consumer demand on its products will decrease.
[edit]Organizational orientation
In this sense, a firm's marketing department is often seen as of prime
importance within the functional level of an organization. Information
from an organization's marketing department would be used to guide
the actions of other departments within the firm. As an example, a
marketing department could ascertain (via marketing research) that
consumers desired a new type of product, or a new usage for an
existing product. With this in mind, the marketing department would
inform the R&D department to create a prototype of a product/service
based on consumers' new desires.
The production department would then start to manufacture the
product, while the marketing department would focus on the
promotion, distribution, pricing, etc. of the product. Additionally, a
firm's finance department would be consulted, with respect to securing
appropriate funding for the development, production and promotion of
the product. Inter-departmental conflicts may occur, should a firm
adhere to the marketing orientation. Production may oppose the
installation, support and servicing of new capital stock, which may be
needed to manufacture a new product. Finance may oppose the
required capital expenditure, since it could undermine a healthy cash
flow for the organization.
[edit]Herd behavior
Herd behavior in marketing is used to explain the dependencies of

customers' mutual behavior. The Economist reported a recent
conference in Rome on the subject of the simulation of adaptive
human behavior.[13] It shared mechanisms to increase impulse buying
and get people "to buy more by playing on the herd instinct." The
basic idea is that people will buy more of products that are seen to be
popular, and several feedback mechanisms to get product popularity
information to consumers are mentioned, including smart
card technology and the use of Radio Frequency Identification
Tagtechnology. A "swarm-moves" model was introduced by a Florida
Institute of Technology researcher, which is appealing to
supermarkets because it can "increase sales without the need to give
people discounts." Other recent studies on the "power of social
influence" include an "artificial music market in which some 19,000
people downloaded previously unknown songs" (Columbia University,
New York); a Japanese chain of convenience stores which orders its
products based on "sales data from department stores and research
companies;" a Massachusetts company exploiting knowledge of social
networking to improve sales; and online retailers who are increasingly
informing consumers about "which products are popular with like-
minded consumers" (e.g., Amazon, eBay).
[edit]Further orientations
 An emerging area of study and practice concerns internal

marketing, or how employees are trained and managed to deliver
the brand in a way that positively impacts the acquisition and
retention of customers, see also employer branding.
 Diffusion of innovations research explores how and why people
adopt new products, services, and ideas.
 With consumers' eroding attention span and willingness to give
time to advertising messages, marketers are turning to forms
of permission marketing such as branded content, custom
media andreality marketing.
[edit]Marketing research
Main article: Marketing research
Marketing research involves conducting research to support
marketing activities, and the statistical interpretation of data into
information. This information is then used by managers to plan
marketing activities, gauge the nature of a firm's marketing
environment and attain information from suppliers. Marketing
researchers use statistical methods such as quantitative
research, qualitative research,hypothesis tests, Chi-squared
tests, linear regression, correlations, frequency distributions, poisson
distributions, binomial distributions, etc. to interpret their findings and
convert data into information. The marketing research process spans
a number of stages, including the definition of a problem,
development of a research plan, collection and interpretation of data
and disseminating information formally in the form of a report. The
task of marketing research is to provide management with relevant,
accurate, reliable, valid, and current information.
A distinction should be made between marketing
research and market research. Market research pertains to research
in a given market. As an example, a firm may conduct research in a
target market, after selecting a suitable market segment. In contrast,
marketing research relates to all research conducted within marketing.
Thus, market research is a subset of marketing research.
[edit]Marketing environment
Main article: Marketing environment
[edit]Market segmentation
Main article: Market segmentation
Market segmentation pertains to the division of a market of
consumers into persons with similar needs and wants. For
instance, Kellogg's cereals, Frosties are marketed to
children. Crunchy Nut Cornflakes are marketed to adults. Both goods
denote two products which are marketed to two distinct groups of
persons, both with similar needs, traits, and wants.
Market segmentation allows for a better allocation of a firm's finite
resources. A firm only possesses a certain amount of resources.
Accordingly, it must make choices (and incur the related costs) in
servicing specific groups of consumers. In this way, the diversified
tastes of contemporary Western consumers can be served better.
With growing diversity in the tastes of modern consumers, firms are
taking note of the benefit of servicing a multiplicity of new markets.
Market segmentation can be defined in terms of the STP acronym,
meaning Segment, Target and Position.
[edit]Types of marketing research
Marketing research, as a sub-set aspect of marketing activities, can
be divided into the following parts:
 Primary research (also known as field research), which involves

the conduction and compilation of research for a specific purpose.
 Secondary research (also referred to as desk research), initially
conducted for one purpose, but often used to support another
purpose or end goal.
By these definitions, an example of primary research would be market

research conducted into health foods, which is used solely to
ascertain the needs/wants of the target market for health foods.
Secondary research in this case would be research pertaining to
health foods, but used by a firm wishing to develop an unrelated
product.
Primary research is often expensive to prepare, collect and interpret
from data to information. Nevertheless, while secondary research is
relatively inexpensive, it often can become outdated and outmoded,
given that it is used for a purpose other than the one for which it was
intended. Primary research can also be broken down into quantitative
research and qualitative research, which, as the terms suggest,
pertain to numerical and non-numerical research methods and
techniques, respectively. The appropriateness of each mode of
research depends on whether data can be quantified (quantitative
research), or whether subjective, non-numeric or abstract concepts
are required to be studied (qualitative research).
There also exist additional modes of marketing research, which are:
 Exploratory research, pertaining to research that investigates an

assumption.
 Descriptive research, which, as the term suggests, describes
"what is".
 Predictive research, meaning research conducted to predict a
future occurrence.
 Conclusive research, for the purpose of deriving a conclusion via
a research process.
[edit]Marketing planning
This section may require cleanup to meet Wikipedia's quality
standards. Please improve this section if you can. The talk page may contain
suggestions. (October 2009)
Main article: Marketing plan

The marketing planning process involves forging a plan for a firm's
marketing activities. A marketing plan can also pertain to a specific
product, as well as to an organization's overall marketing strategy.
Generally speaking, an organization's marketing planning process is
derived from its overall business strategy. Thus, when top
management are devising the firm's strategic direction or mission, the
intended marketing activities are incorporated into this plan. There are
several levels of marketing objectives within an organization. The
senior management of a firm would formulate a general business
strategy for a firm. However, this general business strategy would be
interpreted and implemented in different contexts throughout the firm.
[edit]Marketing strategy
The field of marketing strategy encompasses the strategy involved in
the management of a given product.
A given firm may hold numerous products in the marketplace,
spanning numerous and sometimes wholly unrelated industries.
Accordingly, a plan is required in order to effectively manage such
products. Evidently, a company needs to weigh up and ascertain how
to utilize its finite resources. For example, a start-up car
manufacturing firm would face little success should it attempt to rival
Toyota, Ford, Nissan, Chevrolet, or any other large global car maker.
Moreover, a product may be reaching the end of its life-cycle. Thus,
the issue of divest, or a ceasing of production, may be made. Each
scenario requires a unique marketing strategy. Listed below are some
prominent marketing strategy models.
[edit]Marketing specializations
With the rapidly emerging force of globalization, the distinction
between marketing within a firm's home country and marketing within
external markets is disappearing very quickly. With this in mind, firms
need to reorient their marketing strategies to meet the challenges of
the global marketplace, in addition to sustaining their competitiveness
within home markets.[14]
[edit]Buying behaviour
A marketing firm must ascertain the nature of customers' buying
behavior if it is to market its product properly. In order to entice and
persuade a consumer to buy a product, marketers try to determine the
behavioral process of how a given product is purchased. Buying
behavior is usually split into two prime strands, whether selling to the
consumer, known as business-to-consumer (B2C), or to another
business, known as business-to-business (B2B).
[edit]B2C buying behaviour
This mode of behaviour concerns consumers and their purchase of a
given product. For example, if one imagines a pair of sneakers, the
desire for a pair of sneakers would be followed by an information
search on available types/brands. This may include perusing media
outlets, but most commonly consists of information gathered from
family and friends. If the information search is insufficient, the
consumer may search for alternative means to satisfy the need/want.
In this case, this may mean buying leather shoes, sandals, etc. The
purchase decision is then made, in which the consumer actually buys
the product. Following this stage, a post-purchase evaluation is often
conducted, comprising an appraisal of the value/utility brought by the
purchase of the sneakers. If the value/utility is high, then a repeat
purchase may be made. This could then develop into consumer
loyalty to the firm producing the sneakers.
[edit]B2B buying behaviour
Relates to organizational/industrial buying behavior.[15] "B2B" stands
for Business to Business. B2B marketing involves one business
marketing a product or service to another business. B2C and B2B
behavior are not precise terms, as similarities and differences exist,
with some key differences listed below:
In a straight re-buy, the fourth, fifth and sixth stages are omitted. In a
modified re-buy scenario, the fifth and sixth stages are precluded. In a
new buy, all stages are conducted.
[edit]Use of technologies
Marketing management can also rely on various technologies within
the scope of its marketing efforts. Computer-based information
systems can be employed, aiding in better processing and storage of
data. Marketing researchers can use such systems to devise better
methods of converting data into information, and for the creation of
enhanced data gathering methods. Information technology can aid in
enhancing an MKIS' software and hardware components, and
improve a company's marketing decision-making process.
In recent years, the netbook personal computer has gained significant
market share among laptops, largely due to its more user-friendly size
and portability. Information technology typically progresses at a fast
rate, leading to marketing managers being cognizant of the latest
technological developments. Moreover, the launch
of smartphones into the cellphone market is commonly derived from a
demand among consumers for more technologically advanced
products. A firm can lose out to competitors should it ignore
technological innovations in its industry.
Technological advancements can lessen barriers between countries
and regions. Using the World Wide Web, firms can quickly dispatch
information from one country to another without much restriction. Prior
to the mass usage of the Internet, such transfers of information would
have taken longer to send, especially if done via snail mail, telex, etc.
[edit]Services marketing
Services marketing relates to the marketing of services, as opposed
to tangible products. A service (as opposed to a good) is typically
defined as follows:
 The use of it is inseparable from its purchase (i.e., a service is

used and consumed simultaneously)
 It does not possess material form, and thus cannot be touched,
seen, heard, tasted, or smelled.
 The use of a service is inherently subjective, meaning that
several persons experiencing a service would each experience it
uniquely.
For example, a train ride can be deemed a service. If one buys a train
ticket, the use of the train is typically experienced concurrently with
the purchase of the ticket. Although the train is a physical object, one
is not paying for the permanent ownership of the tangible components
of the train.
Services (compared with goods) can also be viewed as a spectrum.
Not all products are pure goods, nor are all pure services. An example
would be a restaurant, where a waiter's service is intangible, but the
food is tangible.
Advertising
Advertising is a form of communication intended to persuade an audience (viewers,
readers or listeners) to purchase or take some action upon products, ideas, or services. It
includes the name of a product or service and how that product or service could benefit the
consumer, to persuade a target market to purchase or to consume that particular brand.
These messages are usually paid for by sponsors and viewed via various media. Advertising
can also serve to communicate an idea to a large number of people in an attempt to
convince them to take a certain action.
Commercial advertisers often seek to generate increased consumption of

their products or services through branding, which involves the repetition of an image or
product name in an effort to associate related qualities with the brand in the minds
of consumers. Non-commercial advertisers who spend money to advertise items other than
a consumer product or service include political parties, interest groups, religious
organizations and governmental agencies.Nonprofit organizations may rely on free modes of
persuasion, such as a public service announcement.
Modern advertising developed with the rise of mass production in the late 19th and early
20th centuries. Mass media can be defined as any media meant to reach a mass amount of
people. Different types of media can be used to deliver these messages, including traditional
media such as newspapers, magazines, television, radio, outdoor or direct mail; or new
media such as websites and text messages.
In 2010, spending on advertising was estimated at more than $300 billion in the United
States[1] and $500 billion worldwide[citation needed].
Internationally, the largest ("big four") advertising conglomerates

are Interpublic, Omnicom, Publicis, and WPP. Popular definitions of the term
Advertisement-- 1.The non-personal communication of information usually paid for &
usually persuasive in nature, about products (goods & services) or ideas by identified
sponsor through various media.(Arenes (1996) 2.Any paid form of non-personal
communication about an organisation, product ,service, or idea from an identified sponsor.
( Blech & Blech (1998) 3.Paid non -personal communication from an identified sponsor using
mass media to persuade influence an audience. (Wells , burnett, & Moriaty (1998) 4. The
element of the marketing communication mix that is non personal paid for an identified
sponsor, & disseminated through mass channels of communication to promote the adoption
of oods, services, person or ideas.( bearden, Ingram, & Laforge (1998) 5.An informative or
persuasive message carried by a non personal medium & paid for by an identified sponsor
whose organisation or product is identified in some way. ( Zikmund & d'amico (1999) 6.
Impersonal , one way communication about a product or organisation that is paid by
marketer. ( Lamb, Hair & Mc. Daniel (2000)
History
Egyptians used papyrus to make sales messages and wall posters. Commercial
messages and political campaign displays have been found in the ruins ofPompeii and
ancient Arabia. Lost and found advertising on papyrus was common in Ancient
Greece and Ancient Rome. Wall or rock painting for commercial advertising is another
manifestation of an ancient advertising form, which is present to this day in many parts of
Asia, Africa, and South America. The tradition of wall painting can be traced back to
Indian rock art paintings that date back to 4000 BC.[2] History tells us that Out-of-home
advertising and billboards are the oldest forms of advertising.
As the towns and cities of the Middle Ages began to grow, and the general populace was
unable to read, signs that today would say cobbler, miller, tailor or blacksmith would use an
image associated with their trade such as a boot, a suit, a hat, a clock, a diamond, a horse
shoe, a candle or even a bag of flour. Fruits and vegetables were sold in the city square
from the backs of carts and wagons and their proprietors used street callers (town criers) to
announce their whereabouts for the convenience of the customers.
As education became an apparent need and reading, as well as printing, developed

advertising expanded to include handbills. In the 17th century advertisements started to
appear in weekly newspapers in England. These early print advertisements were used
mainly to promote books and newspapers, which became increasingly affordable with
advances in the printing press; and medicines, which were increasingly sought after as
disease ravaged Europe. However, false advertising and so-called "quack" advertisements
became a problem, which ushered in the regulation of advertising content.
As the economy expanded during the 19th century, advertising grew alongside. In the United
States, the success of this advertising format eventually led to the growth of mail-order
advertising.
In June 1836, French newspaper La Presse was the first to include paid advertising in its
pages, allowing it to lower its price, extend its readership and increase its profitability and the
formula was soon copied by all titles. Around 1840, Volney B. Palmer established a
predecessor to advertising agencies inBoston.[3] Around the same time, in France, Charles-
Louis Havas extended the services of his news agency, Havas to include advertisement
brokerage, making it the first French group to organize. At first, agencies were brokers for
advertisement space in newspapers. N. W. Ayer & Son was the first full-service agency to
assume responsibility for advertising content. N.W. Ayer opened in 1869, and was located in
Philadelphia.[3]
At the turn of the century, there were few career choices for women in business; however,
advertising was one of the few. Since women were responsible for most of the purchasing
done in their household, advertisers and agencies recognized the value of women's insight
during the creative process. In fact, the first American advertising to use a sexual sell was
created by a woman – for a soap product. Although tame by today's standards, the
advertisement featured a couple with the message "The skin you love to touch".[4]
In the early 1920s, the first radio stations were established by radio
equipment manufacturers and retailers who offered programs in order
to sell more radios to consumers. As time passed, many non-profit
organizations followed suit in setting up their own radio stations, and
included: schools, clubs and civic groups.[5] When the practice
of sponsoring programs was popularised, each individual radio
program was usually sponsored by a single business in exchange for
a brief mention of the business' name at the beginning and end of the
sponsored shows. However, radio station owners soon realised they
could earn more money by selling sponsorship rights in small time
allocations to multiple businesses throughout their radio station's
broadcasts, rather than selling the sponsorship rights to single
businesses per show.
A print advertisement for the 1913 issue of the Encyclopædia Britannica
This practice was carried over to television in the late 1940s and early
1950s. A fierce battle was fought between those seeking to
commercialise the radio and people who argued that the radio
spectrum should be considered a part of the commons – to be used
only non-commercially and for the public good. The United Kingdom
pursued a public funding model for the BBC, originally a private
company, the British Broadcasting Company, but incorporated as a
public body by Royal Charter in 1927. In Canada, advocates
like Graham Spry were likewise able to persuade the federal
government to adopt a public funding model, creating the Canadian
Broadcasting Corporation. However, in the United States, the
capitalist model prevailed with the passage of the Communications
Act of 1934 which created the Federal Communications Commission.
[5]
However, the U.S. Congress did require commercial broadcasters to
operate in the "public interest, convenience, and necessity".[6] Public
broadcasting now exists in the United States due to the 1967 Public
Broadcasting Act which led to the Public Broadcasting
Service andNational Public Radio.
In the early 1950s, the DuMont Television Network began the modern
practice of selling advertisement time to multiple sponsors. Previously,
DuMont had trouble finding sponsors for many of their programs and
compensated by selling smaller blocks of advertising time to several
businesses. This eventually became the standard for the commercial
television industry in the United States. However, it was still a
common practice to have single sponsor shows, such as The United
States Steel Hour. In some instances the sponsors exercised great
control over the content of the show—up to and including having one's
advertising agency actually writing the show. The single sponsor
model is much less prevalent now, a notable exception being
the Hallmark Hall of Fame.
The 1960s saw advertising transform into a modern approach in
which creativity was allowed to shine, producing unexpected
messages that made advertisements more tempting to consumers'
eyes. The Volkswagen ad campaign—featuring such headlines as
"Think Small" and "Lemon" (which were used to describe the
appearance of the car)—ushered in the era of modern advertising by
promoting a "position" or "unique selling proposition" designed to
associate each brand with a specific idea in the reader or viewer's
mind. This period of American advertising is called the Creative
Revolution and its archetypewas William Bernbach who helped create
the revolutionary Volkswagen ads among others. Some of the most
creative and long-standing American advertising dates to this period.
The late 1980s and early 1990s saw the introduction of cable
television and particularly MTV. Pioneering the concept of the music
video, MTV ushered in a new type of advertising: the consumer tunes
in for the advertising message, rather than it being a by-product or
afterthought. As cable and satellite televisionbecame increasingly
prevalent, specialty channels emerged, including channels
entirely devoted to advertising, such as QVC, Home Shopping
Network, andShopTV Canada.
Marketing through the Internet opened new frontiers for advertisers
and contributed to the "dot-com" boom of the 1990s. Entire
corporations operated solely on advertising revenue, offering
everything from coupons to free Internet access. At the turn of the
21st century, a number of websites including the search
engine Google, started a change in online advertising by emphasizing
contextually relevant, unobtrusive ads intended to help, rather than
inundate, users. This has led to a plethora of similar efforts and an
increasing trend of interactive advertising.
Advertisement for a live radio broadcast, sponsored by a milk company and published in the Los Angeles Times on May
6, 1930
The share of advertising spending relative to GDP has changed little

across large changes in media. For example, in the US in 1925, the
main advertising media were newspapers, magazines, signs
on streetcars, and outdoor posters. Advertising spending as a share
of GDP was about 2.9 percent. By 1998, television and radio had
become major advertising media. Nonetheless, advertising spending
as a share of GDP was slightly lower—about 2.4 percent.[7]
A recent advertising innovation is "guerrilla marketing", which involve
unusual approaches such as staged encounters in public places,
giveaways of products such as cars that are covered with brand
messages, and interactive advertising where the viewer can respond
to become part of the advertising message.Guerrilla advertising is
becoming increasing more popular with a lot of companies. This type
of advertising is unpredictable and innovative, which causes
consumers to buy the product or idea. This reflects an increasing
trend of interactive and "embedded" ads, such as via product
placement, having consumers vote through text messages, and
various innovations utilizing social network services such
as Facebook.
[edit]Public service advertising
The advertising techniques used to promote commercial goods and
services can be used to inform, educate and motivate the public about
non-commercial issues, such as HIV/AIDS, political ideology, energy
conservation and deforestation.
Advertising, in its non-commercial guise, is a powerful educational tool
capable of reaching and motivating large audiences. "Advertising
justifies its existence when used in the public interest—it is much too
powerful a tool to use solely for commercial purposes." Attributed
to Howard Gossage by David Ogilvy.
Public service advertising, non-commercial advertising, public interest
advertising, cause marketing, and social marketing are different terms
for (or aspects of) the use of sophisticated advertising and marketing
communications techniques (generally associated with commercial
enterprise) on behalf of non-commercial, public interest issues and
initiatives.
In the United States, the granting of television and radio licenses by
the FCC is contingent upon the station broadcasting a certain amount
of public service advertising. To meet these requirements, many
broadcast stations in America air the bulk of their required public
service announcements during the late night or early morning when
the smallest percentage of viewers are watching, leaving more day
and prime time commercial slots available for high-paying advertisers.
Public service advertising reached its height during World Wars
I and II under the direction of more than one government. During
WWII President Roosevelt commissioned the creation of The War
Advertising Council (now known as the Ad Council) which is the
nation's largest developer of PSA campaigns on behalf of government
agencies and non-profit organizations, including the longest-running
PSA campaign, Smokey Bear.
[edit]Marketing mix
The marketing mix has been the key concept to advertising. The
marketing mix was suggested by professor E. Jerome McCarthy in the
1960s. The marketing mix consists of four basic elements called the
four P’s Product is the first P representing the actual product. Price
represents the process of determining the value of a product. Place
represents the variables of getting the product to the consumer like
distribution channels, market coverage and movement organization.
The last P stands for Promotion which is the process of reaching the
target market and convincing them to go out and buy the product.[8]
[edit]Advertising theory
 Hierarchy of effects model[9]
It clarifies the objectives of an advertising campaign and for each

individual advertisement. The model suggests that there are six steps
a consumer or a business buyer moves through when making a
purchase. The steps are:
1. Awareness
2. Knowledge
3. Liking
4. Preference
5. Conviction
6. Purchase
 Means-End Theory
This approach suggests that an advertisement should contain a

message or means that leads the consumer to a desired end state.
 Leverage Points
It is designed to move the consumer from understanding a product's
benefits to linking those benefits with personal values.
 Verbal and Visual Images
[edit]Types of advertising
Paying people to hold signs is one of the oldest forms of advertising, as with thisHuman billboard pictured above
A bus with an advertisement for GAP in Singapore. Buses and other vehicles are popular mediums for advertisers.
A DBAG Class 101 with UNICEF ads at Ingolstadt main railway station
Virtually any medium can be used for advertising. Commercial

advertising media can include wall paintings, billboards, street
furniture components, printed flyers and rack cards, radio, cinema and
television adverts, web banners, mobile telephone screens, shopping
carts, web popups, skywriting, bus stop benches, human billboards,
magazines, newspapers, town criers, sides of buses, banners
attached to or sides of airplanes ("logojets"), in-flight
advertisements on seatback tray tables or overhead storage bins,
taxicab doors, roof mounts and passenger screens, musical stage
shows, subway platforms and trains, elastic bands on disposable
diapers,doors of bathroom stalls,stickers on apples in
supermarkets, shopping cart handles (grabertising), the opening
section of streaming audio and video, posters, and the backs of event
tickets and supermarket receipts. Any place an "identified" sponsor
pays to deliver their message through a medium is advertising.
[edit]Digital advertising
Television advertising / Music in advertising
The TV commercial is generally considered the most effective
mass-market advertising format, as is reflected by the high
prices TV networks charge for commercial airtime during popular
TV events. The annual Super Bowl football game in the United
States is known as the most prominent advertising event on
television. The average cost of a single thirty-second TV spot
during this game has reached US$3 million (as of 2009). The
majority of television commercials feature a song or jingle that
listeners soon relate to the product. Virtual advertisements may
be inserted into regular television programming through
computer graphics. It is typically inserted into otherwise blank
backdrops[10] or used to replace local billboards that are not
relevant to the remote broadcast audience.[11] More
controversially, virtual billboards may be inserted into the
background[12] where none exist in real-life. This technique is
especially used in televised sporting events.[13][14] Virtual product
placement is also possible.[15][16] Infomercials: An infomercial is a
long-format television commercial, typically five minutes or
longer. The word "infomercial" combining the words
"information" & "commercial". The main objective in an
infomercial is to create an impulse purchase, so that the
consumer sees the presentation and then immediately buys the
product through the advertisedtoll-free telephone
number or website. Infomercials describe, display, and often
demonstrate products and their features, and commonly have
testimonials from consumers and industry professionals.
Radio advertising
Radio advertising is a form of advertising via the medium
of radio. Radio advertisements are broadcast as radio waves to
the air from a transmitter to an antenna and a thus to a receiving
device. Airtime is purchased from a station or network in
exchange for airing the commercials. While radio has the
obvious limitation of being restricted to sound, proponents of
radio advertising often cite this as an advantage.
Online advertising
Online advertising is a form of promotion that uses the Internet
and World Wide Web for the expressed purpose of
delivering marketing messages to attract customers. Examples
of online advertising include contextual ads that appear
on search engine results pages, banner ads, in text ads, Rich
Media Ads, Social network advertising, online classified
advertising, advertising networks and e-mail marketing,
including e-mail spam.
Product placements
Covert advertising, also known as guerrilla advertising, is when
a product or brand is embedded in entertainment and media. For
example, in a film, the main character can use an item or other
of a definite brand, as in the movie Minority Report, where Tom
Cruise's character John Anderton owns a phone with
the Nokia logo clearly written in the top corner, or his watch
engraved with the Bulgari logo. Another example of advertising
in film is in I, Robot, where main character played by Will
Smith mentions his Converse shoes several times, calling them
"classics," because the film is set far in the future.I,
Robot and Spaceballs also showcase futuristic cars with
the Audi and Mercedes-Benz logos clearly displayed on the front
of the vehicles. Cadillacchose to advertise in the movie The
Matrix Reloaded, which as a result contained many scenes in
which Cadillac cars were used. Similarly, product placement
for Omega Watches, Ford, VAIO, BMW and Aston Martin cars
are featured in recent James Bond films, most notably Casino
Royale. In "Fantastic Four: Rise of the Silver Surfer", the main
transport vehicle shows a large Dodge logo on the front. Blade
Runner includes some of the most obvious product placement;
the whole film stops to show a Coca-Cola billboard.
[edit]Physical advertising
Press advertising
Press advertising describes advertising in a printed medium
such as a newspaper, magazine, or trade journal. This
encompasses everything from media with a very broad
readership base, such as a major national newspaper or
magazine, to more narrowly targeted media such as local
newspapers and trade journals on very specialized topics. A
form of press advertising is classified advertising, which allows
private individuals or companies to purchase a small, narrowly
targeted ad for a low fee advertising a product or service.
Another form of press advertising is the Display Ad, which is a
larger ad (can include art) that typically run in an article section
of a newspaper.
Billboard advertising: Billboards are large structures located in
public places which display advertisements to passing
pedestrians and motorists. Most often, they are located on main
roads with a large amount of passing motor and pedestrian
traffic; however, they can be placed in any location with large
amounts of viewers, such as on mass transit vehicles and in
stations, in shopping malls or office buildings, and in stadiums.
The RedEye newspaper advertised to its target market at North Avenue

Beach with a sailboat billboard on Lake Michigan.
Mobile billboard advertising

Mobile billboards are generally vehicle mounted billboards or
digital screens. These can be on dedicated vehicles built solely
for carrying advertisements along routes preselected by clients,
they can also be specially equipped cargo trucks or, in some
cases, large banners strewn from planes. The billboards are
often lighted; some being backlit, and others employing
spotlights. Some billboard displays are static, while others
change; for example, continuously or periodically rotating among
a set of advertisements. Mobile displays are used for various
situations in metropolitan areas throughout the world, including:
Target advertising, One-day, and long-term campaigns,
Conventions, Sporting events, Store openings and similar
promotional events, and Big advertisements from smaller
companies.
In-store advertising
In-store advertising is any advertisement placed in a retail store.
It includes placement of a product in visible locations in a store,
such as at eye level, at the ends of aisles and near checkout
counters, eye-catching displays promoting a specific product,
and advertisements in such places as shopping carts and in-
store video displays.
Coffee cup advertising
Coffee cup advertising is any advertisement placed upon a
coffee cup that is distributed out of an office, café, or drive-
through coffee shop. This form of advertising was first
popularized in Australia, and has begun growing in popularity in
the United States, India, and parts of the Middle East.[citation needed]
Street advertising
This type of advertising first came to prominence in the UK by
Street Advertising Services to create outdoor advertising on
street furniture and pavements. Working with products such
as Reverse Graffiti and 3d pavement advertising, the media
became an affordable and effective tool for getting brand
messages out into public spaces.
Celebrity branding
This type of advertising focuses upon using celebrity power,
fame, money, popularity to gain recognition for their products
and promote specific stores or products. Advertisers often
advertise their products, for example, when celebrities share
their favorite products or wear clothes by specific brands or
designers. Celebrities are often involved in advertising
campaigns such as television or print adverts to advertise
specific or general products. The use of celebrities to endorse a
brand can have its downsides, however. One mistake by a
celebrity can be detrimental to the public relations of a brand.
For example, following his performance of eight gold medals at
the 2008 Olympic Games in Beijing, China, swimmer Michael
Phelps' contract with Kellogg's was terminated, as Kellogg's did
not want to associate with him after he was photographed
smoking marijuana.
Sales promotions
Sales promotions are another way to advertise. Sales promotions are
double purposed because they are used to gather information about
what type of customers you draw in and where they are, and to
jumpstart sales. Sales promotions include things like contests and
games, sweepstakes, product giveaways, samples coupons, loyalty
programs, and discounts. The ultimate goal of sales promotions is to
stimulate potential customers to action.[17]
Media and advertising approaches

Increasingly, other media are overtaking many of the "traditional"
media such as television, radio and newspaper because of a shift
toward consumer's usage of the Internet for news and music as well
as devices like digital video recorders (DVRs) such as TiVo.
Advertising on the World Wide Web is a recent phenomenon. Prices
of Web-based advertising space are dependent on the "relevance" of
the surrounding web content and the traffic that the website receives.
Digital signage is poised to become a major mass media because of
its ability to reach larger audiences for less money. Digital signage
also offer the unique ability to see the target audience where they are
reached by the medium. Technological advances have also made it
possible to control the message on digital signage with much
precision, enabling the messages to be relevant to the target
audience at any given time and location which in turn, gets more
response from the advertising. Digital signage is being successfully
employed in supermarkets.[18] Another successful use of digital
signage is in hospitality locations such as restaurants.[19] and malls.[20]
E-mail advertising is another recent phenomenon. Unsolicited bulk E-
mail advertising is known as "e-mail spam". Spam has been a
problem for email users for many years.
Some companies have proposed placing messages or
corporate logos on the side of booster rockets and the International
Space Station. Controversy exists on the effectiveness of subliminal
advertising (see mind control), and the pervasiveness of mass
messages (see propaganda).
Unpaid advertising (also called "publicity advertising"), can provide
good exposure at minimal cost. Personal recommendations ("bring a
friend", "sell it"), spreading buzz, or achieving the feat of equating a
brand with a common noun (in the United States, "Xerox" =
"photocopier", "Kleenex" = tissue, "Vaseline" = petroleum jelly,
"Hoover" = vacuum cleaner, "Nintendo" (often used by those exposed
to many video games) = video games, and "Band-Aid" = adhesive
bandage) — these can be seen as the pinnacle of any advertising
campaign. However, some companies oppose the use of their brand
name to label an object. Equating a brand with a common noun also
risks turning that brand into a genericized trademark - turning it into a
generic term which means that its legal protection as a trademark is
lost.
As the mobile phone became a new mass media in 1998 when the
first paid downloadable content appeared on mobile phones in
Finland, it was only a matter of time until mobile advertising followed,
also first launched in Finland in 2000. By 2007 the value of mobile
advertising had reached $2.2 billion and providers such
as Admob delivered billions of mobile ads.
More advanced mobile ads include banner ads, coupons, Multimedia
Messaging Service picture and video messages, advergames and
various engagement marketing campaigns. A particular feature driving
mobile ads is the 2D Barcode, which replaces the need to do any
typing of web addresses, and uses the camera feature of modern
phones to gain immediate access to web content. 83 percent of
Japanese mobile phone users already are active users of 2D
barcodes.
A new form of advertising that is growing rapidly is social network
advertising. It is online advertising with a focus on social networking
sites. This is a relatively immature market, but it has shown a lot of
promise as advertisers are able to take advantage of the demographic
information the user has provided to the social networking site.
Friendertising is a more precise advertising term in which people are
able to direct advertisements toward others directly using social
network service.
From time to time, The CW Television Network airs short
programming breaks called "Content Wraps," to advertise one
company's product during an entire commercial break. The CW
pioneered "content wraps" and some products featured were Herbal
Essences, Crest, Guitar Hero II, CoverGirl, and recently Toyota.
Recently, there appeared a new promotion concept, "ARvertising",
advertising on Augmented Reality technology.
[edit]Current trends
[edit]Rise in new media
With the dawn of the Internet came many new advertising
opportunities. Popup, Flash, banner, Popunder, advergaming, and
email advertisements (the last often being a form of spam) are now
commonplace. Particularly since the rise of "entertaining" advertising,
some people may like an advertisement enough to wish to watch it
later or show a friend. In general, the advertising community has not
yet made this easy, although some have used the Internet to widely
distribute their ads to anyone willing to see or hear them. In the last
three quarters of 2009 mobile and internet advertising grew by 18.1%
and 9.2% respectively. Older media advertising saw declines: −10.1%
(TV), −11.7% (radio), −14.8% (magazines) and −18.7%
(newspapers ).[citation needed]
[edit]Niche marketing
Another significant trend regarding future of advertising is the growing
importance of the niche market using niche or targeted ads. Also
brought about by the Internet and the theory of The Long Tail,
advertisers will have an increasing ability to reach specific audiences.
In the past, the most efficient way to deliver a message was to blanket
the largest mass market audience possible. However, usage tracking,
customer profiles and the growing popularity of niche content brought
about by everything from blogs to social networking sites, provide
advertisers with audiences that are smaller but much better defined,
leading to ads that are more relevant to viewers and more effective for
companies' marketing products. Among others, Comcast Spotlight is
one such advertiser employing this method in their video on
demand menus. These advertisements are targeted to a specific
group and can be viewed by anyone wishing to find out more about a
particular business or practice at any time, right from their home. This
causes the viewer to become proactive and actually choose what
advertisements they want to view.[21]
[edit]Crowdsourcing
Main article: Crowdsourcing

The concept of crowdsourcing has given way to the trend of user-
generated advertisements. User-generated ads are created by
consumers as opposed to an advertising agency or the company
themselves, most often they are a result of brand sponsored
advertising competitions. For the 2007 Super Bowl, the Frito-Lays
division of PepsiCo held the Crash the Super Bowl contest, allowing
consumers to create their own Doritos commercial.[22] Chevrolet held a
similar competition for their Tahoe line of SUVs.[22] Due to the success
of the Doritos user-generated ads in the 2007 Super Bowl, Frito-Lays
relaunched the competition for the 2009 and 2010 Super Bowl. The
resulting ads were among the most-watched and most-liked Super
Bowl ads. In fact, the winning ad that aired in the 2009 Super Bowl
was ranked by the USA Today Super Bowl Ad Meter as the top ad for
the year while the winning ads that aired in the 2010 Super Bowl were
found by Nielsen's BuzzMetrics to be the "most buzzed-about".[23][24]
This trend has given rise to several online platforms that host user-
generated advertising competitions on behalf of a company. Founded
in 2007, Zooppa has launched ad competitions for brands such
as Google, Nike, Hershey’s, General Mills, Microsoft, NBC
Universal, Zinio, and Mini Cooper. Crowdsourced advertisements
have gained popularity in part to its cost effective nature, high
consumer engagement, and ability to generate word-of-mouth.
However, it remains controversial, as the long-term impact on the
advertising industry is still unclear.[25]
[edit]Global advertising
Advertising has gone through five major stages of development:
domestic, export, international, multi-national, and global. For global
advertisers, there are four, potentially competing, business objectives
that must be balanced when developing worldwide advertising:
building a brand while speaking with one voice, developing economies
of scale in the creative process, maximising local effectiveness of ads,
and increasing the company’s speed of implementation. Born from the
evolutionary stages of global marketing are the three primary and
fundamentally different approaches to the development of global
advertising executions: exporting executions, producing local
executions, and importing ideas that travel.[26]
Advertising research is key to determining the success of an ad in any
country or region. The ability to identify which elements and/or
moments of an ad that contributes to its success is how economies of
scale are maximised. Once one knows what works in an ad, that idea
or ideas can be imported by any other market. Market
research measures, such as Flow of Attention, Flow of
Emotion and branding moments provide insight into what is working in
an ad in any country or region because the measures are based on
the visual, not verbal, elements of the ad.[27]
[edit]Foreign public messaging
Foreign governments, particularly those that own marketable
commercial products or services, often promote their interests and
positions through the advertising of those goods because the target
audience is not only largely unaware of the forum as vehicle for
foreign messaging but also willing to receive the message while in a
mental state of absorbing information from advertisements during
television commercial breaks, while reading a periodical, or while
passing by billboards in public spaces. A prime example of this
messaging technique is advertising campaigns to promote
international travel. While advertising foreign destinations and
services may stem from the typical goal of increasing revenue by
drawing more tourism, some travel campaigns carry the additional or
alternative intended purpose of promoting good sentiments or
improving existing ones among the target audience towards a given
nation or region. It is common for advertising promoting foreign
countries to be produced and distributed by the tourism ministries of
those countries, so these ads often carry political statements and/or
depictions of the foreign government's desired international public
perception. Additionally, a wide range of foreign airlines and travel-
related services which advertise separately from the destinations,
themselves, are owned by their respective governments; examples
include, though are not limited to, the Emirates
airline (Dubai), Singapore Airlines (Singapore), Qatar
Airways (Qatar), China Airlines (Taiwan/Republic of China), and Air
China (People's Republic of China). By depicting their destinations,
airlines, and other services in a favorable and pleasant light, countries
market themselves to populations abroad in a manner that could
mitigate prior public impressions.See: Soft Power
 See also: International Travel Advertising
[edit]Diversification
In the realm of advertising agencies, continued industry diversification

has seen observers note that “big global clients don't need big global
agencies any more”.[28] This is reflected by the growth of non-
traditional agencies in various global markets, such as Canadian
business TAXI and SMART in Australia and has been referred to as
"a revolution in the ad world".[29]
[edit]New technology
The ability to record shows on digital video recorders (such as TiVo)
allow users to record the programs for later viewing, enabling them to
fast forward through commercials. Additionally, as more seasons of
pre-recorded box sets are offered for sale of television programs;
fewer people watch the shows on TV. However, the fact that these
sets are sold, means the company will receive additional profits from
the sales of these sets. To counter this effect, many advertisers have
opted for product placement on TV shows like Survivor.
[edit]Advertising education
Advertising education has become widely popular with bachelor,
master and doctorate degrees becoming available in the emphasis. A
surge in advertising interest is typically attributed to the strong
relationship advertising plays in cultural and technological changes,
such as the advance of online social networking. A unique model for
teaching advertising is the student-run advertising agency, where
advertising students create campaigns for real companies.
[30]
Organizations such as American Advertising Federation and AdU
Network partner established companies with students to create these
campaigns.
[edit]Criticisms
Main article: Criticism of advertising

While advertising can be seen as necessary for economic growth, it is
not without social costs. Unsolicited Commercial Email and other
forms of spam have become so prevalent as to have become a major
nuisance to users of these services, as well as being a financial
burden on internet service providers.[31] Advertising is increasingly
invading public spaces, such as schools, which some critics argue is a
form of child exploitation.[32] In addition, advertising frequently uses
psychological pressure (for example, appealing to feelings of
inadequacy) on the intended consumer, which may be harmful.
[edit]Regulation
Main article: Advertising regulation

In the US many communities believe that many forms of outdoor
advertising blight the public realm.[33] As long ago as the 1960s in the
US there were attempts to ban billboard advertising in the open
countryside.[34] Cities such as São Paulo have introduced an outright
ban[35] with London also having specific legislation to control unlawful
displays.
There have been increasing efforts to protect the public interest by
regulating the content and the influence of advertising. Some
examples are: the ban on television tobacco advertising imposed in
many countries, and the total ban of advertising to children under 12
imposed by the Swedish government in 1991. Though that regulation
continues in effect for broadcasts originating within the country, it has
been weakened by the European Court of Justice, which had found
that Sweden was obliged to accept foreign programming, including
those from neighboring countries or via satellite. Greece’s regulations
are of a similar nature, “banning advertisements for children's toys
between 7 am and 10 pm and a total ban on advertisement for war
toys".[36]
In Europe and elsewhere, there is a vigorous debate on whether (or
how much) advertising to children should be regulated. This debate
was exacerbated by a report released by the Kaiser Family
Foundation in February 2004 which suggested fast food
advertising that targets children was an important factor in the
epidemic of childhood obesity in the United States.
In New Zealand, South Africa, Canada, and many European
countries, the advertising industry operates a system of self-
regulation. Advertisers, advertising agencies and the media agree on
a code of advertising standards that they attempt to uphold. The
general aim of such codes is to ensure that any advertising is 'legal,
decent, honest and truthful'. Some self-regulatory organizations are
funded by the industry, but remain independent, with the intent of
upholding the standards or codes like the Advertising Standards
Authority in the UK.
In the UK most forms of outdoor advertising such as the display of
billboards is regulated by the UK Town and County Planning system.
Currently the display of an advertisement without consent from the
Planning Authority is a criminal offense liable to a fine of £2,500 per
offence. All of the major outdoor billboard companies in the UK have
convictions of this nature.
Many advertisers employ a wide-variety of linguistic devices to bypass
regulatory laws (e.g. printing English words in bold and French
translations in fine print to deal with the Article 120 of the 1994Toubon
Law limiting the use of English in French advertising).[37] The
advertisement of controversial products such as cigarettes and
condoms are subject to government regulation in many countries. For
instance, the tobacco industry is required by law in most countries to
display warnings cautioning consumers about the health hazards of
their products. Linguistic variation is often used by advertisers as a
creative device to reduce the impact of such requirements.
[edit]Advertising research
Main article: Advertising research
Advertising research is a specialized form of research that works to
improve the effectiveness and efficiency of advertising. It entails
numerous forms of research which employ different methodologies.
Advertising research includes pre-testing (also known as copy testing)
and post-testing of ads and/or campaigns—pre-testing is done before
an ad airs to gauge how well it will perform and post-testing is done
after an ad airs to determine the in-market impact of the ad or
campaign on the consumer. Continuous ad tracking and
the Communicus System are competing examples of post-testing
advertising research types.
Advertising Adstock
Advertising Adstock is a term coined by Simon Broadbent[1] to describe the prolonged or lagged effect
of advertising on consumer purchase behavior. It is also known as 'advertising carry-over'. Adstock is an
important component of marketing-mix models.
Adstock is a model of how response to advertising builds and decays in consumer markets.
Advertising tries to expand consumption in two ways; it both reminds and teaches. It reminds in-the-market
consumers in order to influence their immediate brand choice and teaches to increase brand awareness
and salience, which makes it easier for future advertising to influence brand choice. Adstock is the
mathematical manifestation of this behavioral process.
The Adstock theory hinges on the assumption that exposure to television advertising builds awareness in
the minds of the consumers, influencing their purchase decision. Each new exposure to advertising builds
awareness and this awareness will be higher if there have been recent exposures and lower if there have
not been. In the absence of further exposures adstock eventually decays to negligible levels.
Measuring and determining adstock, especially when developing a marketing-mix model, is a key
component of determining marketing effectiveness.
There are two dimensions to Advertising Adstock:
1. Decay or Lagged Effect
2. Saturation or Diminishing Returns Effect

3. Advertising Lag: Decay Effect
4. The lagged or decay component of Advertising Adstock can be mathematically modelled and
is usually expressed in terms of the 'half-life' of the ad copy, modeled using TV Gross Rating
Point (GRP). A 'two-week half-life' means that it takes two weeks for the awareness of a copy
to decay to half its present level. Every Ad copy is assumed to have a unique half-life. Some
academic studies have suggested half-life range around 7–12 weeks,.[2] Other academic
studies find shorter half lives of approximately four weeks,[3] and industry practitioners
typically report half-lives between 2–5 weeks, with the average for Fast Moving Consumer
Goods (FMCG) Brands at 2.5 weeks.[4]
5.
6. The copy in the above graph has a half-life of 2.5 weeks.
7. [edit]Advertising Saturation: Diminishing Returns Effect

8. Increasing the amount of advertising increases the percent of the audience reached by the
advertising, hence increases demand, but a linear increase in the advertising exposure
doesn’t have a similar linear effect on demand. Typically each incremental amount of
advertising causes a progressively lesser effect on demand increase. This is advertising
saturation. Saturation only occurs above a threshold level that can be determined by Adstock
Analysis.
9.
10. For e.g. for the ad copy in the above graph, saturation only kicks in above 110 GRPs per
week.
11. Adstock can be transformed to an appropriate nonlinear form like the logistic or negative
exponential distribution, depending upon the type of diminishing returns or ‘saturation’ effect
the response function is believed to follow.
12. [edit]Applications
13. Measuring the Advertising Half-Life enables Brand Managers to efficiently space advertising
schedules to maximize the effect of each advertising exposure. Measuring the Advertising
Saturation indicates if current levels of advertising are too high or too low, helping Brand
Managers determine if more or less investment is needed to make advertising more effective
Classified advertising
Classified advertising is a form of advertising which is particularly common in newspapers, online
and other periodicals which may be sold or distributed free of charge. Advertisements in a newspaper
are typically short, as they are charged for by the line, and one newspaper column wide.
Publications printing news or other information often have sections of classified advertisements; there
are also publications which contain only advertisements. The advertisements are grouped into
categories or classes such as "for sale - telephones", "wanted - kitchen appliances", and "services -
plumbing", hence the term "classified".
Classified advertisements are much cheaper than larger display advertisements used by businesses,
and are mostly placed by private individuals with single items they wish to sell or buy.
Overview
Classified advertisements are usually charged for according to length;
the publications in which they appear may be sold or given away free
of charge. Advertisements usually comprise text with no graphics, and
may be as short as a statement of the article on sale or wanted and a
telephone number, or may have more information such as name and
address, detailed description of the item or items ("red woman's
sweater, V neck, size 10, slightly used, good condition"). There are
usually no pictures or other graphics, although sometimes a logo may
be used.
Classified advertising is called such because it is generally grouped
within the publication under headings classifying the product or
service being offered (headings such as Accounting, Automobiles,
Clothing,e, For Sale, For Rent, etc.) and is grouped entirely in a
distinct section of the periodical, which makes it distinct from display
advertising, which often contains graphics or other art work and which
is more typically distributed throughout a publication adjacent to
editorial content.
A hybrid of the two forms — classified display advertising — may
often be found, in which categorized advertisements with larger
amounts of graphical detail can be found among the text listings of a
classified advertising section in a publication. Business
opportunities often use classifieds to sell their services, usually
employing 1-800 numbers. Classified and classified display ads are
used by many companies to recruit applicants for jobs.
Printed classified ads are typically just a few column lines in length,
and they are often filled with abbreviations to save space and money.
[edit]Developments
In recent years the term "classified advertising" or "classified ads" has

expanded from merely the sense of print advertisements in periodicals
to include similar types of advertising on computer services, radio,
and even television, particularly cable television but occasionally
broadcast television as well, with the latter occurring typically very
early in the morning hours[citation needed].
Like most forms of printed media, the classified ad has found its way
to the Internet.
Internet classified ads do not typically use per-line pricing models, so
tend to be longer. They are also searchable, unlike printed material,
tend to be local, and may foster a greater sense of urgency as a result
of their daily structure and wider scope for audiences. Because of
their self-policing nature and low cost structures, some companies
offer free classifieds internationally. Other companies focus mainly on
their local hometown region, while others blanket urban areas by
using postal codes. Craigslist.org was one of the first online classified
sites, and has grown to become the largest classified source, bringing
in over 14 million unique visitors a month according to comScore
Media Metrix[citation needed]. A growing number of sites and companies
have begun to provide specialized classified marketplaces online,
catering to niche market products and services, such include boats,
pianos, pets, and adult services, amongst others. In many cases,
these specialized services provide better and more targeted search
capabilities than general search engines or general classified services
can provide.
A number of online services called aggregators crawl and aggregate
classifieds from sources such as blogs and RSS feeds, as opposed to
relying on manually submitted listings.
Additionally, other companies provide online advertising services and
tools to assist members in designing online ads using professional ad
templates and then automatically distributing the finished ads to the
various online ad directories as part of their service. In this sense
these companies act as both an application service provider and
a content delivery platform. Social classifieds is niche that is growing
in online classified ads.
[edit]Statistics
In 2003 the market for classified ads in the United States was $15.9
billion (newspapers), $14.1 billion (online) according to market
researcher Classified Intelligence. The worldwide market for classified
ads in 2003 was estimated at over $100 billion. Perhaps due to the
lack of a standard for reporting, market statistics vary concerning the
total market for internet classified ads. The Kelsey Research Group
listed online classified ads as being worth $13.3 billion[citation needed], while
Jupiter Research provided a conservative appraisal of $2.6 billion as
of 2005[citation needed] and the Interactive Advertising Bureau listed the net
worth of online classified revenue at $2.1 billion as of April 2006[citation
needed]
.
Newspaper's revenue from classifieds advertisements is decreasing
continually as internet classifieds grow. Classified advertising at some
of the larger newspaper chains dropped by 14% to 20% in 2007, while
traffic to classified sites grew by 23%.[1]
As the online classified advertising sector develops, there is an
increasing emphasis toward specialization. Vertical markets for
classifieds are developing quickly along with the general marketplace
for classifieds websites. Like search engines, classified websites are
often specialised, with sites providing advertising platforms for niche
markets of buyers of sellers.
Personal advertisement
"Personals" redirects here. For other uses, see Personal (disambiguation).
"W4M" redirects here. For the video game, see Worms 4: Mayhem.
A personal or personal ad is an item or notice traditionally in the newspaper, similar

to a classified ad but personal [disambiguation needed] in nature. In British English it is also
commonly known as an advert in a lonely hearts column.[1] With its rise in
popularity, the World Wide Web has also become a common medium for personals,
commonly referred to as online dating. Personals are generally meant to
generate romance, friendship, or casual (sometimes sexual) encounters, and usually
include a basic description of the person posting it, and their interests.
Due to newspaper prices being based on characters or lines of text, a jargon of

abbreviations, acronyms and code words arose in personals, and have carried over
to the internet
Contact magazine
A contact magazine is a type of classified magazine that is largely or wholly dedicated

to personal ads. As well as publishing the personal ads, the publishers of contact
magazines often run an anonymous mail forwarding service that allows advertisers to
identify themselves only with box numbers.
Many contact magazines are sex-contact magazines aimed at a readership of people
looking for or offering sex. Specialist contact magazines also exist for those with specific
sexual preferences, such as those seeking BDSM encounters, or the services
of professional dominants or submissives.
Marketing management
Marketing
Key concepts
Product • Pricing
Distribution • Service • Retail
Brand management
Account-based marketing
Marketing ethics
Marketing effectiveness
Market research
Market segmentation
Marketing strategy
Marketing management
Market dominance
Promotional content
Advertising • Branding • Underwriting
Direct marketing • Personal Sales
Product placement • Publicity
Sales promotion • Sex in advertising
Loyalty marketing • Premiums • Prizes
Promotional media
Printing • Publication
Broadcasting • Out-of-home
Internet marketing • Point of sale
Promotional merchandise
Digital marketing • In-game
In-store demonstration
Word-of-mouth marketing
Brand Ambassador • Drip Marketing
Marketing Management is a business discipline which is focused on the practical

application of marketing techniques and the management of a firm's marketing
resources and activities. Rapidly emerging forces of globalization have compelled firms
to market beyond the borders of their home country making International
marketing highly significant and an integral part of a firm's marketing strategy.
[1]
Marketing managers are often responsible for influencing the level, timing, and
composition of customer demand accepted definition of the term. In part, this is because
the role of a marketing manager can vary significantly based on a business'
size, corporate culture, and industry context. For example, in a large consumer products
company, the marketing manager may act as the overallgeneral manager of his or her
assigned product [2] To create an effective, cost-efficient Marketing management
strategy, firms must possess a detailed, objectiveunderstanding of their own business
and the market in which they operate.[3] In analyzing these issues, the discipline of
marketing management often overlaps with the related discipline of strategic planning.
Contents
[hide]
• 1 Structure
o 1.1 Marketing strategy
o 1.2 Implementation planning
o 1.3 Project, process, and vendor management
o 1.4 Organizational management and leadership
o 1.5 Reporting, measurement, feedback and
control systems
• 2 See also
• 3 References
• 4 Further reading
• 5 External links
[edit]Structure
Traditionally, marketing analysis was structured into three areas: Customer analysis,
Company analysis, and Competitor analysis (so-called "3Cs" analysis). More recently, it
has become fashionable in some marketing circles to divide these further into certain
five "Cs": Customer analysis, Company analysis, Collaborator analysis, Competitor
analysis, and analysis of the industry Context.
In Customer analysis is to develop a schematic diagram for market segmentation,

breaking down the market into various constituent groups of customers, which are called
customer segments or market segmentation's. Marketing managers work to develop
detailed profiles of each segment, focusing on any number of variables that may differ
among the segments: demographic, psycho graphic, geographic, behavioral, needs-
benefit, and other factors may all be examined. Marketers also attempt to track these
segments' perceptions of the various products in the market using tools such
as perceptual mapping.
company analysis, marketers focus on understanding the company's cost structure and
cost position relative to competitors, as well as working to identify a firm's core
competencies and other competitively distinct company resources. Marketing managers
may also work with the accounting department to analyze the profits the firm is
generating from various product lines and customer accounts. The company may also
conduct periodic brand audits to assess the strength of its brands and sources of brand
equity.[4]
The firm's collaborators may also be profiled, which may include various
suppliers, distributors and other channel partners, joint venture partners, and others. An
analysis of complementary products may also be performed if such products exist.
Marketing management employs various tools from economics and competitive

strategy to analyze the industry context in which the firm operates. These
include Porter's five forces, analysis ofstrategic groups of competitors, value
chain analysis and others.[5] Depending on the industry, the regulatory context may also
be important to examine in detail.
In Competitor analysis, marketers build detailed profiles of each competitor in the

market, focusing especially on their relative competitive strengths and weaknesses
using SWOT analysis. Marketing managers will examine each competitor's cost
structure, sources of profits, resources and competencies,
competitive positioning and product differentiation, degree of vertical integration,
historical responses to industry developments, and other factors.
Marketing management often finds it necessary to invest in research to collect the data
required to perform accurate marketing analysis. As such, they often conduct market
research (alternatelymarketing research) to obtain this information. Marketers employ a
variety of techniques to conduct market research, but some of the more common
include:
 Qualitative marketing research, such as focus groups

 Quantitative marketing research, such as statistical surveys
 Experimental techniques such as test markets
 Observational techniques such as ethnographic (on-site) observation
Marketing managers may also design and oversee various environmental

scanning and competitive intelligence processes to help identify trends and inform the
company's marketing analysis.
[edit]Marketing strategy
Main article: Marketing strategy
If the company has obtained an adequate understanding of the customer base and its
own competitive position in the industry, marketing managers are able to make their own
key strategic decisions and develop a marketing strategy designed to maximize
the revenues and profits of the firm. The selected strategy may aim for any of a variety of
specific objectives, including optimizing short-term unit margins, revenue growth, market
share, long-term profitability, or other goals.
To achieve the desired objectives, marketers typically identify one or more target
customer segments which they intend to pursue. Customer segments are often selected
as targets because they score highly on two dimensions: 1) The segment is attractive to
serve because it is large, growing, makes frequent purchases, is not price sensitive (i.e.
is willing to pay high prices), or other factors; and 2) The company has the resources
and capabilities to compete for the segment's business, can meet their needs better than
the competition, and can do so profitably.[3] In fact, a commonly cited definition of
marketing is simply "meeting needs profitably." [6]
The implication of selecting target segments is that the business will subsequently
allocate more resources to acquire and retain customers in the target segment(s) than it
will for other, non-targeted customers. In some cases, the firm may go so far as to turn
away customers who are not in its target segment.The doorman at a swanky nightclub,
for example, may deny entry to unfashionably dressed individuals because the business
has made a strategic decision to target the "high fashion" segment of nightclub patrons.
In conjunction with targeting decisions, marketing managers will identify the

desired positioning they want the company, product, or brand to occupy in the target
customer's mind. This positioning is often an encapsulation of a key benefit the
company's product or service offers that is differentiated and superior to the benefits
offered by competitive products.[7] For example, Volvo has traditionally positioned its
products in the automobile market in North America in order to be perceived as the
leader in "safety", whereas BMW has traditionally positioned its brand to be perceived as
the leader in "performance."
Ideally, a firm's positioning can be maintained over a long period of time because the
company possesses, or can develop, some form of sustainable competitive advantage.
[8]
The positioning should also be sufficiently relevant to the target segment such that it
will drive the purchasing behavior of target customers.[7]
[edit]Implementation planning
Main article: Marketing plan
The Marketing Metrics Continuum provides a framework for how to categorize metrics from the tactical to strategic.
After the firm's strategic objectives have been identified, the target market selected, and
the desired positioning for the company, product or brand has been determined,
marketing managers focus on how to best implement the chosen strategy. Traditionally,
this has involved implementation planning across the "4Ps" of marketing: Product
management, Pricing (at what price slot do you position your product, for e-g low,
medium or high price), Place (the place/area where you are going to be selling your
products, it could be local, regional, country wide or International) (i.e. sales
and distribution channels), and People. Now a new P has been added making it a total
of 5P's. The 5th P is Politics which affects marketing in a significant way.
Taken together, the company's implementation choices across the 4(5)Ps are often
described as the marketing mix, meaning the mix of elements the business will employ
to "go to market" and execute the marketing strategy. The overall goal for the marketing
mix is to consistently deliver a compelling value proposition that reinforces the firm's
chosen positioning, builds customer loyalty and brand equity among target customers,
and achieves the firm's marketing and financial objectives.
In many cases, marketing management will develop a marketing plan to specify how the
company will execute the chosen strategy and achieve the business' objectives. The
content of marketing plans varies from firm to firm, but commonly includes:
 An executive summary
 Situation analysis to summarize facts and insights gained from market research
and marketing analysis
 The company's mission statement or long-term strategic vision
 A statement of the company's key objectives, often subdivided into marketing
objectives and financial objectives
 The marketing strategy the business has chosen, specifying the target segments
to be pursued and the competitive positioning to be achieved
 Implementation choices for each element of the marketing mix (the 4(5)Ps)
[edit]Project, process, and vendor management

Once the key implementation initiatives have been identified, marketing managers work
to oversee the execution of the marketing plan. Marketing executives may therefore
manage any number of specific projects, such as sales force management initiatives,
product development efforts, channel marketing programs and the execution of public
relations and advertising campaigns. Marketers use a variety of project
management techniques to ensure projects achieve their objectives while keeping to
established schedules and budgets.
More broadly, marketing managers work to design and improve the effectiveness of core
marketing processes, such as new product development, brand management, marketing
communications, and pricing. Marketers may employ the tools of business process
reengineering to ensure these processes are properly designed, and use a variety
of process management techniques to keep them operating smoothly.
Effective execution may require management of both internal resources and a variety of
external vendors and service providers, such as the firm's advertising agency. Marketers
may therefore coordinate with the company's Purchasing department on the
procurement of these services.
[edit]Organizational management and leadership

Marketing management may spend a fair amount of time building or maintaining
a marketing orientation for the business. Achieving a market orientation, also known as
"customer focus" or the "marketing concept", requires building consensus at the senior
management level and then driving customer focus down into the organization. Cultural
barriers may exist in a given business unit or functional area that the marketing manager
must address in order to achieve this goal. Additionally, marketing executives often act
as a "brand champion" and work to enforce corporate identitystandards across the
enterprise.
In larger organizations, especially those with multiple business units, top marketing
managers may need to coordinate across several marketing departments and also
resources from finance, research and development, engineering, operations,
manufacturing, or other functional areas to implement the marketing plan. In order to
effectively manage these resources, marketing executives may need to spend much of
their time focused on political issues and inte-departmental negotiations.
The effectiveness of a marketing manager may therefore depend on his or her ability to
make the internal "sale" of various marketing programs equally as much as the external
customer's reaction to such programs.[6]
[edit]Reporting, measurement, feedback and control systems

Marketing management employs a variety of metrics to measure progress against
objectives. It is the responsibility of marketing managers – in the marketing department
or elsewhere – to ensure that the execution of marketing programs achieves the desired
objectives and does so in a cost-efficient manner.
Marketing management therefore often makes use of various organizational control

systems, such as sales forecasts, sales force and reseller incentive programs, sales
force management systems, and customer relationship management tools (CRM).
Recently, some software vendors have begun using the term "marketing operations
management" or "marketing resource management" to describe systems that facilitate
an integrated approach for controlling marketing resources. In some cases, these efforts
may be linked to various supply chain management systems, such as enterprise
resource planning (ERP), material requirements planning (MRP), efficient consumer
response (ECR), and inventory management systems.
Measuring the return on investment (ROI) of and marketing effectiveness various

marketing initiatives is a significant problem for marketing management. Various market
research, accounting and financial tools are used to help estimate the ROI of marketing
investments. Brand valuation, for example, attempts to identify the percentage of a
company's market value that is generated by the company's brands, and thereby
estimate the financial value of specific investments in brand equity. Another
technique, integrated marketing communications (IMC), is a CRM database-driven
approach that attempts to estimate the value of marketing mix executions based on the
changes in customer behavior these executions generate.[9]
Predictive analytics
Predictive analytics encompasses a variety of techniques from statistics, data mining and game
theory that analyze current and historical facts to make predictions about future events.
In business, predictive models exploit patterns found in historical and transactional data to identify risks and
opportunities. Models capture relationships among many factors to allow assessment of risk or potential
associated with a particular set of conditions, guiding decision making for candidate transactions.
Predictive analytics is used in actuarial science, financial

services, insurance, telecommunications, retail, travel, healthcare, pharmaceuticals and other fields.
One of the most well-known applications is credit scoring, which is used throughout financial services.
Scoring models process a customer’s credit history, loan application, customer data, etc., in order to rank-
order individuals by their likelihood of making future credit payments on time. A well-known example would
be the FICO score.
Predictive analytics
Predictive analytics encompasses a variety of techniques from statistics, data

mining and game theory that analyze current and historical facts to make predictions
about future events.
In business, predictive models exploit patterns found in historical and transactional

data to identify risks and opportunities. Models capture relationships among many
factors to allow assessment of risk or potential associated with a particular set of
conditions, guiding decision making for candidate transactions.
Predictive analytics is used in actuarial science, financial

services, insurance, telecommunications, retail, travel, healthcare, pharmaceuticals a
nd other fields.
One of the most well-known applications is credit scoring, which is used

throughout financial services. Scoring models process a customer’s credit
history, loan application, customer data, etc., in order to rank-order individuals by
their likelihood of making future credit payments on time. A well-known example
would be the FICO score.
Definition
Predictive analytics is an area of statistical analysis that deals with
extracting information from data and using it to predict future trends
and behavior patterns. The core of predictive analytics relies on
capturing relationships between explanatory variables and the
predicted variables from past occurrences, and exploiting it to predict
future outcomes. It is important to note, however, that the accuracy
and usability of results will depend greatly on the level of data analysis
and the quality of assumptions.
[edit]Types
Generally, the term predictive analytics is used to mean predictive

modeling, scoring of predictive models, and forecasting. However,
people are increasingly using the term to describe related analytical
disciplines, such as descriptive modeling and decision modeling or
optimization. These disciplines also involve rigorous data analysis,
and are widely used in business for segmentation and decision
making, but have different purposes and the statistical techniques
underlying them vary.
[edit]Predictive models
Predictive models analyze past performance to assess how likely a
customer is to exhibit a specific behavior in the future in order to
improve marketing effectiveness. This category also encompasses
models that seek out subtle data patterns to answer questions about
customer performance, such as fraud detection models. Predictive
models often perform calculations during live transactions, for
example, to evaluate the risk or opportunity of a given customer or
transaction, in order to guide a decision. With advancement in
computing speed, individual agent modeling systems can simulate
human behavior or reaction to given stimuli or scenarios. The new
term for animating data specifically linked to an individual in a
simulated environment is avatar analytics.
[edit]Descriptive models
Descriptive models quantify relationships in data in a way that is often
used to classify customers or prospects into groups. Unlike predictive
models that focus on predicting a single customer behavior (such as
credit risk), descriptive models identify many different relationships
between customers or products. Descriptive models do not rank-order
customers by their likelihood of taking a particular action the way
predictive models do. Descriptive models can be used, for example, to
categorize customers by their product preferences and life stage.
Descriptive modeling tools can be utilized to develop further models
that can simulate large number of individualized agents and make
predictions.
[edit]Decision models
Decision models describe the relationship between all the elements of
a decision — the known data (including results of predictive models),
the decision and the forecast results of the decision — in order to
predict the results of decisions involving many variables. These
models can be used in optimization, maximizing certain outcomes
while minimizing others. Decision models are generally used to
develop decision logic or a set of business rules that will produce the
desired action for every customer or circumstance.
[edit]Applications
Although predictive analytics can be put to use in many applications,

we outline a few examples where predictive analytics has shown
positive impact in recent years.
[edit]Analytical customer relationship management (CRM)
Analytical Customer Relationship Management is a frequent
commercial application of Predictive Analysis. Methods of predictive
analysis are applied to customer data to pursue CRM objectives.
[edit]Clinical decision support systems
Experts use predictive analysis in health care primarily to determine
which patients are at risk of developing certain conditions, like
diabetes, asthma, heart disease and other lifetime illnesses.
Additionally, sophisticated clinical decision support systems
incorporate predictive analytics to support medical decision making at
the point of care. A working definition has been proposed by Dr.
Robert Hayward of the Centre for Health Evidence: "Clinical Decision
Support systems link health observations with health knowledge to
influence health choices by clinicians for improved health care."
[edit]Collection analytics
Every portfolio has a set of delinquent customers who do not make
their payments on time. The financial institution has to undertake
collection activities on these customers to recover the amounts due. A
lot of collection resources are wasted on customers who are difficult
or impossible to recover. Predictive analytics can help optimize the
allocation of collection resources by identifying the most effective
collection agencies, contact strategies, legal actions and other
strategies to each customer, thus significantly increasing recovery at
the same time reducing collection costs.
[edit]Cross-sell
Often corporate organizations collect and maintain abundant data

(e.g. customer records, sale transactions) and exploiting hidden
relationships in the data can provide a competitive advantage to the
organization. For an organization that offers multiple products, an
analysis of existing customer behavior can lead to efficient cross
sell of products. This directly leads to higher profitability per customer
and strengthening of the customer relationship. Predictive analytics
can help analyze customers’ spending, usage and other behavior, and
help cross-sell the right product at the right time.
[edit]Customer retention
With the amount of competing services available, businesses need to
focus efforts on maintaining continuous consumer satisfaction. In such
a competitive scenario, consumer loyalty needs to be rewarded
and customer attrition needs to be minimized. Businesses tend to
respond to customer attrition on a reactive basis, acting only after the
customer has initiated the process to terminate service. At this stage,
the chance of changing the customer’s decision is almost impossible.
Proper application of predictive analytics can lead to a more proactive
retention strategy. By a frequent examination of a customer’s past
service usage, service performance, spending and other behavior
patterns, predictive models can determine the likelihood of a customer
wanting to terminate service sometime in the near future. An
intervention with lucrative offers can increase the chance of retaining
the customer. Silent attrition is the behavior of a customer to slowly
but steadily reduce usage and is another problem faced by many
companies. Predictive analytics can also predict this behavior
accurately and before it occurs, so that the company can take proper
actions to increase customer activity.
[edit]Direct marketing
When marketing consumer products and services there is the
challenge of keeping up with competing products and consumer
behavior. Apart from identifying prospects, predictive analytics can
also help to identify the most effective combination of product
versions, marketing material, communication channels and timing that
should be used to target a given consumer. The goal of predictive
analytics is typically to lower the cost per order or cost per action.
[edit]Fraud detection
Fraud is a big problem for many businesses and can be of various
types. Inaccurate credit applications, fraudulent transactions (both
offline and online), identity thefts and false insurance claims are some
examples of this problem. These problems plague firms all across the
spectrum and some examples of likely victims are credit card issuers,
insurance companies, retail merchants, manufacturers, business to
business suppliers and even services providers. This is an area where
a predictive model is often used to help weed out the “bads” and
reduce a business's exposure to fraud.
Predictive modeling can also be used to detect financial statement
fraud in companies, allowing auditors to gauge a company's relative
risk, and to increase substantive audit procedures as needed.
The Internal Revenue Service (IRS) of the United States also uses
predictive analytics to try to locate tax fraud.
[edit]Portfolio, product or economy level prediction
Often the focus of analysis is not the consumer but the product,
portfolio, firm, industry or even the economy. For example a retailer
might be interested in predicting store level demand for inventory
management purposes. Or the Federal Reserve Board might be
interested in predicting the unemployment rate for the next year.
These type of problems can be addressed by predictive analytics
using Time Series techniques (see below).
[edit]Underwriting
Many businesses have to account for risk exposure due to their
different services and determine the cost needed to cover the risk. For
example, auto insurance providers need to accurately determine the
amount of premium to charge to cover each automobile and driver. A
financial company needs to assess a borrower’s potential and ability
to pay before granting a loan. For a health insurance provider,
predictive analytics can analyze a few years of past medical claims
data, as well as lab, pharmacy and other records where available, to
predict how expensive an enrollee is likely to be in the future.
Predictive analytics can help underwriting of these quantities by
predicting the chances of illness, default, bankruptcy, etc. Predictive
analytics can streamline the process of customer acquisition, by
predicting the future risk behavior of a customer using application
level data. Predictive analytics in the form of credit scores have
reduced the amount of time it takes for loan approvals, especially in
the mortgage market where lending decisions are now made in a
matter of hours rather than days or even weeks. Proper predictive
analytics can lead to proper pricing decisions, which can help mitigate
future risk of default.
[edit]Statistical techniques
The approaches and techniques used to conduct predictive analytics
can broadly be grouped into regression techniques and machine
learning techniques.
[edit]Regression techniques
Regression models are the mainstay of predictive analytics. The focus
lies on establishing a mathematical equation as a model to represent
the interactions between the different variables in consideration.
Depending on the situation, there is a wide variety of models that can
be applied while performing predictive analytics. Some of them are
briefly discussed below.
[edit]Linear regression model
The linear regression model analyzes the relationship between the

response or dependent variable and a set of independent or predictor
variables. This relationship is expressed as an equation that predicts
the response variable as a linear function of the parameters. These
parameters are adjusted so that a measure of fit is optimized. Much of
the effort in model fitting is focused on minimizing the size of the
residual, as well as ensuring that it is randomly distributed with
respect to the model predictions.
The goal of regression is to select the parameters of the model so as
to minimize the sum of the squared residuals. This is referred to
as ordinary least squares (OLS) estimation and results in best linear
unbiased estimates (BLUE) of the parameters if and only if the Gauss-
Markov assumptions are satisfied.
Once the model has been estimated we would be interested to know if
the predictor variables belong in the model – i.e. is the estimate of
each variable’s contribution reliable? To do this we can check the
statistical significance of the model’s coefficients which can be
measured using the t-statistic. This amounts to testing whether the
coefficient is significantly different from zero. How well the model
predicts the dependent variable based on the value of the
independent variables can be assessed by using the R² statistic. It
measures predictive power of the model i.e. the proportion of the total
variation in the dependent variable that is “explained” (accounted for)
by variation in the independent variables.
[edit]Discrete choice models
Multivariate regression (above) is generally used when the response
variable is continuous and has an unbounded range. Often the
response variable may not be continuous but rather discrete. While
mathematically it is feasible to apply multivariate regression to
discrete ordered dependent variables, some of the assumptions
behind the theory of multivariate linear regression no longer hold, and
there are other techniques such as discrete choice models which are
better suited for this type of analysis. If the dependent variable is
discrete, some of those superior methods are logistic
regression,multinomial logit and probit models. Logistic regression
and probit models are used when the dependent variable is binary.
[edit]Logistic regression
For more details on this topic, see logistic regression.
In a classification setting, assigning outcome probabilities to
observations can be achieved through the use of a logistic model,
which is basically a method which transforms information about the
binary dependent variable into an unbounded continuous variable and
estimates a regular multivariate model (See Allison’s Logistic
Regression for more information on the theory of Logistic
Regression).
The Wald and likelihood-ratio test are used to test the statistical
significance of each coefficient b in the model (analogous to the t tests
used in OLS regression; see above). A test assessing the goodness-
of-fit of a classification model is the –.
[edit]Multinomial logistic regression
An extension of the binary logit model to cases where the dependent

variable has more than 2 categories is the multinomial logit model. In
such cases collapsing the data into two categories might not make
good sense or may lead to loss in the richness of the data. The
multinomial logit model is the appropriate technique in these cases,
especially when the dependent variable categories are not ordered
(for examples colors like red, blue, green). Some authors have
extended multinomial regression to include feature
selection/importance methods such as Random multinomial logit.
[edit]Probit regression
Probit models offer an alternative to logistic regression for modeling

categorical dependent variables. Even though the outcomes tend to
be similar, the underlying distributions are different. Probit models are
popular in social sciences like economics.
A good way to understand the key difference between probit and logit
models, is to assume that there is a latent variable z.
We do not observe z but instead observe y which takes the value 0 or
1. In the logit model we assume that y follows a logistic distribution. In
the probit model we assume that y follows a standard normal
distribution. Note that in social sciences (example economics), probit
is often used to model situations where the observed variable y is
continuous but takes values between 0 and 1.
[edit]Logit versus probit
The Probit model has been around longer than the logit model. They
look identical, except that the logistic distribution tends to be a little flat
tailed. One of the reasons the logit model was formulated was that the
probit model was difficult to compute because it involved calculating
difficult integrals. Modern computing however has made this
computation fairly simple. The coefficients obtained from the logit and
probit model are also fairly close. However, the odds ratio makes the
logit model easier to interpret.
For practical purposes the only reasons for choosing the probit model
over the logistic model would be:
 There is a strong belief that the underlying distribution is normal

 The actual event is not a binary outcome (e.g. Bankrupt/not
bankrupt) but a proportion (e.g. Proportion of population at different
debt levels).
[edit]Time series models

Time series models are used for predicting or forecasting the future
behavior of variables. These models account for the fact that data
points taken over time may have an internal structure (such as
autocorrelation, trend or seasonal variation) that should be accounted
for. As a result standard regression techniques cannot be applied to
time series data and methodology has been developed to decompose
the trend, seasonal and cyclical component of the series. Modeling
the dynamic path of a variable can improve forecasts since the
predictable component of the series can be projected into the future.
Time series models estimate difference equations containing
stochastic components. Two commonly used forms of these models
are autoregressive models (AR) and moving average (MA) models.
TheBox-Jenkins methodology (1976) developed by George Box and
G.M. Jenkins combines the AR and MA models to produce
the ARMA (autoregressive moving average) model which is the
cornerstone of stationary time series analysis. ARIMA (autoregressive
integrated moving average models) on the other hand are used to
describe non-stationary time series. Box and Jenkins suggest
differencing a non stationary time series to obtain a stationary series
to which an ARMA model can be applied. Non stationary time series
have a pronounced trend and do not have a constant long-run mean
or variance.
Box and Jenkins proposed a three stage methodology which includes:
model identification, estimation and validation. The identification stage
involves identifying if the series is stationary or not and the presence
of seasonality by examining plots of the series, autocorrelation and
partial autocorrelation functions. In the estimation stage, models are
estimated using non-linear time series or maximum likelihood
estimation procedures. Finally the validation stage involves diagnostic
checking such as plotting the residuals to detect outliers and evidence
of model fit.
In recent years time series models have become more sophisticated
and attempt to model conditional heteroskedasticity with models such
as ARCH (autoregressive conditional heteroskedasticity) and GARCH
(generalized autoregressive conditional heteroskedasticity) models
frequently used for financial time series. In addition time series
models are also used to understand inter-relationships among
economic variables represented by systems of equations using VAR
(vector autoregression) and structural VAR models.
[edit]Survival or duration analysis
Survival analysis is another name for time to event analysis. These
techniques were primarily developed in the medical and biological
sciences, but they are also widely used in the social sciences like
economics, as well as in engineering (reliability and failure time
analysis).
Censoring and non-normality, which are characteristic of survival
data, generate difficulty when trying to analyze the data using
conventional statistical models such as multiple linear regression.
Thenormal distribution, being a symmetric distribution, takes positive
as well as negative values, but duration by its very nature cannot be
negative and therefore normality cannot be assumed when dealing
with duration/survival data. Hence the normality assumption of
regression models is violated.
The assumption is that if the data were not censored it would be
representative of the population of interest. In survival analysis,
censored observations arise whenever the dependent variable of
interest represents the time to a terminal event, and the duration of
the study is limited in time.
An important concept in survival analysis is the hazard rate, defined
as the probability that the event will occur at time t conditional on
surviving until time t. Another concept related to the hazard rate is the
survival function which can be defined as the probability of surviving
to time t.
Most models try to model the hazard rate by choosing the underlying
distribution depending on the shape of the hazard function. A
distribution whose hazard function slopes upward is said to have
positive duration dependence, a decreasing hazard shows negative
duration dependence whereas constant hazard is a process with no
memory usually characterized by the exponential distribution. Some of
the distributional choices in survival models are: F, gamma, Weibull,
log normal, inverse normal, exponential etc. All these distributions are
for a non-negative random variable.
Duration models can be parametric, non-parametric or semi-
parametric. Some of the models commonly used are Kaplan-
Meier and Cox proportional hazard model (non parametric).
[edit]Classification and regression trees
Main article: decision tree learning
Classification and regression trees (CART) is a non-
parametric Decision tree learning technique that produces either
classification or regression trees, depending on whether the
dependent variable is categorical or numeric, respectively.
Decision trees are formed by a collection of rules based on values of
certain variables in the modeling data set
 Rules are selected based on how well splits based on variables’

values can differentiate observations based on the dependent
variable
 Once a rule is selected and splits a node into two, the same
logic is applied to each “child” node (i.e. it is a recursive procedure)
 Splitting stops when CART detects no further gain can be made,
or some pre-set stopping rules are met
Each branch of the tree ends in a terminal node
 Each observation falls into one and exactly one terminal node
 Each terminal node is uniquely defined by a set of rules
A very popular method for predictive analytics is Leo

Breiman's Random forests or derived versions of this technique
like Random multinomial logit.
[edit]Multivariate adaptive regression splines
Multivariate adaptive regression splines (MARS) is a non-
parametric technique that builds flexible models by
fitting piecewise linear regressions.
An important concept associated with regression splines is that of a
knot. Knot is where one local regression model gives way to another
and thus is the point of intersection between two splines.
In multivariate and adaptive regression splines, basis functions are
the tool used for generalizing the search for knots. Basis functions are
a set of functions used to represent the information contained in one
or more variables. Multivariate and Adaptive Regression Splines
model almost always creates the basis functions in pairs.
Multivariate and adaptive regression spline approach
deliberately overfits the model and then prunes to get to the optimal
model. The algorithm is computationally very intensive and in practice
we are required to specify an upper limit on the number of basis
functions.
[edit]Machine learning techniques
Machine learning, a branch of artificial intelligence, was originally
employed to develop techniques to enable computers to learn. Today,
since it includes a number of advanced statistical methods for
regression and classification, it finds application in a wide variety of
fields including medical diagnostics, credit card fraud
detection, face and speech recognition and analysis of the stock
market. In certain applications it is sufficient to directly predict the
dependent variable without focusing on the underlying relationships
between variables. In other cases, the underlying relationships can be
very complex and the mathematical form of the dependencies
unknown. For such cases, machine learning techniques emulate
human cognition and learn from training examples to predict future
events.
A brief discussion of some of these methods used commonly for
predictive analytics is provided below. A detailed study of machine
learning can be found in Mitchell (1997).
[edit]Neural networks
Neural networks are nonlinear sophisticated modeling techniques that

are able to model complex functions. They can be applied to problems
of prediction, classification or control in a wide spectrum of fields such
as finance, cognitive
psychology/neuroscience, medicine, engineering, and physics.
Neural networks are used when the exact nature of the relationship
between inputs and output is not known. A key feature of neural
networks is that they learn the relationship between inputs and output
through training. There are two types of training in neural networks
used by different networks, supervised and unsupervised training,
with supervised being the most common one.
Some examples of neural network training techniques
are backpropagation, quick propagation, conjugate gradient
descent, projection operator, Delta-Bar-Delta etc. Some unsupervised
network architectures are multilayer perceptrons, Kohonen
networks, Hopfield networks, etc.
[edit]Radial basis functions
A radial basis function (RBF) is a function which has built into it a

distance criterion with respect to a center. Such functions can be used
very efficiently for interpolation and for smoothing of data. Radial
basis functions have been applied in the area of neural
networks where they are used as a replacement for
the sigmoidal transfer function. Such networks have 3 layers, the input
layer, the hidden layer with the RBF non-linearity and a linear output
layer. The most popular choice for the non-linearity is the Gaussian.
RBF networks have the advantage of not being locked into local
minima as do the feed-forward networks such as the
multilayer perceptron.
[edit]Support vector machines
Support Vector Machines (SVM) are used to detect and exploit

complex patterns in data by clustering, classifying and ranking the
data. They are learning machines that are used to perform binary
classifications and regression estimations. They commonly use kernel
based methods to apply linear classification techniques to non-linear
classification problems. There are a number of types of SVM such as
linear, polynomial, sigmoid etc.
[edit]Naïve Bayes
Naïve Bayes based on Bayes conditional probability rule is used for

performing classification tasks. Naïve Bayes assumes the predictors
are statistically independent which makes it an effective classification
tool that is easy to interpret. It is best employed when faced with the
problem of ‘curse of dimensionality’ i.e. when the number of predictors
is very high.
[edit]k-nearest neighbours
The nearest neighbour algorithm (KNN) belongs to the class of

pattern recognition statistical methods. The method does not impose
a priori any assumptions about the distribution from which the
modeling sample is drawn. It involves a training set with both positive
and negative values. A new sample is classified by calculating the
distance to the nearest neighbouring training case. The sign of that
point will determine the classification of the sample. In the k-nearest
neighbour classifier, the k nearest points are considered and the sign
of the majority is used to classify the sample. The performance of the
kNN algorithm is influenced by three main factors: (1) the distance
measure used to locate the nearest neighbours; (2) the decision rule
used to derive a classification from the k-nearest neighbours; and (3)
the number of neighbours used to classify the new sample. It can be
proved that, unlike other methods, this method is universally
asymptotically convergent, i.e.: as the size of the training set
increases, if the observations are independent and identically
distributed (i.i.d.), regardless of the distribution from which the sample
is drawn, the predicted class will converge to the class assignment
that minimizes misclassification error. See Devroy et al.
[edit]Geospatial predictive modeling
Conceptually, geospatial predictive modeling is rooted in the principle

that the occurrences of events being modeled are limited in
distribution. Occurrences of events are neither uniform nor random in
distribution – there are spatial environment factors (infrastructure,
sociocultural, topographic, etc.) that constrain and influence where the
locations of events occur. Geospatial predictive modeling attempts to
describe those constraints and influences by spatially correlating
occurrences of historical geospatial locations with environmental
factors that represent those constraints and influences. Geospatial
predictive modeling is a process for analyzing events through a
geographic filter in order to make statements of likelihood for event
occurrence or emergence.
[edit]Tools
There are numerous tools available in the marketplace which help

with the execution of predictive analytics. These range from those
which need very little user sophistication to those that are designed
for the expert practitioner. The difference between these tools is often
in the level of customization and heavy data lifting allowed.
In an attempt to provide a standard language for expressing predictive
models, the Predictive Model Markup Language (PMML) has been
proposed. Such an XML-based language provides a way for the
different tools to define predictive models and to share these between
PMML compliant applications. PMML 4.0 was released in June, 2009.
Strategic management
Strategic management is a field that deals with the major intended and emergent initiatives
taken by general managers on behalf of owners, involving utilization of resources, to
enhance the performance of ﬁrms in their external environments.[1] It entails specifying
the organization's mission, vision and objectives, developing policies and plans, often in
terms of projects and programs, which are designed to achieve these objectives, and then
allocating resources to implement the policies and plans, projects and programs. A balanced
scorecard is often used to evaluate the overall performance of the business and its progress
towards objectives. Recent studies and leading management theorists have advocated that
strategy needs to start with stakeholders expectations and use a modified balanced
scorecard which includes all stakeholders.
Strategic management is a level of managerial activity under setting goals and over Tactics.
Strategic management provides overall direction to the enterprise and is closely related to
the field ofOrganization Studies. In the field of business administration it is useful to talk
about "strategic alignment" between the organization and its environment or "strategic
consistency." According to Arieu (2007), "there is strategic consistency when the actions of
an organization are consistent with the expectations of management, and these in turn are
with the market and the context." Strategic management includes not only the management
team but can also include the Board of Directors and other stakeholders of the organization.
It depends on the organizational structure.
“Strategic management is an ongoing process that evaluates and controls the business and
the industries in which the company is involved; assesses its competitors and sets goals and
strategies to meet all existing and potential competitors; and then reassesses each strategy
annually or quarterly [i.e. regularly] to determine how it has been implemented and whether
it has succeeded or needs replacement by a new strategy to meet changed circumstances,
new technology, new competitors, a new economic environment., or a new social, financial,
or political environment.” (Lamb, 1984:ix)[2]
Strategy formation
Strategic formation is a combination of three main processes which
are as follows:
 Performing a situation analysis, self-evaluation and competitor

analysis: both internal and external; both micro-environmental and
macro-environmental.
 Concurrent with this assessment, objectives are set. These
objectives should be parallel to a time-line; some are in the short-
term and others on the long-term. This involves crafting vision
statements (long term view of a possible future), mission
statements (the role that the organization gives itself in society),
overall corporate objectives (both financial and strategic), strategic
business unit objectives (both financial and strategic), and tactical
objectives.
 These objectives should, in the light of the situation analysis,
suggest a strategic plan. The plan provides the details of how to
achieve these objectives.
[edit]Strategy evaluation
 Measuring the effectiveness of the organizational strategy, it's

extremely important to conduct a SWOT analysis to figure out the
strengths, weaknesses, opportunities and threats (both internal and
external) of the entity in business. This may require taking certain
precautionary measures or even changing the entire strategy.
In corporate strategy, Johnson, Scholes and Whittington present a

model in which strategic options are evaluated against three key
success criteria:[3]
 Suitability (would it work?)

 Feasibility (can it be made to work?)
 Acceptability (will they work it?)
[edit]Suitability
Suitability deals with the overall rationale of the strategy. The key
point to consider is whether the strategy would address the key
strategic issues underlined by the organisation's strategic position.
 Does it make economic sense?

 Would the organization obtain economies of scale or economies
of scope?
 Would it be suitable in terms of environment and capabilities?
Tools that can be used to evaluate suitability include:
 Ranking strategic options

 Decision trees
[edit]Feasibility
Feasibility is concerned with whether the resources required to

implement the strategy are available, can be developed or obtained.
Resources include funding, people, time and information.
Tools that can be used to evaluate feasibility include:
 cash flow analysis and forecasting

 break-even analysis
 resource deployment analysis
[edit]Acceptability
Acceptability is concerned with the expectations of the identified

stakeholders (mainly shareholders, employees and customers) with
the expected performance outcomes, which can be return, risk and
stakeholder reactions.
 Return deals with the benefits expected by the stakeholders

(financial and non-financial). For example, shareholders would
expect the increase of their wealth, employees would expect
improvement in their careers and customers would expect better
value for money.
 Risk deals with the probability and consequences of failure of a
strategy (financial and non-financial).
 Stakeholder reactions deals with anticipating the likely reaction
of stakeholders. Shareholders could oppose the issuing of new
shares, employees and unions could oppose outsourcing for fear of
losing their jobs, customers could have concerns over a merger
with regards to quality and support.
Tools that can be used to evaluate acceptability include:
 what-if analysis
 stakeholder mapping
[edit]General approaches
In general terms, there are two main approaches, which are opposite
but complement each other in some ways, to strategic management:
 The Industrial Organizational Approach

 based on economic theory — deals with issues like
competitive rivalry, resource allocation, economies of scale
 assumptions — rationality, self discipline behaviour, profit
maximization
 The Sociological Approach
 deals primarily with human interactions
 assumptions — bounded rationality, satisfying behaviour,
profit sub-optimality. An example of a company that currently
operates this way is Google. The stakeholder focused approach
is an example of this modern approach to strategy.
Strategic management techniques can be viewed as bottom-up, top-

down, or collaborative processes. In the bottom-up approach,
employees submit proposals to their managers who, in turn, funnel
the best ideas further up the organization. This is often accomplished
by a capital budgeting process. Proposals are assessed using
financial criteria such as return on investment or cost-benefit
analysis.Cost underestimation and benefit overestimation are major
sources of error. The proposals that are approved form the substance
of a new strategy, all of which is done without a grand strategic design
or a strategic architect. The top-down approach is the most common
by far. In it, the CEO, possibly with the assistance of a strategic
planning team, decides on the overall direction the company should
take. Some organizations are starting to experiment with collaborative
strategic planning techniques that recognize the emergent nature of
strategic decisions.
Strategic decisions should focus on Outcome, Time remaining, and
current Value/priority. The outcome comprises both the desired
ending goal and the plan designed to reach that goal. Managing
strategically requires paying attention to the time remaining to reach a
particular level or goal and adjusting the pace and options
accordingly. Value/priority relates to the shifting, relative concept of
value-add. Strategic decisions should be based on the understanding
that the value-add of whatever you are managing is a constantly
changing reference point. An objective that begins with a high level of
value-add may change due to influence of internal and external
factors. Strategic management by definition, is managing with a
heads-up approach to outcome, time and relative value, and actively
making course corrections as needed.
[edit]The strategy hierarchy
In most (large) corporations there are several levels of management.
Corporate strategy is the highest of these levels in the sense that it is
the broadest - applying to all parts of the firm - while also
incorporating the longest time horizon. It gives direction to corporate
values, corporate culture, corporate goals, and corporate missions.
Under this broad corporate strategy there are typically business-level
competitive strategies and functional unit strategies.
Corporate strategy refers to the overarching strategy of the
diversified firm. Such a corporate strategy answers the questions of
"which businesses should we be in?" and "how does being in these
businesses create synergy and/or add to the competitive advantage of
the corporation as a whole?" Business strategy refers to the
aggregated strategies of single business firm or a strategic business
unit (SBU) in a diversified corporation. According to Michael Porter, a
firm must formulate a business strategy that incorporates either cost
leadership, differentiation, or focus to achieve a sustainable
competitive advantage and long-term success. Alternatively,
according to W. Chan Kim and Renée Mauborgne, an organization
can achieve high growth and profits by creating a Blue Ocean
Strategythat breaks the previous value-cost trade off by
simultaneously pursuing both differentiation and low cost.
Functional strategies include marketing strategies, new product
development strategies, human resource strategies, financial
strategies, legal strategies, supply-chain strategies, and information
technology management strategies. The emphasis is on short and
medium term plans and is limited to the domain of each department’s
functional responsibility. Each functional department attempts to do its
part in meeting overall corporate objectives, and hence to some
extent their strategies are derived from broader corporate strategies.
Many companies feel that a functional organizational structure is not
an efficient way to organize activities so they
have reengineered according to processes or SBUs. A strategic
business unit is a semi-autonomous unit that is usually responsible
for its own budgeting, new product decisions, hiring decisions, and
price setting. An SBU is treated as an internal profit centre by
corporate headquarters. A technology strategy, for example, although
it is focused on technology as a means of achieving an organization's
overall objective(s), may include dimensions that are beyond the
scope of a single business unit, engineering organization or IT
department.
An additional level of strategy called operational strategy was
encouraged by Peter Drucker in his theory of management by
objectives (MBO). It is very narrow in focus and deals with day-to-day
operational activities such as scheduling criteria. It must operate
within a budget but is not at liberty to adjust or create that budget.
Operational level strategies are informed by business level strategies
which, in turn, are informed by corporate level strategies.
Since the turn of the millennium, some firms have reverted to a
simpler strategic structure driven by advances in information
technology. It is felt that knowledge management systems should be
used to share information and create common goals. Strategic
divisions are thought to hamper this process. This notion of strategy
has been captured under the rubric of dynamic strategy, popularized
by Carpenter and Sanders's textbook [1]. This work builds on that of
Brown and Eisenhart as well as Christensen and portrays firm
strategy, both business and corporate, as necessarily embracing
ongoing strategic change, and the seamless integration of strategy
formulation and implementation. Such change and implementation are
usually built into the strategy through the staging and pacing facets.
[edit]Historical development of strategic management
[edit]Birth of strategic management
Strategic management as a discipline originated in the 1950s and
60s. Although there were numerous early contributors to the literature,
the most influential pioneers were Alfred D. Chandler, Philip Selznick,
Igor Ansoff, and Peter Drucker.
Alfred Chandler recognized the importance of coordinating the various
aspects of management under one all-encompassing strategy. Prior
to this time the various functions of management were separate with
little overall coordination or strategy. Interactions between functions or
between departments were typically handled by a boundary position,
that is, there were one or two managers that relayed information back
and forth between two departments. Chandler also stressed the
importance of taking a long term perspective when looking to the
future. In his 1962 groundbreaking workStrategy and Structure,
Chandler showed that a long-term coordinated strategy was
necessary to give a company structure, direction, and focus. He says
it concisely, “structure follows strategy.”[4]
In 1957, Philip Selznick introduced the idea of matching the
organization's internal factors with external environmental
circumstances.[5] This core idea was developed into what we now
call SWOT analysis by Learned, Andrews, and others at the Harvard
Business School General Management Group. Strengths and
weaknesses of the firm are assessed in light of the opportunities and
threats from the business environment.
Igor Ansoff built on Chandler's work by adding a range of strategic
concepts and inventing a whole new vocabulary. He developed a
strategy grid that compared market penetration strategies, product
development strategies, market development strategies
and horizontal and vertical integration and diversification strategies.
He felt that management could use these strategies to systematically
prepare for future opportunities and challenges. In his 1965
classic Corporate Strategy, he developed the gap analysis still used
today in which we must understand the gap between where we are
currently and where we would like to be, then develop what he called
“gap reducing actions”.[6]
Peter Drucker was a prolific strategy theorist, author of dozens of
management books, with a career spanning five decades. His
contributions to strategic management were many but two are most
important. Firstly, he stressed the importance of objectives. An
organization without clear objectives is like a ship without a rudder. As
early as 1954 he was developing a theory of management based on
objectives.[7] This evolved into his theory of management by
objectives (MBO). According to Drucker, the procedure of setting
objectives and monitoring your progress towards them should
permeate the entire organization, top to bottom. His other seminal
contribution was in predicting the importance of what today we would
call intellectual capital. He predicted the rise of what he called the
“knowledge worker” and explained the consequences of this for
management. He said that knowledge work is non-hierarchical. Work
would be carried out in teams with the person most knowledgeable in
the task at hand being the temporary leader.
In 1985, Ellen-Earle Chaffee summarized what she thought were the
main elements of strategic management theory by the 1970s:[8]
 Strategic management involves adapting the organization to its

business environment.
 Strategic management is fluid and complex. Change creates
novel combinations of circumstances requiring unstructured non-
repetitive responses.
 Strategic management affects the entire organization by
providing direction.
 Strategic management involves both strategy formation (she
called it content) and also strategy implementation (she called it
process).
 Strategic management is partially planned and partially
unplanned.
 Strategic management is done at several levels: overall
corporate strategy, and individual business strategies.
 Strategic management involves both conceptual and analytical
thought processes.
[edit]Growth and portfolio theory

In the 1970s much of strategic management dealt with size, growth,
and portfolio theory. The PIMS study was a long term study, started in
the 1960s and lasted for 19 years, that attempted to understand the
Profit Impact of Marketing Strategies (PIMS), particularly the effect of
market share. Started at General Electric, moved to Harvard in the
early 1970s, and then moved to the Strategic Planning Institute in the
late 1970s, it now contains decades of information on the relationship
between profitability and strategy. Their initial conclusion was
unambiguous: The greater a company's market share, the greater will
be their rate of profit. The high market share provides volume
and economies of scale. It also provides experience and learning
curve advantages. The combined effect is increased profits.[9] The
studies conclusions continue to be drawn on by academics and
companies today: "PIMS provides compelling quantitative evidence as
to which business strategies work and don't work" - Tom Peters.
The benefits of high market share naturally lead to an interest in
growth strategies. The relative advantages of horizontal
integration, vertical integration, diversification, franchises, mergers
and acquisitions, joint ventures, and organic growth were discussed.
The most appropriate market dominance strategies were assessed
given the competitive and regulatory environment.
There was also research that indicated that a low market share
strategy could also be very profitable. Schumacher (1973),[10] Woo
and Cooper (1982),[11] Levenson (1984),[12] and later Traverso (2002)
[13]
showed how smaller niche players obtained very high returns.
By the early 1980s the paradoxical conclusion was that high market
share and low market share companies were often very profitable but
most of the companies in between were not. This was sometimes
called the “hole in the middle” problem. This anomaly would be
explained by Michael Porter in the 1980s.
The management of diversified organizations required new
techniques and new ways of thinking. The first CEO to address the
problem of a multi-divisional company was Alfred Sloan at General
Motors. GM was decentralized into semi-autonomous “strategic
business units” (SBU's), but with centralized support functions.
One of the most valuable concepts in the strategic management of
multi-divisional companies was portfolio theory. In the previous
decade Harry Markowitz and other financial theorists developed the
theory of portfolio analysis. It was concluded that a broad portfolio of
financial assets could reduce specific risk. In the 1970s marketers
extended the theory to product portfolio decisions and managerial
strategists extended it to operating division portfolios. Each of a
company’s operating divisions were seen as an element in the
corporate portfolio. Each operating division (also called strategic
business units) was treated as a semi-independent profit center with
its own revenues, costs, objectives, and strategies. Several
techniques were developed to analyze the relationships between
elements in a portfolio. B.C.G. Analysis, for example, was developed
by the Boston Consulting Group in the early 1970s. This was the
theory that gave us the wonderful image of a CEO sitting on a stool
milking a cash cow. Shortly after that the G.E. multi factoral
model was developed by General Electric. Companies continued to
diversify until the 1980s when it was realized that in many cases a
portfolio of operating divisions was worth more as separate
completely independent companies.
[edit]The marketing revolution
The 1970s also saw the rise of the marketing oriented firm. From the
beginnings of capitalism it was assumed that the key requirement of
business success was a product of high technical quality. If you
produced a product that worked well and was durable, it was
assumed you would have no difficulty selling them at a profit. This
was called the production orientation and it was generally true that
good products could be sold without effort, encapsulated in the saying
"Build a better mousetrap and the world will beat a path to your door."
This was largely due to the growing numbers of affluent and middle
class people that capitalism had created. But after the untapped
demand caused by the second world war was saturated in the 1950s
it became obvious that products were not selling as easily as they had
been. The answer was to concentrate on selling. The 1950s and
1960s is known as the sales era and the guiding philosophy of
business of the time is today called the sales orientation. In the early
1970s Theodore Levitt and others at Harvard argued that the sales
orientation had things backward. They claimed that instead of
producing products then trying to sell them to the customer,
businesses should start with the customer, find out what they wanted,
and then produce it for them. The customer became the driving force
behind all strategic business decisions. This marketingorientation, in
the decades since its introduction, has been reformulated and
repackaged under numerous names including customer orientation,
marketing philosophy, customer intimacy, customer focus, customer
driven, and market focused.
[edit]The Japanese challenge
In 2009, industry consultants Mark Blaxill and Ralph Eckardt
suggested that much of the Japanese business dominance that began
in the mid 1970s was the direct result of competition enforcement
efforts by the Federal Trade Commission (FTC) and U.S. Department
of Justice (DOJ). In 1975 the FTC reached a settlement with Xerox
Corporation in its anti-trust lawsuit. (At the time, the FTC was under
the direction of Frederic M. Scherer). The 1975 Xerox consent
decree forced the licensing of the company’s entire patent portfolio,
mainly to Japanese competitors. (See "compulsory license.") This
action marked the start of an activist approach to managing
competition by the FTC and DOJ, which resulted in the compulsory
licensing of tens of thousands of patent from some of America's
leading companies, including IBM, AT&T, DuPont, Bausch & Lomb,
and Eastman Kodak.[original research?]
Within four years of the consent decree, Xerox's share of the
U.S. copier market dropped from nearly 100% to less than 14%.
Between 1950 and 1980 Japanese companies consummated more
than 35,000 foreign licensing agreements, mostly with U.S.
companies, for free or low-cost licenses made possible by the FTC
and DOJ. The post-1975 era of anti-trust initiatives by Washington
D.C. economists at the FTC corresponded directly with the rapid,
unprecedented rise in Japanese competitiveness and a simultaneous
stalling of the U.S. manufacturing economy.[14]
[edit]Competitive advantage
The Japanese challenge shook the confidence of the western
business elite, but detailed comparisons of the two management
styles and examinations of successful businesses convinced
westerners that they could overcome the challenge. The 1980s and
early 1990s saw a plethora of theories explaining exactly how this
could be done. They cannot all be detailed here, but some of the more
important strategic advances of the decade are explained below.
Gary Hamel and C. K. Prahalad declared that strategy needs to be
more active and interactive; less “arm-chair planning” was needed.
They introduced terms like strategic intent and strategic
architecture.[15][16] Their most well known advance was the idea
of core competency. They showed how important it was to know the
one or two key things that your company does better than the
competition.[17]
Active strategic management required active information gathering
and active problem solving. In the early days of Hewlett-Packard
(HP), Dave Packard and Bill Hewlett devised an active management
style that they called management by walking around (MBWA). Senior
HP managers were seldom at their desks. They spent most of their
days visiting employees, customers, and suppliers. This direct contact
with key people provided them with a solid grounding from which
viable strategies could be crafted. The MBWA concept was
popularized in 1985 by a book by Tom Peters and Nancy Austin.
[18]
Japanese managers employ a similar system, which originated at
Honda, and is sometimes called the 3 G's (Genba, Genbutsu, and
Genjitsu, which translate into “actual place”, “actual thing”, and “actual
situation”).
Probably the most influential strategist of the decade was Michael
Porter. He introduced many new concepts including; 5 forces
analysis, generic strategies, the value chain, strategic groups,
andclusters. In 5 forces analysis he identifies the forces that shape a
firm's strategic environment. It is like a SWOT analysis with structure
and purpose. It shows how a firm can use these forces to obtain
a sustainable competitive advantage. Porter modifies Chandler's
dictum about structure following strategy by introducing a second level
of structure: Organizational structure follows strategy, which in turn
follows industry structure. Porter's generic strategies detail the
interaction between cost minimization strategies, product
differentiation strategies, and market focus strategies. Although
he did not introduce these terms, he showed the importance of
choosing one of them rather than trying to position your company
between them. He also challenged managers to see their industry in
terms of a value chain. A firm will be successful only to the extent that
it contributes to the industry's value chain. This forced management to
look at its operations from the customer's point of view. Every
operation should be examined in terms of what value it adds in the
eyes of the final customer.
In 1993, John Kay took the idea of the value chain to a financial level
claiming “ Adding value is the central purpose of business activity”,
where adding value is defined as the difference between the market
value of outputs and the cost of inputs including capital, all divided by
the firm's net output. Borrowing from Gary Hamel and Michael Porter,
Kay claims that the role of strategic management is to identify your
core competencies, and then assemble a collection of assets that will
increase value added and provide a competitive advantage. He claims
that there are 3 types of capabilities that can do this; innovation,
reputation, and organizational structure.
The 1980s also saw the widespread acceptance of positioning theory.
Although the theory originated with Jack Trout in 1969, it didn’t gain
wide acceptance until Al Ries and Jack Trout wrote their classic book
“Positioning: The Battle For Your Mind” (1979). The basic premise is
that a strategy should not be judged by internal company factors but
by the way customers see it relative to the competition. Crafting and
implementing a strategy involves creating a position in the mind of the
collective consumer. Several techniques were applied to positioning
theory, some newly invented but most borrowed from other
disciplines. Perceptual mapping for example, creates visual displays
of the relationships between positions. Multidimensional
scaling, discriminant analysis, factor analysis, and conjoint
analysis are mathematical techniques used to determine the most
relevant characteristics (called dimensions or factors) upon which
positions should be based. Preference regression can be used to
determine vectors of ideal positions and cluster analysis can identify
clusters of positions.
Others felt that internal company resources were the key. In 1992, Jay
Barney, for example, saw strategy as assembling the optimum mix of
resources, including human, technology, and suppliers, and then
configure them in unique and sustainable ways.[19]
Michael Hammer and James Champy felt that these resources
needed to be restructured.[20] This process, that they
labeled reengineering, involved organizing a firm's assets around
whole processes rather than tasks. In this way a team of people saw a
project through, from inception to completion. This avoided functional
silos where isolated departments seldom talked to each other. It also
eliminated waste due to functional overlap and interdepartmental
communications.
In 1989 Richard Lester and the researchers at the MIT Industrial
Performance Center identified seven best practices and concluded
that firms must accelerate the shift away from the mass production of
low cost standardized products. The seven areas of best practice
were:[21]
 Simultaneous continuous improvement in cost, quality, service,

and product innovation
 Breaking down organizational barriers between departments
 Eliminating layers of management creating flatter organizational
hierarchies.
 Closer relationships with customers and suppliers
 Intelligent use of new technology
 Global focus
 Improving human resource skills
The search for “best practices” is also called benchmarking.[22] This

involves determining where you need to improve, finding an
organization that is exceptional in this area, then studying the
company and applying its best practices in your firm.
A large group of theorists felt the area where western business was
most lacking was product quality. People like W. Edwards Deming,
[23]
Joseph M. Juran,[24] A. Kearney,[25] Philip Crosby,[26] andArmand
Feignbaum[27] suggested quality improvement techniques like total
quality management (TQM), continuous improvement (kaizen), lean
manufacturing, Six Sigma, and return on quality (ROQ).
An equally large group of theorists felt that poor customer service was
the problem. People like James Heskett (1988),[28] Earl Sasser (1995),
William Davidow,[29] Len Schlesinger,[30] A. Paraurgman (1988), Len
Berry,[31] Jane Kingman-Brundage,[32] Christopher Hart, and
Christopher Lovelock (1994), gave us fishbone diagramming, service
charting, Total Customer Service (TCS), the service profit chain,
service gaps analysis, the service encounter, strategic service vision,
service mapping, and service teams. Their underlying assumption
was that there is no better source of competitive advantage than a
continuous stream of delighted customers.
Process management uses some of the techniques from product
quality management and some of the techniques from customer
service management. It looks at an activity as a sequential process.
The objective is to find inefficiencies and make the process more
effective. Although the procedures have a long history, dating back
to Taylorism, the scope of their applicability has been greatly widened,
leaving no aspect of the firm free from potential process
improvements. Because of the broad applicability of process
management techniques, they can be used as a basis for competitive
advantage.
Some realized that businesses were spending much more on
acquiring new customers than on retaining current ones. Carl Sewell,
[33]
Frederick F. Reichheld,[34] C. Gronroos,[35] and Earl
Sasser[36]showed us how a competitive advantage could be found in
ensuring that customers returned again and again. This has come to
be known as the loyalty effect after Reicheld's book of the same
name in which he broadens the concept to include employee loyalty,
supplier loyalty, distributor loyalty, and shareholder loyalty. They also
developed techniques for estimating the lifetime value of a loyal
customer, called customer lifetime value (CLV). A significant
movement started that attempted to recast selling and marketing
techniques into a long term endeavor that created a sustained
relationship with customers (called relationship selling, relationship
marketing, and customer relationship management). Customer
relationship management (CRM) software (and its many variants)
became an integral tool that sustained this trend.
James Gilmore and Joseph Pine found competitive advantage
in mass customization.[37] Flexible manufacturing techniques allowed
businesses to individualize products for each customer without
losing economies of scale. This effectively turned the product into a
service. They also realized that if a service is mass customized by
creating a “performance” for each individual client, that service would
be transformed into an “experience”. Their book, The Experience
Economy,[38] along with the work of Bernd Schmitt convinced many to
see service provision as a form of theatre. This school of thought is
sometimes referred to as customer experience management (CEM).
Like Peters and Waterman a decade earlier, James Collins and Jerry
Porras spent years conducting empirical research on what makes
great companies. Six years of research uncovered a key underlying
principle behind the 19 successful companies that they studied: They
all encourage and preserve a core ideology that nurtures the
company. Even though strategy and tactics change daily, the
companies, nevertheless, were able to maintain a core set of values.
These core values encourage employees to build an organization that
lasts. In Built To Last (1994) they claim that short term profit goals,
cost cutting, and restructuring will not stimulate dedicated employees
to build a great company that will endure.[39] In 2000 Collins coined the
term “built to flip” to describe the prevailing business attitudes in
Silicon Valley. It describes a business culture where technological
change inhibits a long term focus. He also popularized the concept of
the BHAG (Big Hairy Audacious Goal).
Arie de Geus (1997) undertook a similar study and obtained similar
results. He identified four key traits of companies that had prospered
for 50 years or more. They are:
 Sensitivity to the business environment — the ability to learn and

adjust
 Cohesion and identity — the ability to build a community with
personality, vision, and purpose
 Tolerance and decentralization — the ability to build
relationships
 Conservative financing
A company with these key characteristics he called a living

company because it is able to perpetuate itself. If a company
emphasizes knowledge rather than finance, and sees itself as an
ongoing community of human beings, it has the potential to become
great and endure for decades. Such an organization is an organic
entity capable of learning (he called it a “learning organization”) and
capable of creating its own processes, goals, and persona.
There are numerous ways by which a firm can try to create a
competitive advantage - some will work but many will not. To help
firms avoid a hit and miss approach to the creation of competitive
advantage, Will Mulcaster [40] suggests that firms engage in a dialogue
that centres around the question "Will the proposed competitive
advantage create Perceived Differential Value?" The dialogue should
raise a series of other pertinent questions, including:
 "Will the proposed competitive advantage create something that

is different from the competition?"
 "Will the difference add value in the eyes of potential
customers?" - This question will entail a discussion of the combined
effects of price, product features and consumer perceptions.
 "Will the product add value for the firm?" - Answering this
question will require an examination of cost effectiveness and the
pricing strategy.
[edit]The military theorists

In the 1980s some business strategists realized that there was a
vast knowledge base stretching back thousands of years that they
had barely examined. They turned to military strategy for guidance.
Military strategy books such as The Art of War by Sun Tzu, On
War by von Clausewitz, and The Red Book by Mao Zedong became
instant business classics. From Sun Tzu, they learned the tactical side
of military strategy and specific tactical prescriptions. From Von
Clausewitz, they learned the dynamic and unpredictable nature of
military strategy. From Mao Zedong, they learned the principles of
guerrilla warfare. The main marketing warfare books were:
 Business War Games by Barrie James, 1984

 Marketing Warfare by Al Ries and Jack Trout, 1986
 Leadership Secrets of Attila the Hun by Wess Roberts, 1987
Philip Kotler was a well-known proponent of marketing warfare

strategy.
There were generally thought to be four types of business warfare
theories. They are:
 Offensive marketing warfare strategies

 Defensive marketing warfare strategies
 Flanking marketing warfare strategies
 Guerrilla marketing warfare strategies
The marketing warfare literature also examined leadership and

motivation, intelligence gathering, types of marketing weapons,
logistics, and communications.
By the turn of the century marketing warfare strategies had gone out
of favour. It was felt that they were limiting. There were many
situations in which non-confrontational approaches were more
appropriate. In 1989, Dudley Lynch and Paul L. Kordis
published Strategy of the Dolphin: Scoring a Win in a Chaotic World.
"The Strategy of the Dolphin” was developed to give guidance as to
when to use aggressive strategies and when to use passive
strategies. A variety of aggressiveness strategies were developed.
In 1993, J. Moore used a similar metaphor.[41] Instead of using military
terms, he created an ecological theory of predators and prey
(see ecological model of competition), a sort
of Darwinianmanagement strategy in which market interactions mimic
long term ecological stability.
[edit]Strategic change
In 1968, Peter Drucker (1969) coined the phrase Age of
Discontinuity to describe the way change forces disruptions into the
continuity of our lives.[42] In an age of continuity attempts to predict the
future by extrapolating from the past can be somewhat accurate. But
according to Drucker, we are now in an age of discontinuity and
extrapolating from the past is hopelessly ineffective. We cannot
assume that trends that exist today will continue into the future. He
identifies four sources of discontinuity:
new technologies, globalization, cultural pluralism, and knowledge
capital.
In 1970, Alvin Toffler in Future Shock described a trend towards
accelerating rates of change.[43] He illustrated how social and
technological norms had shorter lifespans with each generation, and
he questioned society's ability to cope with the resulting turmoil and
anxiety. In past generations periods of change were always
punctuated with times of stability. This allowed society to assimilate
the change and deal with it before the next change arrived. But these
periods of stability are getting shorter and by the late 20th century had
all but disappeared. In 1980 in The Third Wave, Toffler characterized
this shift to relentless change as the defining feature of the third phase
of civilization (the first two phases being the agricultural and industrial
waves).[44] He claimed that the dawn of this new phase will cause
great anxiety for those that grew up in the previous phases, and will
cause much conflict and opportunity in the business world. Hundreds
of authors, particularly since the early 1990s, have attempted to
explain what this means for business strategy.
In 2000, Gary Hamel discussed strategic decay, the notion that the
value of all strategies, no matter how brilliant, decays over time.[45]
In 1978, Dereck Abell (Abell, D. 1978) described strategic
windows and stressed the importance of the timing (both entrance
and exit) of any given strategy. This has led some strategic planners
to build planned obsolescence into their strategies.[46]
In 1989, Charles Handy identified two types of change.[47] Strategic
drift is a gradual change that occurs so subtly that it is not noticed
until it is too late. By contrast, transformational change is sudden
and radical. It is typically caused by discontinuities
(or exogenous shocks) in the business environment. The point where
a new trend is initiated is called a strategic inflection point by Andy
Grove. Inflection points can be subtle or radical.
In 2000, Malcolm Gladwell discussed the importance of the tipping
point, that point where a trend or fad acquires critical mass and takes
off.[48]
In 1983, Noel Tichy wrote that because we are all beings of habit we
tend to repeat what we are comfortable with.[49] He wrote that this is a
trap that constrains our creativity, prevents us from exploring new
ideas, and hampers our dealing with the full complexity of new issues.
He developed a systematic method of dealing with change that
involved looking at any new issue from three angles: technical and
production, political and resource allocation, and corporate culture.
In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless
change requires that businesses continuously reinvent themselves.
[50]
His famous maxim is “Nothing fails like success” by which he
means that what was a strength yesterday becomes the root of
weakness today, We tend to depend on what worked yesterday and
refuse to let go of what worked so well for us in the past. Prevailing
strategies become self-confirming. To avoid this trap, businesses
must stimulate a spirit of inquiry and healthy debate. They must
encourage a creative process of self renewal based on constructive
conflict.
Peters and Austin (1985) stressed the importance of nurturing
champions and heroes. They said we have a tendency to dismiss new
ideas, so to overcome this, we should support those few people in the
organization that have the courage to put their career and reputation
on the line for an unproven idea.
In 1996, Adrian Slywotzky showed how changes in the business
environment are reflected in value migrations between industries,
between companies, and within companies.[51] He claimed that
recognizing the patterns behind these value migrations is necessary if
we wish to understand the world of chaotic change. In “Profit Patterns”
(1999) he described businesses as being in a state ofstrategic
anticipation as they try to spot emerging patterns. Slywotsky and his
team identified 30 patterns that have transformed industry after
industry.[52]
In 1997, Clayton Christensen (1997) took the position that great
companies can fail precisely because they do everything right since
the capabilities of the organization also defines its disabilities.
[53]
Christensen's thesis is that outstanding companies lose their market
leadership when confronted with disruptive technology. He called
the approach to discovering the emerging markets for disruptive
technologies agnostic marketing, i.e., marketing under the implicit
assumption that no one - not the company, not the customers - can
know how or in what quantities a disruptive product can or will be
used before they have experience using it.
A number of strategists use scenario planning techniques to deal with
change. The way Peter Schwartz put it in 1991 is that strategic
outcomes cannot be known in advance so the sources of competitive
advantage cannot be predetermined.[54] The fast changing business
environment is too uncertain for us to find sustainable value in
formulas of excellence or competitive advantage. Instead, scenario
planning is a technique in which multiple outcomes can be developed,
their implications assessed, and their likeliness of occurrence
evaluated. According to Pierre Wack, scenario planning is about
insight, complexity, and subtlety, not about formal analysis and
numbers.[55]
In 1988, Henry Mintzberg looked at the changing world around him
and decided it was time to reexamine how strategic management was
done.[56][57] He examined the strategic process and concluded it was
much more fluid and unpredictable than people had thought. Because
of this, he could not point to one process that could be called strategic
planning. Instead Mintzberg concludes that there are five types of
strategies:
 Strategy as plan - a direction, guide, course of action - intention

rather than actual
 Strategy as ploy - a maneuver intended to outwit a competitor
 Strategy as pattern - a consistent pattern of past behaviour -
realized rather than intended
 Strategy as position - locating of brands, products, or companies
within the conceptual framework of consumers or other
stakeholders - strategy determined primarily by factors outside the
firm
 Strategy as perspective - strategy determined primarily by a
master strategist
In 1998, Mintzberg developed these five types of management

strategy into 10 “schools of thought”. These 10 schools are grouped
into three categories. The first group is prescriptive or normative. It
consists of the informal design and conception school, the formal
planning school, and the analytical positioning school. The second
group, consisting of six schools, is more concerned with how strategic
management is actually done, rather than prescribing optimal plans or
positions. The six schools are the entrepreneurial, visionary, or great
leader school, the cognitive or mental process school, the learning,
adaptive, or emergent process school, the power or negotiation
school, the corporate culture or collective process school, and the
business environment or reactive school. The third and final group
consists of one school, the configuration or transformation school, an
hybrid of the other schools organized into stages, organizational life
cycles, or “episodes”.[58]
In 1999, Constantinos Markides also wanted to reexamine the nature
of strategic planning itself.[59] He describes strategy formation and
implementation as an on-going, never-ending, integrated process
requiring continuous reassessment and reformation. Strategic
management is planned and emergent, dynamic, and interactive. J.
Moncrieff (1999) also stresses strategy dynamics.[60] He recognized
that strategy is partially deliberate and partially unplanned. The
unplanned element comes from two sources: emergent
strategies (result from the emergence of opportunities and threats in
the environment) and Strategies in action (ad hoc actions by many
people from all parts of the organization).
Some business planners are starting to use a complexity theory
approach to strategy. Complexity can be thought of as chaos with a
dash of order. Chaos theory deals with turbulent systems that rapidly
become disordered. Complexity is not quite so unpredictable. It
involves multiple agents interacting in such a way that a glimpse of
structure may appear.
[edit]Information- and technology-driven strategy
Peter Drucker had theorized the rise of the “knowledge worker” back
in the 1950s. He described how fewer workers would be doing
physical labor, and more would be applying their minds. In 1984, John
Nesbitt theorized that the future would be driven largely by
information: companies that managed information well could obtain an
advantage, however the profitability of what he calls the “information
float” (information that the company had and others desired) would all
but disappear as inexpensive computers made information more
accessible.
Daniel Bell (1985) examined the sociological consequences of
information technology, while Gloria Schuck and Shoshana Zuboff
looked at psychological factors.[61] Zuboff, in her five year study of
eight pioneering corporations made the important distinction between
“automating technologies” and “infomating technologies”. She studied
the effect that both had on individual workers, managers, and
organizational structures. She largely confirmed Peter Drucker's
predictions three decades earlier, about the importance of flexible
decentralized structure, work teams, knowledge sharing, and the
central role of the knowledge worker. Zuboff also detected a new
basis for managerial authority, based not on position or hierarchy, but
on knowledge (also predicted by Drucker) which she called
“participative management”.[62]
In 1990, Peter Senge, who had collaborated with Arie de Geus at
Dutch Shell, borrowed de Geus' notion of the learning organization,
expanded it, and popularized it. The underlying theory is that a
company's ability to gather, analyze, and use information is a
necessary requirement for business success in the information age.
(See organizational learning.) To do this, Senge claimed that an
organization would need to be structured such that:[63]
 People can continuously expand their capacity to learn and be

productive,
 New patterns of thinking are nurtured,
 Collective aspirations are encouraged, and
 People are encouraged to see the “whole picture” together.
Senge identified five disciplines of a learning organization. They are:
 Personal responsibility, self reliance, and mastery — We accept

that we are the masters of our own destiny. We make decisions
and live with the consequences of them. When a problem needs to
be fixed, or an opportunity exploited, we take the initiative to learn
the required skills to get it done.
 Mental models — We need to explore our personal mental
models to understand the subtle effect they have on our behaviour.
 Shared vision — The vision of where we want to be in the future
is discussed and communicated to all. It provides guidance and
energy for the journey ahead.
 Team learning — We learn together in teams. This involves a
shift from “a spirit of advocacy to a spirit of enquiry”.
 Systems thinking — We look at the whole rather than the parts.
This is what Senge calls the “Fifth discipline”. It is the glue that
integrates the other four into a coherent strategy. For an alternative
approach to the “learning organization”, see Garratt, B. (1987).
Since 1990 many theorists have written on the strategic importance of

information, including J.B. Quinn,[64] J. Carlos Jarillo,[65] D.L. Barton,
[66]
Manuel Castells,[67] J.P. Lieleskin,[68] Thomas Stewart,[69] K.E.
Sveiby,[70] Gilbert J. Probst,[71] and Shapiro and Varian[72] to name just
a few.
Thomas A. Stewart, for example, uses the term intellectual capital to
describe the investment an organization makes in knowledge. It is
composed of human capital (the knowledge inside the heads of
employees), customer capital (the knowledge inside the heads of
customers that decide to buy from you), and structural capital (the
knowledge that resides in the company itself).
Manuel Castells, describes a network society characterized by:
globalization, organizations structured as a network, instability of
employment, and a social divide between those with access to
information technology and those without.
Geoffrey Moore (1991) and R. Frank and P. Cook[73] also detected a
shift in the nature of competition. In industries with high technology
content, technical standards become established and this gives the
dominant firm a near monopoly. The same is true of networked
industries in which interoperability requires compatibility between
users. An example is word processor documents. Once a product has
gained market dominance, other products, even far superior products,
cannot compete. Moore showed how firms could attain this enviable
position by using E.M. Rogers five stage adoption process and
focusing on one group of customers at a time, using each group as a
base for marketing to the next group. The most difficult step is making
the transition between visionaries and pragmatists (See Crossing the
Chasm). If successful a firm can create a bandwagon effect in which
the momentum builds and your product becomes a de facto standard.
Evans and Wurster describe how industries with a high information
component are being transformed.[74] They cite Encarta's demolition of
the Encyclopedia Britannica (whose sales have plummeted 80% since
their peak of $650 million in 1990). Encarta’s reign was speculated to
be short-lived, eclipsed by collaborative encyclopedias like Wikipedia
that can operate at very low marginal costs. Encarta's service was
subsequently turned into an on-line service and dropped at the end of
2009. Evans also mentions the music industry which is desperately
looking for a new business model. The upstart information savvy
firms, unburdened by cumbersome physical assets, are changing the
competitive landscape, redefining market segments,
and disintermediating some channels. One manifestation of this
is personalized marketing. Information technology allows marketers to
treat each individual as its own market, a market of one. Traditional
ideas of market segments will no longer be relevant if personalized
marketing is successful.
The technology sector has provided some strategies directly. For
example, from the software development industry agile software
development provides a model for shared development processes.
Access to information systems have allowed senior managers to take
a much more comprehensive view of strategic management than ever
before. The most notable of the comprehensive systems is
the balanced scorecard approach developed in the early 1990s by
Drs. Robert S. Kaplan (Harvard Business School) and David
Norton (Kaplan, R. and Norton, D. 1992). It measures several
factorsfinancial, marketing, production, organizational development,
and new product development to achieve a 'balanced' perspective.
[edit]Knowledge Adaptive Strategy
Most current approaches to business "strategy" focus on the
mechanics of management—e.g., Drucker's operational "strategies" --
and as such are not true business strategy. In a post-industrialworld
these operationally focused business strategies hinge on conventional
sources of advantage have essentially been eliminated:
 Scale used to be very important. But now, with access to capital
and a global marketplace, scale is achievable by multiple
organizations simultaneously. In many cases, it can literally be
rented.
 Process improvement or “best practices” were once a favored
source of advantage, but they were at best temporary, as they
could be copied and adapted by competitors.
 Owning the customer had always been thought of as an
important form of competitive advantage. Now, however, customer
loyalty is far less important and difficult to maintain as new brands
and products emerge all the time.
In such a world, differentiation, as elucidated by Michael Porter,

Botten and McManus is the only way to maintain economic or market
superiority (i.e., comparative advantage) over competitors. A company
must OWN the thing that differentiates it from competitors. Without IP
ownership and protection, any product, process or scale advantage
can be compromised or entirely lost. Competitors can copy them
without fear of economic or legal consequences, thereby eliminating
the advantage.
This principle is based on the idea of evolution: differentiation,
selection, amplification and repetition. It is a form of strategy to deal
with complex adaptive systems which individuals, businesses, the
economy are all based on. The principle is based on the survival of
the "fittest". The fittest strategy employed after trail and error and
combination is then employed to run the company in its current
market. Failed strategic plans are either discarded or used for another
aspect of a business. The trade off between risk and return is taken
into account when deciding which strategy to take. Cynefin model and
the adaptive cycles of businesses are both good ways to develop
KAS, reference Panarchy and Cynefin. Analyze the fitness
landscapes for a product, idea, or service to better develop a more
adaptive strategy.
(For an explanation and elucidation of the "post-industrial" worldview,
see George Ritzer and Daniel Bell.)
[edit]Strategic decision making processes
Will Mulcaster [75] argues that while much research and creative
thought has been devoted to generating alternative strategies, too
little work has been done on what influences the quality of strategic
decision making and the effectiveness with which strategies are
implemented. For instance, in retrospect it can be seen that the
financial crisis of 2008-9 could have been avoided if the banks had
paid more attention to the risks associated with their investments, but
how should banks change the way they make decisions to improve
the quality of their decisions in the future? Mulcaster's Managing
Forces framework addresses this issue by identifying 11 forces that
should be incorporated into the processes of decision making and
strategic implementation. The 11 forces are: Time; Opposing forces;
Politics; Perception; Holistic effects; Adding value; Incentives;
Learning capabilities; Opportunity cost; Risk; Style—which can be
remembered by using the mnemonic 'TOPHAILORS'.
[edit]The psychology of strategic management
Several psychologists have conducted studies to determine the
psychological patterns involved in strategic management. Typically
senior managers have been asked how they go about making
strategic decisions. A 1938 treatise by Chester Barnard, that was
based on his own experience as a business executive, sees the
process as informal, intuitive, non-routinized, and involving primarily
oral, 2-way communications. Bernard says “The process is the
sensing of the organization as a whole and the total situation relevant
to it. It transcends the capacity of merely intellectual methods, and the
techniques of discriminating the factors of the situation. The terms
pertinent to it are “feeling”, “judgement”, “sense”, “proportion”,
“balance”, “appropriateness”. It is a matter of art rather than
science.”[76]
In 1973, Henry Mintzberg found that senior managers typically deal
with unpredictable situations so they strategize in ad hoc, flexible,
dynamic, and implicit ways. . He says, “The job breeds adaptive
information-manipulators who prefer the live concrete situation. The
manager works in an environment of stimulous-response, and he
develops in his work a clear preference for live action.”[77]
In 1982, John Kotter studied the daily activities of 15 executives and
concluded that they spent most of their time developing and working a
network of relationships that provided general insights and specific
details for strategic decisions. They tended to use “mental road maps”
rather than systematic planning techniques.[78]
Daniel Isenberg's 1984 study of senior managers found that their
decisions were highly intuitive. Executives often sensed what they
were going to do before they could explain why.[79] He claimed in 1986
that one of the reasons for this is the complexity of strategic decisions
and the resultant information uncertainty.[80]
Shoshana Zuboff (1988) claims that information technology is
widening the divide between senior managers (who typically make
strategic decisions) and operational level managers (who typically
make routine decisions). She claims that prior to the widespread use
of computer systems, managers, even at the most senior level,
engaged in both strategic decisions and routine administration, but as
computers facilitated (She called it “deskilled”) routine processes,
these activities were moved further down the hierarchy, leaving senior
management free for strategic decision making.
In 1977, Abraham Zaleznik identified a difference between leaders
and managers. He describes leadershipleaders as visionaries who
inspire. They care about substance. Whereas managers are claimed
to care about process, plans, and form.[81] He also claimed in 1989
that the rise of the manager was the main factor that caused the
decline of American business in the 1970s and 80s.The main
difference between leader and manager is that, leader has followers
and manager has subordinates. In capitalistic society leaders make
decisions and manager usually follow or execute.[82] Lack of
leadership is most damaging at the level of strategic management
where it can paralyze an entire organization.[83]
According to Corner, Kinichi, and Keats,[84] strategic decision making
in organizations occurs at two levels: individual and aggregate. They
have developed a model of parallel strategic decision making. The
model identifies two parallel processes that both involve getting
attention, encoding information, storage and retrieval of information,
strategic choice, strategic outcome, and feedback. The individual and
organizational processes are not independent however. They interact
at each stage of the process.
[edit]Reasons why strategic plans fail
There are many reasons why strategic plans fail, especially:
 Failure to execute by overcoming the four key organizational

hurdles[85]
 Cognitive hurdle
 Motivational hurdle
 Resource hurdle
 Political hurdle
 Failure to understand the customer
 Why do they buy
 Is there a real need for the product
 inadequate or incorrect marketing research
 Inability to predict environmental reaction
 What will competitors do
 Fighting brands
 Price wars
 Will government intervene
 Over-estimation of resource competence
 Can the staff, equipment, and processes handle the new
strategy
 Failure to develop new employee and management skills
 Failure to coordinate
 Reporting and control relationships not adequate
 Organizational structure not flexible enough
 Failure to obtain senior management commitment
 Failure to get management involved right from the start
 Failure to obtain sufficient company resources to
accomplish task
 Failure to obtain employee commitment
 New strategy not well explained to employees
 No incentives given to workers to embrace the new
strategy
 Under-estimation of time requirements
 No critical path analysis done
 Failure to follow the plan
 No follow through after initial planning
 No tracking of progress against plan
 No consequences for above
 Failure to manage change
 Inadequate understanding of the internal resistance to
change
 Lack of vision on the relationships between processes,
technology and organization
 Poor communications
 Insufficient information sharing among stakeholders
 Exclusion of stakeholders and delegates
[edit]Limitations of strategic management

Although a sense of direction is important, it can also stifle creativity,
especially if it is rigidly enforced. In an uncertain and ambiguous
world, fluidity can be more important than a finely tuned strategic
compass. When a strategy becomes internalized into a corporate
culture, it can lead to group think. It can also cause an organization to
define itself too narrowly. An example of this is marketing myopia.
Many theories of strategic management tend to undergo only brief
periods of popularity. A summary of these theories thus inevitably
exhibits survivorship bias (itself an area of research in strategic
management). Many theories tend either to be too narrow in focus to
build a complete corporate strategy on, or too general and abstract to
be applicable to specific situations. Populism or faddishnesscan have
an impact on a particular theory's life cycle and may see application in
inappropriate circumstances. See business philosophies and popular
management theories for a more critical view of management
theories.
In 2000, Gary Hamel coined the term strategic convergence to
explain the limited scope of the strategies being used by rivals in
greatly differing circumstances. He lamented that strategies converge
more than they should, because the more successful ones are
imitated by firms that do not understand that the strategic process
involves designing a custom strategy for the specifics of each
situation.[45]
Ram Charan, aligning with a popular marketing tagline, believes that
strategic planning must not dominate action. "Just do it!" while not
quite what he meant, is a phrase that nevertheless comes to mind
when combatting analysis paralysis.
[edit]The linearity trap
It is tempting to think that the elements of strategic management – (i)
reaching consensus on corporate objectives; (ii) developing a plan for
achieving the objectives; and (iii) marshalling and allocating the
resources required to implement the plan – can be approached
sequentially. It would be convenient, in other words, if one could deal
first with the noble question of ends, and then address the mundane
question of means.
But in the world where strategies must be implemented, the three
elements are interdependent. Means are as likely to determine ends
as ends are to determine means.[86] The objectives that an
organization might wish to pursue are limited by the range of feasible
approaches to implementation. (There will usually be only a small
number of approaches that will not only be technically and
administratively possible, but also satisfactory to the full range of
organizational stakeholders.) In turn, the range of feasible
implementation approaches is determined by the availability of
resources.
And so, although participants in a typical “strategy session” may be
asked to do “blue sky” thinking where they pretend that the usual
constraints – resources, acceptability to stakeholders , administrative
feasibility – have been lifted, the fact is that it rarely makes sense to
divorce oneself from the environment in which a strategy will have to
be implemented. It’s probably impossible to think in any meaningful
way about strategy in an unconstrained environment. Our brains can’t
process “boundless possibilities”, and the very idea of strategy only
has meaning in the context of challenges or obstacles to be
overcome. It’s at least as plausible to argue that acute awareness of
constraints is the very thing that stimulates creativity by forcing us to
constantly reassess both means and ends in light of circumstances.
The key question, then, is, "How can individuals, organizations and
societies cope as well as possible with ... issues too complex to be
fully understood, given the fact that actions initiated on the basis of
inadequate understanding may lead to significant regret?"[87]
The answer is that the process of developing organizational strategy
must be iterative. It involves toggling back and forth between
questions about objectives, implementation planning and resources.
An initial idea about corporate objectives may have to be altered if
there is no feasible implementation plan that will meet with a sufficient
level of acceptance among the full range of stakeholders, or because
the necessary resources are not available, or both.
Even the most talented manager would no doubt agree that
"comprehensive analysis is impossible" for complex problems.
[88]
Formulation and implementation of strategy must thus occur side-
by-side rather than sequentially, because strategies are built on
assumptions that, in the absence of perfect knowledge, are never
perfectly correct. Strategic management is necessarily a "...repetitive
learning cycle [rather than] a linear progression towards a clearly
defined final destination."[89] While assumptions can and should be
tested in advance, the ultimate test is implementation. You will
inevitably need to adjust corporate objectives and/or your approach to
pursuing outcomes and/or assumptions about required resources.
Thus a strategy will get remade during implementation because
"humans rarely can proceed satisfactorily except by learning from
experience; and modest probes, serially modified on the basis of
feedback, usually are the best method for such learning."[90]
It serves little purpose (other than to provide a false aura of certainty
sometimes demanded by corporate strategists and planners) to
pretend to anticipate every possible consequence of a corporate
decision, every possible constraining or enabling factor, and every
possible point of view. At the end of the day, what matters for the
purposes of strategic management is having a clear view – based on
the best available evidence and on defensible assumptions – of what
it seems possible to accomplish within the constraints of a given set of
circumstances. As the situation changes, some opportunities for
pursuing objectives will disappear and others arise. Some
implementation approaches will become impossible, while others,
previously impossible or unimagined, will become viable.
The essence of being “strategic” thus lies in a capacity for "intelligent
trial-and error"[91] rather than linear adherence to finally honed and
detailed strategic plans. Strategic management will add little value—
indeed, it may well do harm—if organizational strategies are designed
to be used as a detailed blueprints for managers. Strategy should be
seen, rather, as laying out the general path—but not the precise steps
—an organization will follow to create value.[92] Strategic management
is a question of interpreting, and continuously reinterpreting, the
possibilities presented by shifting circumstances for advancing an
organization's objectives. Doing so requires strategists to
think simultaneously about desired objectives, the best approach for
achieving them, and the resources implied by the chosen approach. It
requires a frame of mind that admits of no boundary between means
and ends.
It may not be so limiting as suggested in "The linearity trap" above.
Strategic thinking/ identification takes place within the gambit of
organizational capacity and Industry dynamics. The two common
approaches to strategic analysis are value analysis and SWOT
analysis. Yes Strategic analysis takes place within the constraints of
existing/potential organizational resources but its would not be
appropriate to call it a trap. For e.g., SWOT tool involves analysis of
the organization's internal environment (Strengths & weaknesses) and
its external environment (opportunities & threats). The organization's
strategy is built using its strengths to exploit opportunities, while
managing the risks arising from internal weakness and external
threats. It further involves contrasting its strengths & weaknesses to
determine if the organization has enough strengths to offset its
weaknesses. Applying the same logic, at the external level, contrast is
made between the externally existing opportunities and threats to
determine if the organization is capitalizing enough on opportunities to
offset emerging threats.
Enterprise marketing management

Enterprise Marketing Management defines a category of software used by marketing
operations to manage their end-to-end internal processes. EMM is subset of Marketing
Technologies which consists of a total of 3 key technology types that allow for
corporations and customers to participate in a holistic and real-time marketing campaign.
EMM consists of other marketing software categories such as Web Analytics, Campaign
Management, Digital Asset Management, Web Content Management, Marketing
Resource Management, Marketing Dashboards, Lead Management, Event-driven
Marketing, Predictive Modeling and more. The goal of deploying and using EMM is to
improve both the efficiency and effectiveness of marketing by increasing operational
efficiency, decreasing costs and waste, and standardizing marketing processes for an
accurate and predictable time to market. The benefit of using an EMM suite rather than a
variety of point solutions is improved collaboration, efficiency and visibility across the
entire marketing function, as well as reduced total cost of ownership. Depending on the
variable combinations of solutions, EMM can mean several different things to specific
brands and industries. Enterprise Marketing Management allows for corporations to put
in place a baseline of their operations that will allow them to begin evolution towards a
holistic solution that incorporates customer experience, expectation and brand value
associated with Marketing Technologies.
Economic order quantity

Corporate finance
Working capital
Cash conversion cycle
Return on capital
Economic value added
Just in time
Economic order quantity
Discounts and allowances
Factoring (finance)
Capital budgeting
Capital investment decisions
The investment decision
The financing decision
Sections
Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action
Societal components
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
Clawback
Economic order quantity is the level of inventory that minimizes the total inventory
holding costs and ordering costs. It is one of the oldest classical production scheduling
models. The framework used to determine this order quantity is also known as Wilson
EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but
R. H. Wilson, a consultant who applied it extensively, is given credit for his early in-depth
analysis of it.[1]
[edit]Overview
EOQ only applies where the demand for a product is constant over the year and that
each new order is delivered in full when the inventory reaches zero. There is a fixed cost
charged for each order placed, regardless of the number of units ordered. There is also
a holding or storage cost for each unit held in storage (sometimes expressed as a
percentage of the purchase cost of the item).
We want to determine the optimal number of units of the product to order so that we
minimize the total cost associated with the purchase, delivery and storage of the product
The required parameters to the solution are the total demand for the year, the purchase
cost for each item, the fixed cost to place the order and the storage cost for each item
per year. Note that the number of times an order is placed will also affect the total cost,
however, this number can be determined from the other parameters
[edit]Underlying assumptions
1. The ordering cost is constant.
2. The rate of demand is constant
3. The lead time is fixed
4. The purchase price of the item is constant i.e. no discount is available
5. The replenishment is made instantaneously, the whole batch is delivered
at once.
EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A
common misunderstanding is that the formula tries to find when these are equal.)
[edit]Variables
 Q = order quantity
 Q * = optimal order quantity
 D = annual demand quantity of the product
 P = purchase cost per unit
 S = fixed cost per order (not per unit, in addition to unit cost)
 H = annual holding cost per unit (also known as carrying cost or storage cost)
(warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)
[edit]The Total Cost function

The single-item EOQ formula finds the minimum point of the following cost function:
Total Cost = purchase cost + ordering cost + holding cost
- Purchase cost: This is the variable cost of goods: purchase unit price × annual demand
quantity. This is P×D
- Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we
need to order D/Q times per year. This is S × D/Q
- Holding cost: the average quantity in stock (between fully replenished and empty) is
Q/2, so this cost is H × Q/2
To determine the minimum point of the total cost curve, set the ordering cost equal to the
holding cost:
Solving for Q gives Q* (the optimal order quantity):

Therefore: .
Q* is independent of P; it is a function of only S, D, H.
[edit]Extensions
Several extensions can be made to the EOQ model, including backordering costs and
multiple items. Additionally, the economic order interval can be determined from the
EOQ and the economic production quantity model (which determines the optimal
production quantity) can be determined in a similar fashion.
A version of the model, the Baumol-Tobin model, has also been used to determine
the money demand function, where a person's holdings of money balances can be seen
in a way parallel to a firm's holdings of inventory.[2]
[edit]Example
 Suppose annual requirement (AR) = 10000 units

 Cost per order (CO) = $2
 Cost per unit (CU)= $8
 Carrying cost %age (%age of CU) = 0.02
 Carrying cost Per unit = $0.16
Economic order quantity =
Economic order quantity = 500 units
Number of order per year (based on EOQ)
Number of order per year (based on EOQ) = 20
Total cost = CU * AR + CO(AR / EOQ) + CC(EOQ / 2)
Total cost = 8 * 10000 + 2(10000 / 500) + 0.16(500 / 2)
Total cost = $80080
If we check the total cost for any order quantity other than 500(=EOQ), we will see that
the cost is higher. For instance, supposing 600 units per order, then
Total cost = 8 * 10000 + 2(10000 / 600) + 0.16(600 / 2)
Total cost = $80081
Similarly, if we choose 300 for the order quantity then
Total cost = 8 * 10000 + 2(10000 / 300) + 0.16(300 / 2)
Total cost = $80091
This illustrates that the Economic Order Quantity is always in the best interests of the
entity.
Stock management
Stock management is the function of understanding the stock mix of a company and
the different demands on that stock. The demands are influenced by
both external and internal factors and are balanced by the creation of Purchase order
requests to keep supplies at a reasonable or prescribed level.
Contents
[hide]
• 1 Retail supply chain
o 1.1 Weighted Average Price
Method
• 2 Software applications
• 3 Business models
• 4 See also
• 5 References
[edit]Retail supply chain

Stock management in the retail supply chain follows the following sequence:
1. Request for new stock from stores to head office

2. Head office issues purchase orders to the vendor
3. Vendor ships the goods
4. Warehouse receives the goods
5. Warehouse stocks and distributes to the stores
6. Stores receive the goods
7. Goods are sold to customers at the stores
The management of the inventory in the supply chain involves managing the physical
quantities as well as the costing of the goods as it flows through the supply chain.
In managing the cost prices of the goods throughout the supply chain, several costing
methods are employed:
1. Retail method
2. Weighted Average Price method
3. FIFO (First In First Out) method
4. LIFO (Last In First Out) method
5. LPP (Last Purchase Price) method
6. BNM (Bottle neck method)
[edit]Weighted Average Price Method

The calculation can be done for different periods. If the calculation is done on a monthly
basis, then it is referred to the periodic method. In this method, the available stock is
calculated by:
ADD Stock at beginning of period

ADD Stock purchased during the period
AVERAGE total cost by total qty to arrive at the Average Cost of Goods for the period.
This Average Cost Price is applied to all movements and adjustments in that period.
Ending stock in qty is arrived at by Applying all the changes in qty to the Available
balance.
Multiplying the stock balance in qty by the Average cost gives the Stock cost at the end
of the period.
Using the perpetual method, the calculation is done upon every purchase transaction.
Thus, the calculation is the same based on the periodic calculation whether by period
(periodic) or by transaction (perpetual).
The only difference is the 'periodicity' or scope of the calculation. - Periodic is done
monthly - Perpetual is done for the duration of the purchase until the next purchase
In practice, the daily averaging has been used to closely approximate the perpetual
method. 6. Bottle neck method ( depends on proper planning support)
[edit]Software applications
The implementation of inventory management applications has become a valuable tool
for organizations looking to more efficiently manage stock. While the capabilities of
applications vary, most inventory management applications give organizations a
structured method of accounting for all incoming and outgoing inventory within their
facilities. Organizations save a significant amount in costs associated with manual
inventory counts, administrative errors and reductions in inventory stock-outs.
[edit]Business models
Just-in-time Inventory (JIT), Vendor Managed Inventory (VMI) and Customer Managed
Inventory (CMI) are a few of the popular models being employed by organizations
looking to have greater stock management control.
JIT is a model which attempts to replenish inventory for organizations when the
inventory is required. The model attempts to avoid excess inventory and its associated
costs. As a result, companies receive inventory only when the need for more stock is
approaching.
VMI and CMI are two business models that adhere to the JIT inventory principles. VMI
gives the vendor in a vendor/customer relationship the ability to monitor, plan and control
inventory for their customers. Customers relinquish the order making responsibilities in
exchange for timely inventory replenishment that increases organizational efficiency.
CMI allows the customer to order and control their inventory from their
vendors/suppliers. Both VMI and CMI benefit the vendor as well as the customer.
Vendors see a significant increase in sales due to increased inventory turns and cost
savings realized by their customers, while customers realize similar benefits.
Stock control
Stock control is used to evaluate how much stock is used. It is also used to know what is
needed to be ordered. Stock control can only happen if a stock take has taken place. Stock
rotation must be put into use with stock control by using the oldest products before the
newer products.
Stock-taking
A stocktake involves the physical verification of the quantities and condition of items held in
an inventory, warehouse etc., in order to provide an accurate audit of existing inventory
and stock valuation. It is also the source of stock discrepancy information.
Matching principle
The matching principle is a culmination of accrual accounting and the revenue
recognition principle. They both determine the accounting period, in
whichrevenues and expenses are recognized. According to the principle, expenses are
recognized when obligations are (1) incurred (usually when goods are transferred or
services rendered, e.g. sold), and (2) offset against recognized revenues, which were
generated from those expenses (related on the cause-and-effect basis), no matter when
cash is paid out. In cash accounting—in contrast—expenses are recognized when cash is
paid out, no matter when obligations are incurred through transfer of goods or rendition of
services: e.g., sale. This is often voted on at the shareholders meetings! If no cause-and-
effect relationship exists (e.g., a sale is impossible), costs are recognized as expenses in
the accounting period they expired: i.e., when have been used up or consumed (e.g., of
spoiled, dated, or substandard goods, or not demanded services). Prepaid expenses are not
recognized as expenses, but as assetsuntil one of the qualifying conditions is met resulting
in a recognition as expenses. Lastly, if no connection with revenues can be established,
costs are recognized immediately as expenses (e.g., general administrative and research
and development costs).
Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are
not recognized as expenses (cost of goods sold), but asassets (deferred expenses), until the
actual products are sold.
The matching principle allows better evaluation of actual profitability and performance
(shows how much was spent to earn revenue), and reduces noise from timing mismatch
between when costs are incurred and when revenue is realized.
periods as expenses are recognized, because expenses are recognized when obligations are
incurred regardless when cash is paid out according to the matching principle in accrual accounting.
Cash can be paid out in an earlier or latter period than obligations are incurred (when goods or
services are received) and related expenses are recognized that results in the following two types of
accounts:
 Accrued expense: Expense is recognized before cash is paid out.

 Deferred expense: Expense is recognized after cash is paid out.
Accrued expenses is a liability with an uncertain timing or amount, but where the uncertainty is not
significant enough to qualify it as a provision. An example is an obligation to pay for goods or services
received from a counterpart, while cash for them is to be paid out in a later accounting period when its
amount is deducted from accrued expenses. It shares characteristics with deferred
income (or deferred revenue) with the difference that a liability to be covered latter is cash received
from a counterpart, while goods or services are to be delivered in a latter period, when such income
item is earned, the related revenue item is recognized, and the same amount is deducted
from deferred revenues.
Deferred expenses (or prepaid expenses or prepayment) is an asset, such as cash paid out TO a
counterpart for goods or services to be received in a latter accounting period when fulfilling the
promise to pay is actually acknowledged, the related expense item is recognized, and the same
amount is deducted from prepayments. It shares characteristics with accrued revenue (or accrued
assets) with the difference that an asset to be covered latter are proceeds from a delivery of goods or
services, at which such income item is earned and the related revenue item is recognized, while cash
for them is to be received in a later period, when its amount is deducted from accrued revenues.
[edit]Examples
 Accrued expense allows one to match future costs of products with the proceeds from their
sales prior to paying out such costs.
 Deferred expense (prepaid expense) allows one to match costs of products paid out and not
received yet.
 Depreciation matches the cost of purchasing fixed assets with revenues generated by them
by spreading such costs over their expected life.
[edit]Accrued expenses
Accrued expense is a liability used—according to matching principle—to enable management of
future costs with an uncertain timing or amount.
For example, supplying goods in one accounting period by a vendor, but paying for them in a later
period results in an accrued expense that prevents a fictitious increase in the receiving company's
value equal to the increase in its inventory (assets) by the cost of the goods received, but unpaid.
Without such accrued expense, a sale of such goods in the period they were supplied would cause
that the unpaid inventory (recognized as an expense fictitiously incurred) would effectively offset the
sale proceeds (revenue) resulting in a fictitious profit in the period of sale, and in a fictitious loss in the
latter period of payment, both equal to the cost of goods sold.
Period costs, such as office salaries or selling expenses, are immediately recognized
as expenses (and offset against revenues of the accounting period) also when employees are paid in
the next period. Unpaid period costs are accrued expenses (liabilities) to avoid such costs (as
expenses fictitiously incurred) to offset period revenues that would result in a fictitious profit. An
example is a commission earned at the moment of sale (or delivery) by a sales representative who is
compensated at the end of the following week, in the next accounting period. The company
recognizes the commission as an expense incurred immediately in its current income statement to
match the sale proceeds (revenue), so the commission is also added to accrued expenses in the sale
period to prevent it from otherwise becoming a fictitious profit, and it is deducted from accrued
expenses in the next period to prevent it from otherwise becoming a fictitious loss, when the rep is
compensated.
[edit]Deferred expenses
A Deferred expense (prepaid expenses or prepayment) is an asset used to enable management of
costs paid out and not recognized as expenses according to the matching principle.
For example, when the accounting periods are monthly, an 11/12 portion of an annually
paid insurance cost is added to prepaid expenses, which are decreased by 1/12 of the cost in each
subsequent period when the same fraction is recognized as an expense, rather than all in the month
in which such cost is billed. The not-yet-recognized portion of such costs remains
as prepayments (assets) to prevent such cost from turning into a fictitious loss in the monthly period it
is billed, and into a fictitious profit in any other monthly period.
Similarly, cash paid out for (the cost of) goods and services not received by the end of the accounting
period is added to the prepayments to prevent it from turning into a fictitious loss in the period cash
was paid out, and into a fictitious profit in the period of their reception. Such cost is not recognized in
the income statement (profit and loss or P&L) as the expense incurred in the period of payment, but in
the period of their reception when such costs are recognized as expenses in P&L and deducted from
prepayments (assets) on balance sheets.
[edit]Depreciation
Depreciation is used to distribute the cost of the asset over its expected life span according to the
matching principle. If a machine is bought for $100,000, has a life span of 10 years, and can produce
the same amount of goods each year, then $10,000 of the cost of the machine is matched to each
year, rather than charging $100,000 in the first year and nothing in the next 9 years. So, the cost of
the machine is offset against the sales in that year. This matches costs to sales
Comparison of Cash Method and Accrual Method of

accounting
The two primary accounting methods of the cash and the accruals basis (the difference
being primarily one of timing) are used to calculate US public debt,[1] as well as taxable
income for U.S. federal income taxes and other income taxes. According to the Internal
Revenue Code, a taxpayer may compute taxable income by:
1. the cash receipts and disbursements method;

2. an accrual method;
3. any other method permitted by the chapter; or
4. any combination of the foregoing methods permitted under regulations
prescribed by the Secretary.[2]
As a general rule, a taxpayer must compute taxable income using the same accounting
method he / she uses to compute income in keeping his / her books.[3] Also, the taxpayer
must maintain a consistent method of accounting from year to year. Should he / she change
from the cash basis to the accrual basis (or vice versa), he / she must notify and secure the
consent of the Secretary.[4]
Revenue recognition
The Revenue recognition principle is a cornerstone of accrual accounting together

with matching principle. They both determine the accounting period, in
which revenues and expenses are recognized. According to the principle, revenues are
recognized when they are (1) realised or realisable, and are (2) earned (usually when goods
are transferred or services rendered), no matter when cash is received. In cash accounting -
in contrast - revenues are recognized when cash is received no matter when goods or
services are sold.
Cash can be received in an earlier or latter period than obligations are met (when goods or
services are delivered) and related revenues are recognized that results in the following two
types of accounts:
 Accrued revenue: Revenue is recognized before cash is received.

 Deferred revenue: Revenue is recognized after cash is received.
The Revenue recognition principle is a cornerstone of accrual accounting together with matching
principle. They both determine the accounting period, in which revenues and expenses are
recognized. According to the principle, revenues are recognized when they are (1) realised or
realisable, and are (2) earned (usually when goods are transferred or services rendered), no matter
when cash is received. In cash accounting - in contrast - revenues are recognized when cash is
received no matter when goods or services are sold.
Cash can be received in an earlier or latter period than obligations are met (when goods or services
are delivered) and related revenues are recognized that results in the following two types of accounts:

General rule
Received advances are not recognized as revenues, but
as liabilities (deferred income), until the conditions (1) and (2) are met.
(1) Revenues are realized when cash or claims to cash (receivable)
are received in exchange for goods or services. Revenues are
realizable when assets received in such exchange are readily
convertible to cash or claim to cash.
(2) Revenues are earned when such goods/services are
transferred/rendered. Both, such payment assurance and final
delivery completion (with a provision for returns, warranty claims,
etc.), are required for revenue recognition.
Recognition of revenue from four types of transactions:
1. Revenues from selling inventory are recognized at the date

of sale often interpreted as the date of delivery.
2. Revenues from rendering services are recognized when
services are completed and billed.
3. Revenue from permission to use company’s assets (e.g.
interests for using money, rent for using fixed assets, and
royalties for using intangible assets) is recognized as time
passes or as assets are used.
4. Revenue from selling an asset other than inventory is
recognized at the point of sale, when it takes place.
In practice, this means that revenue is recognized when an invoice

has been sent.
[edit]Revenue vs. cash timing
Accrued revenue (or accrued assets) is an asset such as proceeds
from a delivery of goods or services, at which such income item is
earned and the related revenue item is recognized, while cash for
them is to be received in a latter accounting period, when its amount
is deducted from accrued revenues. It shares characteristics
with deferred expense (or prepaid expense, or prepayment) with the
difference that an asset to be covered latter is cash paid out TO a
counterpart for goods or services to be received in a latter period
when the obligation to pay is actually incurred, the
related expenseitem is recognized, and the same amount is deducted
from prepayments
Deferred revenue (or deferred income) is a liability, such as cash
received FROM a counterpart for goods or services are to be
delivered in a later accounting period, when such income item is
earned, the related revenue item is recognized, and the deferred
revenue is reduced. It shares characteristics with accrued
expense with the difference that a liability to be covered later is an
obligation to pay for goods or services received FROM a counterpart,
while cash for them is to be paid out in a later period when its amount
is deducted from accrued expenses.
For example, a company receives an annual software license fee paid
out by a customer upfront on the January 1. However the
company's fiscal year ends on May 31. So, the company using
accrual accounting adds only five months worth (5/12) of the fee to
its revenues in profit and loss for the fiscal year the fee was received.
The rest is added to deferred income (liability) on the balance
sheet for that year.
[edit]Advances
Advances are not considered to be a sufficient evidence of sale, thus

no revenue is recorded until the sale is completed. Advances are
considered a deferred income and are recorded as liabilities until the
whole price is paid and the delivery made (i.e. matching obligations
are incurred).
[edit]Exceptions
[edit]Revenues not recognized at sale

The general rule says that revenue from selling inventory is
recognized at the point of sale, but there are several exceptions.
 Buyback agreements: buyback agreement means that a

company sells a product and agrees to buy it back after some time.
If buyback price covers all costs of the inventory plus related
holding costs, the inventory remains on the seller’s books. In plain:
there was no sale.
 Returns: companies which cannot reasonably estimate the
amount of future returns and/or have extremely high rates of
returns should recognize revenues only when the right to return
expires. Those companies which can estimate the number of future
returns and have a relatively small return rate can recognize
revenues at the point of sale, but must deduct estimated future
returns.
Revenues recognized before Sale

Long-term contracts
This exception primarily deals with long-term contracts such as
constructions (buildings, stadiums, bridges, highways, etc.),
development of aircraft, weapons, and space exploration hardware.
Such contracts must allow the builder (seller) to bill the purchaser at
various parts of the project (e.g. every 10 miles of road built).
 Percentage-of-completion method says that if (1) the contract

clearly specifies the price and payment options with transfer of
ownership, (2) the buyer is expected to pay the whole amount and
(3) the seller is expected to complete the project, then revenues,
costs, and gross profit can be recognized each period based upon
the progress of construction (that is, percentage of completion). For
example, if during the year, 25% of the building was completed, the
builder can recognize 25% of the expected total profit on the
contract. This method is preferred. However, expected loss should
be recognized fully and immediately due to conservatism
constraint.
 Completed contract method should be used only if
percentage-of-completion is not applicable or the contract involves
extremely high risks. Under this method, revenues, costs, and
gross profit are recognized only after the project is fully completed.
Thus, if a company is working only on one project, its income
statement will show $0 revenues and $0 construction-related costs
until the final year. However, expected loss should be recognized
fully and immediately due to conservatism constraint.
[edit]Completion of production basis
This method allows recognizing revenues even if no sale was made.

This applies to agricultural products and minerals because (1) there is
a ready market for these products with reasonably assured prices, (2)
the units are interchangeable, and (3) selling and distributing does not
involve significant costs.
[edit]Revenues recognized after Sale
Sometimes, the collection of receivables involves a high level of risk.
If there is a high degree of uncertainty regarding collectibility then a
company must defer the recognition of revenue. There are three
methods which deal with this situation:
 Installment Sales Method allows recognizing income after the

sale is made, and proportionately to the product of gross profit
percentage and cash collected calculated. The unearned income is
deferred and then recognized to income when cash is collected.
[1]
For example, if a company collected 45% of total product price, it
can recognize 45% of total profit on that product.
 Cost Recovery Method is used when there is an extremely
high probability of uncollectble payments. Under this method no
profit is recognized until cash collections exceed the seller’s cost of
the merchandise sold. For example, if a company sold a machine
worth $10,000 for $15,000, it can start recording profit only when
the buyer pays more than $10,000. In other words, for each dollar
collected greater than $10,000 goes towards your anticipated gross
profit of $5,000.
 Deposit Method is used when the company receives cash
before sufficient transfer of ownership occurs. Revenue is not
recognized because the risks and rewards of ownership have not
transferred to the buyer.[2]
Accrual
Accrual (accumulation) of something is, in finance, the adding together of interest or
different investments over a period of time. It holds specific meanings in accounting, where it
can refer to accounts on a balance sheet that represent liabilities and non-cash-based
assets used in accrual-based accounting. These types of accounts include, among
others, accounts payable, accounts receivable, goodwill, deferred tax liability and future
interest expense.[1]
For example, a company delivers a product to a customer who will pay for it 30 days later in
the next fiscal year, which starts a week after the delivery. The company recognizes the
proceeds as a revenue in its current income statement still for the fiscal year of the delivery,
even though it will get paid in cash during the following accounting period.[2] The proceeds
are also a accrued income (asset) on the balance sheet for the delivery fiscal year, but not
for the next fiscal year when cash is received.
Similarly, a salesperson, who sold the product, earned a commission at the moment of sale
(or delivery). The company will recognize the commission as anexpense in its current
income statement, even though s-/he will actually get paid at the end of the following week in
the next accounting period. The commission is also a accrued expense (liability) on
the balance sheet for the delivery period, but not for the next period the commission (cash)
is paid out to her/him.
Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued
expense and accrued revenue that share the common name word, but they have the
opposite economic / accounting characteristics.

Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a delivery
of goods or services, when such income is earned and a related revenue item is recognized,
while cash is to be received in a latter period, when the amount is deducted from accrued
revenues.
In the rental industry, there are specialized revenue accruals for rental income which crosses
month end boundaries. These are normally utilized by rental companies who charge in
arrears, based on an anniversary of a contract date. For example a rental contract which
began on 15 January, being invoiced on a recurring monthly basis will not generate its first
invoice until 14 February. Therefore at the end of the January financial period an accrual
must be raised for 16 days worth of the monthly charge. This may be a simple pro-rata basis
(e.g. 16/31 of the monthly charge) or may be more complex if only week days are being
charged or a standardized month is being used (e.g. 28 days, 30 days etc.).
Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the
uncertainty is not significant enough to qualify it as aprovision. An example is a pending
obligation to pay for goods or services received from a counterpart, while cash is to be paid
out in a latter accounting period when the amount is deducted from accrued expenses.
In the United States of America, this difference is best summarized by IAS 37 which states:
"11 Provisions can be distinguished from other liabilities such as trade payables and
accruals because there is uncertainty about the timing or amount of the future expenditure
required in settlement. By contrast:
"(a) trade payables are liabilities to pay for goods or services that have been received or
supplied and have been invoiced or formally agreed with the supplier; and
"(b) accruals are liabilities to pay for goods or services that have been received or supplied
but have not been paid, invoiced or formally agreed with the supplier, including amounts due
to employees (for example, amounts relating to accrued vacation pay). Although it is
sometimes necessary to estimate the amount or timing of accruals, the uncertainty is
generally much less than for provisions.
"Accruals are often reported as part of trade and other payables, whereas provisions are
reported separately."
To add to the confusion, some legalistic accounting systems take a simplistic view of
“’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has
not been formally invoiced. This is primarily due to tax considerations, since the act of
issuing an invoice creates, in some countries, taxable revenue, even if the customer does
not ultimately pay and the related receivable becomes uncollectable.
Accruals in payroll
In payroll, a common benefit that an employer will provide
for employees is a vacation or sick accrual. This means that as time
passes, an employee accumulates additional sick or vacation time
and this time is placed into a bank. Once the time is accumulated, the
employer or the employer's payroll provider will track the amount of
time used for sick or vacation.
[edit]Length of Service
For most employers, a time-off policy is published and followed with
regard to benefit accruals. These guidelines ensure that all employees
are treated fairly with regard to the distribution and use of sick and
vacation time.
Within these guidelines, the rate at which the employee will
accumulate the vacation or sick time is often determined by length of
service (the amount of time the employee has worked for the
employers).
[edit]Trial Period
In many cases, these guidelines indicate there is a trial period (usually
30 to 90 days) where no time is awarded to the employee. This does
not prevent an employee from calling in sick immediately after being
hired, but it does mean that they will not get paid for this time off.
However it does prevent an employee for example, scheduling a
vacation for the second week of work. After this trial period, the award
of time may begin or it may be retroactive, back to the date of hire.
[edit]Rollover/Carry Over
Some accrual policies have the ability to carry over or roll over some
or all unused time that has been accrued into the next year. If the
accrual policy does not have any type of rollover, any accrued time
that is in the bank is usually lost at the end of the employer's calendar
year.
Accrued interest
In finance, accrued Interest is the interest that has accumulated since
the principal investment, or since the previous interest payment if there has been one
already. For a financial instrument such as a bond, interest is calculated and paid in set
intervals. Accrued income is an income which has been accumulated or accrued irrespective
to actual Receipt, which means event occurred but cash not yet received.
Formula
The primary formula for calculating the interest accrued in a given
period is:
where IA is the accrued interest, T is the fraction of the year, P is the
principal, and R is the annualized interest rate.
T is calculated as follows:
where DP is the number of days in the period, and DY is the number of

days in the year.
A compounding instrument adds the previously accrued interest to the
principal each period.
The main variables that affect the calculation are the period between
interest payments and the day count convention used to determine
the fraction of year, and the date rolling convention in use.
[edit]Day count conventions
Main article: Day count convention
Common day count conventions that affect the accrued interest
calculation are:
 actual/360 (days per month, days per year)
Each month is treated normally and the year is assumed to be 360

days e.g. in a period from February 1, 2005 to April 1, 2005 T is
considered to be 59 days divided by 360.
 30/360
Each month is treated as having 30 days, so a period from February

1, 2005 to April 1, 2005 is considered to be 60 days. The year is
considered to have 360 days. This convention is frequently chosen for
ease of calculation: the payments tend to be regular and at
predictable amounts.
 actual/365
Each month is treated normally, and the year is assumed to have 365
days, regardless of leap year status. For example, a period from
February 1, 2005 to April 1, 2005 is considered to be 59 days. This
convention results in periods having slightly different lengths.
 actual/actual (ACT/ACT) - (1)
Each month is treated normally, and the year has the usual number of
days. For example, a period from February 1, 2005 to April 1, 2005 is
considered to be 59 days. In this convention leap years do affect the
final result.
 actual/actual (ACT/ACT) - (2)

Each month is treated normally, and the year is the number of days in
the current coupon period multiplied by the number of coupons in a
year e.g. if the coupon is payable 1 February and August then on April
1, 2005 the days in the year is 362 i.e. 181 (the number of days
between 1 February and 1 August 2005) x 2 (semi-annual).
[edit]Date rolling
Date rolling comes into effect because many instruments can only pay
out accrued interest on business days. This often results in interest
accruing for a slightly shorter or longer period. Common date rolling
conventions are:
 Following business day. The payment date is rolled to the next

business day.
 Modified following business day. The payment date is rolled to
the next business day, unless doing so would cause the payment
to be in the next calendar month, in which case the payment date is
rolled to the previous business day. Many institutions have month-
end accounting procedures that necessitate this.
 Previous business day. The payment date is rolled to the
previous business day.
 Modified previous business day. The payment date is rolled to
the previous business day, unless doing so would cause the
payment to be in the previous calendar month, in which case the
payment date is rolled to the next business day. Many institutions
have month-end accounting procedures that necessitate this.
Accrued jurisdiction
Accrued jurisdiction within the context of the Australian legal system is the power
held over state matters by federal courts. Accrued jurisdiction will occur when there
are several cases brought to theFederal Court of Australia (FCA) where there are
competing jurisdictions between them. In essence the state vests judicial authority in
the federal court providing that a number of requirements are met. A claim that is
based on a state law for example can be heard in a federal court depending on:
1. the actions done by respective parties

2. the relationship between the parties
3. the laws which attach rights or liabilities to the conduct and relationship
of parties
4. whether the different claims arise under the same subject matter
5. whether the different claims are so related that the determination of
one depends on the other
The above test is applied by the court and a decision reached as to whether the
court has accrued jurisdiction. A convenient example of this process is outlined in the
case Re Wakim; Ex parte McNally (1999) HCA where there is a conflict between
state and federal jurisdictions. In this particular case it was held that accrued
jurisdiction did exist but had it not the FCA would have been
actingunconstitutionally had it proceeded hearing the case.
Accrued liabilities
Accrued liabilities are liabilities which have occurred, but have not been paid or logged
under accounts payable during an accounting period; in other words, obligations for goods
and services provided to a company for which invoices have not yet been received.
Examples would include accrued wages payable, accrued sales tax payable, and accrued
rent payable.
There are two general types of Accrued Liabilities:
 Routine and recurring

 Infrequent or non-routine
[edit]Example: Accrued Wages Payable
Most companies pay their employees on a predetermined schedule. Let's say that the
"Imaginary company Ltd." pays its employees each Friday for the hours worked that week.
Because wages are accrued for an entire week before they are paid, wages paid on Friday
June 5 are compensation for the week ended June 5. If the total wages for the 4 Fridays in
June are $1000.00 ($250.00 per week or $50.00 per day) "Imaginary company Ltd." makes
routine entries for wage payments at the end of each week. As the company pays wages it
increases 'Wage Expense' and decreases 'Cash'. In this example "Imaginary company Ltd."
would pay wages on the 5th, 12th, 19th, and 26 June. Assuming that the company prepares
Financial statements each month, they owe an additional $100.00 in wages for the last two
workdays in June (29th & 30th). The company will not pay these wages until Friday the 3rd
of July; to make sure the company's report remains correct an adjustment must be made.
Accrued liabilities are liabilities which have occurred, but have not been paid or logged
under accounts payable during an accounting period; in other words, obligations for goods and
services provided to a company for which invoices have not yet been received. Examples would
include accrued wages payable, accrued sales tax payable, and accrued rent payable.
There are two general types of Accrued Liabilities:
 Routine and recurring

 Infrequent or non-routine
[edit]Example: Accrued Wages Payable

Most companies pay their employees on a predetermined schedule. Let's say that the "Imaginary
company Ltd." pays its employees each Friday for the hours worked that week.
Because wages are accrued for an entire week before they are paid, wages paid on Friday June 5 are
compensation for the week ended June 5. If the total wages for the 4 Fridays in June are $1000.00
($250.00 per week or $50.00 per day) "Imaginary company Ltd." makes routine entries for wage
payments at the end of each week. As the company pays wages it increases 'Wage Expense' and
decreases 'Cash'. In this example "Imaginary company Ltd." would pay wages on the 5th, 12th, 19th,
and 26 June. Assuming that the company prepares Financial statements each month, they owe an
additional $100.00 in wages for the last two workdays in June (29th & 30th). The company will not pay
these wages until Friday the 3rd of July; to make sure the company's report remains correct an
adjustment must be made.
Wage Expense $1000.00

Cash $1000.00
Wage Expense $100.00
Accrued Wages Payable $100.00
If the company does not record the 2nd transaction, both Expenses and Liabilities are understated.
This will make the company's Income appear higher than it really is, which can have very serious
consequences.
Accrued liabilities is the direct opposite of prepaid expense. See Matching principle.
Deferral
Deferred, in accrual accounting, is any account where the asset or liability is not realized
until a future date (accounting period), e.g. annuities, charges,taxes, income, etc. The
deferred item may be carried, dependent on type of deferral, as either an asset or liability.
See also accrual.
Unfortunately, the term deferral is also often used as an abbreviation for the terms deferred
expense and deferred revenue that share the common name word, but they have the
opposite economic / accounting characteristics.

Deferral
Deferred, in accrual accounting, is any account where the asset or liability is not realized until a future
date (accounting period), e.g. annuities, charges,taxes, income, etc. The deferred item may be
carried, dependent on type of deferral, as either an asset or liability. See also accrual.
Unfortunately, the term deferral is also often used as an abbreviation for the terms deferred
expense and deferred revenue that share the common name word, but they have the opposite
economic / accounting characteristics.

 Deferral (deferred charge)
 Deferred charge(or deferral) is cost that is accounted-for in
latter accounting period for its anticipated future benefit, or to
comply with the requirement ofmatching costs
with revenues. Deferred charges include costs of starting up,
obtaining long-term debt, advertising campaigns, etc., and are
carried as a non-current asset on the balance
sheet pending amortization. Deferred charges often extend over
five years or more and occur infrequently unlike prepaid
expenses, e.g. insurance, interest, rent. Financial ratios are
based on the total assets excluding deferred charges since they
have no physical substance (cash realization) and cannot be
used in reducing total liabilities.[1]
 [edit]Deferred expense
 Deferred expense (or prepaid expense, prepayment) is
an asset used to enable cash paid out to a counterpart for goods
or services to be received in a later accounting period when
fulfilling the promise to pay is actually acknowledged, the
related expense item is recognized, and the same amount is
deducted from prepayments. It shares characteristics
with accrued revenue (or accrued assets) with the difference
that an asset to be covered latter are proceeds from a delivery of
goods or services, at which such income item is earned and the
related revenue item is recognized, while cash for them is to be
received in a later period, when its amount is deducted
from accrued revenues.
 For example, when the accounting periods are monthly, an
11/12 portion of an annually paid insurance cost is added
to prepaid expenses, which are decreased by 1/12 of the cost in
each subsequent period when the same fraction is recognized
as an expense, rather than all in the month in which such cost is
billed. The not-yet-recognized portion of such costs remains
as prepayments (assets) to prevent such cost from turning into a
fictitious loss in the monthly period it is billed, and into a fictitious
profit in any other monthly period.
 Similarly, cash paid out for (the cost of) goods and services not
received by the end of the accounting period is added to
the prepayments to prevent it from turning into a fictitious loss in
the period cash was paid out, and into a fictitious profit in the
period of their reception. Such cost is not recognized in
the income statement (profit and loss or P&L) as
the expense incurred in the period of payment, but in the period
of their reception when such costs are recognized as expenses
in P&L and deducted from prepayments (assets) on balance
sheets.
 [edit]Deferred revenue
 Deferred revenue (or deferred income) is a liability, such as
cash received FROM a counterpart for goods or services are to
be delivered in a latter accounting period, when such income
item is earned, the related revenue item is recognized, and
the deferred revenue is reduced. It shares characteristics
with accrued expense with the difference that a liability to be
covered latter is an obligation to pay for goods or services
received FROM a counterpart, while cash for them is to be paid
out in a latter period when its amount is deducted from accrued
expenses.
 For example, a company receives an annual software
license fee paid out by a customer upfront on the January 1.
However the company's fiscal year ends on May 31. So, the
company using accrual accounting adds only five months worth
(5/12) of the fee to its revenues in profit and loss for the fiscal
year the fee was received. The rest is added to deferred
income (liability) on the balance sheet for that year.
Accrual
Accountancy
Key concepts
entry system · Fair value accounting ·FIFO &
LIFO · GAAP / International Financial Reporting
Standards · General ledger ·Historical cost · Matching
Auditing
Accrual (accumulation) of something is, in finance, the adding together of interest or

different investments over a period of time. It holds specific meanings in accounting,
where it can refer to accounts on a balance sheet that represent liabilities and non-cash-
based assets used in accrual-based accounting. These types of accounts include,
among others, accounts payable, accounts receivable, goodwill, deferred tax liability and
future interest expense.[1]
For example, a company delivers a product to a customer who will pay for it 30 days
later in the next fiscal year, which starts a week after the delivery. The company
recognizes the proceeds as a revenue in its current income statement still for the fiscal
year of the delivery, even though it will get paid in cash during the following accounting
period.[2] The proceeds are also a accrued income (asset) on the balance sheet for the
delivery fiscal year, but not for the next fiscal year when cash is received.
Similarly, a salesperson, who sold the product, earned a commission at the moment of
sale (or delivery). The company will recognize the commission as anexpense in its
current income statement, even though s-/he will actually get paid at the end of the
following week in the next accounting period. The commission is also a accrued
expense (liability) on the balance sheet for the delivery period, but not for the next period
the commission (cash) is paid out to her/him.
Unfortunately, the term accrual is also often used as an abbreviation for the
terms accrued expense and accrued revenue that share the common name word, but
they have the opposite economic / accounting characteristics.

Accrued revenue (or accrued assets) is an asset, such as unpaid proceeds from a
delivery of goods or services, when such income is earned and a related revenue item is
recognized, while cash is to be received in a latter period, when the amount is deducted
from accrued revenues.
In the rental industry, there are specialized revenue accruals for rental income which
crosses month end boundaries. These are normally utilized by rental companies who
charge in arrears, based on an anniversary of a contract date. For example a rental
contract which began on 15 January, being invoiced on a recurring monthly basis will not
generate its first invoice until 14 February. Therefore at the end of the January financial
period an accrual must be raised for 16 days worth of the monthly charge. This may be a
simple pro-rata basis (e.g. 16/31 of the monthly charge) or may be more complex if only
week days are being charged or a standardized month is being used (e.g. 28 days, 30
days etc.).
Accrued expense, in contrast, is a liability with an uncertain timing or amount, but

where the uncertainty is not significant enough to qualify it as aprovision. An example is
a pending obligation to pay for goods or services received from a counterpart, while cash
is to be paid out in a latter accounting period when the amount is deducted from accrued
expenses.
In the United States of America, this difference is best summarized by IAS 37 which
states:
"11 Provisions can be distinguished from other liabilities such as trade payables and
accruals because there is uncertainty about the timing or amount of the future
expenditure required in settlement. By contrast:
"(a) trade payables are liabilities to pay for goods or services that have been received or
supplied and have been invoiced or formally agreed with the supplier; and
"(b) accruals are liabilities to pay for goods or services that have been received or
supplied but have not been paid, invoiced or formally agreed with the supplier, including
amounts due to employees (for example, amounts relating to accrued vacation pay).
Although it is sometimes necessary to estimate the amount or timing of accruals, the
uncertainty is generally much less than for provisions.
"Accruals are often reported as part of trade and other payables, whereas provisions are
reported separately."
To add to the confusion, some legalistic accounting systems take a simplistic view of
“’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that
has not been formally invoiced. This is primarily due to tax considerations, since the act
of issuing an invoice creates, in some countries, taxable revenue, even if the customer
does not ultimately pay and the related receivable becomes uncollectable.
Contents
[hide]
• 1 Accruals in payroll
o 1.1 Length of Service
o 1.2 Trial Period
o 1.3 Rollover/Carry
Over
• 2 See also
• 3 References
[edit]Accruals in payroll
In payroll, a common benefit that an employer will provide for employees is a vacation or
sick accrual. This means that as time passes, an employee accumulates additional sick
or vacation time and this time is placed into a bank. Once the time is accumulated, the
employer or the employer's payroll provider will track the amount of time used for sick or
vacation.
[edit]Length of Service
For most employers, a time-off policy is published and followed with regard to benefit
accruals. These guidelines ensure that all employees are treated fairly with regard to the
distribution and use of sick and vacation time.
Within these guidelines, the rate at which the employee will accumulate the vacation or
sick time is often determined by length of service (the amount of time the employee has
worked for the employers).
[edit]Trial Period
In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days)
where no time is awarded to the employee. This does not prevent an employee from
calling in sick immediately after being hired, but it does mean that they will not get paid
for this time off. However it does prevent an employee for example, scheduling a
vacation for the second week of work. After this trial period, the award of time may begin
or it may be retroactive, back to the date of hire.
[edit]Rollover/Carry Over
Some accrual policies have the ability to carry over or roll over some or all unused time
that has been accrued into the next year. If the accrual policy does not have any type of
rollover, any accrued time that is in the bank is usually lost at the end of the employer's
calendar year.
Income statement
Income statement (also referred as profit and loss statement (P&L), statement of
financial performance, earnings statement, operating statement orstatement of
operations)[1] is a company's financial statement that indicates how the revenue (money
received from the sale of products and services before expenses are taken out, also known
as the "top line") is transformed into the net income (the result after all revenues and
expenses have been accounted for, also known as the "bottom line"). It displays the
revenues recognized for a specific period, and the cost and expenses charged against these
revenues, including write-offs (e.g., depreciation and amortization of various assets)
and taxes.[1] The purpose of the income statement is to
show managersand investors whether the company made or lost money during the period
being reported.
The important thing to remember about an income statement is that it represents a period of
time. This contrasts with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an
income statement. Instead, they produce a similar statement that reflects funding sources
compared against program expenses, administrative costs, and other operating
commitments. This statement is commonly referred to as the statement of activities.
Revenues and expenses are further categorized in the statement of activities by the donor
restrictions on the funds received and expended.
The income statement can be prepared in one of two methods.[2] The Single Step income
statement takes a simpler approach, totaling revenues and subtracting expenses to find the
bottom line. The more complex Multi-Step income statement (as the name implies) takes
several steps to find the bottom line, starting with the gross profit. It then calculates operating
expenses and, when deducted from the gross profit, yields income from operations. Adding
to income from operations is the difference of other revenues and other expenses. When
combined with income from operations, this yields income before taxes. The final step is to
deduct taxes, which finally produces the net income for the period measured.
Usefulness and limitations of income statement

Income statements should help investors and creditors determine the past financial
performance of the enterprise, predict future performance, and assess the capability of
generating future cash flows through report of the income and expenses.
However, information of an income statement has several limitations:

 Items that might be relevant but cannot be reliably measured are not reported
(e.g. brand recognition and loyalty).
 Some numbers depend on accounting methods used (e.g. using FIFO or LIFO
accounting to measure inventory level).
 Some numbers depend on judgments and estimates (e.g. depreciation expense
depends on estimated useful life and salvage value).
- INCOME STATEMENT BOND LLC -

For the year ended DECEMBER 31 2007
€ €
Debit Credit
Revenues
GROSS REVENUES (including rental income) 496,397
--------
Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 3,350
EMPLOYEES 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
RENTAL MORTGAGES AND FEES 74,400
TELEPHONE 1,000
UTILITIES 491
--------
TOTAL EXPENSES (195,512)
--------
NET INCOME 300,885
Guidelines for statements of comprehensive income and income

statements of business entities are formulated by the International
Accounting Standards Board and numerous country-specific
organizations, for example the FASB in the U.S..
Names and usage of different accounts in the income statement
depend on the type of organization, industry practices and the
requirements of different jurisdictions.
If applicable to the business, summary values for the following items
should be included in the income statement:[3]
[edit]Operating section
 Revenue - Cash inflows or other enhancements of assets of an

entity during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity's ongoing
major operations. It is usually presented as sales minus sales
discounts, returns, and allowances.
 Expenses - Cash outflows or other using-up of assets or

incurrence of liabilities during a period from delivering or producing
goods, rendering services, or carrying out other activities that
constitute the entity's ongoing major operations.
 Cost of Goods Sold (COGS) / Cost of Sales - represents
the direct costs attributable to goods produced and sold by a
business (manufacturing or merchandizing). It includes material
costs,direct labour, and overhead costs (as in absorption
costing), and excludes operating costs (period costs) such as
selling, administrative, advertising or R&D, etc.
 Selling, General and Administrative expenses
(SG&A or SGA) - consist of the combined payroll costs. SGA is
usually understood as a major portion of non-production related
costs, in contrast to production costs such as direct labour.
 Selling expenses - represent expenses needed to
sell products (e.g. salaries of sales people, commissions and
travel expenses, advertising, freight, shipping, depreciation of
sales store buildings and equipment, etc.).
 General and Administrative (G&A) expenses -
represent expenses to manage the business (salaries of
officers / executives, legal and professional fees, utilities,
insurance, depreciation of office building and equipment,
office rents, office supplies, etc.).
 Depreciation / Amortization - the charge with respect
to fixed assets / intangible assets that have been capitalised on
the balance sheet for a specific (accounting) period. It is a
systematic and rational allocation of cost rather than the
recognition of market value decrement.
 Research & Development (R&D) expenses - represent
expenses included in research and development.
Expenses recognised in the income statement should be analysed

either by nature (raw materials, transport costs, staffing costs,
depreciation, employee benefit etc.) or by function (cost of sales,
selling, administrative, etc.). (IAS 1.99) If an entity categorises by
function, then additional information on the nature of expenses, at
least, – depreciation, amortisation and employee benefits expense –
must be disclosed. (IAS 1.104)
[edit]Non-operating section
 Other revenues or gains - revenues and gains from other than

primary business activities (e.g. rent, income from patents). It also
includes unusual gains that are either unusual or infrequent, but not
both (e.g. gain from sale of securities or gain from disposal of fixed
assets)
 Other expenses or losses - expenses or losses not related to

primary business operations, (e.g. foreign exchange loss).
 Finance costs - costs of borrowing from various creditors

(e.g. interest expenses, bank charges).
 Income tax expense - sum of the amount of tax payable to tax

authorities in the current reporting period (current tax liabilities/ tax
payable) and the amount of deferred tax liabilities (or assets).
[edit]Irregular items
They are reported separately because this way users can better
predict future cash flows - irregular items most likely will not recur.
These are reported net of taxes.
 Discontinued operations is the most common type of irregular

items. Shifting business location(s), stopping production
temporarily, or changes due to technological improvement
do not qualify as discontinued operations. Discontinued
operations must be shown separately.
Cumulative effect of changes in accounting policies
(principles) is the difference between the book value of the affected
assets (or liabilities) under the old policy (principle) and what the book
value would have been if the new principle had been applied in the
prior periods. For example, valuation of inventories
using LIFO instead of weighted average method. The changes should
be appliedretrospectively and shown as adjustments to
the beginning balance of affected components in Equity. All
comparative financial statements should be restated. (IAS 8)
However, changes in estimates (e.g. estimated useful life of a fixed
asset) only requires prospective changes. (IAS 8)
No items may be presented in the income statement
as extraordinary items. (IAS 1.87) Extraordinary items are both
unusual (abnormal) and infrequent, for example, unexpected natural
disaster, expropriation, prohibitions under new regulations. [Note:
natural disaster might not qualify depending on location (e.g. frost
damage would not qualify in Canada but would in the tropics).]
Additional items may be needed to fairly present the entity's results of
operations. (IAS 1.85)
[edit]Disclosures
Certain items must be disclosed separately in the notes (or

the statement of comprehensive income), if material, including:[3] (IAS
1.98)
 Write-downs of inventories to net realisable value or of property,

plant and equipment to recoverable amount, as well as reversals of
such write-downs
 Restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring
 Disposals of items of property, plant and equipment
 Disposals of investments
 Discontinued operations
 Litigation settlements
 Other reversals of provisions
[edit]Earnings per share

Because of its importance, earnings per share (EPS) are required to
be disclosed on the face of the income statement. A company which
reports any of the irregular items must also report EPS for these items
either in the statement or in the notes.
There are two forms of EPS reported:
 Basic: in this case "weighted average of shares outstanding"

includes only actual stocks outstanding.
 Diluted: in this case "weighted average of shares outstanding"
is calculated as if all stock options, warrants, convertible bonds,
and other securities that could be transformed into
shares aretransformed. This increases the number of shares and
so EPS decreases. Diluted EPS is considered to be a more
reliable way to measure EPS.
[edit]Sample income statement

The following income statement is a very brief example prepared in
accordance with IFRS. It does not show all possible kinds of items
appeared a firm, but it shows the most usual ones. Please note the
difference between IFRS and US GAAP when interpreting the
following sample income statements.
Fitness Equipment Limited

INCOME STATEMENTS
(in millions)
Year Ended March 31, 2009 2008
2007
---------------------------------------------------------------------------
-------
Revenue $ 14,580.2 $ 11,900.4 $
8,290.3
Cost of sales (6,740.2) (5,650.1)
(4,524.2)
------------- ------------
------------
Gross profit 7,840.0 6,250.3
3,766.1
------------- ------------
------------
SGA expenses (3,624.6) (3,296.3)
(3,034.0)
------------- ------------
------------
Operating profit $ 4,215.4 $ 2,954.0 $
732.1
------------- ------------
------------
Gains from disposal of fixed assets 46.3 -
-
Interest expense (119.7) (124.1)
(142.8)
------------- ------------
------------
Profit before tax 4,142.0 2,829.9
589.3
------------- ------------
------------
Income tax expense (1,656.8) (1,132.0)
(235.7)
------------- ------------
------------
Profit (or loss) for the year $ 2,485.2 $ 1,697.9 $
353.6
DEXTERITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31, 2009 2008 2007
---------------------------------------------------------------------------
-------------------
Revenue $ 36,525.9 $
29,827.6 $ 21,186.8
Cost of sales (18,545.8)
(15,858.8) (11,745.5)
-----------
----------- ------------
Gross profit 17,980.1
13,968.8 9,441.3
-----------
----------- ------------
Operating expenses:
Selling, general and administrative expenses (4,142.1)
(3,732.3) (3,498.6)
Depreciation (602.4)
(584.5) (562.3)
Amortization (209.9)
(141.9) (111.8)
Impairment loss (17,997.1)
— —
-----------
----------- ------------
Total operating expenses (22,951.8)
(4,458.7) (4,172.7)
-----------
----------- ------------
Operating profit (or loss) $ (4,971.7) $
9,510.1 $ 5,268.6
-----------
----------- ------------
Interest income 25.3
11.7 12.0
Interest expense (718.9)
(742.9) (799.1)
-----------
----------- ------------
Profit (or loss) from continuing operations
before tax, share of profit (or loss) from
associates and non-controlling interest $ (5,665.3) $
8,778.9 $ 4,481.5
-----------
----------- ------------
Income tax expense (1,678.6)
(3,510.5) (1,789.9)
Profit (or loss) from associates, net of tax (20.8)
0.1 (37.3)
Profit (or loss) from non-controlling interest,
net of tax (5.1)
(4.7) (3.3)
-----------
----------- ------------
Profit (or loss) from continuing operations $ (7,369.8) $
5,263.8 $ 2,651.0
-----------
----------- ------------
Profit (or loss) from discontinued operations,
net of tax (1,090.3)
(802.4) 164.6
-----------
----------- ------------
Profit (or loss) for the year $ (8,460.1) $
4,461.4 $ 2,815.6
[edit]Bottom line
"Bottom line" is the net income that is calculated after subtracting the
expenses from revenue. Since this forms the last line of the income
statement, it is informally called "bottom line." It is important to
investors as it represents the profit for the year attributable to the
shareholders.
After revision to IAS 1 in 2003, the Standard is now using profit or
loss rather than net profit or loss or net income as the descriptive
term for the bottom line of the income statement.
[edit]Requirements of IFRS
On 6 September 2007, the International Accounting Standards
Board issued a revised IAS 1: Presentation of Financial Statements,
which is effective for annual periods beginning on or after 1 January
2009.
A business entity adopting IFRS must include:
 a Statement of Comprehensive Income or

 two separate statements comprising:
1. an Income Statement displaying components of

profit or loss and
2. a Statement of Comprehensive
Income that begins with profit or loss (bottom line of the
income statement) and displays the items of other
comprehensive income for the reporting period. (IAS1.81)
All non-owner changes in equity (i.e. comprehensive income )

shall be presented in either in the statement of comprehensive
income (or in a separate income statement and a statement of
comprehensive income). Components of comprehensive income
may not be presented in the statement of changes in equity.
Comprehensive income for a period includes profit or loss (net
income) for that period and other comprehensive
income recognised in that period.
All items of income and expense recognised in a period must be
included in profit or loss unless a Standard or an Interpretation
requires otherwise. (IAS 1.88) Some IFRSs require or permit that
some components to be excluded from profit or loss and instead
to be included in other comprehensive income. (IAS 1.89)
Items and disclosures
The statement of comprehensive income should include:[3] (IAS
1.82)
1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint
ventures accounted for using the equity method
4. Tax expense
5. A single amount comprising the total of (1) the post-
tax profit or loss of discontinued operations and (2) the post-
tax gain or loss recognised on the disposal of the assets or
disposal group(s) constituting the discontinued operation
6. Profit or loss
7. Each component of other comprehensive
income classified by nature
8. Share of the other comprehensive income of
associates and joint ventures accounted for using the equity
method
9. Total comprehensive income
The following items must also be disclosed in the statement of

comprehensive income as allocations for the period: (IAS 1.83)
 Profit or loss for the period attributable to non-controlling

interests and owners of the parent
 Total comprehensive income attributable to non-controlling
interests and owners of the parent
No items may be presented in the statement of comprehensive

income (or in the income statement, if separately presented) or in
the notes as extraordinary items.
Comprehensive income
Comprehensive income (or earnings) is a specific term used in companies' financial
reporting from the company-whole point of view. Because that use excludes the effects of
changing ownership interest, an economic measure of comprehensive income is necessary
for financial analysis from the shareholders' point of view (All changes in Equity except those
resulting from investment by or distribution to owners.)
Accounting
Comprehensive income is defined by the Financial Accounting Standards Board, or FASB,
[1]
as “the change in equity [net assets] of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owners.”
Comprehensive income is the sum of net income and other items that must bypass
the income statement because they have not been realized, including items like an
unrealized holding gain or loss from available for sale securities and
foreign currency translation gains or losses. These items are not part of net income, yet are
important enough to be included in comprehensive income, giving the user a bigger, more
comprehensive picture of the organization as a whole.
Items included in comprehensive income, but not net income are reported under
the accumulated other comprehensive income section of shareholder's equity.
Financial Analysis
Comprehensive income attempts to measure the sum total of all operating and financial
events that have changed the value of an owner's interest in a business. It is measured on a
per-share basis to capture the effects of dilution and options. It cancels out the effects of
equity transactions for which the owner would be indifferent; dividend payments, share buy-
backs and share issues at market value.
It is calculated by reconciling the book value per-share from the start of the period to the end
of the period. This is conceptually the same as measuring a child's growth by finding the
difference between his height on each birthday. All other line items are calculated, and the
equation solved for comprehensive earnings. [2]
Shareholders' Equity, beg. of period (per share)

- Dividends paid (per share)
+ Shares issued (premium over book value per share)
- Share buy-backs (premium over book value per share)
+ Comprehensive Income (per share)
------------------------------------------
= Shareholders' Equity, end of period (per share)
Net income
Net income is the residual income of a firm after adding total revenue and gains and
subtracting all expenses and losses for the reporting period. Net income can be distributed
among holders of common stock as a dividend or held by the firm as an addition to retained
earnings. As profit and earnings are used synonymously for income (also depending on UK
and US usage), net earnings and net profit are commonly found as synonyms for net
income. Often, the term income is substituted for net income, yet this is not preferred due to
the possible ambiguity. Net income is informally called the bottom line because it is typically
found on the last line of a company's income statement (a related term is top line,
meaning revenue, which forms the first line of the account statement).
The items deducted will typically include tax expense, financing expense (interest expense),
and minority interest. Likewise, preferred stock dividends will be subtracted too, though they
are not an expense. For a merchandising company, subtracted costs may be the cost of
goods sold, sales discounts, and sales returns and allowances. For a product
company advertising, manufacturing, and design and development costs are included.
An equation for net income

Net sales revenue
– Cost of goods sold
= Gross profit
– SG&A expenses (combined costs of operating the company)
= EBITDA
– Depreciation & amortization
= EBIT
– Interest expense (cost of borrowing money)
= EBT
– Tax expense
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate
profits paid out to stockholders.[1] When a corporation earns a profit or surplus, that money can be put to
two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the
shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as
a dividend.
For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a shareholder
receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not
an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that
have not been distributed as dividends) are shown in the shareholder equity section in the company's
balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed
schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from
the fixed schedule dividends.
Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are
often considered to be a pre-tax expense.
Dividends are usually paid in the form of cash, store credits (common among retail consumers'
cooperatives) and shares in the company (either newly created shares or existing shares bought in the
market.) Further, many public companies offer dividend reinvestment plans, which automatically use the
cash dividend to purchase additional shares for the shareholder.
The word "dividend" comes from the Latin word "dividendum" meaning "thing to be divided".[2]
Contents
[hide]
• 1 Joint stock company dividends
o 1.1 Forms of payment
o 1.2 Reliability of dividends
o 1.3 Dividend Dates
o 1.4 Dividend-reinvestment
o 1.5 Dividend Taxation
 1.5.1 Australia and New Zealand
 1.5.2 UK
 1.5.3 India
o 1.6 Criticism
• 2 Other corporate entities
o 2.1 Cooperatives
o 2.2 Trusts
o 2.3 Mutuals
• 3 See also
• 4 References
General ledger
Accountancy
Key concepts
entry system · Fair value accounting ·FIFO &
LIFO · GAAP / International Financial Reporting
Standards · General ledger ·Historical cost · Matching
Auditing
The general ledger, sometimes known as the nominal ledger, is the main accounting
record of a business which uses double-entry bookkeeping. It will usually
include accounts for such items as current assets, fixed assets, liabilities, revenue and
expense items, gains and losses. Each General Ledger is divided into debits and credits
sections. The left hand side lists debit transactions and the right hand side lists credit
transactions. This gives a 'T' shape to each individual general ledger account.
A "T" account showing debits on the left and credits on the right.
Debi Credi
ts ts
The general ledger is a collection of the group of accounts that supports the value items
shown in the major financial statements. It is built up by posting transactions recorded in
the sales daybook, purchases daybook, cash book and general journals daybook. The
general ledger can be supported by one or more subsidiary ledgers that provide details
for accounts in the general ledger. For instance, an accounts receivable subsidiary
ledger would contain a separate account for each credit customer, tracking that
customer's balance separately. This subsidiary ledger would then be totalled and
compared with itscontrolling account (in this case, Accounts Receivable) to ensure
accuracy as part of the process of preparing a trial balance.[1]
There are seven basic categories in which all accounts are grouped:
1. Assets
2. Expense
3. Gains (Profits)
4. Liability
5. Losses
6. Owner's equity
7. Revenue
The balance sheet and the income statement are both derived from the general ledger.
Each account in the general ledger consists of one or more pages. The general ledger is
where posting to the accounts occurs. Posting is the process of recording amounts as
credits, (right side), and amounts as debits, (left side), in the pages of the general ledger.
Additional columns to the right hold a running activity total (similar to a checkbook).
The listing of the account names is called the chart of accounts. The extraction of
account balances is called a trial balance. The purpose of the trial balance is, at a
preliminary stage of the financial statement preparation process, to ensure the equality
of the total debits and credits.
The general ledger should include the date, description and balance or total amount for
each account. It is usually divided into at least seven main categories. These categories
generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses.
The main categories of the general ledger may be further subdivided into subledgers to
include additional details of such accounts as cash, accounts receivable, accounts
payable, etc.
Because each bookkeeping entry debits one account and credits another account in an
equal amount, the double-entry bookkeeping system helps ensure that the general
ledger is always in balance, thus maintaining the accounting equation:
Assets = Liabilities + (Shareholders or Owners equity)[2]
The accounting equation is the mathematical structure of the balance sheet.

Although a general ledger appears to be fairly simple, in large or complex
organizations or organizations with various subsidiaries, the general ledger can
grow to be quite large and take several hours or days to audit or balance.[citation needed]
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of
being owned or controlled to produce value and that is held to have positive economic value is considered
an asset. Simply stated, assets represent ownership of value that can be converted into cash (although
cash itself is also considered an asset).[1]
The balance sheet of a firm records the monetary[2] value of the assets owned by the firm. It is money and
other valuables belonging to an individual or business.[1] Two major asset classes are tangible assets and
intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.
[3]
Current assets include inventory, while fixed assets include such items as buildings and equipment.[4]
Intangible assets are nonphysical resources and rights that have a value to the firm because they give the
firm some kind of advantage in the market place. Examples of intangible assets
are goodwill, copyrights, trademarks, patents and computer programs,[4] and financial assets, including
such items asaccounts receivable, bonds and stocks.
Formal definition
 An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the entity[5](Framework Par 49).
[edit]Asset characteristics
It should be noted that - other than software companies and the like -
employees are not considered as assets, like machinery is, even
though they are capable of producing value.
 The probable present benefit involves a capacity, singly or in

combination with other assets, in the case of profit oriented
enterprises, to contribute directly or indirectly to future net cash
flows, and, in the case of not-for-profit organizations, to provide
services;
 The entity can control access to the benefit;
 The transaction or event giving rise to the entity's right to, or
control of, the benefit has already occurred.
In the financial accounting sense of the term, it is not necessary to be

able to legally enforce the asset's benefit for qualifying a resource as
being an asset, provided the entity can control its use by other means.
It is important to understand that in an accounting sense an asset is
not the same as ownership. Assets are equal to "equity" plus
"liabilities."
The accounting equation relates assets, liabilities, and owner's equity:
Assets = Liabilities +Stockholder's Equity (Owner's Equity)
The accounting equation is the mathematical structure of
the balance sheet.
Assets are listed on the balance sheet. Similarly, in economics an
asset is any form in which wealth can be held.
Probably the most accepted accounting definition of asset is the
one used by the International Accounting Standards Board .[6] The
following is a quotation from the IFRS Framework: "An asset is a
resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to
the enterprise."[7]
Assets are formally controlled and managed within larger
organizations via the use of asset tracking tools. These monitor
the purchasing, upgrading, servicing, licensing, disposal etc., of
both physical and non-physical assets.[clarification needed] In a
company's balance sheet certain divisions are required
by generally accepted accounting principles (GAAP), which vary
from country to country.[8]
[edit]Current assets
Main article: Current asset
Current assets are cash and other assets expected to be
converted to cash, sold, or consumed either in a year or in the
operating cycle (whichever is longer), without disturbing the
normal operations of a business. These assets are continually
turned over in the course of a business during normal business
activity. There are 5 major items included into current assets:
1. Cash and cash equivalents — it is the most liquid

asset, which includes currency, deposit accounts,
and negotiable instruments (e.g., money orders, cheque,
bank drafts).
2. Short-term investments — include securities
bought and held for sale in the near future to generate
income on short-term price differences (trading securities).
3. Receivables — usually reported as net of allowance
for uncollectable accounts.
4. Inventory — trading these assets is a normal
business of a company. The inventory value reported on
the balance sheet is usually the historical cost or fair market
value, whichever is lower. This is known as the "lower of
cost or market" rule.
5. Prepaid expenses — these are expenses paid in
cash and recorded as assets before they are used or
consumed (a common example is insurance). See
also adjusting entries.
The phrase net current assets (also called working capital) is often
used and refers to the total of current assets less the total of
current liabilities.
[edit]Long-term investments
Often referred to simply as "investments". Long-term investments
are to be held for many years and are not intended to be disposed
of in the near future. This group usually consists of four types of
investments:
1. Investments in securities such as bonds, common

stock, or long-term notes.
2. Investments in fixed assets not used in operations
(e.g., land held for sale).
3. Investments in special funds (e.g. sinking funds or
pension funds).
Different forms of insurance may also be treated as long term

investments.
[edit]Fixed assets
Main article: Fixed asset
Also referred to as PPE (property, plant, and equipment), these
are purchased for continued and long-term use in earning profit in
a business. This group includes as an
asset land, buildings,machinery, furniture, tools, and certain
wasting resources e.g., timberland and minerals. They are written
off against profits over their anticipated life by
charging depreciation expenses (with exception of land assets).
Accumulated depreciation is shown in the face of the balance
sheet or in the notes.
These are also called capital assets in management accounting.
[edit]Intangible assets
Main article: Intangible asset
Intangible assets lack physical substance and usually are very
hard to evaluate. They
include patents, copyrights, franchises, goodwill, trademarks, trad
e names, etc. These assets are (according to US GAAP)
amortized to expense over 5 to 40 years with the exception of
goodwill.
Websites are treated differently in different countries and may fall
under either tangible or intangible assets.
[edit]Tangible assets
Tangible assets are those that have a physical substance and can
be touched, such as currencies, buildings, real
estate, vehicles, inventories, equipment, and precious metals.
[edit]Other related meanings
[edit]Information asset
Main article: asset (computer security)
In Information technology, chiefly in Information security, data
needed to conduct the organization business and the technical
equipment to manage (input, store, display, print) are called
information asset.
They can represent a large portion of intangible and tangible asset
of an organization.
If these assets become unavailable, business operations can be
disrupted. Confidential information disclosure can represent a
huge liability.
While evaluating the potential loss tied to an asset or a group of
assets, the value tied to the largest sum between the related asset
and their value should be considered.[9] [10]
Expense
In common usage, an expense or expenditure is an outflow of money to another

person or group to pay for an item or service, or for a category of costs. For
a tenant, rent is an expense. For students or parents, tuition is an expense. Buying
food, clothing, furniture or an automobile is often referred to as an expense. An
expense is a cost that is "paid" or "remitted", usually in exchange for something of
value. Something that seems to cost a great deal is "expensive". Something that seems
to cost little is "inexpensive". "Expenses of the table" are expenses
of dining, refreshments, a feast, etc.
In accounting, expense has a very specific meaning. It is an outflow of cash or other

valuable assets from a person or company to another person or company. This outflow
of cash is generally one side of a trade for products or services that have equal or
better current or future value to the buyer than to the seller. Technically, an expense is
an event in which an asset is used up or a liability is incurred. In terms of
the accounting equation, expenses reduce owners' equity. The International Accounting
Standards Board defines expenses as
...decreases in economic benefits during the accounting period in the form of

outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.[1]
Bookkeeping for expenses

In double-entry bookkeeping, expenses are recorded as a debit to an
expense account (an income statement account) and a credit to either
an asset account or a liability account, which are balance
sheet accounts. An expense decreases assets or increases liabilities.
Typical business expenses include salaries, utilities, depreciation of
capital assets, and interest expense for loans. The purchase of a
capital asset such as a building or equipment is not an expense.
[edit]Cash flow
In a cash flow statement, expenditures are divided into operating,
investing, and financing expenditures.
 Operational expense (OPEX)—salary for employees

 Capital expenditure (CAPEX)—buying equipment
 Financing expense—interest expense for loans and bonds
An important issue in accounting is whether a particular expenditure is

classified as an expense, which is reported immediately on the
business's income statement; or whether it is classified as acapital
expenditure or an expenditure subject to depreciation, which is not an
expense. These latter types of expenditures are reported as expenses
when they are depreciated by businesses that useaccrual-basis
accounting, which is most large businesses and all C corporations.
The most common interpretation of whether an expense is of capital
or income variety depends upon its term. Viewing an expense as a
purchase helps alleviate this distinction. If, soon after the "purchase",
that which was expensed holds no value then it is usually identified as
an expense. If it retains value soon and long after the purchase, it will
be viewed as capital with life that should beamortized/depreciated and
retained on the Balance Sheet.
[edit]Deduction of business expenses under the US tax code
For tax purposes, the Internal Revenue Code permits the deduction of
business expenses in the taxable year in which those expenses are
paid or incurred. This is in contrast to capital expenditures[2]that are
paid or incurred to acquire an asset. Expenses are costs that do not
acquire, improve, or prolong the life of an asset. For example, a
person who buys a new truck for a business would be making a
capital expenditure because they have acquired a new business-
related asset. This cost could not be deducted in the current taxable
year. However, the gas the person buys during that year to fuel that
truck would be considered a deductible expense. The cost of
purchasing gas does not improve or prolong the life of the truck but
simply allows the truck to run.[3]
Even if something qualifies as an expense, it is not necessarily
deductible. As a general rule, expenses are deductible if they relate to
a taxpayer’s trade or business activity or if the expense is paid or
incurred in the production or collection of income from an activity that
does not rise to the level of a trade or business (investment activity).
Section 162(a) of the Internal Revenue Code is the deduction
provision for business or trade expenses. In order to be a trade or
business expense and qualify for a deduction, it must satisfy 5
elements in addition to qualifying as an expense. It must be (1)
ordinary and (2) necessary (Welch v. Helvering, 290 U.S. 111, defines
this as necessary for the development of the business at least in that
they were appropriate and helpful). Expenses paid to preserve one’s
reputation do not appear to qualify (Welch v. Helvering). In addition, it
must be (3) paid or incurred during the taxable year. It must be paid
(4) in carrying on (meaning not prior to the start of a business or in
creating it) (5) a trade or business activity. To qualify as a trade or
business activity, it must be continuous and regular, and profit must
be the primary motive.
Section 212 of the Internal Revenue Code is the deduction provision
for investment expenses. In addition to being an expense and
satisfying elements 1-4 above, expenses are deductible as an
investment activity under Section 212 of the Internal Revenue Code if
they are (1) for the production or collection of income, (2) for the
management, conservation, or maintenance of property held for the
production of income, or (3) in connection with the determination,
collection, or refund of any tax.
In investing, one controversy that mounted throughout 2002 and 2003
was whether companies should report the granting of stock
options to employees as an expense on the income statement, or
should not report this at all in the income statement, which is what had
previously been the norm.
[edit]Expense Report
An expense report is a form of document that contains all the
expenses that an individual as incurred as a result of the business
operation. For example, if the owner of a business travels to another
location for a meeting, the cost of travel, the meals, and all other
expenses that he/she has incurred may be added to the expense
report. Consequently, these expenses will be considered business
expenses and are tax deductible.
Cash flow statement

In financial accounting, a cash flow statement, also known as statement of cash
flows or funds flow statement,[1] is a financial statement that shows how changes
in balance sheet accounts and income affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities. Essentially, the cash flow
statement is concerned with the flow of cash in and cash out of the business. The statement
captures both the current operating results and the accompanying changes in the balance
sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-
term viability of a company, particularly its ability to pay bills. International Accounting
Standard 7 (IAS 7), is the International Accounting Standardthat deals with cash flow
statements.
People and groups interested in cash flow statements include:
 Accounting personnel, who need to know whether the organization will be able to
cover payroll and other immediate expenses
 Potential lenders or creditors, who want a clear picture of a company's ability to
repay
 Potential investors, who need to judge whether the company is financially sound
 Potential employees or contractors, who need to know whether the company will be
able to afford compensation
 Shareholders of the business.
Purpose
Statement of Cash Flow - Simple Example
for the period 01/01/2006 to 12/31/2006
Cash flow from operations $4,000
Cash flow from investing $(1,000)
Cash flow from financing $(2,000)
Net cash flow $1,000
Parentheses indicate negative values
The cash flow statement was previously known as the flow of Cash statement.[2] The cash
flow statement reflects a firm's liquidity.
The balance sheet is a snapshot of a firm's financial resources and obligations at a single
point in time, and the income statement summarizes a firm's financial transactions over an
interval of time. These two financial statements reflect the accrual basis accounting used by
firms to match revenues with the expenses associated with generating those revenues. The
cash flow statement includes only inflows and outflows of cash and cash equivalents; it
excludes transactions that do not directly affect cash receipts and payments. These non-
cash transactions include depreciation or write-offs on bad debts or credit losses to name a
few.[3] The cash flow statement is a cash basis report on three types of financial activities:
operating activities, investing activities, and financing activities. Non-cash activities are
usually reported in footnotes.
The cash flow statement is intended to[4]
1. provide information on a firm's liquidity and solvency and its ability to

change cash flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and
equity
3. improve the comparability of different firms' operating performance by
eliminating the effects of different accounting methods
4. indicate the amount, timing and probability of future cash flows
The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets.[5]
History & variations

Cash basis financial statements were very common before accrual
basis financial statements. The "flow of funds" statements of the past
were cash flow statements.
In 1863, the Dowlais Iron Company had recovered from a business
slump, but had no cash to invest for a new blast furnace, despite
having made a profit. To explain why there were no funds to invest,
the manager made a new financial statement that was called
a comparison balance sheet, which showed that the company was
holding too much inventory. This new financial statement was the
genesis of Cash Flow Statement that is used today.[6]
In the United States in 1971, the Financial Accounting Standards
Board (FASB) defined rules that made it mandatory under Generally
Accepted Accounting Principles (US GAAP) to report sources and
uses of funds, but the definition of "funds" was not clear."Net working
capital" might be cash or might be the difference between current
assets and current liabilities. From the late 1970 to the mid-1980s, the
FASB discussed the usefulness of predicting future cash flows.[7] In
1987, FASB Statement No. 95 (FAS 95) mandated that firms provide
cash flow statements.[8] In 1992, the International Accounting
Standards Board issued International Accounting Standard 7 (IAS
7), Cash Flow Statements, which became effective in 1994,
mandating that firms provide cash flow statements.[9]
US GAAP and IAS 7 rules for cash flow statements are similar, but
some of the differences are:
 IAS 7 requires that the cash flow statement include changes in

both cash and cash equivalents. US GAAP permits using cash
alone or cash and cash equivalents.[5]
 IAS 7 permits bank borrowings (overdraft) in certain countries to
be included in cash equivalents rather than being considered a part
of financing activities.[10]
 IAS 7 allows interest paid to be included in operating activities or
financing activities. US GAAP requires that interest paid be
included in operating activities.[11]
 US GAAP (FAS 95) requires that when the direct method is
used to present the operating activities of the cash flow statement,
a supplemental schedule must also present a cash flow statement
using the indirect method. The IASC strongly recommends the
direct method but allows either method. The IASC considers the
indirect method less clear to users of financial statements. Cash
flow statements are most commonly prepared using the indirect
method, which is not especially useful in projecting future cash
flows.
[edit]Cash flow activities

The cash flow statement is partitioned into three segments, namely:
cash flow resulting from operating activities, cash flow resulting from
investing activities, and cash flow resulting from financing activities.
The money coming into the business is called cash inflow,
and money going out from the business is called cash outflow.
[edit]Operating activities
Operating activities include the production, sales and delivery of the
company's product as well as collecting payment from its customers.
This could include purchasing raw materials, building inventory,
advertising, and shipping the product.
Under IAS 7, operating cash flows include:[11]
 Receipts from the sale of goods or services

 Receipts for the sale of loans, debt or equity instruments in a
trading portfolio
 Interest received on loans
 Dividends received on equity securities
 Payments to suppliers for goods and services
 Payments to employees or on behalf of employees
 Interest payments (alternatively, this can be reported under
financing activities in IAS 7, and US GAAP)
Items which are added back to [or subtracted from, as appropriate]
the net income figure (which is found on the Income Statement) to
arrive at cash flows from operations generally include:
 Depreciation (loss of tangible asset value over time)

 Deferred tax
 Amortization (loss of intangible asset value over time)
 Any gains or losses associated with the sale of a non-current
asset, because associated cash flows do not belong in the
operating section.(unrealized gains/losses are also added back
from the income statement)
[edit]Investing activities
Examples of Investing activities are
 Purchase or Sale of an asset (assets can be land, building,

equipment, marketable securities, etc.)
 Loans made to suppliers or received from customers
 Payments related to mergers and acquisitions
[edit]Financing activities
Financing activities include the inflow of cash from investors such
as banks and shareholders, as well as the outflow of cash to
shareholders as dividends as the company generates income. Other
activities which impact the long-term liabilities and equity of the
company are also listed in the financing activities section of the cash
flow statement.
Under IAS 7,
 Proceeds from issuing short-term or long-term debt

 Payments of dividends
 Payments for repurchase of company shares
 Repayment of debt principal, including capital leases
 For non-profit organizations, receipts of donor-restricted cash
that is limited to long-term purposes
Items under the financing activities section include:
 Dividends paid
 Sale or repurchase of the company's stock
 Net borrowings
 Payment of dividend tax
[edit]Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed
in footnotes to the financial statements. Under US General Accepted
Accounting Principles (GAAP), non-cash activities may be disclosed
in a footnote or within the cash flow statement itself. Non-cash
financing activities may include[11]
 Leasing to purchase an asset

 Converting debt to equity
 Exchanging non-cash assets or liabilities for other non-cash
assets or liabilities
 Issuing shares in exchange for assets
[edit]Preparation methods
The direct method of preparing a cash flow statement results in a
more easily understood report.[12] The indirect method is almost
universally used, because FAS 95 requires a supplementary report
similar to the indirect method if a company chooses to use the direct
method.
[edit]Direct method
The direct method for creating a cash flow statement reports major
classes of gross cash receipts and payments. Under IAS 7, dividends
received may be reported under operating activities or under investing
activities. If taxes paid are directly linked to operating activities, they
are reported under operating activities; if the taxes are directly linked
to investing activities or financing activities, they are reported under
investing or financing activities.
Sample cash flow statement using the direct method[13]
Cash flows from (used in) operating

activities
Cash receipts from customers 9,500
Cash paid to suppliers and (2,00

employees 0)
Cash generated from operations

7,500
(sum)
(2,00
Interest paid
0)
(3,00
Income taxes paid
0)
Net cash flows from operating

2,500
activities
Cash flows from (used in) investing

activities
Proceeds from the sale of

7,500
equipment
Dividends received 3,000
Net cash flows from investing

10,500
activities
Cash flows from (used in) financing

activities
(2,50
Dividends paid
0)
Net cash flows used in financing

(2,500)
activities
.
Net increase in cash and cash

10,500
equivalents
Cash and cash equivalents,

1,000
beginning of year
Cash and cash equivalents, end of $11,50

year 0
[edit]Indirect method
The indirect method uses net-income as a starting point, makes
adjustments for all transactions for non-cash items, then adjusts from
all cash-based transactions. An increase in an asset account is
subtracted for net income, and an increase in a liability account is
added back to net income. This method converts accrual-basis net
income (or loss) into cash flow by using a series of additions and
deductions.[14]
[edit]Rules (Operating Activities)
To Find Cash Flows
from Operating Activities
using the Balance Sheet and Net Income
For Increases in Net Inc Adj
Current Assets (Non-Cash) Decrease
Current Liabilities Increase
For All Non-Cash...
*Expenses (Decreases in Fixed Assets) Increase
*Non-cash expenses must be added back to NI. Such expenses may be

represented on the balance sheet as decreases in long term asset accounts.
Thus decreases in fixed assets increase NI.
The following rules can be followed to calculate Cash Flows from

Operating Activities when given only a two year comparative balance
sheet and the Net Income figure. Cash Flows from Operating
Activities can be found by adjusting Net Income relative to the change
in beginning and ending balances of Current Assets, Current
Liabilities, and sometimes Long Term Assets. When comparing the
change in long term assets over a year, the accountant must be
certain that these changes were caused entirely by their devaluation
rather than purchases or sales (ie they must be operating items not
providing or using cash) or if they are nonoperating items.[15]
 Decrease in non-cash current assets are added to net income

 Increase in non-cash current asset are subtracted from net
income
 Increase in current liabilities are added to net income
 Decrease in current liabilities are subtracted from net income
 Expenses with no cash outflows are added back to net income
(depreciation and/or amortization expense are the only operating
items that have no effect on cash flows in the period)
 Revenues with no cash inflows are subtracted from net income
 Non operating losses are added back to net income
 Non operating gains are subtracted from net income
The intricacies of this procedure might be seen as,
For example, consider a company that has a net income of $100 this
year, and its A/R increased by $25 since the beginning of the year. If
the balances of all other current assets, long term assets and current
liabilities did not change over the year, the cash flows could be
determined by the rules above as $100 – $25 = Cash Flows from
Operating Activities = $75. The logic is that, if the company made
$100 that year (net income), and they are using the accrual
accounting system (not cash based) then any income they generated
that year which has not yet been paid for in cash should be subtracted
from the net income figure in order to find cash flows from operating
activities. And the increase in A/R meant that $25 dollars of sales
occurred on credit and have not yet been paid for incash.
In the case of finding Cash Flows when there is a change in a fixed
asset account, say the Buildings and Equipment account decreases,
the change is subtracted from Net Income. The reasoning behind this
is that because Net Income is calculated by, Net Income = Rev - Cogs
- Depreciation Exp - Other Exp then the Net Income figure will be
decreased by the building's depreciation that year. This depreciation
is not associated with an exchange of cash, therefore the depreciation
is added back into net income to remove the non-cash activity.
[edit]Rules (Financing Activities)
Finding the Cash Flows from Financing Activities is much more

intuitive and needs little explanation. Generally, the things to account
for are financing activities:
 Include as outflows, reductions of long term notes payable (as

would represent the cash repayment of debt on the balance sheet)
 Or as inflows, the issuance of new notes payable
 Include as outflows, all dividends paid by the entity to outside
parties
 Or as inflows, dividend payments received from outside parties
 Include as outflows, the purchase of notes stocks or bonds
 Or as inflows, the receipt of payments on such financing
vehicles.[citation needed]
In the case of more advanced accounting situations, such as when

dealing with subsidiaries, the accountant must
 Exclude intra-company dividend payments.

 Exclude intra-company bond interest.[citation needed]
A traditional equation for this might look something like,
Example: cash flow of Citigroup:[16][17][18]
Citigroup Cash Flow Statement

(all numbers in millions of US$)
12/31/20 12/31/20 12/31/200

Period ending
07 06 5
Net income 21,538 24,589 17,046

Operating activities, cash flows provided by or used in:
Depreciation and amortization 2,790 2,592 2,747
Adjustments to net income 4,617 621 2,910
Decrease (increase) in accounts receivable 12,503 17,236 --
Increase (decrease) in liabilities (A/P, taxes

131,622 19,822 37,856
payable)
Decrease (increase) in inventories -- -- --
Increase (decrease) in other operating

(173,057) (33,061) (62,963)
activities
Net cash flow from operating

13 31,799 (2,404)
activities
Investing activities, cash flows provided by or used in:
Capital expenditures (4,035) (3,724) (3,011)
Investments (201,777) (71,710) (75,649)
Other cash flows from investing activities 1,606 17,009 (571)
Net cash flows from investing

(204,206) (58,425) (79,231)
activities
Financing activities, cash flows provided by or used in:
Dividends paid (9,826) (9,188) (8,375)
Sale (repurchase) of stock (5,327) (12,090) 133

Increase (decrease) in debt 101,122 26,651 21,204
Other cash flows from financing activities 120,461 27,910 70,349
Net cash flows from financing

206,430 33,283 83,311
activities
Effect of exchange rate changes 645 (1,840) 731
Net increase (decrease) in cash and

2,882 4,817 2,407
cash equivalents
Statement of retained earnings

The Statement of Retained Earnings (also known as Equity Statement, Statement of
Owner's Equity for a single proprietorship, Statement of Partner's Equity for partnership,
and Statement of Retained Earnings and Stockholders' Equity for corporation)[1] is one
of the basic financial statements as perGenerally Accepted Accounting Principles, and it
explains the changes in a company's retained earnings over the reporting period. It breaks
down changes affecting the account, such as profits or losses from
operations, dividends paid, and any other items charged or credited to retained earnings.
Requirements of the U.S. GAAP

A retained earnings statement is required by the U.S. Generally
Accepted Accounting Principles (U.S. GAAP) whenever comparative
balance sheets and income statements are presented. It may appear
in the balance sheet, in a combined income statement and changes in
retained earnings statement, or as a separate schedule.
Therefore, the statement of retained earnings uses information from
the income statement and provides information to the balance sheet.
Retained earnings are part of the balance sheet (another basic
financial statement) under "stockholders equity (shareholders' equity)"
and is mostly affected by net income earned during a period of time
by the company less any dividends paid to the company's owners /
stockholders. The retained earnings account on the balance sheet is
said to represent an "accumulation of earnings" since net profits and
losses are added/subtracted from the account from period to period.
The general equation can be expressed as following:
Ending Retained Earnings = Beginning Retained Earnings -

Dividends Paid + Net Income
[edit]Requirements of IFRS
IAS 1 requires a business entity to present a separate Statement
of Changes in Equity (SOCE) as one of the components of
financial statements.
The statement shall show: (IAS1.106)
1. total comprehensive income for the period, showing

separately amounts attributable to owners of the parent and
to non-controlling interests
2. the effects of retrospective application, when
applicable, for each component
3. reconciliations between the carrying amounts at
the beginning and the end of the period for each component
of equity, separately disclosing:
 profit or loss
 each item of other comprehensive income
 transactions with owners, showing separately contributions
by and distributions to owners and changes in ownership
interests in subsidiaries that do not result in a loss of control
However, the amount of dividends recognised as distributions,
and the related amount per share, may be presented in
the notes instead of presenting in the statement of changes in
equity. (IAS1.107)
For Small and Medium-size Enterprises (SMEs), the

Statement of Changes in Equity should show all changes in
equity including:
 totalcomprehensive income
 owners' investments
 dividends
 owners' withdrawals of capital
 treasury share transactions
They can omit the statement of changes in equity if the entity

has no owner investments or withdrawals other than
dividends, and elects to present a combined statement of
comprehensive income and retained earnings.
Retained earnings
In accounting, retained earnings refers to the portion of net income which is retained by
the corporation rather than distributed to its owners as dividends. Similarly, if the corporation
takes a loss, then that loss is retained and called variously retained losses, accumulated
losses or accumulated deficit. Retained earnings and losses are cumulative from year to
year with losses offsetting earnings.
Retained earnings are reported in the shareholders' equity section of the balance sheet.
Companies with net accumulated losses may refer to negative shareholders' equity as a
shareholders' deficit. A complete report of the retained earnings or retained losses is
presented in the Statement of Retained Earnings or Statement of Retained Losses.
Stockholders' equity
When total assets are greater than total liabilities, stockholders have a
positive equity (positive book value). Conversely, when total liabilities
are greater than total assets, stockholders have a negative
stockholders' equity (negative book value) — also sometimes called
stockholders' deficit. A stockholders' deficit does not mean that
stockholders owe money to the corporation as they own only its net
assets and are not accountable for its liabilities. It means that the
value of the assets of the company must rise above its liabilities
before the stockholders hold positive equity value in the company.
Liabilities that exceed assets is the classic definition of bankruptcy.
Dividends
The decision of whether a firm should retain net income or have it paid out
as dividends depends on several factors including, but not limited to the:
 Tax treatment of dividends; and

 Funds required for reinvestment in the corporation (called retention).
Equity (finance)
in accounting and finance, equity is the residual claim or interest of the most junior class of
investors in assets, after all liabilities are paid. If valuations placed on assets do not exceed
liabilities, negative equity exists. In an accounting context, Shareholders' equity (or
stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents
the remaining interest in assets of a company, spread among
individual shareholders of common orpreferred stock.
At the start of a business, owners put some funding into the business to finance operations.
This creates a liability on the business in the shape of capitalas the business is a separate
entity from its owners. Businesses can be considered to be, for accounting purposes, sums
of liabilities and assets; this is the accounting equation. After liabilities have been accounted
for, the positive remainder is deemed the owner's interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At

first, all the secured creditors are paid against proceeds from assets. Afterward, a series of
creditors, ranked in priority sequence, have the next claim/right on the residual proceeds.
Ownership equity is the last orresidual claim against assets, paid only after all other creditors
are paid. In such cases where even creditors could not get enough money to pay their bills,
nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero.
Ownership equity is also known as risk capital, liable capital or simply, equity.
Equity investments
An equity investment generally refers to the buying and holding of
shares of stock on a stock market by individuals and firms in
anticipation of income from dividends and capital gains, as the value
of the stock rises. It may also refer to the acquisition of equity
(ownership) participation in a private (unlisted) company or a startup
company. When the investment is in infant companies, it is referred to
as venture capital investing and is generally understood to be higher
risk than investment in listed going-concern situations.
The equities held by private individuals are often held via mutual
funds or other forms of collective investment scheme, many of which
have quoted prices that are listed in financial newspapers or
magazines; the mutual funds are typically managed by prominent fund
management firms, such as Schroders, Fidelity Investments or The
Vanguard Group. Such holdings allow individual investors to obtain
the diversification of the fund(s) and to obtain the skill of the
professional fund managers in charge of the fund(s). An alternative,
which is usually employed by large private investors and pension
funds, is to hold shares directly; in the institutional environment many
clients who own portfolios have what are called segregated funds, as
opposed to or in addition to the pooled mutual fund alternatives.
A calculation can be made to assess whether an equity is over or
underpriced, compared with a long-term government bond. This is
called the Yield Gap or Yield Ratio. It is the ratio of the dividend yield
of an equity and that of the long-term bond.
Accounting
In financial accounting, equity capital is the owners' interest on
the assets of the enterprise after deducting all its liabilities.[1] It
appears on the balance sheet / statement of financial position,[2] one
of the four primary financial statements.
Ownership equity includes both tangible and intangible items (such as
brand names and reputation / goodwill).
Accounts listed under ownership equity include (example):
 Share capital (common stock)

 Preferred stock
 Capital surplus
 Retained earnings
 Treasury stock
 Stock options
 Reserve
[edit]Book value
The book value of equity will change in the case of the following
events:
 Changes in the firm's assets relative to its liabilities. For

example, a profitable firm receives more cash for its products than
the cost at which it produced these goods, and so in the act of
making a profit, it is increasing its assets.
 Depreciation - Equity will decrease, for example, when
machinery depreciates, which is registered as a decline in the
value of the asset, and on the liabilities side of the firm's balance
sheet as a decrease in shareholders' equity.
 Issue of new equity in which the firm obtains new capital
increases the total shareholders' equity.
 Share repurchases, in which a firm gives back money to its
investors, reducing on the asset side its financial assets, and on
the liability side the shareholders' equity. For practical purposes
(except for its tax consequences), share repurchasing is similar to
a dividend payment, as both consist of the firm giving money back
to investors. Rather than giving money to all shareholders
immediately in the form of a dividend payment, a share repurchase
reduces the number of shares (increases the size of each share) in
future income and distributions.
 Dividends paid out to preferred stock owners are considered an
expense to be subtracted from net income[citation needed](from the point
of view of the common share owners).
 Other reasons - Assets and liabilities can change without any
effect being measured in the Income Statement under certain
circumstances; for example, changes in accounting rules may be
applied retroactively. Sometimes assets bought and held in other
countries get translated back into the reporting currency at different
exchange rates, resulting in a changed value.
[edit]Shareholders' equity
When the owners are shareholders, the interest can be called
shareholders' equity; the accounting remains the same, and it is
ownership equity spread out among shareholders. If all shareholders
are in one and the same class, they share equally in ownership equity
from all perspectives. However, shareholders may allow different
priority ranking among themselves by the use of share classes and
options. This complicates both analysis for stock valuation and
accounting.
The individual investor is interested not only in the total changes to
equity, but also in the increase / decrease in the value of his own
personal share of the equity. This reconciliation of equity should be
done both in total and on a per share basis.
 Equity (beg. of year)

 + net income inter net money you gained
 − dividends how much money you gained or lost so far
 +/− gain/loss from changes to the number of shares
outstanding.more or less
 = Equity (end of year) if you get more money during the year or
less or not anything
[edit]Market value of shares

In the stock market, market price per share does not correspond to
the equity per share calculated in the accounting statements. Stock
valuations, which are often much higher, are based on other
considerations related to the business' operating cash flow, profits and
future prospects; some factors are derived from the accounting
statements. Thus, there is little or no correlation between the equity
seen in financial statements and the stock valuation of the business.
[edit]Equity in Real Estate
The notion of equity with respect to real estate comes the equity of
redemption. This equity is a property right valued at the difference
between the market price of the property and the amount of any
mortgage or other encumbrance.
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary
of the financial balances of a sole proprietorship, a business partnership or
a company. Assets, liabilities and ownership equity are listed as of a specific date, such as
the end of its financial year. A balance sheet is often described as a "snapshot of a
company's financial condition".[1] Of the four basic financial statements, the balance sheet is
the only statement which applies to a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and ownership equity.
The main categories of assets are usually listed first, and typically in order of liquidity.
[2]
Assets are followed by the liabilities. The difference between the assets and the liabilities
is known as equity or the net assets or the net worth or capital of the company and
according to the accounting equation, net worth must equal assets minus liabilities.[3]
Another way to look at the same equation is that assets equals liabilities plus owner's equity.
Looking at the equation in this way shows how assets were financed: either by borrowing
money (liability) or by using the owner's money (owner's equity). Balance sheets are usually
presented with assets in one section and liabilities and net worth in the other section with the
two sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing the entire bank
balance at the end of the period, plus any cash in hand. However, many businesses are not
paid immediately; they build up inventories of goods and they acquire buildings and
equipment. In other words: businesses have assets and so they can not, even if they want
to, immediately turn these into cash at the end of each period. Often, these businesses owe
money to suppliers and to tax authorities, and the proprietors do not withdraw all their
original capital and profits at the end of each period. In other words businesses also
have liabilities.
Types
A balance sheet summarizes an organization or individual's assets,
equity and liabilities at a specific point in time. Individuals and small
businesses tend to have simple balance sheets.[4] Larger businesses
tend to have more complex balance sheets, and these are presented
in the organization's annual report.[5] Large businesses also may
prepare balance sheets for segments of their businesses.[6] A balance
sheet is often presented alongside one for a different point in time
(typically the previous year) for comparison.[7][8]
[edit]Personal balance sheet
A personal balance sheet lists current assets such as cash
in checking accounts and savings accounts, long-term assets such
as common stock and real estate, current liabilities such as loan debt
and mortgage debt due, or overdue, long-term liabilities such as
mortgage and other loan debt. Securities and real estate values are
listed at market value rather than at historical cost or cost basis.
Personal net worth is the difference between an individual's total
assets and total liabilities.[9]
[edit]US small business balance sheet
Sample Small Business Balance Sheet[10]
Assets Liabilities and Owners' Equity
Cash $6,600 Liabilities
Accounts
$6,200 Notes Payable $30,000
Receivable
Accounts Payable
Total liabilities $30,000
Tools and equipment $25,000 Owners' equity
Capital Stock $7,000
Retained Earnings $800
Total owners' equity $7,800
Total $37,800 Total $37,800
A really small business balance sheet lists current assets such as

cash, accounts receivable, and inventory, fixed assets such as land,
buildings, and equipment, intangible assets such as patents, and
liabilities such as accounts payable, accrued expenses, and long-term
debt. Contingent liabilities such as warranties are noted in the
footnotes to the balance sheet. The small business's equity is the
difference between total assets and total liabilities.[11]
[edit]Public Business Entities balance sheet structure

Guidelines for balance sheets of public business entities are given by
the International Accounting Standards Committee (now International
Accounting Standards Board) and numerous country-specific
organizations/companys.
Balance sheet account names and usage depend on the
organization's country and the type of organization. Government
organizations do not generally follow standards established for
individuals or businesses.[12][13][14][15]
If applicable to the business, summary values for the following items
should be included in the balance sheet:[16] Assets are all the things
the business own, this will include property tools, cars, etc.
[edit]Assets
Current assets
1. Cash and cash equivalents

2. Inventories
3. Accounts receivable
4. Prepaid expenses for future services that will be used
within a year
Non-current assets (Fixed assets)
1. Property, plant and equipment

2. Investment property, such as real estate held for
investment purposes
3. Intangible assets
4. Financial assets (excluding investments accounted for
using the equity method, accounts receivables, and cash
and cash equivalents)
5. Investments accounted for using the equity method
6. Biological assets, which are living plants or animals.
Bearer biological assets are plants or animals which bear
agricultural produce for harvest, such as apple trees grown to
produce apples and sheep raised to produce wool.[17]
[edit]Liabilities
1. Accounts payable
2. Provisions for warranties or court decisions
3. Financial liabilities (excluding provisions and accounts
payable), such as promissory notes and corporate bonds
4. Liabilities and assets for current tax
5. Deferred tax liabilities and deferred tax assets
6. Unearned revenue for services paid for by customers but
not yet provided
[edit]Equity
The net assets shown by the balance sheet equals the third part of
the balance sheet, which is known as the shareholders' equity. It
comprises:
1. Issued capital and reserves attributable to equity holders of

the parent company (controlling interest)
2. Non-controlling interest in equity
Formally, shareholders' equity is part of the company's liabilities: they

are funds "owing" to shareholders (after payment of all other
liabilities); usually, however, "liabilities" is used in the more restrictive
sense of liabilities excluding shareholders' equity. The balance of
assets and liabilities (including shareholders' equity) is not a
coincidence. Records of the values of each account in the balance
sheet are maintained using a system of accounting known as double-
entry bookkeeping. In this sense, shareholders' equity by construction
must equal assets minus liabilities, and are a residual.
Regarding the items in equity section, the following disclosures are
required:
1. Numbers of shares authorized, issued and fully paid, and

issued but not fully paid
2. Par value of shares
3. Reconciliation of shares outstanding at the beginning and
the end of the period
4. Description of rights, preferences, and restrictions of
shares
5. Treasury shares, including shares held by subsidiaries and
associates
6. Shares reserved for issuance under options and contracts
7. A description of the nature and purpose of each reserve
within owners' equity
[edit]Sample balance sheet

The following balance sheet is a very brief example prepared in
accordance with IFRS. It does not show all possible kinds of assets,
liabilities and equity, but it shows the most usual ones. Because it
shows goodwill, it could be a consolidated balance sheet. Monetary
values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd.

As of 31 December 2009
ASSETS
Current Assets
Cash and Cash Equivalents
Accounts Receivable (Debtors)
Less : Allowances for Doubtful Accounts
Inventories
Prepaid Expenses
Investment Securities (Held for trading)
Other Current Assets
Non-Current Assets (Fixed Assets)
Property, Plant and Equipment (PPE)
Less : Accumulated Depreciation
Investment Securities (Available for sale/Held-to-maturity)
Investments in Associates
Intangible Assets (Patent, Copyright, Trademark, etc.)
Less : Accumulated Amortization
Goodwill
Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable
LIABILITIES and SHAREHOLDERS' EQUITY

LIABILITIES
Current Liabilities (Creditors: amounts falling due within one year)
Accounts Payable
Current Income Tax Payable
Current portion of Loans Payable
Short-term Provisions
Other Current Liabilities, e.g. Unearned Revenue, Deposits
Non-Current Liabilities (Creditors: amounts falling due after more than one
year)
Loans Payable
Issued Debt Securities, e.g. Notes/Bonds Payable
Deferred Tax Liabilities
Provisions, e.g. Pension Obligations
Other Non-Current Liabilities, e.g. Lease Obligations
SHAREHOLDERS' EQUITY
Paid-in Capital
Share Capital (Ordinary Shares, Preference Shares)
Share Premium
Less: Treasury Shares
Retained Earnings
Revaluation Reserve
Accumulated Other Comprehensive Income
Non-Controlling Interest
Capital expenditure
Capital expenditures (CAPEX or capex) are expenditures creating
future benefits. A capital expenditure is incurred when a business
spends money either to buy fixed assets or to add to the value of an
existing fixed asset with a useful life that extends beyond the taxable
year. Capex are used by a company
toacquire or upgrade physical assets such as equipment, property, or
industrial buildings. In accounting, a capital expenditure is added to an
asset account ("capitalized"), thus increasing the asset's basis (the
cost or value of an asset as adjusted for tax purposes). Capex is
commonly found on the cash flow statement as "Investment in Plant
Property and Equipment" or something similar in the Investing
subsection.
For tax purposes, capital expenditures are costs that cannot be
deducted in the year in which they are paid or incurred and must
be capitalized. The general rule is that if the property acquired has a
useful life longer than the taxable year, the cost must be capitalized.
The capital expenditure costs are then amortized or depreciated over
the life of the asset in question. As stated above, capital expenditures
create or add basis to the asset or property, which once adjusted, will
determine tax liability in the event of sale or transfer. In the US,
Internal Revenue Code §§263 and 263A deal extensively with
capitalization requirements and exceptions.[1]
Included in capital expenditures are amounts spent on:
1. acquiring fixed assets

2. fixing problems with an asset that existed prior to
acquisition if it results in a superior fixture
3. preparing an asset to be used in business
4. restoring property or adapting it to a new or different use
5. starting a new business
An ongoing question of the accounting of any company is whether

certain expenses should be capitalized or expensed. Costs that are
expensed in a particular month simply appear on the financial
statement as a cost that was incurred that month. Costs that are
capitalized, however, are amortized over multiple years. Capitalized
expenditures show up on the balance sheet. Most ordinary business
expenses are clearly either expensable or capitalizable, but some
expenses could be treated either way, according to the preference of
the company. Capitalized interest if applicable is also spread out over
the life of the asset.
The counterpart of capital expenditure is operational
expenditure ("OpEx").
In management accounting, cost accounting establishes budget and actual cost

of operations, processes, departments or product and the analysis of variances,
profitability or social use of funds. Managers use cost accounting to support
decision-making to cut a company's costs and improve profitability. As a form
of management accounting, cost accounting need not follow standards such as
GAAP, because its primary use is for internal managers, rather than outside
users, and what to compute is instead decided pragmatically.
Costs are measured in units of nominal currency by convention. Cost

accounting can be viewed as translating the supply chain (the series of events in
the production process that, in concert, result in a product) into financial values.
There are various managerial accounting approaches:
• standardized or standard cost accounting

• lean accounting
• activity-based costing
• resource consumption accounting
• throughput accounting
• marginal costing/cost-volume-profit analysis
Classical cost elements are:
1. raw materials
2. labor
3. indirect expenses/overhead
Origins
Cost accounting has long been used to help managers understand the costs of running a
business. Modern cost accounting originated during the industrial revolution, when the
complexities of running a large scale business led to the development of systems for
recording and tracking costs to help business owners and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern
accountants call "variable costs" because they varied directly with the amount of production.
Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to
production. Managers could simply total the variable costs for a product and use this as a
rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs, which
rise and fall with volume of work. Over time, the importance of these "fixed costs" has
become more important to managers. Examples of fixed costs include the depreciation of
plant and equipment, and the cost of departments such as maintenance, tooling, production
control, purchasing, quality control, storage and handling, plant supervision and engineering.
In the early twentieth century, these costs were of little importance to most businesses.
However, in the twenty-first century, these costs are often more important than the variable
cost of a product, and allocating them to a broad range of products can lead to bad decision
making. Managers must understand fixed costs in order to make decisions about products and
pricing.
For example: A company produced railway coaches and had only one product. To make each
coach, the company needed to purchase $60 of raw materials and components, and pay 6
laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that
making a coach required spending $300, managers knew they couldn't sell below that price
without losing money on each coach. Any price above $300 became a contribution to the
fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance
and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000
(priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a
profit of $500 in both cases.
[edit] Elements of cost

• 1. Material(Material is a very important part of business)
o A. Direct material
• 2. Labor
o A. Direct labor
• 3. Overhead
o A. Indirect material
o B. Indirect labor
(In some companies, machine cost is segregated from overhead and reported as a separate
element)
They are grouped further based on their functions as,
• 1. Production or works overheads

• 2. Administration overheads
• 3. Selling overheads
• 4. Distribution overheads
[edit] Classification of costs

Classification of cost means, the grouping of costs according to their common characteristics.
The important ways of classification of costs are:
• By nature or element: materials, labor, expenses

• By functions: production, selling, distribution, administration, R&D, development,
• By traceability: direct and indirect
• By variability: fixed, variable, semi-variable
• By controllability: controllable, uncontrollable
• By normality: normal, abnormal
[edit] Standard cost accounting

In modern cost accounting, the concept of recording historical costs was taken further, by
allocating the company's fixed costs over a given period of time to the items produced during
that period, and recording the result as the total cost of production. This allowed the full cost
of products that were not sold in the period they were produced to be recorded in inventory
using a variety of complex accounting methods, which was consistent with the principles of
GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to
ignore the fixed costs, and look at the results of each period in relation to the "standard cost"
for any given product.
For example: if the railway coach company normally produced 40 coaches per month,
and the fixed costs were still $1000/month, then each coach could be said to incur an
overhead of $25 ($1000 / 40). Adding this to the variable costs of $300 per coach
produced a full cost of $325 per coach.
This method tended to slightly distort the resulting unit cost, but in mass-production
industries that made one product line, and where the fixed costs were relatively low, the
distortion was very minor.
For example: if the railway coach company made 100 coaches one month, then the
unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the
company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)),
a relatively minor difference.
An important part of standard cost accounting is a variance analysis, which breaks down the
variation between actual cost and standard costs into various components (volume variation,
material cost variation, labor cost variation, etc.) so managers can understand why costs were
different from what was planned and take appropriate action to correct the situation.
[edit] The development of throughput accounting
Main article: Throughput accounting
As business became more complex and began producing a greater variety of products, the use
of cost accounting to make decisions to maximize profitability came under question.
Management circles became increasingly aware of the Theory of Constraints in the 1980s,
and began to understand that "every production process has a limiting factor" somewhere in
the chain of production. As business management learned to identify the constraints, they
increasingly adopted throughput accounting to manage them and "maximize the throughput
dollars" (or other currency) from each unit of constrained resource.
For example: The railway coach company was offered a contract to make 15 open-
topped streetcars each month, using a design that included ornate brass foundry work,
but very little of the metalwork needed to produce a covered rail coach. The buyer
offered to pay $280 per streetcar. The company had a firm order for 40 rail coaches
each month for $350 per unit.
The company accountant determined that the cost of operating the foundry vs. the
metalwork shop each month was as follows:
Overhead Cost by Department Total Cost Hours Available per month Cost per hour
Foundry $ 7,300.00 160 $45.63
Metal shop $ 3,300.00 160 $20.63
Total $10,600.00 320 $33.13
The company was at full capacity making 40 rail coaches each month. And since the
foundry was expensive to operate, and purchasing brass as a raw material for the
streetcars was expensive, the accountant determined that the company would lose
money on any streetcars it built. He showed an analysis of the estimated product costs
based on standard cost accounting and recommended that the company decline to
build any streetcars.
Standard Cost Accounting Analysis Streetcars Rail coach
Monthly Demand 15 40
Price $280 $350
Foundry Time (hrs) 3.0 2.0
Metalwork Time (hrs) 1.5 4.0
Total Time 4.5 6.0
Foundry Cost $136.88 $ 91.25
Metalwork Cost $ 30.94 $ 82.50
Raw Material Cost $120.00 $ 60.00
Total Cost $287.81 $233.75
Profit per Unit $ (7.81) $116.25
However, the company's operations manager knew that recent investment in
automated foundry equipment had created idle time for workers in that department.
The constraint on production of the railcoaches was the metalwork shop. She made an
analysis of profit and loss if the company took the contract using throughput
accounting to determine the profitability of products by calculating "throughput"
(revenue less variable cost) in the metal shop.
Throughput Cost Accounting Analysis Decline Contract Take Contract
Coaches Produced 40 34
Streetcars Produced 0 15
Foundry Hours 80 113
Metal shop Hours 160 159
Coach Revenue $14,000 $11,900
Streetcar Revenue $0 $ 4,200
Coach Raw Material Cost $(2,400) $(2,040)
Streetcar Raw Material Cost $0 $(1,800)
Throughput Value $11,600 $12,260
Overhead Expense $(10,600) $(10,600)
Profit $1,000 $1,660
After the presentations from the company accountant and the operations manager, the
president understood that the metal shop capacity was limiting the company's
profitability. The company could make only 40 rail coaches per month. But by taking
the contract for the streetcars, the company could make nearly all the railway coaches
ordered, and also meet all the demand for streetcars. The result would increase
throughput in the metal shop from $6.25 to $10.38 per hour of available time, and
increase profitability by 66 percent.
[edit] Activity-based costing

Main article: Activity-based costing
Activity-based costing (ABC) is a system for assigning costs to products based on the
activities they require. In this case, activities are those regular actions performed inside a
company. "Talking with customer regarding invoice questions" is an example of an activity
inside most companies.
Accountants assign 100% of each employee's time to the different activities performed inside
a company (many will use surveys to have the workers themselves assign their time to the
different activities). The accountant then can determine the total cost spent on each activity
by summing up the percentage of each worker's salary spent on that activity.
A company can use the resulting activity cost data to determine where to focus their
operational improvements. For example, a job-based manufacturer may find that a high
percentage of its workers are spending their time trying to figure out a hastily written
customer order. Via ABC, the accountants now have a currency amount pegged to the
activity of "Researching Customer Work Order Specifications". Senior management can now
decide how much focus or money to budget for resolving this process deficiency. Activity-
based management includes (but is not restricted to) the use of activity-based costing to
manage a business.
While ABC may be able to pinpoint the cost of each activity and resources into the ultimate
product, the process could be tedious, costly and subject to errors.
As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs
do not vary according to each month's production volume. For example, an elimination of
one product would not eliminate the overhead or even direct labor cost assigned to it. ABC
better identifies product costing in the long run, but may not be too helpful in day-to-day
decision-making.
[edit] Lean accounting

Main article: Lean accounting
Lean accounting[1] has developed in recent years to provide the accounting, control, and
measurement methods supporting lean manufacturing and other applications of lean thinking
such as healthcare, construction, insurance, banking, education, government, and other
industries.
There are two main thrusts for Lean Accounting. The first is the application of lean methods
to the company's accounting, control, and measurement processes. This is not different from
applying lean methods to any other processes. The objective is to eliminate waste, free up
capacity, speed up the process, eliminate errors & defects, and make the process clear and
understandable. The second (and more important) thrust of Lean Accounting is to
fundamentally change the accounting, control, and measurement processes so they motivate
lean change & improvement, provide information that is suitable for control and decision-
making, provide an understanding of customer value, correctly assess the financial impact of
lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does
not require the traditional management accounting methods like standard costing, activity-
based costing, variance reporting, cost-plus pricing, complex transactional control systems,
and untimely & confusing financial reports. These are replaced by:
• lean-focused performance measurements

• simple summary direct costing of the value streams
• decision-making and reporting using a box score
• financial reports that are timely and presented in "plain English" that everyone can
understand
• radical simplification and elimination of transactional control systems by eliminating
the need for them
• driving lean changes from a deep understanding of the value created for the customers
• eliminating traditional budgeting through monthly sales, operations, and financial
planning processes (SOFP)
• value-based pricing
• correct understanding of the financial impact of lean change
As an organization becomes more mature with lean thinking and methods, they recognize that
the combined methods of lean accounting in fact creates a lean management system (LMS)
designed to provide the planning, the operational and financial reporting, and the motivation
for change required to prosper the company's on-going lean transformation.
Marginal costing
See also: Cost-Volume-Profit Analysis and Marginal cost
This method is used particularly for short-term decision-making. Its principal tenets are:
• Revenue (per product) − variable costs (per product) = contribution (per product)
• Total contribution − total fixed costs = (total profit or total loss)
Thus, it does not attempt to allocate fixed costs in an arbitrary manner to different products.
The short-term objective is to maximize contribution per unit. If constraints exist on
resources, then Managerial Accounting dictates that marginal cost analysis be employed to
maximize contribution per unit of the constrained resource (see Development of throughput
accounting, above).
Fixed asset turnover

Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed
assets (on the balance sheet). It indicates how well the business is using its fixed assets to
generate sales.
[1]
Generally speaking, the higher the ratio, the better, because a high ratio indicates the business
has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may
indicate that the business is over-invested in plant, equipment, or other fixed assets.
Trial balance
A trial balance is a list of all the nominal ledger (general ledger) accounts
contained in the ledger of a business. This list will contain the name of the
nominal ledger account and the value of that nominal ledger account. The value
of the nominal ledger will hold either a debit balance value or a credit value
balance. The debit balance values will be listed in the debit column of the trial
balance and the credit value balance will be listed in the credit column. The
profit and loss statement and balance sheet and other financial reports can then
be produced using the ledger accounts listed on the trial balance.
The name comes from the purpose of a trial balance which is to prove that the value of all the
debit value balances equal the total of all the credit value balances. Trialing, by listing every
nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial
reporting of a business's performance. If the total of the debit column does not equal the total
value of the credit column then this would show that there is an error in the nominal ledger
accounts. This error must be found before a profit and loss statement and balance sheet can
be produced.
The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks
to record financial transactions and then post them to the nominal ledgers and personal ledger
accounts. The trial balance is a part of the double-entry bookkeeping system and uses the
classic 'T' account format for presenting values.
Trial balance limitations

A trial balance only checks the sum of debits against the sum of credits. That is why it does
not guarantee that there are no errors. The following are the main classes of error that are not
detected by the trial balance:
• An error of original entry is when both sides of a transaction include the wrong
amount.[1] For example, if a purchase invoice for £21 is entered as £12, this will result
in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant
creditor account), both for £9 less, so the total of both columns will be £9 less, and
will thus balance.
• An error of omission is when a transaction is completely omitted from the
accounting records.[1] As the debits and credits for the transaction would balance,
omitting it would still leave the totals balanced. A variation of this error is omitting
one of the ledger account totals from the trial balance.[2]
• An error of reversal is when entries are made to the correct amount, but with debits
instead of credits, and vice versa.[1] For example, if a cash sale for £100 is debited to
the Sales account, and credited to the Cash account. Such an error will not affect the
totals.
• An error of commission is when the entries are made at the correct amount, and the
appropriate side (debit or credit), but one or more entries are made to the wrong
account of the correct type.[1] For example, if fuel costs are incorrectly debited to the
postage account (both expense accounts). This will not affect the totals.
• An error of principle is when the entries are made to the correct amount, and the
appropriate side (debit or credit), as with an error of commission, but the wrong type
of account is used.[1] For example, if fuel costs (an expense account), are debited to
stock (an asset account). This will not affect the totals.
• Compensating errors are multiple unrelated errors that would individually lead to an
imbalance, but together cancel each other out.[1]
• A Transposition Error is an error caused by switching the position of two adjacent
digits. Since the resulting error is always divisible by 9, accountants use this fact to
locate the misentered number. For example, a total is off by 72, dividing it by 9 gives
8 which indicates that one of the switched digit is either more, or less, by 8 than the
other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9.
This will also not affect the totals.
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of

the financial balances of a sole proprietorship, a business partnership or a company. Assets,
liabilities and ownership equity are listed as of a specific date, such as the end of its financial
year. A balance sheet is often described as a "snapshot of a company's financial condition".[1]
Of the four basic financial statements, the balance sheet is the only statement which applies to
a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and ownership equity.
The main categories of assets are usually listed first, and typically in order of liquidity.[2]
Assets are followed by the liabilities. The difference between the assets and the liabilities is
known as equity or the net assets or the net worth or capital of the company and according to
the accounting equation, net worth must equal assets minus liabilities.[3]
Another way to look at the same equation is that assets equals liabilities plus owner's equity.
Looking at the equation in this way shows how assets were financed: either by borrowing
money (liability) or by using the owner's money (owner's equity). Balance sheets are usually
presented with assets in one section and liabilities and net worth in the other section with the
two sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing the entire bank
balance at the end of the period, plus any cash in hand. However, many businesses are not
paid immediately; they build up inventories of goods and they acquire buildings and
equipment. In other words: businesses have assets and so they can not, even if they want to,
immediately turn these into cash at the end of each period. Often, these businesses owe
money to suppliers and to tax authorities, and the proprietors do not withdraw all their
original capital and profits at the end of each period. In other words businesses also have
liabilities.
Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a
specific point in time. Individuals and small businesses tend to have simple balance sheets.[4]
Larger businesses tend to have more complex balance sheets, and these are presented in the
organization's annual report.[5] Large businesses also may prepare balance sheets for segments
of their businesses.[6] A balance sheet is often presented alongside one for a different point in
time (typically the previous year) for comparison.[7][8]
[edit] Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings
accounts, long-term assets such as common stock and real estate, current liabilities such as
loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other
loan debt. Securities and real estate values are listed at market value rather than at historical
cost or cost basis. Personal net worth is the difference between an individual's total assets and
total liabilities.[9]
[edit] US small business balance sheet

Sample Small Business Balance Sheet[10]
Assets Liabilities and Owners' Equity
Cash $6,600 Liabilities
Accounts Receivable $6,200 Notes Payable $30,000
Accounts Payable
Total liabilities $30,000
Tools and equipment $25,000 Owners' equity
Capital Stock $7,000
Retained Earnings $800
Total owners' equity $7,800
Total $37,800 Total $37,800
A really small business balance sheet lists current assets such as cash, accounts receivable,
and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as
patents, and liabilities such as accounts payable, accrued expenses, and long-term debt.
Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The
small business's equity is the difference between total assets and total liabilities.[11]
[edit] Public Business Entities balance sheet structure

Guidelines for balance sheets of public business entities are given by the International
Accounting Standards Committee (now International Accounting Standards Board) and
numerous country-specific organizations/companys.
Balance sheet account names and usage depend on the organization's country and the type of
organization. Government organizations do not generally follow standards established for
individuals or businesses.[12][13][14][15]
If applicable to the business, summary values for the following items should be included in
the balance sheet:[16] Assets are all the things the business own, this will include property
tools, cars, etc.
[edit] Assets
Current assets
1. Cash and cash equivalents

2. Inventories
3. Accounts receivable
4. Prepaid expenses for future services that will be used within a year
Non-current assets (Fixed assets)
1. Property, plant and equipment

2. Investment property, such as real estate held for investment purposes
3. Intangible assets
4. Financial assets (excluding investments accounted for using the equity method,
accounts receivables, and cash and cash equivalents)
5. Investments accounted for using the equity method
6. Biological assets, which are living plants or animals. Bearer biological assets are
plants or animals which bear agricultural produce for harvest, such as apple trees
grown to produce apples and sheep raised to produce wool.[17]
[edit] Liabilities
1. Accounts payable
2. Provisions for warranties or court decisions
3. Financial liabilities (excluding provisions and accounts payable), such as promissory
notes and corporate bonds
4. Liabilities and assets for current tax
5. Deferred tax liabilities and deferred tax assets
6. Unearned revenue for services paid for by customers but not yet provided
[edit] Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is
known as the shareholders' equity. It comprises:
1. Issued capital and reserves attributable to equity holders of the parent company
(controlling interest)
2. Non-controlling interest in equity
Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to
shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in
the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets
and liabilities (including shareholders' equity) is not a coincidence. Records of the values of
each account in the balance sheet are maintained using a system of accounting known as
double-entry bookkeeping. In this sense, shareholders' equity by construction must equal
assets minus liabilities, and are a residual.
Regarding the items in equity section, the following disclosures are required:
1. Numbers of shares authorized, issued and fully paid, and issued but not fully paid
2. Par value of shares
3. Reconciliation of shares outstanding at the beginning and the end of the period
4. Description of rights, preferences, and restrictions of shares
5. Treasury shares, including shares held by subsidiaries and associates
6. Shares reserved for issuance under options and contracts
7. A description of the nature and purpose of each reserve within owners' equity
[edit] Sample balance sheet

The following balance sheet is a very brief example prepared in accordance with IFRS. It
does not show all possible kinds of assets, liabilities and equity, but it shows the most usual
ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values
are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd.

As of 31 December 2009
ASSETS
Current Assets
Cash and Cash Equivalents
Accounts Receivable (Debtors)
Less : Allowances for Doubtful Accounts
Inventories
Prepaid Expenses
Investment Securities (Held for trading)
Other Current Assets
Non-Current Assets (Fixed Assets)
Property, Plant and Equipment (PPE)
Less : Accumulated Depreciation
Investment Securities (Available for sale/Held-to-maturity)
Investments in Associates
Intangible Assets (Patent, Copyright, Trademark, etc.)
Less : Accumulated Amortization
Goodwill
Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable
LIABILITIES and SHAREHOLDERS' EQUITY

LIABILITIES
Current Liabilities (Creditors: amounts falling due within one year)
Accounts Payable
Current Income Tax Payable
Current portion of Loans Payable
Short-term Provisions
Other Current Liabilities, e.g. Unearned Revenue, Deposits
Non-Current Liabilities (Creditors: amounts falling due after more than one
year)
Loans Payable
Issued Debt Securities, e.g. Notes/Bonds Payable
Deferred Tax Liabilities
Provisions, e.g. Pension Obligations
Other Non-Current Liabilities, e.g. Lease Obligations
SHAREHOLDERS' EQUITY
Paid-in Capital
Share Capital (Ordinary Shares, Preference Shares)
Share Premium
Less: Treasury Shares
Retained Earnings
Revaluation Reserve
Accumulated Other Comprehensive Income
Non-Controlling Interest
Balance sheet substantiation
Balance Sheet Substantiation is the accounting process conducted by businesses on a
regular basis to confirm that the balances held in the primary accounting system of record
(e.g. SAP, Oracle, other ERP system's General Ledger) are reconciled (in balance with) with
the balance and transaction records held in the same or supporting sub-systems.
Balance Sheet Substantiation includes multiple processes including reconciliation (at a

transactional or at a balance level) of the account, a process of review of the reconciliation
and any pertinent supporting documentation and a formal certification (sign-off) of the
account in a predetermined form driven by corporate policy.
Balance Sheet Substantiation is an important process that is typically carried out on a

monthly, quarterly and year-end basis. The results help to drive the regulatory balance sheet
reporting obligations of the organization.
Historically, Balance Sheet Substantiation has been a wholly manual process, driven by
spreadsheets, email and manual monitoring and reporting. In recent years software solutions
have been developed to bring a level of process automation, standardization and enhanced
control to the Balance Sheet Substantiation or account certification process. These solutions
are suitable for organizations with a high volume of accounts and/or personnel involved in
the Balance Sheet Substantiation process and can be used to drive efficiencies, improve
transparency and help to reduce risk.
Balance Sheet Substantiation is a key control process in the SOX 404 top-down risk
assessment.
Income statement
Income statement (also referred as profit and loss statement (P&L), statement
of financial performance, earnings statement, operating statement or
statement of operations)[1] is a company's financial statement that indicates how
the revenue (money received from the sale of products and services before
expenses are taken out, also known as the "top line") is transformed into the net
income (the result after all revenues and expenses have been accounted for, also
known as the "bottom line"). It displays the revenues recognized for a specific
period, and the cost and expenses charged against these revenues, including
write-offs (e.g., depreciation and amortization of various assets) and taxes.[1]
The purpose of the income statement is to show managers and investors whether
the company made or lost money during the period being reported.
The important thing to remember about an income statement is that it represents
a period of time. This contrasts with the balance sheet, which represents a single
moment in time.
Charitable organizations that are required to publish financial statements do not

produce an income statement. Instead, they produce a similar statement that
reflects funding sources compared against program expenses, administrative
costs, and other operating commitments. This statement is commonly referred to
as the statement of activities. Revenues and expenses are further categorized in
the statement of activities by the donor restrictions on the funds received and
expended.
The income statement can be prepared in one of two methods.[2] The Single Step
income statement takes a simpler approach, totaling revenues and subtracting
expenses to find the bottom line. The more complex Multi-Step income
statement (as the name implies) takes several steps to find the bottom line,
starting with the gross profit. It then calculates operating expenses and, when
deducted from the gross profit, yields income from operations. Adding to
income from operations is the difference of other revenues and other expenses.
When combined with income from operations, this yields income before taxes.
The final step is to deduct taxes, which finally produces the net income for the
period measured.
Usefulness and limitations of income statement

Income statements should help investors and creditors determine the past financial
performance of the enterprise, predict future performance, and assess the capability of
generating future cash flows through report of the income and expenses.
However, information of an income statement has several limitations:
• Items that might be relevant but cannot be reliably measured are not reported (e.g.
brand recognition and loyalty).
• Some numbers depend on accounting methods used (e.g. using FIFO or LIFO
accounting to measure inventory level).
• Some numbers depend on judgments and estimates (e.g. depreciation expense
depends on estimated useful life and salvage value).
See also: Creative accounting

- INCOME STATEMENT BOND LLC -
For the year ended DECEMBER 31 2007
€ €
Debit Credit
Revenues
GROSS REVENUES (including rental income) 496,397
--------
Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 3,350
EMPLOYEES 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
RENTAL MORTGAGES AND FEES 74,400
TELEPHONE 1,000
UTILITIES 491
--------
TOTAL EXPENSES (195,512)
--------
NET INCOME 300,885
Guidelines for statements of comprehensive income and income statements of business

entities are formulated by the International Accounting Standards Board and numerous
country-specific organizations, for example the FASB in the U.S..
Names and usage of different accounts in the income statement depend on the type of
organization, industry practices and the requirements of different jurisdictions.
If applicable to the business, summary values for the following items should be included in
the income statement:[3]
[edit] Operating section
• Revenue - Cash inflows or other enhancements of assets of an entity during a period

from delivering or producing goods, rendering services, or other activities that
constitute the entity's ongoing major operations. It is usually presented as sales minus
sales discounts, returns, and allowances.
• Expenses - Cash outflows or other using-up of assets or incurrence of liabilities

during a period from delivering or producing goods, rendering services, or carrying
out other activities that constitute the entity's ongoing major operations.
o Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs
attributable to goods produced and sold by a business (manufacturing or
merchandizing). It includes material costs, direct labour, and overhead costs
(as in absorption costing), and excludes operating costs (period costs) such as
selling, administrative, advertising or R&D, etc.
o Selling, General and Administrative expenses (SG&A or SGA) - consist of
the combined payroll costs. SGA is usually understood as a major portion of
non-production related costs, in contrast to production costs such as direct
labour.
 Selling expenses - represent expenses needed to sell products (e.g.
salaries of sales people, commissions and travel expenses, advertising,
freight, shipping, depreciation of sales store buildings and equipment,
etc.).
 General and Administrative (G&A) expenses - represent expenses
to manage the business (salaries of officers / executives, legal and
professional fees, utilities, insurance, depreciation of office building
and equipment, office rents, office supplies, etc.).
o Depreciation / Amortization - the charge with respect to fixed assets /
intangible assets that have been capitalised on the balance sheet for a specific
(accounting) period. It is a systematic and rational allocation of cost rather
than the recognition of market value decrement.
o Research & Development (R&D) expenses - represent expenses included in
research and development.
Expenses recognised in the income statement should be analysed either by nature (raw
materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function
(cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function,
then additional information on the nature of expenses, at least, – depreciation, amortisation
and employee benefits expense – must be disclosed. (IAS 1.104)
[edit] Non-operating section
• Other revenues or gains - revenues and gains from other than primary business
activities (e.g. rent, income from patents). It also includes unusual gains that are either
unusual or infrequent, but not both (e.g. gain from sale of securities or gain from
disposal of fixed assets)
• Other expenses or losses - expenses or losses not related to primary business

operations, (e.g. foreign exchange loss).
• Finance costs - costs of borrowing from various creditors (e.g. interest expenses,
bank charges).
• Income tax expense - sum of the amount of tax payable to tax authorities in the
current reporting period (current tax liabilities/ tax payable) and the amount of
deferred tax liabilities (or assets).
[edit] Irregular items
They are reported separately because this way users can better predict future cash flows -
irregular items most likely will not recur. These are reported net of taxes.
• Discontinued operations is the most common type of irregular items. Shifting

business location(s), stopping production temporarily, or changes due to technological
improvement do not qualify as discontinued operations. Discontinued operations
must be shown separately.
Cumulative effect of changes in accounting policies (principles) is the difference between

the book value of the affected assets (or liabilities) under the old policy (principle) and what
the book value would have been if the new principle had been applied in the prior periods.
For example, valuation of inventories using LIFO instead of weighted average method. The
changes should be applied retrospectively and shown as adjustments to the beginning
balance of affected components in Equity. All comparative financial statements should be
restated. (IAS 8)
However, changes in estimates (e.g. estimated useful life of a fixed asset) only requires
prospective changes. (IAS 8)
No items may be presented in the income statement as extraordinary items. (IAS 1.87)
Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected
natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster
might not qualify depending on location (e.g. frost damage would not qualify in Canada but
would in the tropics).]
Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)
[edit] Disclosures
Certain items must be disclosed separately in the notes (or the statement of comprehensive
income), if material, including:[3] (IAS 1.98)
• Write-downs of inventories to net realisable value or of property, plant and equipment

to recoverable amount, as well as reversals of such write-downs
• Restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring
• Disposals of items of property, plant and equipment
• Disposals of investments
• Discontinued operations
• Litigation settlements
• Other reversals of provisions
[edit] Earnings per share
Because of its importance, earnings per share (EPS) are required to be disclosed on the face
of the income statement. A company which reports any of the irregular items must also report
EPS for these items either in the statement or in the notes.
There are two forms of EPS reported:
• Basic: in this case "weighted average of shares outstanding" includes only actual
stocks outstanding.
• Diluted: in this case "weighted average of shares outstanding" is calculated as if all
stock options, warrants, convertible bonds, and other securities that could be
transformed into shares are transformed. This increases the number of shares and so
EPS decreases. Diluted EPS is considered to be a more reliable way to measure
EPS.
[edit] Sample income statement

The following income statement is a very brief example prepared in accordance with IFRS. It
does not show all possible kinds of items appeared a firm, but it shows the most usual ones.
Please note the difference between IFRS and US GAAP when interpreting the following
sample income statements.
Fitness Equipment Limited

INCOME STATEMENTS
(in millions)
Year Ended March 31, 2009 2008
2007
---------------------------------------------------------------------------
-------
Revenue $ 14,580.2 $ 11,900.4 $
8,290.3
Cost of sales (6,740.2) (5,650.1)
(4,524.2)
------------- ------------
------------
Gross profit 7,840.0 6,250.3
3,766.1
------------- ------------
------------
SGA expenses (3,624.6) (3,296.3)
(3,034.0)
------------- ------------
------------
Operating profit $ 4,215.4 $ 2,954.0 $
732.1
------------- ------------
------------
Gains from disposal of fixed assets 46.3 -
-
Interest expense (119.7) (124.1)
(142.8)
------------- ------------
------------
Profit before tax 4,142.0 2,829.9
589.3
------------- ------------
------------
Income tax expense (1,656.8) (1,132.0)
(235.7)
------------- ------------
------------
Profit (or loss) for the year $ 2,485.2 $ 1,697.9 $
353.6
DEXTERITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31, 2009 2008 2007
---------------------------------------------------------------------------
-------------------
Revenue $ 36,525.9 $
29,827.6 $ 21,186.8
Cost of sales (18,545.8)
(15,858.8) (11,745.5)
-----------
----------- ------------
Gross profit 17,980.1
13,968.8 9,441.3
-----------
----------- ------------
Operating expenses:
Selling, general and administrative expenses (4,142.1)
(3,732.3) (3,498.6)
Depreciation (602.4)
(584.5) (562.3)
Amortization (209.9)
(141.9) (111.8)
Impairment loss (17,997.1)
— —
-----------
----------- ------------
Total operating expenses (22,951.8)
(4,458.7) (4,172.7)
-----------
----------- ------------
Operating profit (or loss) $ (4,971.7) $
9,510.1 $ 5,268.6
-----------
----------- ------------
Interest income 25.3
11.7 12.0
Interest expense (718.9)
(742.9) (799.1)
-----------
----------- ------------
Profit (or loss) from continuing operations
before tax, share of profit (or loss) from
associates and non-controlling interest $ (5,665.3) $
8,778.9 $ 4,481.5
-----------
----------- ------------
Income tax expense (1,678.6)
(3,510.5) (1,789.9)
Profit (or loss) from associates, net of tax (20.8)
0.1 (37.3)
Profit (or loss) from non-controlling interest,
net of tax (5.1)
(4.7) (3.3)
-----------
----------- ------------
Profit (or loss) from continuing operations $ (7,369.8) $
5,263.8 $ 2,651.0
-----------
----------- ------------
Profit (or loss) from discontinued operations,
net of tax (1,090.3)
(802.4) 164.6
-----------
----------- ------------
Profit (or loss) for the year $ (8,460.1) $
4,461.4 $ 2,815.6
[edit] Bottom line

"Bottom line" is the net income that is calculated after subtracting the expenses from revenue.
Since this forms the last line of the income statement, it is informally called "bottom line." It
is important to investors as it represents the profit for the year attributable to the shareholders.
After revision to IAS 1 in 2003, the Standard is now using profit or loss rather than net
profit or loss or net income as the descriptive term for the bottom line of the income
statement.
[edit] Requirements of IFRS

On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1:
Presentation of Financial Statements, which is effective for annual periods beginning on or
after 1 January 2009.
A business entity adopting IFRS must include:
• a Statement of Comprehensive Income or

• two separate statements comprising:
1. an Income Statement displaying components of profit or loss and

2. a Statement of Comprehensive Income that begins with profit or loss
(bottom line of the income statement) and displays the items of other
comprehensive income for the reporting period. (IAS1.81)
All non-owner changes in equity (i.e. comprehensive income ) shall be presented in either in
the statement of comprehensive income (or in a separate income statement and a statement of
comprehensive income). Components of comprehensive income may not be presented in the
statement of changes in equity.
Comprehensive income for a period includes profit or loss (net income) for that period and
other comprehensive income recognised in that period.
All items of income and expense recognised in a period must be included in profit or loss
unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or
permit that some components to be excluded from profit or loss and instead to be included in
other comprehensive income. (IAS 1.89)
[edit] Items and disclosures
The statement of comprehensive income should include:[3] (IAS 1.82)
1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint ventures accounted for using the
equity method
4. Tax expense
5. A single amount comprising the total of (1) the post-tax profit or loss of discontinued
operations and (2) the post-tax gain or loss recognised on the disposal of the assets or
disposal group(s) constituting the discontinued operation
6. Profit or loss
7. Each component of other comprehensive income classified by nature
8. Share of the other comprehensive income of associates and joint ventures accounted
for using the equity method
9. Total comprehensive income
The following items must also be disclosed in the statement of comprehensive income as
allocations for the period: (IAS 1.83)
• Profit or loss for the period attributable to non-controlling interests and owners of the
parent
• Total comprehensive income attributable to non-controlling interests and owners of
the parent
No items may be presented in the statement of comprehensive income (or in the income
statement, if separately presented) or in the notes as extraordinary items.
Comprehensive income
Comprehensive income (or earnings) is a specific term used in companies' financial

reporting from the company-whole point of view. Because that use excludes the effects of
changing ownership interest, an economic measure of comprehensive income is necessary for
financial analysis from the shareholders' point of view (All changes in Equity except those
resulting from investment by or distribution to owners.
Accounting
Comprehensive income is defined by the Financial Accounting Standards Board, or FASB,[1]
as “the change in equity [net assets] of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and distributions to
owners.”
Comprehensive income is the sum of net income and other items that must bypass the income
statement because they have not been realized, including items like an unrealized holding
gain or loss from available for sale securities and foreign currency translation gains or losses.
These items are not part of net income, yet are important enough to be included in
comprehensive income, giving the user a bigger, more comprehensive picture of the
organization as a whole.
Items included in comprehensive income, but not net income are reported under the
accumulated other comprehensive income section of shareholder's equity.
[edit] Financial Analysis

Comprehensive income attempts to measure the sum total of all operating and financial
events that have changed the value of an owner's interest in a business. It is measured on a
per-share basis to capture the effects of dilution and options. It cancels out the effects of
equity transactions for which the owner would be indifferent; dividend payments, share buy-
backs and share issues at market value.
It is calculated by reconciling the book value per-share from the start of the period to the end
of the period. This is conceptually the same as measuring a child's growth by finding the
difference between his height on each birthday. All other line items are calculated, and the
equation solved for comprehensive earnings. [2]
Shareholders' Equity, beg. of period (per share)

- Dividends paid (per share)
+ Shares issued (premium over book value per share)
- Share buy-backs (premium over book value per share)
+ Comprehensive Income (per share)
------------------------------------------
= Shareholders' Equity, end of period (per share)
Net income
"Bottom line" redirects here. For other uses, see Bottom line (disambiguation).
It has been suggested that this article or section be merged with profit
(accounting). (Discuss)
Accountancy
Key concepts
Accountant · Accounting period ·

Bookkeeping · Cash and accrual basis ·
Constant Item Purchasing Power Accounting ·
Cost of goods sold · Debits and credits ·
Double-entry system · Fair value accounting ·
FIFO & LIFO · GAAP / International Financial
Reporting Standards · General ledger ·
Historical cost · Matching principle · Revenue
recognition · Trial balance
Cost · Financial · Forensic · Fund ·

Management · Tax
Statement of Financial Position · Statement of

cash flows · Statement of changes in equity ·
Statement of comprehensive income · Notes ·
MD&A · XBRL
Auditing
Auditor's report · Financial audit · GAAS / ISA ·

Internal audit · Sarbanes–Oxley Act
Net income
is the residual income of a firm after adding total revenue and gains and subtracting all
expenses and losses for the reporting period. Net income can be distributed among holders of
common stock as a dividend or held by the firm as an addition to retained earnings. As profit
and earnings are used synonymously for income (also depending on UK and US usage), net
earnings and net profit are commonly found as synonyms for net income. Often, the term
income is substituted for net income, yet this is not preferred due to the possible ambiguity.
Net income is informally called the bottom line because it is typically found on the last line
of a company's income statement (a related term is top line, meaning revenue, which forms
the first line of the account statement).
The items deducted will typically include tax expense, financing expense (interest expense),
and minority interest. Likewise, preferred stock dividends will be subtracted too, though they
are not an expense. For a merchandising company, subtracted costs may be the cost of goods
sold, sales discounts, and sales returns and allowances. For a product company advertising,
manufacturing, and design and development costs are included.
An equation for net income

Net sales revenue
– Cost of goods sold
= Gross profit
– SG&A expenses (combined costs of operating the company)
= EBITDA
– Depreciation & amortization
= EBIT
– Interest expense (cost of borrowing money)
= EBT
– Tax expense
= Net income (EAT)
Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of
goods sold. Gross income is the starting point for determining Federal and state income tax of
individuals, corporations, estates and trusts, whether resident or nonresident.[1]
"Except as otherwise provided" by law, Gross income means "all income from whatever
source," and is not limited to cash received. However, tax regulations expand on this and say
"all income from whatever source derived, unless excluded by law." The amount of income
recognized is generally the value received or which the taxpayer has a right to receive.
Certain types of income are specifically excluded from gross income.
The time at which gross income becomes taxable is determined under Federal tax rules,
which differ in some cases from financial accounting rules.
What is income
Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries
("taxpayers") are subject to Income tax in the United States. The amount on which tax is
computed, taxable income, equals gross income less allowable tax deductions.
The Internal Revenue Code states that "gross income means all income from whatever source
derived," and gives specific examples.[2] The examples are not all inclusive. The term
"income" is not defined in the law or regulations. However, a very early Supreme Court case
stated, "Income may be defined as the gain derived from capital, from labor, or from both
combined, provided it is understood to include profit gained through a sale or conversion of
capital assets."[3] The Court also held that the amount of gross income on disposition of
property is the proceeds less the capital value (cost basis) of the property.[4]
Gross income is not limited to cash received. "It includes income realized in any form,
whether money, property, or services."[5]
Following are some of the things that are included in income:
• Wages, fees for services, tips, and similar income. It is well established that income
from personal services must be included in the gross income of the person who
performs the services. Mere assignment of the income does not shift the liability for
the tax.[6]
• Interest received,[7] as well as imputed interest on below market and gift loans.[8]
• Dividends, including capital gain distributions, from corporations.[9]
• Gross profit from sale of inventory. The sales price, net of discounts, less cost of
goods sold is included in income.[10]
• Gains on disposition of other property. Gain is measured as the excess of proceeds
over the taxpayer's adjusted basis in the property.[11] Losses from property may be
allowed as tax deductions.[12]
• Rents and royalties from use of tangible or intangible property.[13] The full amount of
rent or royalty is included in income, and expenses incurred to produce this income
may be allowed as tax deductions.[14]
• Alimony and separate maintenance payments.[15]
• Pensions,[16] annuities,[17] and income from life insurance or endowment contracts.[18]
• Distributive share of partnership income[19] or pro rata share of income of an S
corporation.[20]
• State and local income tax refunds, to the extent previously deducted. Note that these
are generally excluded from gross income for state and local income tax purposes.
• Any other income from whatever source. Even income from crimes is taxable and
must be reported, as failure to do so is a crime in itself.[21]
Gifts and inheritances are not considered income to the recipient under U.S. law.[22] However,
gift or estate tax may be imposed on the donor or the estate of the decedent.
[edit] Year of inclusion

A taxpayer must include income as part of taxable income in the year recognized under the
taxpayer's method of accounting. Generally, a taxpayer using the cash method of accounting
(cash basis taxpayer) recognizes income when received. A taxpayer using the accrual method
(accrual basis taxpayer) recognizes income when earned. Income is generally considered
earned:
• on sales of property when title to the property passes to the customer, and
• on performance of services when the services are performed.
[edit] Amount of income

For a cash basis taxpayer, the measure of income is generally the amount of money or fair
market value of property received. For an accrual basis taxpayer, it is the amount the taxpayer
has a right to receive.[23]
Certain specific rules apply, including:
• Constructive receipt,
• Deferral of income from advance payment for goods or services (with exceptions),
• Determination what portion of an annuity is income and what is return of capital,
The value of goods or services received is included in income in barter transactions.
[edit] Exclusions from gross income

Gross income includes "all income from whatever source derived." The courts have
consistently given very broad meaning to this phrase, interpreting it to include all income
unless a specific exclusion applies.[24] Certain types of income are specifically excluded from
gross income. These may be referred to as exempt income, exclusions, or tax exemptions.
Among the more common excluded items[25] are the following:
• Tax exempt interest. For Federal income tax, interest on state and municipal bonds is
excluded from gross income.[26] Some states provide an exemption from state income
tax for certain bond interest.
• Social Security benefits. The amount exempt has varied by year. The exemption is
phased out for individuals with gross income above certain amounts.[27]
• Gifts and inheritances.[28] However, a "gift" from an employer to an employee is
considered compensation, and is generally included in gross income.
• Life insurance proceeds.[29]
• Compensation for personal physical injury or physical sickness, including:
o Amounts received under worker’s compensation acts for personal physical
injuries or physical sickness,
o Amounts received as damages (other than punitive damages) in a suit or
settlement for personal physical injuries or physical sickness,
o Amounts received through insurance for personal physical injuries or physical
sickness, and
o Amounts received as a pension, annuity, or similar allowance for personal
physical injuries or physical sickness resulting from active service in the
armed forces.[30]
• Scholarships. However, amounts in the nature of compensation, such as for teaching,
are included in gross income.[31]
• Certain employee benefits. Non-taxable benefits include group health insurance,
group life insurance for policies up to $50,000, and certain fringe benefits, including
those under a flexible spending orcafeteria plan.[32]
• Certain elective deferrals of salary (contributions to "401(k)" plans).
• Meals and lodging provided to employees on employer premises for the convenience
of the employer.[33]
• Foreign earned income exclusion for U.S. citizens or residents for income earned
outside the U.S. when the individual met qualifying tests.[34]
• Income from discharge of indebtedness for insolvent taxpayers or in certain other
cases.[35]
• Contributions to capital received by a corporation.[36]
• Gain up to $250,000 ($500,000 on a married joint tax return) on the sale of a personal
residence.[37]
There are numerous other specific exclusions. Restrictions and specific definitions apply.
Some state rules provide for different inclusions and exclusions.[38]
[edit] Source of income

United States persons (including citizens, residents, and U.S. corporations) are generally
subject to U.S. federal income tax on their worldwide income. Foreign persons (i.e., persons
who are not U.S. persons) are subject to U.S. federal income tax only on income from a U.S.
business and certain income from United States sources. Source of income is determined
based on the type of income. The source of compensation income is the place where the
services giving rise to the income were performed. The source of certain income, such as
dividends and interest, is based on location of the residence of the payor. The source of
income from property is based on the location where the property is used. Significant
additional rules apply.[39]
[edit] Taxation of foreign persons
Foreign persons are subject to regular income tax on income from a U.S. business or for
services performed in the U.S.[40] Foreign persons are subject to a flat rate of U.S. income tax
on certain enumerated types of U.S. source income, generally collected as a withholding tax.
[41]
The rate of tax is 30% of the gross income, unless reduced by a tax treaty. Foreign persons
are not subject to U.S. tax on capital gains. Wages may be treated as effectively connected
income, or may be subject to the flat 30% tax, depending on the facts and circumstances.
Effective gross income
This term used for an income-producing property, derived from the potential
gross income, less the vacancy factor and a collection loss amount.
This is the relationship or ratio between the sale price of the value of a property
and its effective gross rental income.
The anticipated income from all operations of the real property after an
allowance is made for a vacancy and collection losses. Effective gross income
includes items constituting other income, i.e., income generated from the
operation of the real property that is not derived from space rental (e.g., parking
rental or income from vending machines).
For example: Let's say that we have a couple properties that have a potential
income of $15,000 if they are all filled to maximum occupancy. The average
vacancy rate of the properties in cash is $1,250 (this is the sum of the rent that is
not coming in due to vacancy in the properties). We then subtract the average
vacancy rate in dollars from the potential income from renting the properties.
Our total is then $13,750. Therefore the Effective Gross Rental Income is then
$13,750.
Earnings before interest and taxes
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a
firm's profitability that excludes interest and income tax expenses.[1] Operating income is the
difference between operating revenues and operating expenses. When a firm has zero non-
operating income, then operating income is sometimes used as a synonym for EBIT and
operating profit.[2]
EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income
Operating Income = Operating Revenue – Operating Expenses[1]
A professional investor contemplating a change to the capital structure of a firm (e.g.,

through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected
by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA and EBIT), and
then determines the optimal use of debt vs. equity.
To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative
expenses) are subtracted from revenues.[3] Profit is later obtained by subtracting interest and
taxes from the result
Revenue
In business, revenue is income that a company receives from its normal business activities,
usually from the sale of goods and services to customers. In many countries, such as the
United Kingdom, revenue is referred to as turnover. Some companies receive revenue from
interest, dividends or royalties paid to them by other companies.[1] Revenue may refer to
business income in general, or it may refer to the amount, in a monetary unit, received during
a period of time, as in "Last year, Company X had revenue of $42 million." Profits or net
income generally imply total revenue minus total expenses in a given period. In accounting,
revenue is often referred to as the "top line" due to its position on the income statement at the
very top. This is to be contrasted with the "bottom line" which denotes net income.[2]
For non-profit organizations, annual revenue may be referred to as gross receipts.[3] This
revenue includes donations from individuals and corporations, support from government
agencies, income from activities related to the organization's mission, and income from
fundraising activities, membership dues, and financial investments such as stock shares in
companies.
In general usage, revenue is income received by an organization in the form of cash or cash
equivalents. Sales revenue or revenues is income received from selling goods or services over
a period of time. Tax revenue is income that a government receives from taxpayers.
In more formal usage, revenue is a calculation or estimation of periodic income based on a

particular standard accounting practice or the rules established by a government or
government agency. Two common accounting methods, cash basis accounting and accrual
basis accounting, do not use the same process for measuring revenue. Corporations that offer
shares for sale to the public are usually required by law to report revenue based on generally
accepted accounting principles or International Financial Reporting Standards.
In a double-entry bookkeeping system, revenue accounts

are general ledger accounts that are summarized
periodically under the heading Revenue or Revenues
on an income statement. Revenue account names
describe the type of revenue, such as "Repair service
revenue", "Rent revenue earned" or "Sales". Business
revenue
Business revenue is income from activities that are ordinary for a particular corporation,
company, partnership, or sole-proprietorship. For some businesses, such as manufacturing
and/or grocery, most revenue is from the sale of goods. Service businesses such as law firms
and barber shops receive most of their revenue from rendering services. Lending businesses
such as car rentals and banks receive most of their revenue from fees and interest generated
by lending assets to other organizations or individuals.
Revenues from a business's primary activities are reported as sales, sales revenue or net
sales. This excludes product returns and discounts for early payment of invoices. Most
businesses also have revenue that is incidental to the business's primary activities, such as
interest earned on deposits in a demand account. This is included in revenue but not included
in net sales.[5] Sales revenue does not include sales tax collected by the business.
Other revenue (a.k.a. non-operating revenue) is revenue from peripheral (non-core)

operations. For example, a company that manufactures and sells automobiles would record
the revenue from the sale of an automobile as "regular" revenue. If that same company also
rented a portion of one of its buildings, it would record that revenue as “other revenue” and
disclose it separately on its income statement to show that it is from something other than its
core operations.
[edit] Financial statement analysis
Main article: Financial statement analysis
Revenue is a crucial part of financial statement analysis. A company’s performance is

measured to the extent to which its asset inflows (revenues) compare with its asset outflows
(expenses). Net Income is the result of this equation, but revenue typically enjoys equal
attention during a standard earnings call. If a company displays solid “top-line growth,”
analysts could view the period’s performance as positive even if earnings growth, or “bottom-
line growth” is stagnant. Conversely, high income growth would be tainted if a company
failed to produce significant revenue growth. Consistent revenue growth, as well as income
growth, is considered essential for a company's publicly traded stock to be attractive to
investors.
Revenue is used as an indication of earnings quality. There are several financial ratios
attached to it, the most important being gross margin and profit margin. Also, companies use
revenue to determine bad debt expense using the income statement method.
Price / Sales is sometimes used as a substitute for a Price to earnings ratio when earnings are
negative and the P/E is meaningless. Though a company may have negative earnings, it
almost always has positive revenue.
Gross Margin is a calculation of revenue less cost of goods sold, and is used to determine
how well sales cover direct variable costs relating to the production of goods.
Net income/sales, or profit margin, is calculated by investors to determine how efficiently a

company turns revenues into profits....
[edit] Government revenue

Main article: Government revenue
Government revenue includes all amounts of money received from sources outside the
government entity. Large governments usually have an agency or department responsible for
collecting government revenue from companies and individuals.[6]
Government revenue may also include reserve bank currency which is printed. This is
recorded as an advance to the retail bank together with a corresponding currency in
circulation expense entry. The income derives from the Official Cash rate payable by the
retail banks for instruments such as 90 day bills.There is a question as to whether using
generic business based accounting standards can give a fair and accurate picture of
government accounts in that with a monetary policy statement to the reserve bank directing a
positive inflation rate the expense provision for the return of currency to the reserve bank is
largely symbolic in that to totally cancel the currency in circulation provision all currency
would have to be returned to the reserve bank and cancelled.
List of companies by revenue
This is a list of the world's largest public and private businesses by gross revenues. The list
is limited to companies with annual revenues exceeding 40 billion U.S. dollars.
Cautionary notes
1. The availability and reliability of up to date information on private companies is
limited and varies from country to country.
2. Revenue is only one of many ways of measuring company size and it is not the most
appropriate for all purposes. Using a different measure, such as total assets or market
capitalisation, would produce a fundamentally different list.
3. Many major companies, especially outside the USA, do not have a 31 December year
end, so the figures are for years to a variety of dates.
4. This list is shown in U.S. dollars, but many of the companies on it prepare their
accounts in other currencies. The value of their turnover in dollar terms may change
substantially in a short period of time due to exchange rate fluctuations.
5. Figures are latest full year results; the year these results were reported in is shown
beside them.
6. This list may be incomplete.
[edit] List of companies by revenue

Market
capitali
Reven
zation
ue Fiscal Primary CEO,
Ran Company Primary (Dec Emplo Headqua
(USD Year Stock compens
k name Industry 2009, yees rters
Billion listing ation
USD
)
million)
[1]
Bento
Mike
Januar nville,
$408.2 $203,65 2,150,0 NYSE: W Duke,
1 Walmart Retailing y 31, Arkansas,
14[2] 4 00 MT $19.23M[
2010 United 3]
States
The
Hague,
Netherlan
Royal $368.0 $186,61 112,00 LSE: RDS Peter
2 Oil and gas [4] 2010 ds and
Dutch Shell 56 8 0A Voser
Londo
n, United
Kingdom
Irving Rex W.
ExxonMobi $301.5[ $323,71 NYSE: X , Texas, Tillerson,
3 Oil and gas 5] 2009 90,800
l 7 OM United $10.53M[
6]
States
Londo
n,
$297.1 $181,80 Robert
4 BP Oil and gas [7] 2010 97,600 LSE: BP England,
07 6 Dudley
United
Kingdom
Dhahr
Saudi $233.3[ $781,00 Governme Khalid A.
5 Oil and gas 8] 2008 54,441 an, Saudi
Aramco 0[9] nt-owned Al-Falih
Arabia
Courb
evoie, Christoph
$212.8 $151,54 111,40 Euronext:
11 Total S.A. Oil and gas 2010 Île-de- e de
15[10] 4 1 FP
France, Margerie
France
March Toyot
Toyota $203.6 $143,70 316,12 TYO:
6 Automotive 31, a, Aichi, Fujio Cho
Motors 87[11] 5 1 7203
2010 Japan
March
Japan Post Conglomera $200.9 Governme Tokyo
7 31, - 3,251 Jiro Saito
Holdings te 95[12] nt-owned , Japan
2010
Houst
on,
ConocoPhil $198.6 NYSE: C James
8 Oil and gas 2010 $97,435 29,700 Texas,
lips 55[13] OP Mulva
United
States
SSE:
$197.0 $159,26 400,51 600028, Beijin Jiming
9 Sinopec Oil and gas 2009
19[14] 3 3 SEHK: 03 g, China Wang
86
Rotter
dam,
Netherlan
Raw $195.0 [ ds and
10 Vitol 15] 2010 - - Private -
material Genev
a,
Switzerla
nd
12 State Grid Electricity $184.5 2009 - 1,502,0 Governme Beijin Liu
[16]
Corporatio 61 00 nt-owned g, China Zhenya
n of China
Sams
KRX: ung
Samsung Conglomera $172.5 275,00 005930, Town, Lee Kun-
13 2009 -
Group te 00[17] 0 KRX: Seoul, hee
005935 South
Korea
Wolfs
ISIN: burg, Martin
Volkswage $169.5 329,30
14 Automotive 2010 $42,507 DE000766 Lower Winterko
n Group 3[18] 5
4005 Saxony, rn
Germany
San
Ramon,
$167.4 $154,46 NYSE: C David J.
15 Chevron Oil and gas [19] 2009 61,533 Californi
02 2 VX O'Reilly
a, United
States
Fairfi
eld,
General Conglomera $150.2 $161,09 287,00 NYSE: G Connecti Jeffrey
16 2010
Electric te 11[20] 6 0E cut, Immelt
United
States
SSE:
$149.3[ $353,14 464,00 601857, Beijin Zhou
17 PetroChina Oil and gas 21] 2009
0 0 SEHK: 08 g, China Jiping
57
Glencore Baar, Ivan
Raw $144.9
18 Internation 2010 - 52,000 Private Switzerla Glasenbe
materials 78[22]
al nd rg
Munic
ISIN: Michael
Financial $142.2 151,38 h,
19 Allianz 2010 $54.008 DE000840 Diekman
services 4[23] 8 Bavaria,
4005 n
Germany
Amste
Financial $140.7 107,10 Euronext: rdam, Jan
20 ING Group 2010 $37,414
services 29[24] 6 INGA Netherlan Hommen
ds
Omah
NYSE: B
a,
Berkshire Conglomera $136.1 $153,62 217,00 RKA, Warren
21 [25] 2010 Nebraska
Hathaway te 85 4 0 NYSE: B Buffett
, United
RKB
States
Detroi
G.
t,
General $135.5 $13,180[ 284,00 NYSE: G Richard
22 Automotive [26] 2010 27] Michigan
Motors 92 0M Wagoner,
, United
Jr.
States
Stuttg
art,
Daimler $130.6 260,10 FWB: DA Baden- Dieter
23 Automotive [28] 2010 $56,671
AG 28 0[28] I Württem Zetsche
berg,
Germany
Dearb
orn,
Ford Motor $128.9 327,53 Alan
32 Automotive 2010 $32,362 NYSE: F Michigan
Company 54[29] 1 Mulally
, United
States
Palo
Octob Alto, Léo
Hewlett- Information $126.0 $121,77 321,00 NYSE: H
25 [30] er 31, Californi Apotheke
Packard technology 33 8 0 PQ
2010 a, United r
States
Levall
$125.8 475,97 Euronext: ois- Lars
26 Carrefour Retailing [31] 2009 $33,940
78 6 CA Perret, Olofsson
France
Dallas Randall
Telecommu $124.2 $165,40 266,59 , Texas, L.
27 AT&T [32] 2010 NYSE: T
nications 8 5 0[32] United Stephens
States on
Düsse
ldorf,
North
Electricity; $124.0 FWB: EO Johannes
28 E.ON 2010 $58,392 85,105 Rhine-
gas 84[33] AN Teyssen
Westphal
ia,
Germany
Paris,
Financial $121.5 189,92 Euronext: Île-de- Henri de
24 AXA [34] 2010 $54,340
services 77 7 CS France, Castries
France
Rome,
$121.5 $102,28 78,417[3 Paolo
29 Eni Oil and gas 2009 6] BIT: ENI Lazio,
07[35] 8 Scaroni
Italy
Triest Sergio
e, Friuli- Balbinot,
Assicurazio $121.2
30 Insurance 2010 $42,037 85,368 BIT: G Venezia Giovanni
ni Generali 99[37]
Giulia, Perissinot
Italy to
Gérard
Public $115.1 160,70 Euronext: Paris,
33 GDF Suez 2009 $98,209 Mestralle
utilities 15[38] 0 SZE France
t
31 Bank of Banking $111.3 2010 $134,53 203,42 NYSE: B Charl Brian
America 9[39] 4 5 AC otte, Moyniha
North n
Carolina,
United
States
Nippon Tokyo
March
Telegraph Telecommu $108.9 205,28 TYO: , Tokyo Norio
34 31, $61,717
and nications 77[40] 8 9432 Prefectur Wada
2010
Telephone e, Japan
San
Francisco
McKesson March John
$108.7 $16,970[ NYSE: M ,
35 Corporatio Health care 31, 31,800 Hammerg
02[41] 27]
CK Californi
n 2010 ren
a, United
States
Wayz
May ata,
$107.8 158,00 Greg
36 Cargill Agriculture 31, - Private Minnesot
82[42] 0 Page
2010 a, United
States
New
Jersey,
Ivan
Telecommu $106.5 $104,64 203,10 NYSE: V New
37 Verizon 2010 Seidenber
nications 65[43] 6 0Z Jersey,
g
United
States
Vevey
Food $104.9 $190,16 253,00 SIX: NES , Vaud, Paul
38 Nestlé 2010 [44]
processing 72[44] 3 0N Switzerla Bulcke
nd
Mosc
$104.0 $299,76 432,00 RTS:GAZ Alexei
39 Gazprom Oil and Gas 2009 ow,
24[45] 4 0P Miller
Russia
Septe Munic
Siemens Conglomera $103.6 mber 480,00 h, Peter
40 [46] $84,219 FWB: SIE
AG te 95 30, 0 Bavaria, Löscher
2010 Germany
New
York,
JPMorgan Financial $100.4 $145,88 176,00 NYSE: JP New Jamie
41 [47] 2009
Chase Services 34 1 0M York, Dimon
United
States
Wichi
ta,
Koch Conglomera $100.0[ 2009 Charles
42 48] - 80,000 Private Kansas,
Industries te est. Koch, ?
United
States
[
43 IBM Information $99.87 2010 $159,39 426,75 NYSE: IB Armo Samuel J.
49]
technology 2 2[49] M nk, New Palmisan
York, o
United
States
Dubli
June
Cardinal $98.50 $21,090[ NYSE: C n, Ohio, George
45 Health care 30th, 27] 40,000
Health 3[50] AH United Barrett
2010
States
March
JX $96.86[ TYO:
46 Energy 51] 31, - - Japan -
Holdings 5020
2010
Tokyo
March
Hitachi, Conglomera $96.43 306,87 TYO: , Tokyo Etsuhiko
47 31, $19,999
Ltd. te 6[52] 6 6501 Prefectur Shoyama
2010
e, Japan
Woon
socket,
CVS $96.41 $47,423[ 160,00 NYSE: C Rhode Tom
44 Retailing [53] 2010 53]
Caremark 3 0 VS Island, Ryan
United
States
Paris,
Electricité Electricity $95.56 $159,11 156,15 Euronext: Île-de- Henri
48 2009
de France generation 4[54] 8 2 EDF France, Proglio
France
Chesh
Febru
unt,
$95.06 ary 310,41 LSE: TSC Terry
49 Tesco Retailing [55] $59,131 England,
3 27, 1O Leahy
United
2010
Kingdom
Rome,
Electricity $94.24 BIT: Fulvio
50 Enel [56] 2009 $65,863 58,548 Lazio,
generation 9 ENEL Conti
Italy
Minne
tonka,
UnitedHeal $94.15 NYSE: U Stephen
51 Health care 2010 $42,998 55,000 Minnesot
th Group 5[57] NH Hemsley
a, United
States
Kuwait
March
Petroleum $93.88 Kuwa Saad Al
52 Oil and gas 31, - 18,500 -
Corporatio 4[58] it Shuwaib
2009
n
Tokyo
[ March
$92.21 181,87 TYO: , Tokyo Takeo
53 Honda Automotive 59] 31, $52,445
6[60] 7267 Prefectur Fukui
2010
e, Japan
54 Petrobras Oil and gas $91.86 2009 $199,10 38,908 Bovespa: Rio de José
[61]
9 8 PETR3,4 Janeiro, Sérgio
State of Gabrielli
Rio de de
Janeiro, Azevedo
Brazil
Stava
$90.73 30,344[6 nger, Helge
55 Statoil Oil and gas 2010 $95,752 3] OSE: STL
3[62] Rogaland Lund
, Norway
ISIN: Düsse
$89.87[ 263,79 Eckhard
56 Metro AG Retailing 64] 2010 $26,284 DE000725 ldorf,
4 Cordes
7503 Germany
Bruss
$88.78 34,234[6 Euronext: Pierre
57 Dexia Banking 2009 $33,708 els,
4[65] 6]
DX Mariani
Belgium
New
York,
Financial $86.60 $106,69 299,00 New Vikram
58 Citigroup 2010 NYSE: C
services 1[67] 6 0 York, Pandit
United
States
Seoul,
Conglomera $86.51 $12,240[ 177,00 KRX: Koo Bon-
58 LG Group 2009 South
te 0[68] 27]
0 003550 Moo
Korea
Société Financial $85.86 120,00 Euronext: Paris, Frédéric
59 2009 $57,315
Générale Services 0[69] 0 GLE France Oudéa
Ludwi
gshafen
am
Rhein, Jurgen
Chemical $85.34 FWB: BA
60 BASF 2010 $66,302 85,124 Rhinelan Hambrec
industry 7[70] S
d- ht
Palatinate
,
Germany
San
Francisco John
Banking /
Wells $85.21[ 160,00 NYSE: W , Stumpf,
61 Financial 71] 2010 $95,937
Fargo 0 FC Californi $21.34M[
services
a, United 72]
States
Espoo
,
Telecommu $84.61 $120,58 OMX: NO Stephen
62 Nokia 2009 62,763 Southern
nications 8[73] 3 K1V Elop
Finland,
Finland
Madri
d,
Telecommu $84.09 $137,66 173,55 Euronext: Communi César
63 Telefónica 2009
nications 6[74] 0 4 TFA ty of Alierta
Madrid,
Spain
64 Deutsche Telecommu $83.40 2010 $72,907 246,77 ISIN: Bonn, René
North
Rhine-
DE000555 Oberman
Telekom nications 7[75] 7[76] Westphal
7508 n
ia,
Germany
Mosc Vagit
$81.08 150,00 RTS:LKO
65 LUKoil Oil and Gas 2009 $72,723 ow, Alekpero
3[77] 0H
Russia v
Munic
$80.80 104,34 ISIN: h, Norbert
66 BMW Automotive 2010 $35,742
9[78] 2 DE0005 Bavaria, Reithofer
Germany
Mexic Jesús F.
$80.64 138,21 Governme
67 Pemex Oil and gas 2009 - o City, Reyes
3[79] 5 nt-owned
Mexico Heroles
Yoko
hama,
March
Nissan $80.46 127,62 TYO: Kanagaw Carlos
68 Automotive 31, $37,425
Motors 2[80] 5 7201 a Ghosn
2010
Prefectur
e, Japan
Kado
Panasonic March Kunio
$79.39 290,49 TYO: ma,
69 Corporatio Electronics 31, $53,234 Nakamur
9[81] 3 6752 Osaka,
n 2010 a
Japan
Lucer
Raw $79.2[82 ne,
70 Trafigura ] 2010 - 4,000 Private ?
materials Switzerla
nd
Groupe $79.19 127,00 Paris, François
71 Banking [83] 2009 - -
BPCE 5 0 France Pérol
Cinci
Robert A.
June nnati,
Procter & Consumer $78.93 $215,64 138,00 NYSE: P "Bob"
72 30, Ohio,
Gamble goods 8[84] 0 0G McDonal
2010 United
d
States
Seoul, Chung
Hyundai $78.33 $15,610[ 117,00 KRX:
73 Automotive 2009 South Mong-
Motors 4[85] 27]
0 005380
Korea Koo
National March Masoud
$78.00[ Governme Tehra
74 Iranian Oil Oil and gas 86] 21, - 36,000 Mir
nt-owned n, Iran
Company 2009 Kazemi
Chest
Septe erbrook,
Amerisourc $77.95 mber $6,780[2 NYSE: A Pennsylv R. David
75 Health care 12,300
eBergen 4[87] 30, 7] BC ania, Yost
2010 United
States
New
York, Robert
American
Financial $77.30 $109,09 NYSE: AI New Benmosc
76 Internation [88] 2010 86,000
services 1 1 G York, he,
al Group
United $2.7M[89]
States
March
$77.21 $38,494[ TYO: Tokyo Howard
77 Sony Electronics [90] 31, 91] -
6 6758 , Japan Stringer
2010
Cinci
Januar nnati,
$76.73 $16,380[ 334,00 NYSE: K David
78 Kroger Retailing [92] y 31, 27] [92] Ohio,
3 0 R Dillon
2010 United
States
Issaqu
ah,
Augus
$76.25 132,00 NASDAQ Washingt Jim
79 Costco Retailing t 29, $28,149
5[93] 0 : COST on, Sinegal
2010
United
States
Turin, Sergio
Conglomera $75.17 162,23
80 Fiat 2010 $28,591 BIT: F Piedmont Marchion
te 2[94] 7
, Italy ne
Carac
as,
Petróleos
$74.99 Governme Maracaib Rafael
81 de Oil and gas 2009 - 67,900
6[95] nt-owned o Ramírez
Venezuela
Venezuel
a
Houst
on, Clarence
Marathon $73.62 NYSE: M
82 Oil and gas 2010 $32,329 28,855 Texas, Cazalot,
Oil 1[96] RO
United Jr.
States
Colog
REWE $73.34 325,84 Alain
83 Retailing [97] 2009 - Private ne,
Group 1 8 Caparros
Germany
Londo
n,
Financial $73.10 Andrew
84 Aviva [98] 2009 $32,247 59,000 LSE: AV. England,
services 6 Moss
United
Kingdom
Bonn,
North
ISIN:
Deutsche $71.75 436,65 Rhine- Frank
85 Courier 2010 $37,180 DE000555
Post 1[99] 1[100] Westphal Appel
2004
ia,
Germany
86 RWE Public $71.24 2010 $68,287 127,02 ISIN: Essen, Jürgen
North
Rhine-
DE000703 Großman
utilities 6[101] 8 Westphal
7129 n
ia,
Germany
Londo
n,
Legal & Financial $71.03 LSE: LGE Tim
87 2009 - - England,
General services 3[102] N Breedon
United
Kingdom
Repsol $70.63 BMAD: R Madri Antonio
88 Oil and Gas 2009 $42,288 41,017
YPF 5[103] EP d, Spain Brufau
Chūō-
Nippon March
$70.58 ku, Kunie
89 Life Insurance 31, - 67,348 Mutual
6[104] Osaka, Okamoto
Insurance 2010
Japan
Paris,
PSA
$69.75[ $17,980[ 186,22 Euronext: Île-de- Philippe
90 Peugeot Automotive 105] 2009 27]
0[106] UG France, Varin
Citroën
France
Londo
Prudential $69.29 Tidjane
91 Banking 2009 $34,743 26,000 LSE: PRU n, United
plc 1[107] Thiam
Kingdom
Gilles
CNP $68.98 $16,360[ Euronext: Paris,
92 Insurance [108] 2009 27] Benoist,
Assurances 1 CNP France
€1.027M
Tokyo
March
Conglomera $68.30 199,00 TYO: , Tokyo Tadashi
93 Toshiba 31, $21,659
te 6[109] 0 6502 Prefectur Okamura
2010
e, Japan
Chica
go, Jim
$68.28 157,00 NYSE: B
94 Boeing Aerospace 2009 $56,881 Illinois, McNerne
1[110] 0A
United y
States
San
Antonio,
Valero $68.14 NYSE: V Bill
95 Oil and gas 2009 $26,257 22,000 Texas,
Energy 4[111] LO Klesse
United
States
Zurich Zürich
$67.85[ SIX: ZUR , Martin
96 Financial Insurance 112] 2010 $46,024 58,000
N Switzerla Senn
Services
nd
97 Walgreens Retailing $67.42[ Augus $37,762 238,00 NYSE: W Deerfi Jeff Rein
113] [114]
t 31, 0 AG eld,
2010 Illinois,
United
States
Newb
March
Telecommu $67.36 $159,33 LSE: VO ury, Vittorio
98 Vodafone 31,
nications 8[115] 7 D United Colao
2010
Kingdom
Washi
United Septe
ngton,
States $67.05 mber 583,90 Governme John E.
99 Courier N/A D.C.,
Postal 2[116] 30, 8 nt agency Potter
United
Service 2010
States
Alfredo
BM&F
São Egydio
Conglomera $66.36[ 117,37 Bovespa:
100 Itaúsa 117] 2009 - Paulo, Arruda
te 3 ITSA3 /
Brazil Villela
ITSA4
Filho
Tan Sri
March Kuala Dato Sri
$66.34[ Governme
101 Petronas Oil and gas 118] 31, - 33,944 Lumpur, Mohd
nt-owned
2010 Malaysia Hassan
Marican
Hong
China Telecommu $66.22 145,93 SEHK: 09 Kong
102 2009 - Li Yue
Mobile nications 3[119] 4 41 SAR.,
China
France Telecommu $66.18 191,00 Euronext: Paris, Stéphane
103 2009 $88,049
Télécom nications 7[120] 0 FTE France Richard
Londo
n,
Financial $66.18 $199,25 302,00 LSE: HSB Stephen
104 HSBC 2009 England,
services 1[121] 5 0[122] A Green
United
Kingdom
Vinin
Januar gs,
Home $66.17 317,00 NYSE: H Frank
105 Retailing y 31, $47,203 Georgia,
Depot, Inc. 6[123] 0D Blake
2010 United
States
Seoul,
Conglomera $65.66 $8,530[2 KRX: Choi Tae-
106 SK Group [124] 2009 7] South
te 6 003600 Won
Korea
Minne
Target apolis, Gregg
$65.25 352,00 NYSE: T
107 Corporatio Retailing 2009 $41,205 Minnesot Steinhafe
7[125] 0 GT
n a, United l
States
Edinb
Lloyds urgh,
Financial $65.25 LSE: LLO Eric
108 Banking 2009 $41,723 72,000 Scotland,
Services 5[126] Y Daniels
Group United
Kingdom
Cuper
Septe
tino,
$65.22 mber $189,80 NASDAQ Steve
109 Apple Inc. Electronics - Californi
5[127] 25, 2 : AAPL Jobs
a, United
2010
States
Euronext:
Luxe
MT),
mbourg
ArcelorMitt $65.11[ $119,12 319,57 (NYSE: M Lakshmi
110 Steel 128] 2009 City,
al 4 8 T, Mittal
Luxembo
LuxSE: M
urg
T
Crédit Financial $64.17 134,00 Euronext: Paris, Jean-Paul
112 [129] 2009 $51,857
Agricole Services 2 0 ACA France Chifflet
Londo
United
n,
Barclays $63.97 Kingdom John
113 Banking 2010 $50,861 77,000 England,
Bank 8[130] LSE: BAR Varley
United
C
Kingdom
[13
Agricultural $63.5
114 ZEN-NOH 1] 2005 12,557 Japan
marketing
Redm
ond,
June
Information $62.48 $270,63 NASDAQ Washingt Steve
115 Microsoft 30, 71,000
technology 4[132] 5 : MSFT on, Ballmer
2010
United
States
New
Philip York,
Morris Tobacco $62.08[ 77,300[1 NYSE: P New Louis C.
116 133] 2009 $93,935 33]
Internation industry M York, Camilleri
al United
States
Schip
Netherlan hol-Rijk,
$61.68 109,13 ds North Louis
117 EADS Aerospace [134] 2009 $19,361
9 5 (Euronext: Holland, Gallois
EAD) Netherlan
ds
Decat
Archer Agriculture, June ur, Patricia
$61.68 NYSE: A
118 Daniels Food 30, $26,490 30,000 Illinois, A.
2[135] DM
Midland processing 2010 United Woertz
States
New
Brunswic
William
Johnson & $61.58 $183,75 120,50 NYSE: JN k, New
119 Health care 2010 C.
Johnson 7[136] 1 0J Jersey,
Weldon
United
States
Bloo
- mington, Edward
State Farm $61.5[13
120 Insurance 7] 2009 (Mutual 68,800 - Illinois, B. Rust
Insurance
) United Jr.
States
Hamb
Edeka $60.59
121 Retailing 2009 - - Private urg,
Group 2[138]
Germany
Jakart Karen
$61.45 Governme
122 Pertamina Oil and gas 2008 - 15,868 a, Agustiaw
4[139] nt-owned
Indonesia an
Frankl
in Lakes,
Medco
$59.80 NYSE: M New David B.
123 Health Health care 2009 $22,943 14,800
4[140] HS Jersey, Snow, Jr.
Solutions
United
States
Munic
ISIN: Nikolaus
Financial $59.67 h,
124 Munich Re 2009 $30,777 41,431 DE000843 von
services 4[141] Bavaria,
0026 Bomhard
Germany
Lo
ndon,
United
Kingdom
Consumer $59.14 $101,64 179,00 Euronext: Paul
125 Unilever 2010 /
goods 3[142] 2 0 UNA Polman
Rotterda
m,
Netherlan
ds
Indian
apolis,
$58.80 NYSE: W Angela
111 WellPoint Health care 2010 $23,916 42,000 Indiana,
18[143] LP Braly
United
States
Septe Essen
ISIN:
ThyssenKr Conglomera $58.16 mber 188,00 & Ekkehard
126 $29,544 DE000750
upp te 9[144] 30, 0 Duisburg, D. Schulz
0001
2010 Germany
BNP Financial $57.89 201,70 Euronext: Paris, Baudouin
127 2009 $91,689
Paribas Services 9[145] [146]
0 BNP France Prot
Seven & I March
$57.43[ Tokyo Toshifum
128 Holdings Retailing 147] 31, $24,023 55,815 TYO: 382
, Japan i Suzuki
Co. 2010
Croix, Christoph
$57.15[ 243,00
129 Auchan Retailing 148] 2009 - - Nord, e
0
France Dubrulle
130 Grupo Banking $56.73 2009 $136,63 129,74 BMAD: S Santa Emilio
Santander 2[149] 1 9 AN nder, Botín
Cantabria
, Spain
Febru
$56.7[15 ary $9,420[2 TYO: Tokyo
131 ÆON Retailing 0]
27, 7] 8267 , Japan
2010
Noble Raw $56.69 Hong Ricardo
132 2010 - SGX: N21
Group materials 6[151] Kong Leiman
March
Dai-ichi $56.66 TYO: Tokyo
133 Insurance 31, -
Life 5[152] 8750 , Japan
2010
Edinb
urgh,
Royal Bank Financial $55.73 120,00 Stephen
134 [153] 2009 $67,158 LSE: RBS Scotland,
of Scotland services 7 0 Hester
United
Kingdom
Iraq
National $55.1[15
135 Oil and gas 4] 2007 - ?- Iraq ?
Oil
Company
Gerlin
Bosch $54.99 270,68
136 Automotive 2009 - Private gen,
Group 3[155] 7
Germany
Sovereign March
Temasek $54.78 Governme Singa
137 Wealth [156] 31, - -
Holdings 1 nt-owned pore
Fund 2010
Indian Oil March New
$54.73 $16,360[ B.M.Ban
138 Corporatio Oil and Gas 31, 27] 36,127 NSE: IOC Delhi,
4[157] sal
n 2010 India
Pierre-
Saint- Constructio $54.43 208,00 Euronext: Paris, André de
139 2009 $30,626
Gobain n 5[158] 0 SGO France Chalenda
r
Hartfo
rd,
United
Conglomera $54.32 215,00 NYSE: U Connecti George
140 Technologi 2010 $67,548
te 6[159] 0 TX cut, David
es
United
States
Tokyo Tsunehis
Tokyo March
Electricity $53.90 TYO: , Tokyo a
141 Electric 31, $36,222 39,619
generation 9[160] 9501 Prefectur Katsumat
Power 2010
e, Japan a, ?
Roun
Januar d Rock,
Information $52.90 NASDAQ Michael
142 Dell y 29, $44,640 95,000 Texas,
technology 2[161] : DELL Dell
2010 United
States
[2
143 Toyota Sogo $52.89 March $9,070 20,708 TYO: Nago Masaaki
31,
Tsusho shosha 3[162] 7]
8015 ya, Japan Furukawa
2010
Melbo
urne,
LSE: BLT Victoria,
Jun.
BHP $52.79 $201,24 , Australia Marius
144 Mining [163] 30, 34,000
Billiton 8 8 ASX: BH and Kloppers
2010
P London,
United
Kingdom
Frank
Josef
Deutsche $51.66 FWB: DB furt am
145 Banking 2009 $44,021 82,504 Ackerma
Bank 6[164] K Main,
nn
Germany
China
Railway Infrastructur $50.53 SEHK: 11 Beijin
146 [165] 2009 - -
Constructio e 1 86 g, China
n
March Hiroaki
$50.31 $14,990[ 157,04 TYO: Tokyo
147 Fujitsu Electronics 31, 27] Kurokaw
7[166] 4 6702 , Japan
2010 a, ?
Zürich
Credit Financial $50.19 SIX: CSG , Canton Brady
148 [167] 2009 $58,682 60,477 of Zürich,
Suisse services 3 N Dougan
Switzerla
nd
$50.05 170,00 Milan, Federico
149 UniCredit Banking [168] 2009 $89,654 BIT: UCG
5 0 Italy Ghizzoni
New
York
$50.00 $141,50 106,00 NYSE: PF Jeff
150 Pfizer Health care 2009 City,
9[169] 7 0E Kindler
United
States
Veolia
Public $49.77 312,59 Euronext: Paris, Antoine
151 Environne 2009 $32,938
utilities 4[170] 0 VIE France Frérot
ment
SSE:
China Life $49.69 601628, Beijin
152 Insurance [171] 2009 - -
Insurance 8 SEHK: 26 g, China
28
Richfi
Feb. eld,
$49.69 NYSE: B Brian J.
153 Best Buy Retailing [172] 27, - - Minnesot
4 BY Dunn
2010 a, United
States
154 United Transportati $49.54 2010 $50,553 400,60 NYSE: U Sandy Scott
Parcel on 5[173] 0 PS Springs, Davis
Service Georgia,
United
States
BM&F Luiz
Banco $49.26 Bovespa: Osasc Carlos
155 Banking [174] 2009 $58,441 85,577
Bradesco 7 BBDC3/B o, Brazil Trabuco
BDC4 Cappi
China
Railway
Engineerin Infrastructur $48.84 SEHK: 39 Beijin
156 2009 -
g e 8[175] 0 g, China
Corporatio
n
Mitsubishi March
Sogo $48.83 $34,794[ TYO: Tokyo Mikio
157 Corporatio [176] 31, 177]
shosha 3 8058 , Japan Sasaki
n 2010
Boulo
gne-
$48.56 121,42 Euronext: Billancou Carlos
158 Renault Automotive 2009 $31,650
6[178] 2 RNO rt, Île-de- Ghosn
France,
France
OMX: M
A. P. Copen
$48.52 110,00 AERSK Nils
159 Møller - Transport [179] 2009 $49,039 hagen,
2 0 A,MAER Andersen
Mærsk Denmark
SK B
Hoffmann- $47.62 $165,24 Basel, Severin

160 Health care [180] 2009 74,372 SIX: ROG Switzerla
La Roche 9 1 Schwan
nd
PTT Public Bangk Prasert
$47.61
161 Company Oil and Gas 2009 $28,285 3,681 SET: PTT ok, Bunsump
9[181]
Limited Thailand un
Banco
Bilbao $47.42 BMAD: B Bilba Francisco
162 Banking 2009 $68,452 91,000
Vizcaya 9[182] BVA o, Spain González
Argentaria
Moor
esville,
$47.22[ 210,00 NYSE: L North Robert
163 Lowe's Retailing 183] 2009 $33,552
0 OW Carolina, Niblock
United
States
Mosc
$46.82 RTS:ROS
164 Rosneft Oil and gas 2009 - - ow, -
6[184] N
Russia
165 National Insurance $46.8[13 2005 6,248 Japan
1]
Mutual
Insurance
Federation
of
Agricultura
l
Cooperativ
es
(Zenkyoren
or JA
Kyosai)
Rueil-
Constructio $46.76 162,00 Euronext: Xavier
166 VINCI [185] 2009 $35,334 Malmaiso
n 2 0 DG Huillard
n, France
Woori Seoul,
Financial $46.45 KRX: Lee Pal
167 Financial 2009 - - South
services 9[186] 053000 Seung
Group Korea
$46.42 120,00 Governme Algier Djenane
168 Sonatrach Oil and gas 2009 -
0[187] 0 nt-owned s, Algeria El Malik
Londo
n,
GlaxoSmit $46.01 $114,83 100,01 Andrew
169 Health care [188] 2009 LSE: GSK England,
hKline 6 3 9 Witty
United
Kingdom
Hon Hai Tuche
$45.89 920,00 TWSE: Terry
170 Precision Electronics 2009 $40,635 ng,
9[189] 0 2317 Gou
Industry Taiwan
Bethe
sda,
Lockheed $45.80 140,00 NYSE: L Robert J.
171 Aerospace 2010 $40,527 Maryland
Martin 3[190] 0 MT Stevens
, United
States
Industrial
SSE:
and
$45.32 $268,95 385,60 601398, Beijin Jiang
172 Commercia Banking [191] 2009
2 6 9 SEHK: 13 g, China Jianqing
l Bank of
98
China
New
York
City,
Goldman Financial $45.17 NYSE: G Lloyd
173 [192] 2009 $65,479 30,335 New
Sachs services 3 S Blankfein
York,
United
States
June Bella Michael
Woolworth $45.17 195,00 ASX: WO
174 Retailing 28, $31,224 Vista, Luscomb
s Limited 0[193] 0W
2010 Australia e
Conglomera $45.16 113,30 Euronext: Paris, Martin
175 Bouygues [194] 2009 $22,157
te 7 0 EN France Bouygues
176 Bayer Health care $44.90 2009 - 106,00 FWB: BA Lever Marijn
[195]
1 0 YN kusen, Dekkers
North
Rhine-
Westphal
ia,
Germany
China
Investment Sovereign $44.87 Governme Beijin
177 2009 - - Lou Jiwei
Corporatio wealth fund 6[196] nt-owned g, China
n
Midla
nd, Andrew
Dow Manufacturi $44.87 NYSE: D
178 2009 $34,625 46,000 Michigan N.
Chemical ng 5[197] OW
, United Liveris
States
Septe
Bristo
Imperial Tobacco $44.71 mber Gareth
179 - - LSE: IMT l, United
Tobacco industry 3[198] 30, Davis
Kingdom
2010
March
Reliance Conglomera $44.63 BSE: 5003 Mum Mukesh
180 [199] 31, - -
Industries te 2 25 bai, India Ambani
2010
Januar
$44.26 $134,92 100,73 SIX: NOV Basel, Joseph
181 Novartis Health care y 26, Switzerla Jimenez
7[200] 8 5N
2010 nd
March
Mitsui & Conglomera $44.04 TYO: Tokyo
182 31, ? ? -
Co. te 8[201] 8045 , Japan
2010
Hoff
man
Januar
Sears $44.04 $12,660[ 355,00 NASDAQ Estates, Alan J.
183 Retailing y 30,
Holdings 3[202] 27]
0 : SHLD Illinois, Lacy
2010
United
States
Londo
n, United
Kingdom
$44.03 101,99 and Tom
184 Rio Tinto Mining [203] 2009 - ASX: RIO
6 4 City of Albanese
Melbourn
e,
Australia
KRX:
Shinhan Seoul, Sang
Financial $43.97 055550,
185 Financial 2009 - - South Hoon
services 5[204] NYSE: S
Group Korea Shin
HG
June
Wesfarmer $43.94 200,00 ASX: WE Perth, Bob
186 Retailing 30, $32,530
s 9[205] 0S Australia Every
2010
187 Mitsubishi Banking $43.89 March $68,694 57,500 TYO: Tokyo Nobuo
UFJ
31, Kuroyana
Financial 6[206] 8306 , Japan
2010 gi
Group
Moun
Dece tain
Semiconduc $43.62 mber $109,21 NASDAQ View, Paul S.
188 Intel [207] 82,500
tors 3 25, 0 : INTC Californi Otellini
2010 a , United
States
Sumitomo March
$43.27 N/A Osaka
189 Life Insurance 31, - - -
2[208] (Mutual) , Japan
Insurance 2010
Purch
ase, New
$43.23 NYSE: PE Indra
190 PepsiCo Food [209] 2009 - - York,
2 P Nooyi
United
States
The
Alex
$42.85 Euronext: Hague,
191 Aegon Insurance 2009 $23,967 29,000 Wynaend
9[210] AGN Netherlan
ts
ds
Douglas
Peoria
Heavy $42.58 NYSE: C R.
192 Caterpillar [211] 2010 - - , Illinois,
equipment 8 AT Oberhelm
USA
an
Berlin
Deutsche Transportati $42.26[ 229,20 Rüdiger
193 212] 2009 - - ,
Bahn on 0 Grube
Germany
Chris
Sanofi- $42.21 $102,84 Euronext: Paris,
194 Health care 2009 96,439 Viehbach
Aventis 8[213] 9 SAN France
er
Aubur
Sergio
$41.94 Private n Hills,
195 Chrysler Automotive 2010 N/A - Marchion
6[214] company Michigan
ne
, USA
White
Plains,
Bunge $41.92 $13,400[ NYSE: B New Alberto
196 Agriculture 2009 30,000
Limited 6[215] 27]
G York, Weisser
United
States
March
Sogo $41.33 $4,790[2 TYO: Tokyo Yutaka
197 Sojitz [216] 31, 7] 17,331
shosha 8 2768 , Japan Kase
2010
New
York C. Robert
$41.05 NYSE: M
198 MetLife Insurance 2009 $42,734 83,800 City, Henrikso
8[217] ET
United n
States
Pleasa
Januar nton,
$40.85 $12,650[ 201,00 NYSE: S Steven
199 Safeway Retailing [218] y 2, 27] Californi
07 0 WY Burd
2010 a, United
States
Eden
Febru
Prairie,
$40.59 ary $5,550[2 200,00 NYSE: S Craig
200 SuperValu Retailing [219] 7] Minnesot
7 27, 0 VU Herkert
a, United
2010
States
SIX: UBS Zurich
[2
Financial $40.56 65,233 N, & Basel, Oswald
201 UBS 2009 -
services 1[220] 21]
NYSE: U Switzerla Grübel
BS nd
North
field, Irene
$40.38 $40,172[ 97,000[2 NYSE: K
202 Kraft Foods Food 2009 222] Illinois, Rosenfel
6[222] 22]
FT
United d
States
Federal McLe
Home Loan an,
Financial $40.34 $16,270[ NYSE: FR Richard
203 Mortgage 2009 5,000 Virginia,
services 6[223] 27]
E F. Syron
Corporatio United
n States
Amste
[
$40.22 $15,790 206,00 Euronext: rdam, John
204 Ahold Retailing 2009 27]
9[224] 0[225] AH Netherlan Rishton
ds
Information
205 Cisco
technology
CHA
PTE
R1
INT
ROD
UCT
ION:
Bank
ing is
an
impo
rtant
sect
or of
the
econ
omy
of
any
coun
try
and
for
the
deve
lopm
ent
of
the
econ
omy
a
healt
hy
bank
ing
syste
m is
a
must
.
After
the
liber
alizat
ion
of
the
econ
omy,
the
bank
ing
syste
m
has
unde
rgon
ea
total
chan
ge in
India
.Ther
e is
hard
com
petiti
on in
the
bank
ing
indu
stry
to
survi
ve in
the
curre
nt
circu
msta
nces
.
With
the
purp
ose
to
have
bette
r
finan
cial
disci
pline
& to
ensu
re
unifo
rmity
in
acco
untin
g
norm
s
RBI
intro
duce
d the
conc
ept
of
asse
t
class
ificati
on &
inco
me
reco
gniti
on
as
per
the
reco
mme
ndati
ons
of
Nara
simh
an
Com
mitte
e. It
was
also
sugg
este
d to
class
ify
the
adva
nces
give
n by
bank
s
into
Perf
ormi
ng &
Non
Perf
ormi
ng
Adva
nces
(N.P.
A.).
Bank
s
and
Fina
ncial
Instit
ution
s
lend
mon
ey
agai
nst
hypo
thec
ation
and
pled
ge of
stock
s,
book
debt
s
and
secu
rities
.
Bank
s
have
to
close
ly
moni
tor
the
activi
ty of
borro
wer
to
ensu
re
that
the
mon
ey
lend
ed
by
bank
is
secu
re &
there
is
adeq
uate
marg
in for
reco
very
of
loan.
To
ensu
re
the
safeg
uard
of
the
adva
nces
given
and
to
identi
fy the
prob
able
N.P.
A. at
an
early
stage
, the
Bank
s and
Fina
ncial
Instit
ution
s
appr
oach
exter
nal
Audit
or to
carry
out
an
indep
ende
nt
exam
inatio
n of
these
hypot
hecat
ed
and
pledg
ed
stock
s,
book
debts
and
secur
ities.
The
role
of
the
Audit
or
assu
mes
a
great
impo
rtanc
e, as
he is
an
indep
ende
nt
and
neutr
al
party
whos
e
repor
t is
looke
d
upon
with
resp
ect
and
credi
bility.
CHA
PTE
R2
STO
CK
&
REC
EIVA
BLE
AUD
IT

Pink Gurlz

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pink Gurlz

Uploaded by

Copyright:

Available Formats

ASSETS

 An asset is a resource controlled by the entity as a result of past

 The probable present benefit involves a capacity, singly or in

1. Investments in securities such as bonds, common

Different forms of insurance may also be treated as long term

Bookkeeping is the recording of financial transactions. Transactions include

A bookkeeper (or book-keeper), also known as an accounting clerk or

Sample revenue and expense journal for single-entry bookkeeping[1

 Sales daybook, for recording all the sales invoices.

]Petty cash book

Cost of goods sold

Debits and credits

Debits and credits are a system of notation used in bookkeeping

The term "debit and credit" in accounting

According to dictionary debit means 1. "a written note on bank

The five accounting elements and how they are affected

Debits (dr) Credits (cr)

Where "X" denotes the effect of a transaction on the asset account.

Debits (dr) Credits (cr)

Debits (dr) Credits (cr)

Debits (dr) Credits (cr)

Debits (dr) Credits (cr)

Debit and Credit principle

Debits (dr) Credits (cr)

Examples of accounts pertaining to the five accounting elements:

 Asset accounts: Bank, Receivables, Inventory etc...

There are numerous accounts related to the five accounting elements

To balance the accounting equation the corresponding account is

1. A business pays rent with cash: you increase rent

TYPE DEBIT CREDIT

Therefore, if an Asset account is debited, the Asset amount

Double-entry bookkeeping system

Century Development Stage

Double-entry bookkeeping has been considered a fundamental

Account types (nature)

Type Represent Examples

Tangibles - Plant and Machinery, Furniture

Temporary Income and Expenditure

Example: A sales account is opened for recording the sales of goods

Type of Long term Long term Short term Short term

Real accounts Assets

 the income statement, also known as the statement of financial

]Abbreviations used in bookkeeping

[edit]Debits and credits

 Debit: A debit is recorded on the left hand side of a T

[edit]Double entry example 1

 Sales Invoice Daybook (records customer Invoice

The books of prime entry are where transactions are first

 Customer Ledger Cards

[edit]Purchase invoice daybook

Purchase Invoice Daybook

Referen Electric Widge

------- ------- -------

Total 2600 1000 1600

==== ==== ====

Credit Debit Debit

Creditors G/L G/L

 The amount value is posted as a credit to the

From example above:

 Line 1 - Amount value 1000 is posted as a credit to

The totals of each column are posted as follows:

 Amount total value 2600 posted as a credit to the Trade