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

After studying this chapter you will be able to: Accounting equation entries applied to capital costs and expenses and their impact on financial statements; depreciation methods, calculating depreciation and book value of assets and the affect on profit, taxes and cash flow; inventory management and the affect on the accounting equation; financial statement ratios and their use for economic decision making.

IET 35000 Engineering Economics

Chapter 3 – Unit 2

Depreciation

 :

where

21 nn    Years

of  Sum







j 

‐ 1 n    

j year in

 MACRS table provides percentages that are used with the 

basis to determine annual depreciation amounts (Table 3‐4)

31 Bowman page 95

IET 35000 Engineering Economics

WIP Inventory  Account ‐ Lot 56789

Direct Labor Cost + 

Overhead Expense

Direct Labor Cost +  Overhead Expense

Direct Labor Cost +  Overhead Expense

Finished Goods Inventory  Account

Example Problem 3.2

51

Example Problem 3.2 Solution

Go to Unit 4 Financial Statement Ratios

52

IET 35000 Engineering Economics

Assets   Current     Ratio  

Current 

s Inventorie  ‐

Assets   Current    

Interest   and   Tax   Before   Profit    

Power

Earning 

Receivable  

Accounts  

  g Outstandin  

Sales   Ratio   Assets   to  

Earning 

Share   per   Price   Market   Ratio  

Equity   Owners'  

  Value

Dividends  

  Payout 

Share   per   Dividend     Yield 

Income   Net

Equity   Share   Common Assets   Total Assets   Total Sales Sales Income   Net

Equity   to   Assets   Assets   to Revenue   Ratio   Profit