Page 73 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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money were charged against his budget when it was commit-
ted, he would know how much he had left to commit or spend
in later months.
The questions made sense to the sales manager, yet frus-
trated the accountants. They could never quite convince him
they had done it right, especially since they sometimes hadn’t.
Yet the best answer lay in better communication between the
two groups about how accounting works.
Today, many companies have integrated enterprise account-
ing systems that can keep track of purchase orders issued but
not yet fulfilled, and it’s much easier to track and report com-
mitments made for future goods and services. Even so, such
commitments cannot be booked as actual expenses until the
goods have been delivered and the purchase order satisfied.
This is the flip side of the sales example above, but the same
accounting rules apply.
With that overview in mind, let’s look at the line items in a
typical income statement. As an example, let’s use the most
recent income statement of The Wonder Widget Company. Take
a look at Figure 4-1, and then read on.

Sales: The Grease for the Engine
“Nothing happens until you sell something.” This is the sale to
customers of products and services that the company regularly

If It Counts Toward My Bonus, It Must Be Sales
A good example of conflicting objectives that can cause mis-
understanding is the answer to the question,When is it sold?
The corporate scandals reported in the press during the past couple
years included equipment service contracts that one company record-
ed as equipment sales.Why? Probably because equipment sales go into
profit immediately, while service contracts can be recorded only as the
service is rendered, often over months or years.A sale recorded now
counts for more than a sale that will be recorded next year, especially
if you’re watching earnings per share this quarter.A smart manager
understands about conflicting objectives and the dangers that result.