What Every Engineer Should Know about Accounting and Finance

262 Pages·1994·10.531 MB·\262

by  Shim (Author)

WHAT EVERY
ENGINEER SHOULD
KNOWABOUT
ACCOUNTING
AND FINANCE
WHAT EVERY ENGINEER SHOULD KNOW
A Series
Editor
William H. Middendorf
Department of Electrical and Computer Engineering
University of Cincinnati
Cincinnati, Ohio
1. What Every Engineer Should Know About Patents, William G. Kono/d,
Bruce Titte/, Donald F. Frei, and David S. Stallard
2. What Every Engineer Should Know About Product Liability, James F.
Thorpe and William H. Middendorf
3. What Every Engineer Should Know About Microcomputers:
Hardware/Software Design, A Step-by-Step Example, William S.
Bennett and Carl F. Evert, Jr.
4. What Every Engineer Should Know About Economic Decision Analysis,
Dean S. Shupe
5. What Every Engineer Should Know About Human Resources
Management, Desmond D. Martin and Richard L. Shell
6. What Every Engineer Should Know About Manufacturing Cost
Estimating, Eric M. Malstrom
7. What Every Engineer Should Know About Inventing, William H.
Middendorf
8. What Every Engineer Should Know About Technology Transfer and
Innovation, Louis N. Mogavero and Robert S. Shane
9. What Every Engineer Should Know About Project Management, Ar-
nold M. Ruskin and W. Eugene Estes
10. What Every Engineer Should Know About Computer-Aided Design and
Computer-Aided Manufacturing: The CAD/CAM Revolution, John K.
Krouse
11. What Every Engineer Should Know About Robots, Maurice I. Zeldman
12. What Every Engineer Should Know About Microcomputer Systems
Design and Debugging, Bill Wray and Bill Crawford
13. What Every Engineer Should Know About Engineering Information
Resources, Margaret T. Schenk and James K. Webster
14. What Every Engineer Should Know About Microcomputer Program
Design, Keith R. Wehmeyer
15. What Every Engineer Should Know About Computer Modeling and
Simulation, Don M. Ingels
16. What Every Engineer Should Know About Engineering Workstations,
Justin E. Harlow III
17. What Every Engineer Should Know About Practical CAD/CAM Appli-
cations, John Stark
18. What Every Engineer Should Know About Threaded Fasteners:
Materials and Design, Alexander Blake
19. What Every Engineer Should Know About Data Communications, Carl
Stephen Clifton
20. What Every Engineer Should Know About Material and Component
Failure, Failure Analysis, and Litigation, Lawrence E. Murr
21. What Every Engineer Should Know About Corrosion, Philip Schweitzer
22. What Every Engineer Should Know About Lasers, D. C. Winburn
23. What Every Engineer Should Know About Finite Element Analysis,
edited by John R. Brauer
24. What Every Engineer Should Know About Patents: Second Edition,
William G. Konold, Bruce Tittel, Donald F. Frei, and David S. Stallard
25. What Every Engineer Should Know About Electronic Communications
Systems, L. R. McKay
26. What Every Engineer Should Know About Quality Control, Thomas
Pyzdek
27. What Every Engineer Should Know About Microcomputers: Hardware/
Software Design, A Step-by-Step Example. Second Edition, Revised
and Expanded, William S. Bennett, Carl F. Evert, and Leslie C. Lander
28. What Every Engineer Should Know About Ceramics, Solomon Musi-
kant
29. What Every Engineer Should Know About Developing Plastics Pro-
ducts, Bruce C. Wendle
30. What Every Engineer Should Know About Reliability and Risk Analysis,
M. Modarres
31. What Every Engineer Should Know About Finite Element Analysis:
Second Edition, Revised and Expanded, edited by John R. Brauer
32. What Every Engineer Should Know About Accounting and Finance,
Jae K. Shim and Norman Henteleff
ADDITIONAL VOLUMES IN PREPARATION
What Every Engineer Should Know About Project Management: Sec-
ond Edition, Revised and Expanded, Arnold M. Ruskin and W. Eugene
Estes

WHAT EVERY
ENGINEER SHOULD
KNOW ABOUT
ACCOUNTING
AND FINANCE
Jae K. Shim
California State University, Long Beach
Long Beach, California
Norman Henteleff
Consultant in Engineering Management
and
National Business Review Foundation
Long Beach, California
MARCEL DEKKER, INC. NEW YORK • BASEL
Library of Congress Cataloging-in-Publication Data
Shim, Jae K.
What every engineer should know about accounting and finance / Jae
K. Shim, Norman Henteleff.
p. cm. — (What every engineer should know ; v. 32)
Includes index.
ISBN 0-8247-9271-8
1. Engineering—Accounting, 2. Engineering firms—Finance.
I. Henteleff, Norman. II. Title. III. Series.
TA185.K56 1994
620.00681 -dc20 94-29763
CIP
The publisher offers discounts on this book when ordered in bulk quantities.
For more information, write to Special Sales/Professional Marketing at the
address below.
This book is printed on acid-free paper.
Copyright © 1995 by MARCEL DEKKER, INC. All Rights Reserved.
Neither this book nor any part may be reproduced or transmitted in any form
or by any means, electronic or mechanical, including photocopying, micro-
filming, and recording, or by any information storage and retrieval system,
without permission in writing from the publisher.
MARCEL DEKKER, INC.
270 Madison Avenue, New York, New York 10016
Current printing (last digit):
10 9 8 7 6
PREFACE
This book is directed toward the engineer who must have accounting and finan-
cial knowledge but has not had formal training in accounting or finance—
perhaps a newly promoted middle engineering manager or a project manager
who must have this knowledge to perform engineering and project analyses and
to communicate with the financial officers in various areas of his or her function.
This book is also targeted to engineers who aspire to be entrepreneurs or sole
proprietors; they may have brilliant product ideas, but not the slightest idea about
financial management, including financing. This book will ease the transition
from effective engineer to successful engineering manager. The book's goals are
threefold:
1. To provide an understanding and working knowledge of the fundamen-
tals of finance and accounting that can be put to practical application in
day-to-day jobs of engineers and engineering managers.
2. To provide a working vocabulary for communication, so that the engi-
neer can develop an ability to ask the right questions and interpret
jargon-based financial answers.
3. To cover a variety of methods, processes, and tools of accounting and
finance with many examples and illustrations drawn from the fields of
engineering and project management.
Project managers and engineers cannot avoid financial information. Prof-
itability statements, rates of return, budgets, variances, and project analyses are
included in the engineer's job. The financial aspects of operations are a part of
the project manager's day-to-day considerations.
Most engineers who are promoted to management positions have years of
training and experience in their technical areas but very limited education or
experience in administrative or project management.The book will enable engi-
neers and project managers to prepare, appraise, evaluate, and approve plans to
accomplish departmental and company objectives. It will also enable them to
prepare financial support documents that must accompany a given program or
project.
iii
iv Preface
The transition from civil engineer, chemical engineer, electrical engineer,
mechanical engineer, industrial engineer, systems engineer, radio/television
engineer, or scientist to engineering or project manager can be, at the least,
unnerving or unsettling. For new engineering managers, the first item of business
is survival. They must be knowledgeable and able to communicate with lawyers,
accountants, financial officers, quality specialists, other engineers, and a host of
upper and middle management people.
Engineering managers must be able to express budgetary needs in order to
obtain proper funding for their departments. They may have to forecast future
sales, cash flows, and costs to determine whether their company will be operat-
ing effectively in the future. A knowledge of variance analysis will help the
project manager spot areas of inefficiency or efficiency by comparing actual per-
formances to standards. An understanding of certain financial strategies will help
the engineering manager to improve return on investment and enhance prof-
itability as well as use the company's assets more effectively. The concepts of
break-even analysis and the time value of money are excellent financial tools
enabling the project manager to choose whether to buy or lease, or purchase
machine A or machine B, thus improving the investment opportunities of the
company. Cost analysis can be applied to appraising and evaluating costs associ-
ated with a decision or project, including effects on profitability.
Understanding the concepts and conventions of accounting and finance will
assist engineers in the proper interpretation of financial data. For example,
knowing how facilities are depreciated is a necessity for the engineer when
making investment decisions since depreciation expenses directly affect taxable
income, and tax considerations often prove to be a deciding factor. Financial
concepts such as debit and credit, accrual versus cash basis, and return-risk
tradeoff need to be understood for proper interpretation and analysis of account-
ing data.
Understanding financial statement analysis gives the engineering manager a
working knowledge of how to evaluate the company's health and operating per-
formance, and how to investigate trends in profitability and return on investment.
For the engineer or engineering manager the budget offers a means to do a
better job and to prevent failure. Reporting performance against budget goals and
standards permits measurement and control of engineering activities. Cost
reporting leads to better definitions of objectives, more effective evaluation of
work in progress, and better measurement of performance at every level. Cost
reporting is an important phase of measuring and evaluating engineering
projects.
The knowledgeable project manager has a numbei of methods at hand to
choose among new product developments or alternative facilities. These include
discounted cash flow (DCF) analysis such as uniform annual cost, net present
value, internal rate of return, payback period, and scoring and ranking methods.
Preface v
Often the engineering manager has to evaluate time-cost tradeoffs, for example,
whether to increase resource allocation to specific tasks so that a project can be
finished at an earlier date.
The focus of this book is to create an awareness and understanding of spe-
cific finance and accounting processes, methods, strategies (such as tax advan-
tages of leasing), and terminology (such as depreciation, leverage, financial
ratios, and net present value) to ensure the survival and profitability of the firm
and the project, and the survival of the engineering manager. This knowledge of
basic financial and accounting principles and techniques not only enhances the
company's communication processes, financial stability, and profitability, but
acts as an incentive and motivation for engineers and engineering managers at all
levels of management.
There must be cooperation and communication among all department pro-
ject managers and middle and upper administration to ensure departmental and
company objectives and goals. This responsibility can be assured by having all
engineers with financial responsibilities be knowledgeable and involved in the
financial process.
Jae K. Shim
Norman Henteleff