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Prelims/The Finance Manual28/6/02 11:57 amPage iThe Finance Manualfor Non-FinancialManagers

Prelims/The Finance Manual28/6/02 11:57 amPage iiAbout the AuthorsPAUL MCKOEN is a Fellow of the Chartered Institute ofManagement Accountants. After reading a financedegree, he joined Ford Motor Company where hespent eleven years in a variety of roles. Now FinanceDirector of Vertex, the Business Process Outsourcingcompany created by United Utilities, he is based inCheshire.This is his first book and is inspired by all thosemarketing, operational and engineering managers who have patientlyshared their technical expertise in exchange for help with financialissues.L E O G O U G H is a financial journalist. His otherbooks include How the Stock Market Really Works andOffshore Investment.The Institute of Management (IM) is at the forefront of managementdevelopment and best management practice. The Institute embracesall levels of management from students to chief executives. Itprovides a unique portfolio of services for all managers, enablingthem to develop skills and achieve management excellence.If you would like to hear more about the benefits of membership,please write to Department P, Institute of Management, CottinghamRoad, Corby NN17 1TT.This series is commissioned by the Institute of ManagementFoundation.

Prelims/The Finance Manual28/6/02 11:57 amPage iiiSMARTER SOLUTIONSThe finance packThe Finance Manualfor Non-FinancialManagersThe power to make confident financial decisionsPA U L M c K O E N a n d L E O G O U G HLondon New York Toronto Sydney Tokyo SingaporeMadrid Mexico City Munich Paris

Prelims/The Finance Manual28/6/02 11:57 amPage ivPEARSON EDUCATION LIMITEDHead Office:Edinburgh GateHarlow CM20 2JETel: 44 (0)1279 623623Fax: 44 (0)1279 431059London Office:128 Long AcreLondon WC2E 9ANTel: 44 (0)20 7447 2000Fax: 44 (0)20 7447 2170www.business-minds.comFirst published in Great Britain 1997 Pearson Education Limited 2000The right of Paul McKoen and Leo Gough to be identified as Authors of this Work has been assertedby them in accordance with the Copyright, Designs, and Patents Act 1988.ISBN 0 273 64493 9British Library Cataloguing in Publication DataA CIP catalogue record for this book can be obtained from the British Library.All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording, orotherwise without either the prior written permission of the Publishers or a licence permittingrestricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd,90 Tottenham Court Road, London W1P 0LP. This book may not be lent, resold, hired out or otherwisedisposed of by way of trade in any form of binding or cover other than that in which it is published,without the prior consent of the Publishers.10 9 8 7 6 5 4 3Typeset by Northern Phototypesetting Co. Ltd, BoltonPrinted and bound in Great Britain by Bookcraft, Midsomer NortonThe Publishers’ policy is to use paper manufactured from sustainable forests.

Prelims/The Finance Manual28/6/02 11:57 amPage vContents1 Reporting to the outside worldCompany backgroundThe frameworkThe reportThe financial statementsThe profit and loss accountThe balance sheetThe cash flow statementPublished accounts and the stock market2 Analysing accountsAnalysing company accountsRatio analysisApplying ratios in credit controlCorporate governanceAuditors3 The basics of accountingDouble entry bookkeeping – the debits and the creditsAccounting recordsBasic principles11356813192127272836404351515460v

Prelims/The Finance Manual28/6/02 11:57 amPage viCONTENTS4 Accounting within the organisationInternal versus external accountsThe control cycleStructuring the planMaking budgets effectiveCost centresProfit centresMeasuring performance5 CostingIntroductionCost – some definitionsTraditional (absorption) costingStandard costingActivity based costingSales versus inventoryAccounting for throughputCosting – some general thoughts6 PricingIntroductionCompetitive positionProduct revisionsReturn on salesThe ‘Special Value Programme’ (SVP)General points on pricing7 Project analysisWhat is project analysis?The basic toolsPaybackInternal Rate of Return (IRR) and Discounted Cash Flow (DCF)Some more advanced 103105105107109110114118119119122122124131

Prelims/The Finance Manual28/6/02 11:57 amPage viiCONTENTSWACC – the Weighted Average Cost of CapitalCashflows in perpetuity8 Organisational controlIntroductionInternal controlFraud – a general profileOrganisational control – whose responsibility?9 Corporate taxationTax – a strategyThe main taxes on companiesCapital allowancesThe taxation of multinationalsDouble taxation treatiesTransfer pricingUsing offshore centres and tax havensHolding companies in HollandCompany structureSummary10 FinancingThe balance sheetThe cash flow cycleForms of financingOverdrafts and loansBondsCredit termsFinancing of specific assetsEquity 2168176179183185186188190191194198200203vii

Prelims/The Finance Manual28/6/02 11:57 amPage viiiCONTENTS11 Acquisitions211IntroductionAcquisitions – the strategic viewWhat makes companies vulnerable to bids?Accounting implicationsAccounting policiesBids and the stock market12 Risk and risk managementviii211212214218224227235Risk analysisEnvironmental/strategic riskFinancial riskThe forward contractDerivativesFinancial futures – hedging versus speculationOther financial risksLonger-term riskThe risk/reward relationship and the stock marketThe ‘equity risk’ of a listed Appendix AAppendix BAppendix CAppendix DGlossaryIndex257269285289291299Financial controls – who, where, when and howSome numerical toolsThe Greenbury reportPresent value tables

Prelims/The Finance Manual28/6/02 11:57 amPage ixThe MCI MiddleIf you are studying for one of the NVQs on which the MCI standards are based, this bookcan help. Here’s how some of the topics in this book relate to particular units.Middle Management StandardsUnit 1 Initiate and implement change and improvement in services, productsand systemsChapter 4. Accounting within the organisationChapter 8. Organisational controlElement 1.1Identify opportunities for improvements in services, products and systemsChapter 4. Accounting within the organisationChapter 7. Project analysisElement 1.263119Evaluate proposed changes for benefits and disadvantagesChapter 7. Project analysisAppendix B. Some numerical toolsUnit 263139119269Monitor, maintain and improve service and product deliveryElement 2.1departmentEstablish and maintain the supply of resources into the organisation/Chapter 5. CostingElement 2.287Establish and agree customer requirementsChapter 6. Pricing105ix

Prelims/The Finance Manual28/6/02 11:57 amPage xT H E M C I M I D D L E A N D S E N I O R M A N A G E M E N T S TA N D A R D SUnit 3Monitor and control the use of resourcesElement 3.1Element 3.2Control costs and enhance valueChapter 4. Accounting within the organisationChapter 5. Costing6387Monitor and control activities against budgetsChapter 4. Accounting within the organisationChapter 10. FinancingAppendix A. Financial controls –who, where, when and how63185257Unit 4Secure effective resource allocation for activities and projectsElement 4.1Justify proposals for expenditure on projectsChapter 7. Project analysisChapter 9. Corporate taxationChapter 10. FinancingElement 4.2119151185Negotiate and agree budgetsChapter 4. Accounting within the organisation63Unit 9Seek, evaluate and organise information for actionElement 9.1Obtain and evaluate information to aid decision makingChapter 4. Accounting within the organisation63Chapter 7. Organisational control119Appendix B. Some numerical tools269Element 9.2Forecast trends and developments which affect objectivesChapter 7. Project analysis119Chapter 12. Risk and risk management235Appendix B. Some numerical tools269x

Prelims/The Finance Manual28/6/02 11:57 amPage xiT H E M C I M I D D L E A N D S E N I O R M A N A G E M E N T S TA N D A R D SSenior Management StandardsUnit A2Internal strengths and weaknessesElement A2.1 Product and service auditUnit C1Chapter 5. Costing87Chapter 6. Pricing105Appendix C. The Greenbury report285Programmes, projects and plansElement C1.1 Preparing and submitting proposalsChapter 4. Accounting within the organisation63Chapter 7. Project analysis119Chapter 10. Financing185Chapter 11. Acquisitions211Chapter 12. Risk and risk management235Element C1.2 Evaluating proposalsChapter 7. Project analysis119Chapter 12. Risk and risk management235Appendix B. Some numerical tools269Element C1.5 Obtaining agreementChapter 4. Accounting within the organisationUnit C263Delegation and actionElement C2.3 TargetsChapter 4. Accounting within the organisationUnit C463MonitoringElement C4.1 Key indicatorsChapter 1. Reporting to the outside world1Chapter 2. Analysing accounts27Chapter 4. Accounting within the organisation63Chapter 7. Project analysis119Chapter 10. Financing185Chapter 12 Risk and risk management235xi

Prelims/The Finance Manual28/6/02 11:57 amPage xiiT H E M C I M I D D L E A N D S E N I O R M A N A G E M E N T S TA N D A R D SElement C4.2 Performance reviewChapter 8. Organisational control139Element C4.3 Future performanceChapter 8. Organisational control139Chapter 12. Risk and risk management235Element A2.2 Organisational structuresChapter 8. Organisational control139Chapter 9. Corporate taxation151Chapter 10. Financing185Appendix A. Financial controls –who, where, when and how257Element A2.5 Financial resourcesUnit A3Chapter 2. Analysing accounts27Chapter 4. Accounting within the organisation63Chapter 7. Project analysis119Chapter 10. Financing185Chapter 12. Risk and risk management235Appendix B. Some numerical tools269StakeholdersElement A3.1 Stakeholders’ interestsChapter 1. Reporting to the outside worldChapter 2. Analysing accounts127Chapter 11. Acquisitions211Appendix C. The Greenbury report285Element A3.2 Stakeholders’ impactChapter 1. Reporting to the outside worldChapter 2. Analysing accountsxii127Chapter 11. Acquisitions211Appendix C. The Greenbury report285

Prelims/The Finance Manual28/6/02 11:57 amPage xiiiT H E M C I M I D D L E A N D S E N I O R M A N A G E M E N T S TA N D A R D SUnit B1Setting the strategy and gaining commitmentElement B1.2 Objectives and strategiesChapter 2. Analysing accountsChapter 4. Accounting within the organisationChapter 7. Project analysisChapter 10. FinancingChapter 12. Risk and risk managementAppendix B. Some numerical tools2763119185235269Unit D1Evaluating and improving performanceElement D1.1 Measures and criteriaChapter 1. Reporting to the outside worldChapter 2. Analysing accountsChapter 4. Accounting within the organisationChapter 12 Risk and risk management12763235xiii

Prelims/The Finance Manual28/6/02 11:57 amPage xivAcknowledgementThanks to Steve Morris of the Burton Morris Consultancy for his initial support andencouragement.xiv

Prelims/The Finance Manual28/6/02 11:57 amPage xvKey to margin symbols!Key thoughts for the section Example / case study Checklist An exerciseA reference to another relevantsection of the bookA book referencexv

Prelims/The Finance Manual28/6/02 11:57 amPage xviThis book is aimed at giving the non-financial manager an insight into thecomplexities of finance, business law, and best practice. We have tried to simplifyand clarify the issues and present them in a concise fashion to allow the manager ina non-finance discipline a general understanding of the more important and mostcommon issues which may be encountered but neither the accuracy nor thecompleteness of the information contained can be guaranteed.This book aims to provide general information only – it cannot deal with allpossible issues which may arise in any particular situation and should not be reliedupon by managers in making financial decisions. It is sold with the understandingthat neither the authors nor the publishers are engaged in rendering legal,investment or other professional advice. If assistance is required the reader shouldseek expert professional advice.No responsibility for any loss resulting from actions taken or refrained fromacting as a result of any part of this publication will be accepted by the authors orthe publisher.

Chap1/The Finance Manual.128/6/02 11:48 amPage 1CHAPTER ONEReporting to theoutside worldnCompany backgroundnThe frameworknThe reportnThe financial statementsnThe profit and loss accountnThe balance sheetnThe cash flow statementnPublished accounts and the stock marketCompany backgroundIn this chapter we will look at the financial interface of a company with the outsideworld, which is its reporting of financial results.These are typically referred to as ‘annual reports’, with listed companies filinginterim half-year reports as well. Companies’ annual reports are prepared to the end ofthat company’s financial year, which is not necessarily either the calendar year or theApril to March ‘fiscal’ year.To understand the context of this reporting we must explore some of thebackground and history, since it is easy today to take the concepts entirely for granted.The term ‘company’ is now used to describe a company registered under the1

Chap1/The Finance Manual.128/6/02 11:48 amPage 2THE FINANCE MANUAL FOR NON-FINANCIAL MANAGERSCompanies Act. Today’s Companies Acts, revised and updated by Parliament, continueto refine the laws relating to companies. The fundamental principles that follow from incorporation and registration of a limitedcompany, are that:nthe company has its own distinct legal existence, separate from that of its owners,andnthe owners are protected by the concept of limited liability, which means that in theevent of the company failing, they stand to lose only their investment in thatcompany, and not any other assets which they may own.Historically, the first Companies Act allowed business people to create companiesinstead of trading as a sole trader or partnership, with the benefits mentioned above.In the landmark case of Salomon vs. Salomon Ltd 1897, the courts upheld the legaldistinction between the company Salomon Ltd and Mr Salomon, confirming theseparate legal existence of the Limited Company.Additionally, the concept of shares and shareholders allowed stakes in suchcompanies to be traded freely between individuals.The quid pro quo for these commercial benefits was the stipulation of certain requirements and restrictions on the company in the form of: registration with CompaniesHouse, the maintenance at Companies House of up-to-date records, including particulars of directors, and the filing of annual reports of the financial affairs of the business.Probably designed originally simply to protect existing and potential shareholdersand creditors of the company, the law and best practice has since shifted to recognisethe concept of a stakeholder in a company. A stakeholder is defined as someone with an interest or stake in the future of thecompany, and includes the following:nshareholders – these can be private individuals, other companies, pension funds orother financial institutionsncreditors of the company (those to whom the company owes money)nthose trading significantly with the companynemployees of the companynthe public at large.2

Chap1/The Finance Manual.128/6/02 11:48 amPage 3REPORTING TO THE OUTSIDE WORLD!With the growth in size of companies to the point where some of today’s companiesare substantially larger and arguably more powerful than many smaller nations, therehas been a discernible shift toward more open management of companies. This isgenerally referred to as corporate governance.A marked increase in the amount of information required in the annual reports, mainlyof listed companies, has been one result of this trend. Increased legal responsibility ofcompany directors has been another (see pages 146–147).So all companies have the requirement to make annual returns to Companies Houseand to circulate these to shareholders. This book will assume that you work for a ‘listed’UK company, but much of the information will be useful if you work in a privatecompany. Most listed companies recognise that the annual report is not just a routinefiling of financial information, but also the opportunity to inform shareholders ofgeneral information about the company’s affairs and prospects, and so to increase the‘feel-good’ factor among private shareholders.!Increasingly, the best corporate practice is to disseminate at least a summary of theannual report to all the employees of the company. Do you have a copy of your company’s annual report? If not, do obtain one; as we workthrough this section it will be very useful to refer to your organisation’s report. If you havea copy but don’t understand it, you’ve bought the right book. The fun starts here!3

Chap1/The Finance Manual.128/6/02 11:48 amPage 4THE FINANCE MANUAL FOR NON-FINANCIAL MANAGERSThe frameworkThe contents of the annual report follow a pre-set pattern that is similar for allcompanies. This is not a coincidence. The contents of the annual report are prescribedin some detail in the Companies Acts. The acts set out the requirements for directors’reports, which must include a fair review of the company’s activities throughout theyear and of its position at the year end. Additionally, detailed formats are provided forthe financial information which must be supplied.Further detail as to the preparation of company accounts in general, and the annualreport, are included in FRSs, or Financial Reporting Standards (previously SSAPs,Standard Statements of Accounting Practice). These are developed and issued by theASB (Accounting Standards Board) and cover areas which are developing, or whichrequire additional clarification and standardisation within the profession in order toensure that the accounting treatment of certain areas is consistent between companies.The ASB has been authorised by the Secretary of State for the purpose of issuing suchstandards, and these statements become ‘Accounting Standards’ as referred to in theCompanies Acts. There is generally substantial consultation within the accountancyprofession before a new standard is issued.The combined effect of the legislation, the standards and current best practice is, ofcourse, enormously detailed, and way beyond the scope of this book. In the sections thatfollow, we will be describing the basic principles of reporting to the outside world, whichtakes place in the annual report.Directors are responsibleAlthough in practice non-financial managers and directors leave the preparation andfiling of financial reports to their finance directors, if you are a director you have a dutyto ensure that appropriate accounting records are maintained, prepared and submitted.As a director you cannot leave or delegate this responsibility to your Finance Director,you are jointly liable. If you are a director, I can recommend the Coopers & Lybrandpublication Being a Director as an excellent ‘user friendly’ guide to the responsibilities ofthe post.!If you’re a senior manager, particularly in a smaller company, ask yourself ‘Do I act as adirector?’ If so, the law might treat you as one! Consider taking professional advice.4

Chap1/The Finance Manual.128/6/02 11:48 amPage 5REPORTING TO THE OUTSIDE WORLDThe reportHaving discussed the framework which stipulates the contents of the report, let’s lookat the report itself. Every report will contain:na directors’ reportna statement by the auditorsnthe financial statements.We will take a brief look at the first two before examining the financial statements inmore depth.Read through the annual report and accounts of your company – you’ll find thereport of the chairman/directors contains a full review of the year and some descriptionof the current position and outlook. There’ll be a section on directors’ contracts,corporate governance, and dissemination of the report to employees. All this information is required.!Often companies add to the reports in order to produce a document that will impresspotential investors and/or customers, but you’ll find that much of the content ismandatory.The picture of the chairman smiling confidently in front of his newest most glamorousproduct will also feature in your company’s report. This isn’t mandatory, but might aswell be!There will also be a report of the auditors saying that ‘in our opinion the accountsgive a true and fair view’. There is currently an interesting debate on the role of auditors,and the extent of their liability when they miss something. In an entirely unconnecteddevelopment(!), some of the big audit firms either have, or are considering, moving tolimited liability companies from their current status as unlimited liability partnerships.In the real world, an audit can never check the validity of every transaction in everypart of the largest companies, and hence the terms used in the auditor’s report:‘reasonable assurance’ and ‘material mis-statement’. The audit can only ever provide ahigh-level review of the company’s policies and controls together with more detailedspot-check reviews of new and/or more critical operations. Indeed the responsibility formanaging internal controls remains with the directors.5

Chap1/The Finance Manual.128/6/02 11:48 amPage 6THE FINANCE MANUAL FOR NON-FINANCIAL MANAGERSThe financial statementsLet’s now move on to look at the financial statements of the company. These are brokendown into three main statements as follows:nprofit and loss accountnbalance sheetsncash flow statement.profit and loss/cash flow(Year 1)balancesheetMost large companies are now actually groups of companies, and their glossy annualreport will cover the ‘top’ company, or ultimate holding company of the group.The profit and loss account and cash flow statement will be for the group as a whole,while the balance sheet is provided for the consolidated group and for the holdingcompany alone. For the purposes of this description I will ignore the holding companybalance sheet, and concentrate on the consolidated statements.The first thing to note is that the profit and loss and cash flow will state ‘for the yearended ’, while the balance sheet will state ‘as at (the year end)’.Profits and cash are earned throughout the year, whereas the balance sheet is asnapshot at the point in time which is the year end.profit and loss/cash flow(Year 2)Consolidation (group accounts)Note that a ‘group’ of companies will probably include some companies which are notwholly owned. The method of consolidation of these companies depends on whetherthey are managed or controlled by the group.The basic test here is whether the ownership and/or control is over 50 per cent. Thestandards are actually quite complicated in this area, and are full of anti-avoidancemeasures. What follows is, therefore, a simplification.6

Chap1/The Finance Manual.128/6/02 11:48 amPage 7REPORTING TO THE OUTSIDE WORLD The basics are as follows:nSubsidiary – when a group owns a majority of the rights of another company, orexercises dominant control, the company is deemed to be a subsidiary of the group.Normally if 50 per cent of the shares of the company is owned by another company,the former is a ‘subsidiary’ of the latter.nAssociate – when a group owns a participating interest with a significant influence,the company is an associate. Normally if 20–50 per cent of the shares of a companyis owned by another company, the former is an ‘associate’.nInvestment – at less than 20 per cent of shares, the holding would be treated simplyas an investment.In the case of associates and investments, consolidation is simply shown by recordingthe group’s share of profits and assets as ‘one-liners’ on the profit and loss account andbalance sheet.Subsidiaries are dealt with by including the whole of the subsidiary’s results in thegroup accounts, and then excluding the minority interests separately.ExampleFor example, the results for a simple parent company with one 75 per cent ownedsubsidiary would be as follows:SalesProfitless minority interestsParentSubsidiary 100 100 100 100Total Group profit!Group 200 200(25) 175NOTE: sales and profits are shown gross, with the profits due to minority shareholdersshown near the bottom of the profit and loss account.Now let’s consider the shape and content of annual reports, starting with the profit andloss account.7

Chap1/The Finance Manual.128/6/02 11:48 amPage 8THE FINANCE MANUAL FOR NON-FINANCIAL MANAGERSThe profit and loss accountConceptually the most readily understood, the profit and loss is the statement of profitsor losses in the year, or other stated period. The layout is prescribed in FRS3.Profit is the surplus of revenue over costs attributable for that period. It is not cashflow. Profit can and often is earned despite strongly negative cash flow, particularly infast-growing companies.The treatment of stocks (or inventories) and capital investments can illustrate thegeneration of profit data. Example: StocksA company sells 50 pieces of machinery, but has manufactured 100 in the year.Costs 100 units @ 500 eachSales 50 units @ 750 eachTotal (50,000)Total 37,500So the cash impact on the trading company is 50,000 out and only 37,500 in, or a cashoutflow of 12,500. What is the profit?At the end of the year the company still has 50 units of stock in hand, and may evenhave orders for delivery in the following year, so it has an asset worth at least thereplacement cost of the units, or 25,000.The accounting profit for the period would be developed by looking at the salesfigures, and then deducting the cost of those sales. This is known as matching, and wouldbe as follows:!Sales 50 units @ 750 eachCost of sales 50 units @ 500 each 37,500(25,000)Profit for the period 12,500NOTE: the difference between the cash outflow (top) of 12,500 and the profit of 12,500 is 25,000, which just happens to be the replacement value of the stocks at theyear end. Look at your own company’s accounts and find the note that is called ‘reconciliation of trading profit to cash flow’. Find the line that reads ‘increase/decrease instocks’.8

Chap1/The Finance Manual.128/6/02 11:48 amPage 9REPORTING TO THE OUTSIDE WORLD Example: Capital Investment and depreciationA company purchases a capital asset for 1 million with an estimated useful life of 10years. In pure cash terms, it is down 1 million assuming outright purchase (i.e. notleased). What is the effect on profits?As you might expect, there is a technique to ‘spread’ the cost of the asset, or, to bemore accurate, to spread the charge to the profit and loss account, over the useful lifeof the asset. In that way you might think that you would take the cost of the asset,divide it by its useful life to give an annual amount, and charge this against each year’sprofits. This is called depreciation. There are two main kinds: ‘straight line’ depreciationwhich is very common, and ‘declining balance’ where a percentage of the remainingvalue is charged.What is your company’s depreciation policy? Look at your company’s annual reportfor the answer. Try note 1, accounting policies if you’re stuck.For an asset with a three-year life, the charges would be as follows (declining balanceassumes 50 per cent write off):Straight lineDeclining balancePurchase 300,000 300,000Year 1(100,000)(150,000)Year 2(100,000)(75,000)Year 3 (final)(100,000)(75,000)Which method is ‘right’ or ‘wrong’ depends very much on the type of asset, the industrysector, whether there is a residual or scrap value at the end of the period, and on othervariables. Other depreciation techniques also exist, but you’ll find these two are themost common. You can see why you might want to depreciate different assets different ways by considering the causes of depreciation:nObsolescence. Your company may have a substantial amount of high-techequipment. This may have many years of working life left in it, but if new equipmentcomes out which works better, or can do more, the company will have to replace itsold equipment in order to stay competitive. Companies in the media, for example, areconstantly having to purchase new technology because of the rapid pace of improvements.9

Chap1/The Finance Manual.128/6/02 11:48 amPage 10THE FINANCE MANUAL FOR NON-FINANCIAL MANAGERSnWear and tear. Assets wear out when they are used, but are also affected by theenvironment. Equipment located in harsh conditions overseas may well wear outfaster than equipment at home.nCopyrights, patents and leases are all assets, but they have a fixed life which isset either by law or by contract. This makes their remaining life predictable. This kindof depreciation is called ‘amortisation’.nGrowth. If a company increases in size, some of its assets may no longer be useful.Suppose it operates ski-lifts in a resort which suddenly becomes popular – it willhave to install new, improved ski-lifts which can carry more people and, perhaps, aremore comfortable. The old ski-lifts may have to be scrapped if the company can’t finda buyer for them.Here are two important points about depreciation:1Depreciation looks as if it is just a paper transaction. You don’t actually pay outcash when you depreciate, although it reduces the profit figure. One day, though,the company’s machines and other fixed assets are going to wear out and will haveto be replaced. At that point, the company will have to pay out for new machines,so if it hasn’t prepared itself by depreciating, it will have an unpleasant surprise.2This might lead you to think that it is sensible to depreciate assets as quickly aspossible – that way, the assets will have years of useful life left in them after theyhave been depreciated to nothing. The trouble with this

The Finance Manual for Non-Financial Managers Prelims/The Finance Manual 28/6/02 11:57 am Page i. The Institute of Management (IM) is at the forefront of management development and best management practice. The Institute embraces all l

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