This morning the e mailbag contained a good question.  A cost student questions why we have  a third costing system in ABC when we studied variable and absorption in the previous chapter.  Here’s the answer.

ABC is NOT an alternative to absorption or variable.  Those two methods address whether we expense all fixed costs (variable) or carry some forward as assets to the next period (absorption).  These result in different presentations on the income statement  and balance sheet, remember the discussion between Sean and Mary?  ABC does not result in different presentations on the financial statements. 

ABC reflects the change in the American economy from manufacturing to service.  A manufacturing environment tracks costs in the traditional direct labor, direct material, mfg OH cost pools.  But for companies like UPS or Fed Ex or a real estate firm or a bank, this makes no sense as there is no direct material cost.  So a different method of looking at labor was invented where we classify costs bg activities rather than DL DM MOH.  Recall the problem about the bank tellers and the two officers. The activities were making deposits, opening accounts, etc. 

Okay think about an accounting firm or a radio station.  What is the product?  Service, and we would need to track the activities of the participants to divide up their work day.  Eliminating non value added activities, the dictum of JIT, would result in spending time on more profitable pursuits.  This is why we want to avoid multiple set ups, they don’t produce anything. 

Is anyone doing this or is this just another academic concept?  Well here is a page from the
Comptorller of the Defense Department  no less explaining how to implement an ABC system.

DLE

An old saying has it that if it sounds too good to be true, it probably isn’t.  This is particularly true of returns that are much higher than normal. If T Note are returning say 4.75% as they are now, one should be wary of an investment trust returning say 13%. That has been the case for Canadian Petroleum Income Trusts .  Oil trusts like real investment trusts REITs (Real Estate Investment Trusts) pay out 90% of their earnings and therefore no income tax to the government. The recipient of the dividend pays all the tax.  The government of course does not necessarily see it that way, click on the hyper link.  They want the money first, leaving less for the dividend recipient.  Here’s Bloomberg’s report on it.   C$19 billion in trust capitalization was wiped out just today.  The TSX index lost 2.4% of its value.  One observer noted that billions will be lost in capitalization due to the government losing C$300 M in tax revenue.

Click on the image at left to see what a one day 15% loss in a stock looks like.  Now using your accounting knowledge, how would you assess how much this cost the stockholders of CNE?  Hint,look at the drop in market capitalization. 

Another goal of a university education is to stimulate critical thinking on your part.

Okay, was this good for the trust business in Canada?
After promising to leave trusts alone, did this inspire confidence in the Canadian capital markets outside Canada, ie, if you were a foreign investor that held such shares, how would you feel?
Does government intervention in capital markets matter?  (hint does $19 billion loss in one day matter)
How might the government have handled this differently even if they were going to impose taxes so as to not have a large one day collapse in prices generally or in trust prices specifically?

I expect multiple responses to this post as this really gets to the heart of numerous issues, accounting values, tax policy, govt intervention, ownership of private versus public assets, etc.

DLE

Or of course we can discuss this on  a pop quiz in all classes this next week……
What is a real esatate investment trust, can you use one of the glossaries in Helpful Websites to find out?   Try this link.

Decades ago when I was sitting where you are, the profs would put articles from academic and workplace journals on reserve in the library for us to read.  Frankly I never got it, they were boring and dreary seemingly never making a point.  I am seeking to do just the opposite with you by pointing out things that are interesting to read that actually relate to what we do in class.

With that in mind this afternoon Tues 10/31/06 I am putting last Wed and Thursday’s WSJ on reserve in the library. If you are subscribing, here are the articles of interest, page number first

Wednesday Oct 25 2006

A1    The study of forensic accounting is exploding, this article about thieves counterfeiting bar codes explains why and how.
A14    Mercenaries are as old as war itself; Gov Schwarzenegger led a group of them in the movie  Predator.  A write suggests on page A14 that may be the best way to solve the genocide in Africa.  The idea of the French Foreign Legion was also along these lines, hire someone else to fight so the French don’t have to.
B1    Still made in America, Viking stoves in dirt poor Mississippi churns out high end kitchen appliances. The secret is the Dell method of make no product until it is ordered, keeping inventories to a minimum and following the JIT dictum.  Interesting, this company just started in the 1980s. Here is another example along the lines of Legend Aircraft on the blog, can you think of a product  for which there is a ready market? Note many of these are high end products.
D1    Companies are buying iPods for their employees.  It tuns out podcasts lower training costs and make it easier for employees to learn new methods.  Again, here is cost accounting at work, lowering the cost of Dr. Deming’s training. It also makes it easier on the employee life style to listen when they can instead of attending day long seminars away from home.
D3   Big Brother is snooping around again with iLike, a program that identifies what music you prefer so your friends can tune in.  Remember the post about data mining and how Amazon is using such techniques to identify which products you might buy next, here is another variation.

Thursday October 26, 2006

A2    Clear Channel com templates a buyout, here is the perfect example of how the ratios and concepts of debt to equity we study in class play out in a real world scenario.  Also factor in the home grown Mays group that does not want someone else messing with what they see as their company, will this deal make?
C3    Here is a tombstone ad, notice how it looks like a tombstone?  What does it tell you , who underwrote the deal?  The underwriting business is now dominated by a few large firms alike in the 1970s when there were many more small firms.
D3    A survey indicates that donors would give more if they thought charities did a better job of controlling administrative costs.  We are studying just that in cost accounting in chapter 9 about budgets. Here is another growing demand for accounting expertise-could you help a non profit reign in its costs?  How would you tackle the project?

Friday October 27, 2006

B1    Bill Ford discovers globalization, will this work for Ford, where has he been the last ten years anyway?

W1 A female writer takes a ride in a ‘soccer mom’ $250K Ferrari, designed for women in skirts.  Question, who ever saw a mom at a soccer game in a skirt?  It is a cleverly written piece but what caught my eye was the table later in the article.  Turns out the buyers of such exotica own multiple cars like this.  And she reveals the clever marketing strategy of making a limited supply of cars keeping the cachet of the brand alive, as well as the prices of the older vehicles. A fun read and evidence the market for high end products is alive and well.

DLE

PS I highlighted the titles of the articles for you so they are easily found.

"Things have gone global almost overnight."

Bill Ford,  WSJ Page B1 10/27/06 on the occasion of visiting China to expand Ford production into Asia.

Gee Bill, no wonder you aren’t running the company any more.  I have suggested that some of you review Investment Biker and Adventure Capitalist by Jim Rogers.  Touted as the Indiana Jones of Finance, Jim toured the world by motorcycle in the early 1990s commenting on globalization and then again at the millenium to update his earlier predictions.  Click on the hyper link above to see his website and literally travel the world with Jim.  By studying in class you should be aware that globalization did not just happen overnight, maybe one of you should apply to help Ford out!

John Templeton pioneered global investing several decades earlier.

DLE

The Sunday DMN Business Section details that  Plano Investor Craig Hall has taken  a position of 8.23 M shares in RSH.  I checked and sure enough from its 2000 high of $75 it has fallen to $15, up to $20 and now back to $17.67.  The stock tumbled that $2.50 or so on an unexpected third quarter loss.  Halll’
s comment  was that he was surprised anyone was surprised. After all it is in  the interest of the new CEO, Julian Day, to get all the bad news out of the way early on.  In the Fin Statement Analysis class this is referred to as the Big Bath. The idea is that new management writes off every conceivable thing that could possibly go wrong or be written down as an impairment. Then the idea is that all the bad news is gone, earnings lie ahead. 

I taught Ethics this past spring. I used the example of RSH’s board firing the last President  for lying about his non existent diploma from what is now a Bible College based in Tulsa, OK.  In fact I believe we discussed that this semester. 

You can click on the monthly chart at left to get an idea of the enormity of the loss in share value the last few years.  The famous financier Amschel Rothschild  financed Britain’s war against Napoleon. When the outcome of Waterloo was unknown, Rothschild started selling shares of stock.  Everyone assumed Napoleon had won and also sold, the wrong shares it turns out.  At the market low, Rothschild bought  back the shares of British companies on the cheap.  It was perhaps this incident that prompted him to remark, One must buy when there is blood in the street-and there was plenty of just that at Waterloo.  Modern investors quote the famous financier usually forgetting that he really meant it, one buys during a war betting on the winner. 

Hall says that is what he did with AMR at $6 and now with RSH at $15.What do you think?  The stock is half what it was just a   few months back and 20% of its all time high.  Has RSH gone to the dogs that badly in a few years, or is this a diamond in the rough? 

And that my friends is precisely what a study of accounting teaches one-Warren Buffet has gotten rich by making just such judgments, so do we buy or sell, and at what price?

DLE

Sir Arthur Conan Doyle introduced a Victorian world to the the new ‘science of deductive reasoning then popularized at Scotland Yard. His character was the ever so famous to this day Sherlock Holmes, chemist and crime solver.  Holmes took particular pride in letting the Yard take credit for cases he had solved.  The character has been so popular that he has been played by numerous actors and remains a library staple today. 

Student Development and I have recommended several sources to aid in your successful job search and interview process.  What Color is Your Parachute and  How to Win Friends and Influence People should be at the top of the list as well as continued hints off MSN Careers.  I would add another suggestion to the list.

Try A Study in Scarlet .  It tells of how Dr. Watson came to meet Holmes, describes Holmes eccentricities, the science of deduction, a description of Holmes arch enemies, and an interesting mystery. It was published in 1887, and Doyle continued to write stories until 1925, an incredibly long fictional accomplishment. By the way, the second Holmes story, the Sign of Four, begins with Holmes administering himself a dose of cocaine.  I want to be on record as definitely opposing that sort of self destruction… So what does this have to do with our interview process?

I am attempting to heighten your sense of observation, inquiry, critical thinking , and supportable conclusion.  Perhaps you are being interviewed in the office of the recruiter, this would be far batter from your standpoint than an interview at the Career Center. Why?  Well there is a Sherlock Holmes question in itself.

The answer is that his or her office is likely to be complete with all sorts of clues as to their likes and dislikes, hobbies and interest, even their extent of a family. Photos, degrees, momentos, awards, souvenirs, all contribute to telling you who this person is.   The interview office at Career Services will not offer clues beyond the manner of dress and appearance of the interviewer which frankly is probably uniform throughout the company.  It requires a trained eye to rapidly  take in the details of an office and conclude what sort of person you are visiting.  But the results can be rewarding, the faster you connect with the interviewer, the better. And as Dale C observed,

You will make more friends in two months taking an interest in someone else than you will in two years trying to get them interested in you.

DLE

Media companies have been battered by the rapid change in technology.  I noted that NBC is radically cutting expenses.  Terrestrial radio is losing customers to iPod, satellite radio, and internet broadcasts.  So why is Mays Group  considering a buyout of Clear Channel?  CCU has hired Goldman Sachs as an adviser.  And trust me at GS rates they better do something!  Scuttlebutt has it that the current chairman Mays may attempt a leveraged buyout of CCU. The stock has run up as investors apprently think the deal will happen at a higher price.  But a Merrill analyst says this makes no sense.  Who is right?

I have noted that mergers and acquisitions are inclusive events that happen at market tops.  Thus Kinder Morgan, HCA, and other companies are being taken private by loading up on debt via junk bonds.  I noted in Gluttons as the Gate that some of these deals are crafted to return money immeditaely to the buyer, and worse, more debt is laid on to deny assets to other creditors if the company is forced into bankruptcy.  So what’s going on here, is Mays making a good business decision or thinking of a backdoor way to acquire more stations and not pay for them if the debt load proves too high. 

Click on this chart to see how the rumor of GS involvement affected the stock price. Note the big jump in volume at the bottom in the vertical bars. Remember it is volume that ultimately determines stock price direction.   Is it any wonder GS always has a former partner in a Presidential cabinet. Yes presidents come and go but Goldman is a forever presence providing both Clinton’s Sec of Tsy as well as Bush’s current one.

DLE

The last job that Ms. Fastow had at Enron was Art Collector, she had formerly been a tax preparer, and preparing false returns sent her to jail in downtown Houston for one year.  It is important to remember that for a public company, the statements are public!  Atmos Energy  was reminded of that this week as a public watchdog group growled and bit at some of their expenses.  Atmos symbol ATO is seeking a rate hike from the Public Utility Commission PUC that would raise home bills about $4 per month. The watchdog group decries $75,000 worth of artwork, expensive meals, and a trip to the Bush Inauguration as unnecessary. In fact they have proposed cutting expenses and therefore utility bills of customers. 

Read the article at the hyper link.  Could you use your knowledge of accounting to defend the company and get the rate hike?  Conversely, are these expenses so out of line as to deny Atmos the rate hike?  Which camp would you find yourself in?  You can bet that both camps have relied on folks with extensive accounting knowledge to examine the statements and make their case.

A tip of the bloggin hat to my better half, Christy pictured here with out late Shar Pei, Chocolate.  Christy brought Atmos and CCU to me attention. She was also instrumental in my including Final Accounting by Barb Toffler as required reading for the Audit Class. She also highly recommends The Smartest Guys in the Room, the Enron story which was made into a documentary, now available in video.

DLE

I am having trouble using the mail function of web ct today. For those of you in the Fin Statement Analysis class I have posted a Futures Toolbox on WEB CT. The outline contains a link to a good description of the Amsterdam stock exchange in the 1600s. Please read that. In addition there is a link to a glossary and a page of helpful wewbsites.  I will be going over this outline Tuesday evening

More on the syllabus later, I hope the e mail function will be better tomorrow as I cannot attach anything in the blog

DLE

Yes I am back at it again, preaching the importance of design.  Another objective of the blog is to get you to expand your dimension of what is possible. What with computer aided design CAD, it is much easier to go from concept to final product than ever before.  A case in point is the new design of an old favorite, the Piper Cub. 

Hart and Elliott were looking to purchase a do it yourself kit to buld such a plane. Told the wait was 18 months, they decided to improve on the original and do it themselves.  Mind you this is happenign in Sulphur Springs, TX. And the result is
Legend Aircraft.   They kept their day jobs and the airplane is featured in an article in the latest Forbes Life. 

So, see anything retro that you think could be improved on with a new design?   Could you design it and have it built and market it?   An understanding of accounting will help with our budget and knowing break even and target profit levels.

DLE

PS Did you see the special section on Restaurant Design in this Sunday DMN? Restaurants have become art deco in themselves, a treat for the eyes as well as the palette. This is a logical extension of luxury at the top of the market.  The  pairing of  celebrities with watches (Nicolas Cage and Montblanc have a joint commitment to social responsibility, buy a Timewalker  and they contribute to Heal the Bay) and causes, pairing autos with watches , and linking a place to eat with art itself, and suggesting that even Trump real estate is worthy for a statement of who one actually is or has become.  All of this is a rationalization for buying absurdly expensive goods in the name of social good.  At these prices folks have to feell they are doing more than just indulging them selves.  And so the markets accomodate that feeling of inclusion.

DLE