Mark P. Holtzman

Article / Updated 09-15-2022

Financial statement fraud, commonly referred to as "cooking the books," involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices. These red flags include the following: Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered Unusually high revenues and low expenses at period end that can't be attributed to seasonality Growth in inventory that doesn't match growth in sales Improper capitalization of expenses in excess of industry norms Reported earnings that are positive and growing but operating cash flow that's declining Growth in revenues that's far greater than growth in other companies in the same industry or peer group Gross margin or operating margins out of line with peer companies Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages Unusual increases in the book value of assets, such as inventory and receivables Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction Invoices that go unrecorded in the company's financial books Loans to executives or other related parties that are written off A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.

Cheat Sheet / Updated 02-22-2022

Managerial accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand managerial-accounting terms. When planning for the future, they follow a master budgeting process. To prepare this budget, and to understand how costs behave, the decision-makers should understand cost-volume-profit relationships, which explain how changes in volume or price affect profits.

Article / Updated 06-01-2017

The Limited Liability Company or LLC is an alternative type of business entity. A Limited Liability Company or LLC is like a corporation regarding limited liability, and it’s like a partnership regarding the flexibility of dividing profit among the owners. An LLC can elect to be treated either as a partnership or as a corporation for federal income tax purposes. Consult a tax expert if you’re facing this choice. The key advantage of the Limited Liability Company (LLC) legal form is its flexibility, especially regarding how profit and management authority are determined. For example, an LLC permits the founders of the business to put up, say, only 10 or 20 percent of the money to start a business venture but to keep all management authority in their hands. The other investors share in profit but not necessarily in proportion to their invested capital. LLCs have a lot more flexibility than corporations, but this flexibility can have a downside. The owners must enter into a very detailed agreement that spells out the division of profit, the division of management authority and responsibility, their rights to withdraw capital, and their responsibilities to contribute new capital as needed. These schemes can get very complicated and difficult to understand, and they may end up requiring a lawyer to untangle them. If the legal structure of an LLC is too complicated and too far off the beaten path, the business may have difficulty explaining itself to a lender when applying for a loan, and it may have difficulty convincing new shareholders to put capital into the business.

Step by Step / Updated 03-27-2016

A scattergraph helps you visualize the relationship between activity level and total cost. To scattergraph, just follow these steps (with explanations for creating the scattergraph in Microsoft Excel):

Step by Step / Updated 03-27-2016

Factories and other companies typically must pay costs that include variable and fixed components, challenging accountants to figure out which camp these costs belong in. These mixed costs typically change with the level of activity, but not proportionately. Therefore, in order to predict cost behavior, you need to split mixed costs into variable and fixed components. Analyzing accounts is the common sense method.

Step by Step / Updated 03-27-2016

A wide variety of factors can cause overhead to increase. To gain a better understanding of these factors, managerial accountants use activity-based costing. The assumption that the more direct labor your employees work, the more overhead your company incurs made sense in the days before automation, but today completely automated factories operate with little or no direct labor. Activity-based costing gets around the problem of automated factories that use very little direct labor. It also provides you with valuable insights into how costs behave and can help you reduce the costs and get the manufacturing process to flow more smoothly. Here are the steps of activity-based costing:

Step by Step / Updated 03-27-2016

Information about product cost helps managers to set and adjust prices and to decide how to best utilize limited production capacity. Here you use only two credit accounts: Accounts payable (which are moneys owed to suppliers), and Wages payable (moneys owed to employees). To increase one of these credit accounts, credit it to the right. To decrease it, debit it to the left. Here’s the premise of the example you're about to walk through: fictional National Snow Globe Corp. manufactures custom souvenir snow globes for tourist gift shops. The company makes snow globes in large batches. Each globe features a unique three-dimensional image inside, a custom logo, and one of four different grades of snow.

Step by Step / Updated 03-27-2016

Responsibility centers are identifiable segments within a company for which individual managers have accepted authority and accountability. Responsibility centers define exactly what assets and activities each manager is responsible for. How to classify any given department depends on which aspects of the business the department has authority over. Managers prepare a responsibility report to evaluate the performance of each responsibility center. This report compares the responsibility center’s budgeted performance with its actual performance, measuring and interpreting individual variances. Responsibility reports should include only controllable costs so that managers are not held accountable for activities they have no control over. Using a flexible budget is helpful for preparing a responsibility report.

Step by Step / Updated 03-27-2016

Managers often want to know how much they need to sell in order to break even or in order to earn a target level of profit. To get this information, managers derive something called a break-even point (BE) — the amount of sales necessary to earn zero profit. Why bother? Because knowing the break-even point helps you set sales targets. To figure out the break-even point when you make and sell more than one product, follow these steps:

Article / Updated 03-26-2016

In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in managerial accounting: Direct cost: Cost that you can trace to a specific product Indirect cost: Cost that you can't easily trace to a specific product Materials: Physical things you need to make products Labor: Work needed to make products Overhead: Indirect materials, indirect labor, and other miscellaneous costs needed to make products Variable costs: Costs that change in direct proportion with activity level Fixed costs: Costs that don't change with activity level Mixed costs: Combination of fixed and variable costs Contribution margin: Sales less variable costs Product costs: Costs needed to make goods; considered part of inventory until sold Period costs: Costs not needed to make goods; recorded as expenses when incurred Work-in-process cost: How much you paid for goods that are started but not yet completed Finished goods cost: How much you paid for goods completed but not yet sold Cost of goods manufactured: The cost of the goods completed during a period Cost of goods sold: The cost of making goods that you sold Controllable costs: Costs that you can change Noncontrollable costs: Costs that you can't change Conversion costs: Direct labor and overhead Incremental costs: Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs Irrelevant costs: Costs that don't change depending on which alternative you choose Opportunity costs: Costs of income lost because you chose a different alternative Sunk costs: Costs you've already paid or committed to paying Historical cost: How much you originally paid for something Cost per unit: Cost of a single unit of product Expense: Costs deducted from revenues on the income statement Cost driver: Factor thought to affect costs Process cost: Cost of similar goods made in large quantities on an assembly line Job order cost: Cost of a batch of specially made goods Absorption cost: Cost that includes fixed and variable product costs Target cost: Cost goal set for engineers designing a product