Burton S. Kaliski

The Basic Skills

This chapter focuses on the number system. The number system is a decimal system because it is based on 10. Any number can be written using the proper choice and combination of 10 symbols—0 through 9. The decimal system is a place value system. This means that the value of each digit depends in part on its position within the number. On moving to the left in a decimal number, each place is worth 10 times the previous place; on moving to the right, each place is worth one-tenth of the previous place. A rounding variation that is found in other studies is the computer rule, which can avoid errors in rounding large series of numbers. By means of this rule, some numbers may become larger while others become smaller. The correct alignment of numbers around the decimal point is essential in successful addition. To accomplish this, the numbers must be put in a column by lining up the decimal points and by filling in zeroes for any numbers with fewer decimal digits than the longest number.

Base, Rate, and Percentage

This chapter discusses the base, rate, and percentage problems, which are basic to business mathematics. Mathematical techniques are used to solve specific types of business problems. Every base, rate, or percentage problem gives two of the three factors. A rate of increase or decrease is the difference between two numbers divided by one of them. Generally, the base is preceded by the words “part of” or “of.” The rate is easily recognized as it includes a percent sign. The percentage is the number that is related to the base by the rate. In comparing the data from two different time periods, the earlier period is always the base.

Accumulation of Funds

This chapter discusses the accumulation of funds. Individuals and businesses need to put aside money for the future. An individual may want a sufficient retirement income or money for a childs college education. A business may want a new building or need to repay a large bond issue. In either case, it is desirable that any money put aside for such purposes should be used to earn interest—but not simple interest. The best interest is the compound interest. If interest earned on the original principal at the end of one time period is added to that principal, then the interest earned during the next time period will be based on a compound or combined figure. While the simple interest is earned on the principal only, the compound interest is an interest paid on both the principal and past interest. The principles of the annuity cover retirement pensions. Many employees have a retirement plan at work in which equal amounts are withheld from each paycheck and are deposited in a fund earning compound interest.

8 - Simple Interest and Bank Discount

This chapter discusses simple interest and bank accounts. As rent is paid for the use of property and a salary is paid for the use of a persons services, interest is paid for the use of someones money. The amount of money borrowed is the principal. Interest paid only on the principal is simple interest. The simple interest is charged on overdue customer accounts and on loans to business firms or between individuals. The bank discount is used for personal bank loans and for loans given in exchange for notes endorsed by a business firm to a bank. The period of time for which the bank discount is charged is the term of discount. It runs from the date of discount until the date of maturity, which is the time during which a banks money is on loan. The bank discount is based on the maturity value of a promissory note, the rate of discount, and the term of discount. These factors correspond to the principal, rate, and time in simple interest problems. If a note is noninterest-bearing, the maturity value is the same as the face of the note.

Bonds and Other Investments

This chapter describes a bond as a long-term obligation of a corporation or government, given in return for a loan of money by the investor. The investor is paid interest during the term of the bond, and at the end of the term, the loan is repaid. Mutual funds, real estate, life insurance, or savings certificates can be used as investments. Investing in bonds differs from investing in stocks. The bondholder seeks a regular income from the interest, while the stockholder seeks a gain on the sale of a rising stock, in addition to varying dividends. A bondholder is a creditor of a corporation and is paid, in the event of the corporations failure, before the stockholder. The terms yield and effective rate are similar in all types of investment. It is the effective rate that the investor must consider when comparing investment choices.

Depreciation, Other Expenses, and Business Profits

Publisher Summary Payroll and insurance are the major areas of business expenses. Depreciation is important because of its detailed mathematics. Expenses have their ultimate effect on a companys net profit or loss, that is, in determining whether a company survives or fails. A business firm owns many types of property or assets. Some assets are classified as tangible, that is, they are capable of being touched. Buildings, equipment, furniture, fixtures, and cars are tangible assets. Tangible assets are considered to have lives of their own, that is, they age. As they age, their value decreases. Accumulated depreciation is the total depreciation on an asset from its purchase to the time in question. To calculate depreciation, it is necessary to determine cost, life, and, in most cases, the salvage value. The simplest approach is to assume equal depreciation for every year, which is the straight-line method. A variation on the units-of-production method is the machine-hours method, in which depreciation is determined by the number of hours that a machine is expected to run.

11 – Corporation Stocks

Publisher Summary This chapter discusses the various types of corporation stocks. Some corporations issue a single class of stock—called common stock. Other corporations issue two classes: (1) common and (2) preferred. The preferred stock has a number of advantages when compared to the common stock: it comes first in distributions of profit, it is even guaranteed a profit distribution in certain instances, and it is redeemed first if the corporation is dissolved. The holders of common stock have the voting power. The charter specifies the maximum, or authorized, number of shares that a corporation can sell. As a share is sold, it is said to be issued. Stock is either par or no-par. The preferred stock is guaranteed a distribution of profits. If a year passes in which the board of directors decides not to distribute any profits, the cumulative preferred stock has the right to the unpaid past dividends in the next year. The noncumulative preferred stock does not have this right, and the common stock never has the cumulative right. Corporation profits distributed to stockholders are known as dividends. To compute the dividends earned by a class or a share of stock, it is necessary to know what kinds of stock have been issued, with what rights, and in what amounts.

10 – Consumer Credit

Publisher Summary This chapter discusses consumer credit. For a long time, consumers who bought on the installing plan or the instalment plan or who used credit cards or charge accounts were unable to obtain accurate information about the interest charges from their creditors. An average daily balance of a charge account is calculated by multiplying each balance by the number of days it was maintained. Instalment buying is an important feature of the economy. A person who cannot afford the price of an item can buy now and pay later. In this type of purchase, the buyer gets the use of the item. In retail instalment sales, the finance charge can be found before the monthly payment is computed. In actuarial loans, the finance charge is found after computing the monthly payment.

14 – Analytical Procedures

Publisher Summary This chapter describes vertical analysis as the process of determining what percent of a total is represented by each individual amount. In the vertical analysis of assets on a balance sheet, each individual asset will be the percentage, while total assets will be the base. Horizontal analysis denotes the comparison of two years. This is done for either comparative percents on the same item each year or for the rate of change from one year to the next. A third procedure for analyzing financial statements is to determine the ratios between various individual items on the statements and to then compare these with standard ratios. The purpose of the current ratio is to see if the assets in the current period would be enough to pay the liabilities due in the current period. The inventory turnover ratio is another good measure. It is the ratio of the goods sold during a period to the average inventory held during the period.

13 – Summary Techniques

Publisher Summary A summary is the gathering of related bits of information into a meaningful form. One of the jobs of the accountant and the statistician is to provide the business with such summaries. A financial statement is a formal document summarizing the results of a business activity. This chapter discusses the two types of financial statements: (1) the balance sheet and (2) the income statement. The balance sheet lists the assets, liabilities, and capital of a firm as of a specific date. The income statement shows the results of the operations for the period just ended. An asset is any property owned by a firm that has money value. One type of asset is cash—bills, coins, money orders, and checks. If a firm is the payee on a note, it will have the asset notes receivable. A firm selling on credit would show the claims against its customers as the asset accounts receivable. The goods in a firms stockroom are its inventory. Supplies are also assets. Services paid for in advance are called prepaid expenses.