Tag Archives: Accounting

Lessons from a Masters In Business Administration: Accounting Is About Perception

Accounting Is About Perception: example, MLB calculation of profits and limiting tax liabilities. In this case study, a baseball team, the Montreal Expos has a dispute between players, and the owner about how profitable the club is in actual terms.

The argument for the players is that the owners are using accounting tricks to reduce their profit and then using those numbers to justify not paying the players as much as they are worth. The trick is that players are depreciated under the tax laws in Canada, and the US. When you buy a team, you can capitalize the value of your players ie you treat your players as assets on your balance sheet, rather than an expense, which is on the income statement. Therefore, if you buy a team for 100 million, and capitalize the value of players at 50 million, you can then charge a depreciation expense over six years. With salaries, this expense means you get a double expense. The problem is that the depreciation expense doesn’t make any sense since the team might have young talent that only improves over time, players don’t depreciate. So the players argue that the real expense is salary and that the owners are abusing the depreciation allowance to minimize their profits to then justify lower salaries.

ACCOUNTING is useless to some because it appears to be the art of manipulating numbers to fit whatever goal you had in mind. It is confusing and deceptive, and describes events long after they had happened. There were far more effective ways of examining a company’s health. Others believe that account is useful because it is a standard measure that allows us to compare companies with different performances. You will need to gain a critical eye in accounting to be successful in an MBA.

There are two major mantras of accounting. The foundation is the following:

Assets = Liabilities + Equity

&

Accounting = Economic Truth + Measurement error + Bias

Discovering economic truth is very difficult to do. The rules are the messy by-product of corporate and technological change, lawyers, lobbyists, politicians, and companies all scrapping for some advantage. If accounting ceases to reflect what is going on but instead becomes a game, it becomes worthless and destructive on a macro-level as demonstrated by the 2008-2011 Western Country Recessions.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Phil Knight | Accounting Is A Very Useful Skill | 1963

beat-the-cpa
Phil Knight’s family dynamic has changed upon his return; he finds that something has changed in him – it is not just his scruffy beard and castaway attire that causes his mother to thoughtfully call him ‘worldly’; there is a fundamental change in his spirit. Buddhism had captured him; be one with the path.

accounting-for-phil-knightHaving been betrayed by someone he thought was a business associate and having lost fifty dollars borrowed from his father for the purpose of getting a specific pair of shoes shipped, he comes to the realization that he is actually drifting in life without a sense of purpose. He brings this up with his father, who encourages him to talk to a friend of his, Mr. Frisbee.

Mr. Frisbee had officially ‘made it’ in life – he was an alumnus of Harvard Business School and had quickly risen to become the CEO of a New York State Exchange Company. This makes quite an impression on Phil. In a meeting with Frisbee, Knight hears a useful philosophy of working, saying that everyone typically changes three jobs before they hit upon the right one.
ledger-phil-knightNow, if you are not adequately educated, your career and earning scale might go down as you progress from job to job instead of going up. Therefore to secure a solid financial return, it is necessary to do two things – get a CPA and an MBA.

portland-state-campusThis though poses a problem for Phil because he hadn’t studied accounting as a major and didn’t have the necessary hours to qualify. He therefore enrolled at Portland State for three accounting classes. Portland State is a far cry from something like Harvard (something that both Phil and his father realize), but the author finishes his nine hours and starts working at the accounting firm Lybrand, Ross Bros. and Montgomery. It is one of the Big Eight National firms, but the offices in Portland are quite small. Knight takes this positively, reflecting that this would give him a chance to learn the language of business.

The author quickly discovers the downside of a small branch. There is no one to take up the slack when the workload increases, which means that everyone is logging in long hours, not leaving much opportunity for the learning process. However the author admires the CEO, Al Reser, who happens to be a mere three years older than Phil.

ledgerThe best example of how important work is at this firm is reflected when Phil is refused a holiday on the day after President Kennedy’s assassination. Of course, the upside to all this is that Phil is earning well. So he buys a car for himself. His life has finally taken a definite direction, and he seems set in his profession too. However, the chapter closes with him often wondering if his travels around the world last year were the peak of his life, and there is nothing better to look forward to…..

shoe-dog-by-phil-knightThe above synopsis is based on notes from ShoeDog by Phil Knight – Founder of NIKE INC.nike