Service operations: production activities that yield tangible and intangible service products.
Goods operations: production activities that yield tangible products.
Operation (production) management: the systematic direction and control of the processes that
transform resources into finished goods. They are ultimately responsible for creating utility for customers.
Production managers: managers responsible for ensuring that operations processes create value and
provide benefits. As demand increases, they must schedule and control work to produce amount required.
Meanwhile they must control costs, quality levels, inventory, and plant and equipment. An example of a
production manager who does not work in a factory is a farmer (converting soil, seeds, human labour and
gas into agricultural products, livestock and related products (eggs, milk). They have the option of employing
many workers to help them with the work, or use automated machinery in order to do most of it for them.
Types of Transformation Technology:
Chemical Processes: raw materials that are chemically altered. Such techniques are common in
the aluminium, steel, fertilizer, petroleum and paint industries.
Fabrication Processes: the basic shape or form of a product that is mechanically altered.
Fabrication occurs in the metal form, woodworking and textile industries.
Assembly Processes: put together various components. These techniques are common in the
electronics, appliance and automotive industries.
Transport Processes: goods acquire place utility by being moved from one location to another. An
example can be seen in trucks moving finished bicycles from manufacturing plants to consumers through
warehouses and discount stores.
Clerical processes: transform information. Combining data on employee absences and machine
breakdown into a productivity report is a clerical process. So is compiling inventory reports at a retail outlet.
Analytic versus Synthetic Processes:
Analytic Process: any production process in which resources are broken down.
Synthetic Process: any production process in which resources are combined.
High-Contact System: a system in which the service cannot be provided without the customer
being physically in the system (example: transits systems)
Low-Contact System: a system in which the service can be provided without the customer being
physically in the system (example: lawn care services)
Differences between Service and Manufacturing Operations:
1 Focus on Performance: whereas goods are produced, services are performed, since they are more
intangible, and less storable than goods.
Focus on Service Characteristics: products offered by most service operations are combinations
of goods and services.
Focus of Service Characteristics:
Intangibility: services cannot be seen, touched, smelled or tasted. However an important value is the
intangible feeling of pleasure, satisfaction and/or safety that the customer feels when they purchase the
service. There are also some tangible aspects of services, (example: wills are an example of a service).
Customization: what a customer expects when they purchase and/or receive a service. For an example, a
person visiting a dentist will expect the dentist to check their teeth, and if necessary, perform the required
processes to clean their teeth.
Unstorability: Services such as rubbish collection, transportation, childcare and housecleaning cannot be
produced ahead of time and then stored. If a service is not used when it is available, it is usually wasted.
Services are typically characterized by a high degree of unstorability.
Focus on the Customer-Service Link: because they transform customers or their possessions,
service operations often acknowledge as part of the operations process itself. An example can bee seen in a
barbershop. Since a customer is a physical participant in the operations process, service consumers have a
unique ability to affect that processes. In other words, the consumers expect the salon to be conveniently
located, to offer needed services at reasonable prices, and to extend prompt services.
Focus on Service Quality Considerations: consumers use different criteria to judge services and
goods. Service managers must understand that quality of work and quality of service are not necessarily
synonymous. For example although a car may have been repaired perfectly, the fact that it was finished a
day late may cause some dissatisfaction for the customer.
Forecasts: estimates of future demand for both new and existing products.
Capacity: the amount of a good that a firm can produce under normal working conditions.
Capacity planning for producing goods: capacity planning for goods means ensuring that a
manufacturing firm’s capacity slightly exceeds the normal demand for its product. To see why this policy is
best, consider the alternatives. If capacity is too small to meet demand, the company must turn away
customers- a situation that not only cuts into profits, but also alienates customers and salespeople. If
capacity greatly exceeds demand, it means the firm is wasting money, by maintaining a plant that are too
large, keeping excessive machinery online, and/ or by employing too many workers.
Capacity planning for producing services: in low-contact processes, maintaining inventory
allows managers to set capacity at the level of average demand. In high contact processes, managers must
plan capacity to meet peak demand.
2 Location planning for producing goods: in goods-producing operations, location decisions are
influenced by proximity to raw materials and markets, availability of labour, energy and transportation costs,
local and provincial regulations and taxes, and community living conditions.
Location planning for producing services: in planning low contact services, companies can be
located near resource supplies, labour, customers, or transportation outlets. On the other hand, high-contact
services are more restricted. They must be rated near the customers who are a part of the system.
Layout planning for producing goods:
Productive facilities: workstations and equipment for transforming raw materials, for example.
Non-productive facilities: storage and maintenance areas.
Support facilities: offices, restrooms, parking lots, cafeterias, and so forth.
Process layout: a way of organizing production activities such that equipment and people are grouped
together according to their function.
Cellular layouts: used to produce goods when families of products can follow similar flow paths.
Product layout: a way of organizing production activities such that equipment and people are set up to
produce only one type of good.
Assembly line: a type of product layout in which a partially finished product moves through a plant on a
conveyor belt or other equipment.
U-shaped production line: production layout in which machines are placed in a narrow U shape rather
than a straight line.
Flexible manufacturing system (FMS): a production system that allows a single factory to produce small
batches of different goods on the same production line.
Soft manufacturing: reducing huge FMS operations to smaller, more manageable groups of machines.
Methods Improvement in Goods
Improvement of production of goods begins when a manager documents the current method.
Process flow chart: a diagram used for organizing and recording all information, and helps to identify the
sequence of production activities, movements of materials, and work performed at each stage as the
product flows through production. The flow can be analyzed to identify wasteful activities, sources of delay in
production flows, and other inefficiencies. The final step is implementing improvements
Methods Improvement in Services
Service flow analysis: An analysis that shows the process flows that is necessary to provide a service to
customers; it allows managers to determine which processes are necessary.
Designing to control employee discretion: By careful planning and sometimes even by automating to
control human discretion, managers can make services more customer-oriented because they can ensure
3 Design for customer contact in services: In a high contact service, the demands on system designs are
somewhat different. Here managers must develop procedures that clearly spell out the ways in which
workers interact with customers. These procedures must cover such activities as exchanging information or
money, delivering and receiving materials and even making physical contact.
Tools for scheduling:
Gantt charts: production schedule diagramming the steps in a project and specifying the time required for
PERT chart: production schedule specifying the sequence and critical path for performing the steps in a
Operations control: managers monitor production performance by comparing results with plans
Follow-up: checking to ensure that production decisions are being implemented.
Materials management: planning, organizing and controlling the flow of materials from purchase
through distribution of finished goods.
Standardization: using standard and uniform components in the production process.
Transportation: the means of transporting resources to the company and finished goods to buyers.
Warehousing: the storage of both incoming materials for production and finished goods for
physical distribution to customers.
Inventory control: in materials management, receiving, storing, handling and counting of all raw
materials, partly finished goods, and finished goods.
Purchasing: the acquisition of all the raw materials and services that a company needs to produce
Holding costs: costs of keeping extra supplies or inventory on hand.
Lead times: in purchasing control, the gap between the customer’s placement of an order and the
seller’s shipment of merchandise.
Supplier selection: finding and determining suppliers to buy from.
Investigating possible suppliers.
Evaluating and isolating the best candidates.
Negotiating terms of service with a final choice.
4 Maintaining a positive buyer-seller relationship.
Just-in-time (JIT) production system: a method of inventory control in which materials are
acquired and put into production just as they are needed.
Manufacturing requirements planning (MRP): a method of inventory control in which a
computerized bill of materials is used to estimate production needs so that resources are acquired and put
into production only as needed.
Bill of materials: production control tool that specifies the necessary ingredients of a product, the
order in which they should be combined, and how many of each are needed to make one batch.
Manufacturing resource planning (MRP II): an advanced version of MRP that ties together all
parts of the organization into the company’s production activities.
Quality control: the management of the production process so as to manufacture goods or supply
services that meet specific quality standards.
5 CHAPTER 2
Productivity: a measure of efficiency that compares how much is produced with the resources used to
Quality: a product’s fitness for use in terms of offering the features that consumers want.
Labour productivity: partial productivity ratio calculated by dividing gross domestic product by
total number of workers.
Domestic Productivity: A country that improves its ability to make something out of its existing
resources can increase the wealth of all its inhabitants. Conversely a decline in productivity shrinks a
nation’s total health. When that happens, an increase in one person’s wealth comes only at the expense of
others with whom he or she shares an economic system.
Manufacturing versus Service Productivity: manufacturing productivity is higher than service
Industry Productivity: In addition to differences between the manufacturing and service sectors,
industries within these sectors differ vastly in terms of productivity. Agriculture is more productive in Canada
than in many other nations because we use more sophisticated technology and superior natural resources.
Company productivity: high productivity gives a company a competitive edge because its costs
are lower. As a result, it can offer its product at a lower price (and gain more customers) or it can make a
greater profit on each item sold. Increased productivity also allows companies to pay workers higher wages
without raising prices.
Total quality management (TQM): a concept that emphasizes that no defects are tolerable and
that all employees are responsible for maintaining quality standards.
Performance quality: the overall degree of quality: how well the features of a product meet
consumer’s needs and how well the product performs.
6 Quality reliability: the consistency of quality from unit to unit of a product.
Organizing for Quality:
Perhaps most important to the quality concept is the belief that producing quality goods and
services requires an effort from all parts of the organization. The old idea of a separate “quality control”
department is no longer enough. Everyone from the chairperson of the board to the different part-time
workers in the company must work to ensure quality.
Leading for Quality:
Quality ownership: the concept that quality belongs to each employee who creates or destroys it in
producing a good or service; the idea that all workers must take responsibility for producing a quality
Controlling for Quality:
By monitoring its products and services, a company can detect mistakes and make corrections. To
do so, however, managers must first establish specific quality standards and measurements.
Business process re-engineering: redesigning of business processes to improve performance, quality
The Re-engineering Process:
Identify the business activity that will be changed.
Evaluate information and human resources to see if they can meet the requirements for change.
Diagnose the current process to identify its strengths and weaknesses.
Create the new process design.
Implement the new design.
Supply chain: flow of information, materials, and services that starts with raw materials suppliers and
continues through other stages in the operations process until the product reaches the end customer.
Step 1: State a case for action.
Activities: show value that will be added for customers and for the company.
7 Key resources for this step: company vision statement, awareness of competitive status.
Step 2: Identify the process for re-engineering.
Activities: which process, if changed, will yield best improvement? Determine how it might be
changed and at what cost.
Key resources for this step: Process flow analysis, process mapping
Step 3: Evaluate information and human resource requirements for re-engineering.
Activities: determine if the information technology exists for the re-engineering process. Is the
organizational structure ready for the change?
Key resources for this step: Information technology, business culture management
Step 4: Understand the current process
Activities: diagnose the current process to understand how it relates to other processes. Identify
value-adding steps versus wasteful steps in the current process.
Key resources for this step: process analysis skills
Step 5: Create a new process design
Activities: Eliminate all waste work. Apply the tools for process redesign to determine the best
process for adding value for customers.
Key resources for this step: teamwork: customer focus
Step 6: Implement the re-engineered design
Activities: Phase in the new process. Encourage acceptance in the company and measure results.
Key resources for this step: leadership; teamwork; employee training.
Supply chain management (SCM): principle of looking at the chain as a whole to improve the overall
flow through the system.
Re-engineering Supply Chains for better results:
By lowering costs, speeding up service, or coordinating flows of information and materials, process
improvements and re-engineering often improve supply chains.
8 Information manager: the manager responsible for the activities needed to generate, analyze and
disseminate information that a company needs to make good decisions. Information management: an
internal operation that arranges the firm’s information resources to support business performance and
Data: raw facts and figures.
Information: a meaningful, useful interpretation of data.
Information systems (IS): an organized method of transforming data into information that can be
used for decision making.
Electronic information technologies (EIT): IS applications based on telecommunications
technologies. EITs enhance the performance and productivity of general business activities by performing
two functions: providing coordination and communication within the firm, and speeding up transactions with
The Six types of EIT are:
Fax machine (facsimile machine): a machine that can quickly transmit a copy of documents or
graphics over telephone lines.
Voice mail: A computer-based system for receiving and delivering incoming telephone calls.
Electronic mail (email) system: electronic transmission of letters, reports, and other information
Electronic conferencing: allows people to communicate simultaneously from different locations
via telephone, video or email group software.
Groupware: a system that allows two or more individuals to communicate electronically between
Data communication networks: global networks that permits users to send electronic messages
quickly and economically.
Internet: A gigantic network of networks that serves millions of computers, offers information on
businesses, science, and government, and provides communication flows among more than 170,000
separate networks around the world.
Internet service provider (ISP): A commercial firm that maintains a permanent connection to the
internet and sells temporary connections to subscribers.
9 World Wide Web: A system with universally accepted standards for storing, retrieving, formatting
and displaying information on the Internet.
Web servers: dedicated workstations – large computers – that are customized for managing,
maintaining and supporting websites.
Browser: software that enables a user to access information on the web.
Directories: features that help people find the content they want on the web. The user types in key
words and the directory retrieves a list of websites with titles containing those words.
Search engine: software for searching web pages that does not pre-classify them into a directory.
Intranet: A company’s private network that is accessible only to employees via entry through
Firewall: Hardware and software security systems that ensure that internal computer systems are
not accessible to outsiders.
Extranet: A network that allows outsiders limited access to a firm’s internal information system.
Information networks leading to leaner companies with few employees and simpler organizational
Since today’s networked form can maintain information linkages among both employees and
customers, more work can be accomplished with fewer people.
Widespread reductions in middle-management positions and the shrinkage of layers in
organizational structure are possible because information networks now provide direct communications
between the top managers and workers at lower levels.
Electronic information networks are replacing the operating managers who formerly communicated
company policies, or work instructions to lower-level employees.
Mass customization: producing large volumes of products or services, but giving customers the
choice of features and options they want.
Collaboration not only among internal units but with outside firms as well, is on the rise because
networked systems make it cheaper and easier to contact everyone, whether other employees or outside
10 Aided by intranets, more companies are learning that complex problems can be solved better by
means of collaboration, either in formal teams or through spontaneous interactions.
In the new networked organization, decisions that were once the domain of individuals are now
shared as both people and departments have become more interdependent.
Networking and the Virtual Company:
Networked systems can also improve collaboration between organizations through the so-called
This can be a temporary team assembled by a single organization, but a virtual company can also
be created by several allied firms.
Each contributes different skills and resources that collectively result in a competitive business that
wouldn’t be feasible for any one of them working alone.
Greatest Independence of Company and Workplace:
Geographic separation of the workplace from the company headquarters is more common than ever
because of networked organizations.
Employees do not work only at the office or the factory, nor are all of a company’s operations
performed at one location.
A company’s activities may also be geographically scattered but highly coordinated, thanks to a
Improved Management Processes:
Networked systems have changed the very nature of the management process.
The activities, methods, and procedures of today’s manager differ significantly from those that were
common just a few years ago. Before, upper-level managers did not concern themselves with all the detailed
information that filtered upward in the workplace, since gathering that information was expensive and the
arrival was slow in coming. This type of management was delegated to middle and first-line managers.
With networked systems, however, instantaneous information is accessible in a convenient and
Consequently more and more upper managers use it routinely for planning, leading, directing and
Today a top manager can find out the current status of any customer, inspect productivity statistics
for each workstation, and analyze the delivery performance of any driver and vehicle.
11 Enterprise Resource Planning (ERP): large information systems for integrating all the activities
of a company’s business units.
User Groups and Systems Requirements:
Knowledge workers: employees whose jobs involve the use of information and knowledge as the
raw materials of their work.
Managers at Different Levels:
Due to their work on different kinds of problems, top manager, middle managers, knowledge
workers and first line managers have different information needs.
First line (operational) managers: need information to oversee daily details of their
Knowledge workers: need special information for conducting technical projects.
Middle managers: need summaries and analyses for setting intermediate and long-range goals for
the departments or projects under their supervision.
Top-management: analyzes broader trends in the economy, the business environment, and overall
company performance to conduct long-range planning for the entire organization.
Functional Areas and Business Processes:
Each business function – marketing, human resources, accounting, production, and finance – has its
own information needs.
In addition, in business organized according to business processes, process group need special
Each user group and department is represented by an IS.
Transaction Processing System (TPS): applications of information processing for basic day-to-
day business transactions.
Systems for Knowledge Workers and Office Applications:
Systems analysts and designers deal with the entire computer system. They represent the IS group
in working with users to learn user’s requirements and to design systems that meet them.
Programmers write the software instructions that tell computers what to do.
12 Operations Personnel (Data Workers):
System operations personnel: people who run a company’s computer equipment.
Knowledge-Level and Office Systems:
Computer-aided design (CAD): computer analysis and graphics programs that are used to create
Computer-aided manufacturing (CAM): computer systems used to design and to control all the
equipment and tools for producing goods.
Management Information Systems (MIS): systems that support an organization’s managers by
providing daily reports, schedules, plans and budgets.
Decision Support System (DSS): computer systems used to help managers consider alternatives
when making decisions or complicated problems.
Executive Support Systems (ESS): a quick-reference, easy-access application of information
systems specially designed for upper-level managers.
Artificial intelligence (AI): the construction and/or programming of computers to imitate human
Robotics: the use of computer-controlled machines that perform production tasks.
Expert system: A form of artificial intelligence in which a program draws on the rules an expert in a
given field has laid out to arrive at a solution for a problem.
Elements of the Information System
Hardware: the physical components of a computer system.
Input device: hardware that gets data into the computer in a form the computer can understand.
Central processing unit (CPU): hardware in which the actual transforming of data into
information takes place; contains the primary storage unit, the control unit and arithmetic logic unit.
Main memory: the part of a computer’s CPU that stores those programs that it needs to operate.
Program: any sequence of instructions to a computer.
13 Output device: that part of a computer’s hardware that presents results to users; common forms
include printers and video monitors.
Software: programs that instruct the computer in what to do and how to do it.
System program: a program that tells a computer what resources to use and how to use them.
Application program: a program that actually processes data according to a particular user’s
Graphical user interface (GUI): the user-friendly display that helps users select from among the
many possible applications of the computer.
Icons: small images on a computer screen that represent various applications.
- Problems of Privacy and Security:
Privacy intrusion: with information systems, privacy intrusion occurs when intruders (hackers)
gain unauthorized access, either to steal information, money and/or property or to tamper with data.
Encryptions: the use of a secret numerical code to scramble characters in a message, so that the
message is not understandable during transmission.
Programs: address such common, long-standing needs as accounting and inventory control, while
others have been developed for an endless variety of specialized needs.
Word processing programs: application programs that allow the computer to act as a
sophisticated typewriter to store, edit and print letters and numbers. Examples include Microsoft Word.
Electronic spreadsheets: application programs that allow the user to enter categories of data and
determine the effect of changes in one category (e.g. sales), on other categories (e.g. profits). Examples
include Microsoft Excel.
Database management program: application programs that keep track of and manipulate the
relevant data of a business. Examples include Microsoft Access.
Computer graphics programs: application that convert numerical and character data into
pictorial forms. Examples include pie chart and bar graphs.
Presentation graphic programs: application programs that offer choices for assembling graphics
for visual displays, slides, video, and even sound splices for professional presentations.
14 Desktop publishing: combines word processing and graphics capability in producing typeset-
quality text from personal computers.
Software piracy: the unauthorized use of software such as word processing and spreadsheets.
Multimedia communication systems: connected networks of communication appliances such as
faxes, televisions, sound equipment, cell phones, printers and photocopiers that may also be linked by
satellite with other remote networks.
- Communication Devices
Global positioning systems (GPSs): uses satellite transmission to track the geographic locations
Personal digital assistants (PDAs): are tiny hand-held computers with wireless communication
capabilities, being able to access the Internet and send email messages from any location.
Wide area network (WAN): a system to link computers across the country through telephone
wires or satellites.
Local area network (LAN): a system to link computers in one building or in a small geographical
area by cabling or wireless technology.
Wireless networks: use airborne electronic signals for linking network appliances.
Client-server network: a network composed of both clients (users) and servers which allows the
clients to access various services without costly and unnecessary duplication.
Client: a point of entry in a client-server network.
Server: a computer that provides the services shared by network users.
Understanding Accounting Issues
Accounting: a comprehensive system for collecting, analysing and communicating financial
Bookkeeping: recording accounting transactions.
15 Accounting information system (AIS): an organized procedure for identifying, measuring, recording
and retaining financial information so that it can be used in accounting statements and management reports.
Controller: the individual who manages all the firm’s accounting activities.
Chartered accountant (CA): an individual who has met certain experience and education
requirements and has passed a licensing examination; acts as an outside accountant for other firms. About
half of all CA work in CA firms that offer accounting services to the public, while the other half work in
government or industry. CA firms typically provide audit, tax and management services. CAs focus on
external financial reporting for various interested parties (shareholders, lenders, Canada Customs, and
Revenue Agency, etc) that financial records of a company accurately reflect the true financial condition of
Certified general accountant (CGA): an individual who has completed an education program and
passed a national exam; works in private industry or a CGA firm. To be eligible a person must have an
accounting job with a company. CGA were formerly not allowed to audit financial statements belong to
publicly held companies, but due to changing times and policies, they are now allowed do so. Most CGAs
work in private companies, but there are a few CGA firms.
Certified management accountant (CMA): An individual, who has completed a university degree,
passed a national examination and completed a strategic leadership; works in industry and focuses on
internal management accounting. CMAs works in all kinds and sizes of organization, and focus on applying
best management practices in all operations of a business. CMAs bring a strong market focus to strategic
management and resource deployment, synthesizing and analyzing financial and non-financial information to
help organizations maintain a competitive advantage. CMA’s emphasize the role of accountants in the
planning and overall strategy of the firm in which they work.
Audit: an accountant’s examination of a company’s financial records to determine if it used proper
procedures to prepare its financial reports. Companies must normally provide audited financial reports when
applying for loans or when selling stock. They will determine if the firm has controls to prevent errors or
fraud from going undetected, and will also examine receipts and inventories.
Forensic accountants: an accountant who tracks down hidden funds in business firms, usually as
part of a criminal investigation.
Generally accepted accounting principles (GAAP): standard rules and methods used by accountants
in preparing financial reports.
Tax services: include helping clients not only with preparing their tax returns but also in their tax
planning. A CA’s advice can help a business structure or restructure its operations and investments and
save millions of dollars in taxes.
16 Management consulting services: specialized accounting services to help managers resolve a variety
of problems in finance, production scheduling and other areas. These services include personal financial
planning, planning of corporate mergers, plant layout and design, marketing studies, production scheduling,
computer feasibility studies and design and implementation of accounting systems.
Private accountants: an accountant hired as a salaried employee to deal with a company’s day-to-
day accounting needs.
Asset: anything of economic value owned by a firm or individual.
Liability: any debt owed by a firm or individual to others.
Owner’s equity: any positive difference between a firm’s assets and its liabilities; what would remain
for a firm’s owners if the company if the company was liquidated, all its assets were sold, and all its debts
are paid. It consists of two sources of capital: the amount that the owners originally invested and the profits
earned by and reinvested in the company.
Owner’s Equity = Assets – Liabilities
Assets = Liabilities + Owner’s Equity
Double-entry accounting: a bookkeeping system, developed in the fifteenth century and still in use,
that requires every transaction to be entered in two ways – how it affects assets and how it affects liabilities
and owner’s equity – so that the accounting equation is always in balance.
Financial statements: any of several types of broad reports regarding a company’s financial status;
most often used in reference to balance sheets, income statements, and/or statements of cash flows.
Balance sheet: a type of financial statement that summarizes a firm’s financial position on a
particular date in terms of its assets, liabilities and owner’s equity.
Current assets: cash and other assets that can be converted into cash within a year.
Liquidity: the ease and speed with which an asset can be converted to cash; cash is said to be
Accounts receivable: amounts due to the firm from customers who have purchased goods and
services on credit; a form of current asset.
Merchandise inventory: the cost of merchandise that has been acquired for sale to customers but
that is still on hand.
17 Prepaid expenses: includes supplies on hand and rent paid for the period to come.
Fixed assets: assets that have long-term use or value to the firm such as land, buildings and
Depreciation: distributing the cost of a major asset over the years in which it produces revenues;
calculated by each year subtracting the asset’s original value divided by the number of years in its
Intangible assets: non-physical assets such as patents, trademarks, copyrights and franchise fees
that have economic value but whose precise value is difficult to calculate.
Goodwill: the amount paid for an existing business beyond the value of its other assets.
Current liabilities: any debts owed by the firm that must be paid within one year.
Accounts payable: amounts due from the firm to its suppliers for goods and/or services purchased
on credit; a form of current liability. An example can include credit or debit.
Long term liabilities: any debts owed by the firm that are not due for at least one year.
Paid in capital: any additional money invested in the firm by the owners.
Retained earnings: a company’s net profits less any dividend payments to shareholders.
Income (profit-and-loss) statement: a type of financial statement that describes a firm’s revenues
and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period.
(Revenues – Expenses = Profit (or loss)
Revenues: any sum of money received by a firm as a result of selling a good or service or from other
sources such as interest, rent and licensing fees.
Cost of goods sold: any expenses directly involved in producing or selling a good or service during a
given time period.
Gross Profit (or gross margin): a firm’s revenues (gross sales) less its cost of goods sold.
Operating expenses: costs incurred by a firm other than those included in cost of goods sold.
Operating income: compares the gross profit from business operations against operation expenses.
18 Net income (net profit or net earnings): a firm’s gross profit minus its operating expenses and
Statement of cash flows: a financial statement that describes a firm’s generation and use of cash
during a given period. They can