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Questions and Answers
According to the American Institute of Certified Public Accountants (AICPA), what is the main purpose of providing quantitative information, primarily financial in nature, about economic entities?
According to the American Institute of Certified Public Accountants (AICPA), what is the main purpose of providing quantitative information, primarily financial in nature, about economic entities?
Which of the following is NOT included within the definition of accounting provided by the American Institute of Certified Public Accountants (AICPA) in 1970?
Which of the following is NOT included within the definition of accounting provided by the American Institute of Certified Public Accountants (AICPA) in 1970?
According to the Statement of Basic Accounting Theory (1996), what is the primary goal of accounting?
According to the Statement of Basic Accounting Theory (1996), what is the primary goal of accounting?
Which of the following best describes the nature of the information typically used in accounting?
Which of the following best describes the nature of the information typically used in accounting?
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What is the primary purpose of accounting information?
What is the primary purpose of accounting information?
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Based on the provided text, which of the following is a characteristic of accounting?
Based on the provided text, which of the following is a characteristic of accounting?
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Which of the following BEST encapsulates the role of accounting in a business?
Which of the following BEST encapsulates the role of accounting in a business?
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Which of these activities are part of the strategic management process?
Which of these activities are part of the strategic management process?
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What is the main goal of organizing a company?
What is the main goal of organizing a company?
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Which of the following is NOT a key characteristic of a company organization?
Which of the following is NOT a key characteristic of a company organization?
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Why is it important that a company's organization reflects its values?
Why is it important that a company's organization reflects its values?
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What is one common element mentioned in the content regarding the importance of people in organizing a company?
What is one common element mentioned in the content regarding the importance of people in organizing a company?
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What is considered the primary output of accounting activities?
What is considered the primary output of accounting activities?
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What is bookkeeping primarily concerned with?
What is bookkeeping primarily concerned with?
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In double entry accounting, what must always be true for a transaction?
In double entry accounting, what must always be true for a transaction?
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What is the primary role of the audit committee?
What is the primary role of the audit committee?
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What distinguishes external transactions from internal transactions?
What distinguishes external transactions from internal transactions?
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Which of the following committees has experienced a recent increase in prominence?
Which of the following committees has experienced a recent increase in prominence?
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What happens if the entries in a double entry transaction do not balance?
What happens if the entries in a double entry transaction do not balance?
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Which of the following best describes internal transactions?
Which of the following best describes internal transactions?
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What role does the board of directors play in setting the tone at the top?
What role does the board of directors play in setting the tone at the top?
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Which of the following committees is responsible for reviewing management’s report on the effectiveness of internal control over financial reporting?
Which of the following committees is responsible for reviewing management’s report on the effectiveness of internal control over financial reporting?
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Which of the following is NOT an output of the accounting process?
Which of the following is NOT an output of the accounting process?
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What is a key function of the compensation committee?
What is a key function of the compensation committee?
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What is the main purpose of the accounting process?
What is the main purpose of the accounting process?
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Which element does NOT belong in the set of traditional financial statements?
Which element does NOT belong in the set of traditional financial statements?
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Why are boards of directors increasingly focused on nominating committees?
Why are boards of directors increasingly focused on nominating committees?
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According to the content, what role does the board of directors play in relation to shareholders and managers?
According to the content, what role does the board of directors play in relation to shareholders and managers?
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What is the primary focus of the board of directors in terms of company sustainability?
What is the primary focus of the board of directors in terms of company sustainability?
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Study Notes
Strategy and Management
- This is a course
- The course is about strategy and management
- The first class discusses what a company is.
- A company is a voluntary association of two or more members coming together for a common business goal.
- Companies operate for profit and sell goods/services to customers.
- Companies have a separate legal existence from their owners (members or shareholders).
- A company can incur debt, sue, and be sued, just like a person.
- Company objectives include maximizing sales revenue, profit, return on capital employed, long-term stability, growth, satisfying people, and increasing the wealth of the company.
- The input-output model illustrates the relationship between the external environment, the firm, and the output.
- Resources, including primary resources (equity, labour, property), and other resources (technical and industrial properties, commercial properties), are crucial inputs for the firm.
- The activities of the firm (Management, Organization, and Accounting)transform inputs into outputs.
- Management activities run the business.
- Organization activities organize the business.
- Accounting activities record the business.
- Strategic management includes long-term performance considerations and environmental analysis (internal and external), strategy formulation, strategy implementation, and evaluation/control.
- Operative management encompasses daily activity and short-term performance, including purchasing, operations, and sales.
What is a company (continued)
- A company is a business organization, which could include an association or a network, a foundation, or an organized group of persons (incorporated or not).
Company objectives
- Maximization of sales revenue
- Maximization of profit
- Maximization of investments (return on capital employed)
- Surviving over time
- Long-term stability
- Growth
- Satisfying people
- Enhancement/maximization of the wealth of the business
The Input-Output Model
- The model shows the relationship between the external environment, the firm, and outputs.
- Inputs are resources.
- Activities are performed by the firm.
- Outputs are the result of activities by the firm
Resources
- Primary resources: equity, labor, technology & industrial properties, and commercial properties
- Other resources: ...
Activities
- Management activities
- Organization activities
- Accounting activities
Activities - Management
- Strategic Management
- Operative Management
Activities - Organization
- Discussion of the topic of organizing a company.
- Discussion of how relevant the people are to the organisation process.
Activities – Organization (continued)
- Organizing involves creating a structure of relationship among people working towards desired results.
- Organizing means:
- Determining, grouping, and structuring activities.
- Creating rules to ensure effective work performance.
- Allocating authority and responsibility.
- Determining detailed procedures and systems regarding coordination, communication, and motivation.
- Company organization follows company values. Values include innovation, integrity, excellence, talent, entrepreneurship, and stewardship.
Activities – Organization (Example)
- Discussion regarding the importance of culture in companies and the relationship to organization.
Activities – Accounting
- Accounting is the language of business
- The art of recording, classifying, and summarizing financial transactions.
- Transactions are often money-related, significant, and financial in nature.
Activities – Accounting (Continued)
- Process of identifying, measuring, and communicating financial information.
- Used for informed judgments and decisions by users of the information.
- Accounting is a way to measure and summarize business data, to provide an organized way to show activities of business.
- Its users rely on information in accounting for decision making in their firm.
Activities – Accounting(Internal vs External users)
- Internal users (owners, managers, officers, internal auditors, sales staff, budget officers) rely on accounting information for decision-making.
- External users (lenders, potential shareholders, governments, labor unions, external auditors, customers) rely on accounting information for decision-making.
Activities – Accounting(Examples of Accounting Scandals)
- Enron, WorldCom and Parmalat
- Misrepresentation of financial statements, management, and financial partnerships.
Output
- KPIs are used to measure company performance.
- Financial performance: Profit, Financial ratios (ROE, ROA, ROS), Market share, and Customer satisfaction.
- Competitive performance: Meeting client expectations and needs.
- Institutional performance: Stakeholder consensus on the way the firm works, satisfaction of employees, and relationship with banks.
The Firm-Environment Relationship
- The relationship between the firm and its environment.
- Products and services are inputs for customers.
- Activities are how the firm runs its business.
- Outputs include products/services given to the customers.
- Stakeholders include people and groups, who will have interest or concerns relevant to the business.
- Firms exchange contributions with stakeholders for rewards.
- Goods are tangible products.
- Services are intangible products.
- Consumer products are bought by consumers for their personal use; business products are purchased by firms/companies for their use in business operations.
- Client needs and expectations include Market size, segments, segmentation criteria, needs/expectations, geographical markets, socio-demographic elements, and purchasing habits.
- Stakeholder groups include: Owners, stockholders, investors, banks and creditors, partners and suppliers, buyers/customers, prospects, management, employees, unions, works councils, and competitors. Government & regulators (local, national, international), professional and industry associations, media (local, national, trade, financial), NGO's, communities, and other interest groups.
Focus on Governance
- Governance refers to the rules and guidelines for company managers when acting on behalf of owners.
- Owners of the company are typically separate from managers; a board of directors oversees company governance.
- Corporate governance is the framework that governs the division and exercise of power in the company, and includes mechanisms and rules that regulate relationships among participants (shareholders, directors, managers and sometimes employees).
Focus on Governance (continued)
- Corporate governance is distinct from the day-to-day operational management activities conducted by executives.
- It directs and controls company activities through a board of directors.
- The need for corporate governance arises because owners (shareholders) typically do not manage the business operations.
- To ensure the alignment of managers' interest with that of investors and shareholders.
- The governance pillars include accountability, fairness, independence, and transparency.
Focus on Ownership and Managerial Control
- Modern public corporations often separate ownership from management due to efficiency advantages.
- Owners (e.g., shareholders) bear the risk, while managers focus on strategic decisions.
- Advantages of separation include: specialization of tasks and expertise, clear separation of roles; better operational performance due to skilled management; checks and balances are in place.
- The ability to evaluate company performance is easier when the managers and owners are separate individuals, but it can be more difficult to evaluate performance when the owners are also the managers.
The board of directors
- A company's board of directors is the primary body influencing corporate governance.
- The directors are responsible for setting the company's strategic aims, providing leadership, supervising management, and reporting to shareholders about their stewardship.
- The board of directors typically performs the following functions: represent shareholders, align management with shareholder interests, define company mission & goals, establish and approve strategic plans, appoint senior executives, oversee performance, approve major transactions, and approve executive pay.
The board of directors (Functions)
- Review financial reports, including MD&A, earnings releases, and reports on the effectiveness of internal controls over financial reporting
- Counsel senior executives, concerning strategic decisions, including risk-management advice
- Ensure compliance with regulations (laws, rules and regulations)
- Approve major operating, investing, and financial activities
- Set ethical tone and conduct
- Evaluate performance of board members and committee members
- Approve dividends, financing, and capital changes
- Oversee long-term shareholder value creation and protection of stakeholder interests
Focus on Governance (Why it's needed)
- Owners (shareholders) typically do not manage company operations.
- Corporate governance ensures alignment of managers' interests with those of investors, encouraging proper use of capital and effective project management.
The Income Statement
- An income statement reports on the activities of a company.
- It lists revenues, gains, costs, and losses over a period of time .
- It reports expenses incurred in order to earn that income.
- Net income is total revenues and gains minus total expenses and losses.
- Net Income greater than zero is profit
- Net income less than zero is a loss
Revenues and Gains
- Income is increases of economic benefits from inflows or enhancements of assets or decreases of liabilities.
- Revenues arise in the ordinary activity of a company; examples are sales, fees, royalties, etc.
- Gains are other items that meet the definition of income. - Examples include sale of assets for less than carrying amount, write-down of assets, or a loss from lawsuits
Expenses and Losses
- Expenses are costs to generate revenue (e.g., raw materials, personnel costs, distribution costs, administrative expenses).
- Losses are decrements of economic benefits that are not connected with ordinary activity (e.g., sale of an asset for less than its carrying amount, from write-down of assets, losses from lawsuits).
Income Statement Structures
- Single-step: groups all revenues and expenses into one step
- Multi-step: presents an hierarchical structure that analyzes profitability from various business functions.
Analyzing the Income Statement
- Importance of assessing intermediate margins (between revenues and EBIT for specific operating activities)
- EBIT - earnings before interest and tax)
- EBITDA: earnings before interest, tax, depreciation, and amortization, to eliminate the impact of investing decisions.
- Cost of Sales (COGS): the direct costs of producing/purchasing goods/services that are sold during the period examined; calculates the gross profit.
Analyzing the Income Statement (Continued)
- Useful for analysis of the profitability across the various functions of an organization.
The Balance Sheet
- A balance sheet is a financial “snapshot” of a company at a specific, one point in time.
- It details the resources of the company and how those resources are financed.
- Assets represent the company's resources; Liabilities are how the firm obtained those resources.
- Shareholders' Equity are the funds from shareholders’ invested capital.
Analyzing the Balance Sheet
- Evaluation of asset composition to understand the risks the firm bears.
- Assessment of the financial sources section (liabilities and equity) to understand the firm's financial risks.
- Comparison of investment and financial resource nature to understand their appropriateness.
Financial Ratios (Liquidity)
- Current Ratio: measures short-term debt-paying ability of the company. (Current assets / Current liabilities)
- Quick Ratio: measures short-term debt-paying ability of the company, excluding inventory. (Current assets - Inventory/ Current liabilities)
Financial Ratios (Solvency)
- Debt Ratio: measures the proportion of total (net) assets financed by debt at a given point in time. (Total Liabilities / Total Assets).
- Equity Ratio: measures the proportion of assets contributed/owned by the shareholders at a given moment. (Shareholders' equity / Total assets).
Financial Ratios (Profitablity)
- Return on Sales (ROS): measures a company's ability to earn operating income from sales. (EBIT / Sales)
- Return on Assets (ROA): measures how effectively the firm uses its assets to generate operating income. (EBIT/ Total Assets)
Financial Ratios (Profitability) - (ROE)
- Return on Equity (ROE): measures how effectively the company's equity has been used to generate returns. (Net income / Shareholders' equity)
Financial Ratios (Growth)
- Growth rate calculation involves comparing the current year's value of the item in examination to the prior year's value to evaluate the growth or decline.
A definition of strategy
- A plan, method, or series of actions designed to achieve a specific goal or effect.
- The determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Alfred Chandler, Strategy and Structure)
Definitions of Strategy (Continued)
- The pattern of a company’s objectives, purposes, or goals, and its major policies and plans for achieving these goals (Kenneth Andrews, The Concept of Corporate Strategy).
Definitions of Strategy (Continued)
- Choosing a unique and valuable position rooted in systems of activities that are much more difficult to match (Michael Porter, What is Strategy?).
Evolution of Strategic Management, from Financial Budget to Adaption to Turbulence
- Financial budgeting and operational budgeting were dominant themes in the 1950s and 1960s; Corporate Planning from the 1960s and 1970s was characterized by corporate plans based on medium-term forecasts.
- The emergence of strategic management (1980s-1990s) focused on industry analysis and competitive positioning, and the quest for competitive advantage. Adapting to turbulence in the late 1990s and 2000s emphasized strategic alliances, exploiting technology, and incorporating social/environmental responsibility.
Sources of Superior Profitability
- How to do strategy in relation to business strategies
Describing Strategy
- Using Positioning vs Direction to describe a strategy
The Role of Strategy
- Strategy as decision support
- Strategy as a coordinating device
- Strategy as target
- Strategy as animation and orientation
Profit and Purpose
- Profits are essential for a corporation to exist, but not for its overall purposes.
Vision, Mission, and Strategy
- The mission statement describes the company's values.
- The vision statement describes where the company wants to be in the future.
- The strategic plan details the steps needed to reach the vision.
- Goals and objectives are outlined to measure the degree of success.
- Stakeholders need to understand the company's purpose, the path needed to reach the goal and the success measure.
Corporate Social Responsibility (Stakeholder Approach)
- Companies consider responsibilities that go beyond shareholder interest.
- Ethical considerations.
- Self-interest concerns (reputation, license to operate, etc.)
- Sustainability, encompassing environmental considerations and social needs. Key steps in Stakeholder Analysis
- Identifying the list of potential stakeholders
- Ranking stakeholders according to their importance to the company
- Identifying the criteria that stakeholders use to evaluate a company
- Deciding how well the company is doing from different stakeholders' perspectives
- Identifying what can be done to satisfy stakeholders
- Identifying and recording long-term issues for different stakeholder groups.
Stakeholder power/interest grid and managerial responses
- A framework to display the managerial response to various stakeholder groups based on their power and level of interest
- Used to establish, monitor and manage relations with them.
The basic framework: Strategy as a link between the firm and its environment
– The industry environment • Competitors • Customers • Suppliers
Industry Analysis
- Profitability differences across industries are due to underlying economic characteristics.
- Environmental analysis involves assessing business environment threats and opportunities.
- External factors (political, economic, social, and technological) influence company decisions and performance.
- Macro-environmental analysis (e.g., PESTEL, or PEST) provides an overview of the broader environment; Micro-environmental focuses on the industry.
- Porter's Five Forces model examines the competitive dynamics within an industry
Porter's Five Forces of Competition Framework (and implications for a firm)
- Bargaining power of suppliers (e.g., how badly does a supplier need your business?).
- Bargaining power of buyers (e.g., how badly does a buyer need your business or services?).
- Threat of new entrants (e.g., how easy is it another company to enter the industry?).
- Threat of substitutes (e.g., what could perform a similar function as your product/services?). Analysis needed of each of the five forces on how they affect an organization’s profitability and competitive position.
- Rivalry among existing competitors (how intense is competition in the industry?).
- Each of these forces can be evaluated on its potential impact on a firm’s profitability relative to its industry position.
The Functional Analysis of Organizational Capabilities
- The analysis of organizational capabilities in relation to each functional area of the firm • Identifying Organizational Strengths & Weaknesses • Identifying linkages between functions/departments within the organization • Functional analysis helps identify the skills across a company. This information can be used to improve processes, identify key areas of improvement, and develop future strategies
Value Chain Analysis of Organizational Capabilities
- The activities of the firm are analyzed in sequence. • Primary activities are those crucial for transforming inputs into outputs and for meeting customer needs. • Support activities help support primary activities. • Value chain analysis helps identify linkages
Appraising Resources and Capabilities
- The analysis assesses the degree to which resources and capabilities affect performance and provide a basis for achieving sustainable competitive advantage • Identifying the resources and capabilities of an organization • Identifying the firm's resources • Identifying firm's capabilities
Approaching Organizational Capabilities through V.R.I.N.
- Valuable: is it providing value to the buyer?
- Rare: do other companies have it?
- Inimitable: is it hard to imitate?
- Non-substitutable: is it difficult to be substituted?
Dynamic Capabilities
- The firm’s ability to constantly monitor and scan for opportunities
- Assess both the opportunities and external threats/changes
- This allows organizations to renew & recreate their strategic capabilities to meet changed environment needs..
Diversification: Types of Diversification
- Related diversification (e.g., same industries)
- Unrelated diversification (e.g., very different industries)
Diversification at Disney
- Disney’s diversification is a case of related diversification.
- Key steps of the diversification are evident from the company’s strategies, such as acquiring similar companies, expanding existing activities, or identifying related new activities.
- The advantages of diversification are numerous
- The disadvantages are related to complexity
Diversification at Google
- Google’s case is an example of diversification through different Internet-related products and services.
- The key strengths/capabilities include sharing resources, product complementarities, and multi-market rivalry.
- Google's strategy is to take advantage of the internet age.
The Vertical Chain
- A vertical chain consists of a set of companies that have roles or stages in production or distribution.
- In some industries, companies can choose to vertically integrate (controlling several stages within the vertical chain) or operate independently within the market.
- For a vertical firm: •Advantages: technical economies, avoidance of transactions costs/expenses (where there are small numbers of other firms). •Disadvantages: difficulty to respond to changes in demand and technology, loss of specialization and increased risk (through potential losses in one area of the value chain, for instance, when a firm performs activities in which change occurs).
New Business Models
- Data monetization: Companies make money through selling raw data, aggregated data, or analysis reports.
- Smart Factories: Manufacturing operations become more efficient through real-time data analytics. Data analysis optimizes all stages of a product's lifecycle within the manufacturing process.
- Servitization: Companies provide value through their products and the services that support the process/product use. For instance, companies may invest in apps that provide after-sales service.
- Platform-based models: Firms build a platform for interaction (e.g., ride-sharing platforms, online market places) to create value by providing services in a complex, multi-sided/two-sided market.
Internet and Technology, During COVID-19
- The crisis had a great impact on the digitalization of customer interactions.
- Technology facilitated change/development of products and new revenue streams.
- Reshaping internal processes and evolving consumer habits were made possible through digital tools.
- Firms found new ways to maintain customer relationships or create new customer relationships.
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Description
Test your knowledge on the fundamental principles and goals of accounting as defined by the AICPA. This quiz covers key concepts such as the nature of accounting information, the strategic management process, and the characteristics of company organization. Ideal for students and professionals in accounting and finance.
