Chapter 15: Using Management and Accounting Information PDF

Chapter 15 Using Management and Accounting...

Chapter 15 Using Management and Accounting Information © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  LEARNING OBJECTIVES 15-1 Examine how information can reduce risk when making a decision. 15-2 Discuss management’s information requirements. 15-3 Outline the five functions of an information system. 15-4 Explain why accurate accounting information and audited financial statements are important. 15-5 Read and interpret a balance sheet. 15-6 Read and interpret an income statement. 15-7 Describe business activities that affect a business’s cash flow. 15-8 Summarise how managers evaluate the financial health of a business. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Information and Risk ▪ To improve the decision-making process, the information used by individuals and businesses must be relevant. Using relevant information results in better decisions. Relevant information → Better intelligence and knowledge → Better decisions For businesses, better intelligence and knowledge that lead to better decisions are especially important because they can provide a competitive edge over competitors and improve a business’s profits. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-1 The Relationship Between Information and Risk © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Information Rules ▪ Marketing research continues to show that discounts influence almost all car and truck buyers. Simply put, if dealers lower their prices, they will sell more cars and trucks. ▪ This relationship between buyer behaviour and price can be thought of as an information rule that usually will guide the marketing manager correctly. ▪ An information rule emerges when research confirms the same results each time that it studies the same or a similar set of circumstances. ▪ Managers and employees are continuously looking for new rules that can be put to good use and looking to discredit old ones that are no longer valid. ▪ ongoing process is necessary because business conditions rarely stay the same for very long. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Difference Between Data and Information ▪ Data – numerical or verbal descriptions that usually result from some sort of measurement Examples: your current wage level, the current retail prices of Dell computers ▪ Information – data presented in a form that is useful for a specific purpose Example: a graph of average wages paid to men and to women © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Knowledge Management (slide 1 of 2) ▪ Database – a single collection of data and information stored in one place that can be used by people throughout an organisation to make decisions ▪ Knowledge management (KM) – a business’s procedures for generating, using and sharing important data and information © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Knowledge Management (slide 2 of 2) Making Smart Decisions ▪ Decision-support system (DSS) – a type of software program that provides relevant data and information to help a business’s employees make decisions ▪ Expert system – a type of computer program that uses artificial intelligence to imitate a human’s ability to think An expert system uses a set of rules that analyse information supplied by the user about a particular activity or problem. Based on the information supplied, the expert system then provides recommendations or suggests specific actions in order to help make decisions. Business Application Software ▪ A number of business software applications can improve both employee decision making and productivity. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 15-1 Current Business Application Software Used to Improve Productivity © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  What Is a Management Information System? ▪ Management information system (MIS) – a system that provides managers and employees with the information they need to perform their jobs as effectively as possible ▪ The purpose of an MIS is to distribute timely and useful information from both internal and external sources to the managers and employees who need it. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-2 Management Information System (MIS) © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  A Business’s Information Requirements (slide 1 of 2) ▪ Many businesses are organised into five areas of management: 1. Finance 2. Operations 3. Marketing 4. Human Resources 5. Administration © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  A Business’s Information Requirements (slide 2 of 2) ▪ Managers in each of these areas need specific information to make decisions. Financial managers must ensure that the business’s managers and employees, lenders and suppliers, shareholders and potential investors, and government agencies have the information they need to measure the financial health of the business. Operations managers are concerned with present and future sales levels, current inventory levels of work in process and finished goods, and the availability and cost of the resources required to produce goods and services. Marketing managers need to have detailed information about a business’s products and services and those offered by competitors. Human resources managers must be aware of anything that pertains to a business’s employees. Administrative managers are responsible for the overall management of the organisation. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-3 Five Management Information System Functions © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-4 Typical Visual Displays Used in Business Presentations © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 15-2 Typical Four-Column Table Used in Business Presentations © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Why Accounting Information Is Important ▪ Accounting – the process of systematically collecting, analysing and reporting financial information ▪ Not only can accounting information be used to answer questions about what has happened in the past, it can also be used to help make decisions about the future. ▪ To improve the accuracy of a business’s accounting information and its financial statements, businesses rely on audits conducted by accountants employed by public accounting firms. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Why Audited Financial Statements Are Important ▪ Audit – an examination of a company’s financial statements and the accounting practices that produced them ▪ The purpose of an audit is to make sure that a business’s financial statements have been prepared in accordance with generally accepted accounting principles. Generally accepted accounting principles (GAAPs) – an accepted set of guidelines and practices for US companies reporting financial information and for the accounting profession ▪ If an accountant determines that a business’s financial statements present financial information fairly and conform to GAAPs, then he or she will issue the following statement: ‘In our opinion, the financial statements … present fairly, in all material respects the financial position of the company … in conformity with generally accepted accounting principles.’ © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Fraud, Ethical Behaviour and Reform (slide 1 of 2) ▪ Accounting problems at many companies have forced many investors, lenders and suppliers, and government regulators to question the motives behind fraudulent and unethical accounting practices. Example: Both Enron and Lehman Brothers used all kinds of illegal and unethical accounting methods to inflate profits. ▪ Unfortunately, the ones hurt when companies report inaccurate or misleading accounting information often are not the high-paid corporate executives; rather, it’s the employees, who lose their jobs and the money they invested in the company’s retirement programme if the company files for bankruptcy, and the investors, lenders and suppliers, who experience a loss due to their investments in the company based on fraudulent accounting information. ▪ To help ensure that corporate financial information is accurate and to prevent accounting scandals, the US Congress enacted the Sarbanes–Oxley Act. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Fraud, Ethical Behaviour and Reform (slide 2 of 2) ▪ Key components of the Sarbanes–Oxley Act: The Securities and Exchange Commission (SEC) is required to establish a full-time five-member public company accounting oversight board. Executive and financial officers are required to certify periodic financial reports and are liable for intentional violations of securities reporting requirements. Accounting firms are prohibited from providing many types of non-audit and consulting services to the companies they audit. Auditors must maintain financial documents and audit work papers for seven years. Auditors, accountants and employees can be imprisoned for up to 20 years and subject to fines for destroying financial documents and willful violations of the securities law. A public corporation must change its lead auditing firm every five years. There is added protection for whistle-blowers who report violations of the Sarbanes–Oxley Act. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Different Types of Accounting ▪ Accounting is usually broken down into two broad categories: 1. Managerial accounting – provides managers and employees with the information needed to make decisions about a business’s financing, investing, marketing and operating activities 2. Financial accounting – generates financial statements and reports for interested people outside an organisation ▪ Additional special areas of accounting include: Cost accounting – determining the cost of producing specific products or services Tax accounting – planning tax strategy and preparing tax returns for firms or individuals Government accounting – providing basic accounting services to ensure that tax revenues are collected and used to meet the goals of government agencies Not-for-profit accounting – helping not-for-profit organisations to account for all donations and expenditures © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Careers in Accounting ▪ Accountants generally are classified as either: Private accountants – are employed by a specific organisation Public accountants – work on a fee basis for clients and may be self-employed or be the employee of an accounting firm o Typically, public accounting firms include on their staffs at least one certified public accountant. - Certified public accountant (CPA) – an individual who has met state requirements and experience and has passed a rigorous accounting examination © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Accounting Equation (slide 1 of 2) ▪ Accounting equation – the basis for the accounting process: Assets = Liabilities + Owners’ equity Assets – the resources that a business owns Liabilities – a business’s debts and obligations Owners’ equity – the difference between a business’s assets and its liabilities ▪ For every kind of business, the total dollar amount for assets must equal the sum of its liabilities and owners’ equity. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Accounting Equation (slide 2 of 2) ▪ To use the accounting equation, a business’s accountants record the business’s day-to-day financial transactions using the double-entry bookkeeping system. Double-entry bookkeeping system – a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation ▪ At the end of a specific accounting period, all of the financial transactions are summarised in the buisness’s financial statements and included in its annual report. Annual report – a report distributed to shareholders and other interested parties that describes the business’s operating activities and its financial condition © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Balance Sheet ▪ Balance sheet (or statement of financial position) – a summary of the rand amounts of a business’s assets, liabilities and owners’ equity accounts at the end of a specific accounting period ▪ The balance sheet must demonstrate that assets are equal to liabilities plus owners’ equity, and the accounting equation is still in balance. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-5 Personal Balance Sheet © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-6 Business Balance Sheet © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Assets (slide 1 of 3) ▪ On a balance sheet, assets are listed in order from the most liquid to the least liquid. Liquidity – the ease with which an asset can be converted into cash Current Assets ▪ Current assets – assets that can be converted quickly into cash or that will be used in one year or less © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Assets (slide 2 of 3) Current Assets (cont.) ▪ Order of current assets from most liquid to least liquid: 1. Cash 2. Marketable securities o Stocks, bonds, and other investments that can be converted into cash in a matter of days 3. Accounts receivable o Credit purchases that are generally paid within 30 to 60 days 4. Notes receivable o Are repaid over a longer period of time than accounts receivable 5. Inventory o Represents the value of goods on hand for sale to customers 6. Prepaid expenses o Assets that have been paid for in advance but have not yet been used © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Assets (slide 3 of 3) Fixed Assets ▪ Fixed assets – assets that will be held or used for a period longer than one year Examples: land, buildings and equipment used in the continuing operation of the business ▪ Depreciation – the process of apportioning the cost of a fixed asset over the period during which it will be used Intangible Assets ▪ Intangible assets – assets that do not exist physically but that have a value based on the rights or privileges they confer on a business Examples: patents, copyrights, trademarks and brands, goodwill © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Liabilities and Owners’ Equity (slide 1 of 2) Current Liabilities ▪ Current liabilities – debts that will be repaid in one year or less ▪ Include: Accounts payable o Short-term obligations that arise as a result of a business making credit purchases Salaries payable Taxes payable © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Liabilities and Owners’ Equity (slide 2 of 2) Long-Term Liabilities ▪ Long-term liabilities – debts that need not be repaid for at least one year Owners’ or Shareholders’ Equity ▪ For a sole proprietorship or partnership, the owners’ equity is shown as the difference between assets and liabilities. ▪ For a company, the owners’ equity usually is referred to as shareholders’ equity. The rand amount reported on the balance sheet is the total value of shares plus retained earnings that have accumulated to date. o Retained earnings – the portion of a business’s profits not distributed to shareholders © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Income Statement ▪ Income statement – a summary of a business’s revenues and expenses during a specified accounting period Sometimes called the: o Earnings statement o Statement of income and expenses ▪ The difference between income and expenses is referred to as: Profit or loss (for a business) Cash surplus or cash deficit (for an individual) ▪ For a business: Revenues – Cost of goods sold – Operating expenses = Net income © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-7 Personal Income Statement © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-8 Business Income Statement © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Revenues ▪ Revenues – the rand amounts earned by a business from selling goods, providing services, or performing business activities Gross sales – Sales deductions = Net sales Gross sales – the total rand amount of all goods and services sold during the accounting period Deductions: o Sales returns o Sales allowances o Sales discounts Net sales – the actual rand amounts received by a business for the goods and services it has sold after adjustment for returns, allowances and discounts © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Cost of Goods Sold ▪ Cost of goods sold – the rand amount equal to beginning inventory plus net purchases less ending inventory Cost of goods sold = Beginning inventory + Net purchases – Ending inventory ▪ Gross profit – a business’s net sales less the cost of goods sold Gross profit = Net sales – Cost of goods sold © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Operating Expenses ▪ Operating expenses – all business costs other than the cost of goods sold ▪ Total operating expenses generally are divided into two categories: 1. Selling expenses o Costs related to the business’s marketing activities 2. General expenses o Costs incurred in managing a business © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Net Income ▪ Net income – occurs when revenues exceed expenses ▪ Net loss – occurs when expenses exceed revenues Formulas: Net income from operations = Gross profit – Total operating expenses Net income before taxes = Net income from operations – Interest expense © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Statement of Cash Flows (slide 1 of 2) ▪ Statement of cash flows – a statement that illustrates how the company’s operating, investing, and financing activities affect cash during an accounting period ▪ The information on the statement of cash flows can be used to evaluate decisions related to a business’s future investments and financing needs. ▪ Investors, lenders and suppliers are also interested in a business’s statement of cash flows. Investors want to know if a business can pay dividends. Lenders and suppliers often use the information on the statement of cash flows to evaluate the business’s ability to repay its debts. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-9 Statement of Cash Flows © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Statement of Cash Flows (slide 2 of 2) ▪ Three sections of a statement of cash flows: 1. Cash flows from operating activities o Addresses the business’s primary revenue source – providing goods and services 2. Cash flows from investing activities o Includes the purchase and sale of equipment, land and other assets and investments 3. Cash flows from financing activities o Reports changes in debt obligation and owners’ equity accounts o Includes loans and repayments, the sale and repurchase of the company’s own stock, and cash dividends ▪ The totals of all three activities are added to the beginning cash balance to determine the ending cash balance. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Evaluating Financial Statements ▪ The balance sheet, the income statement and the statement of cash flows can provide answers to a variety of questions about a business’s ability to do business and stay in business, its profitability and its value as an investment. ▪ Even more information about a business’s financial health can be obtained by comparing its current financial data with its own financial results over recent accounting periods and with other businesses in similar industries. ▪ Many businesses compare their financial results with their own historical financial results, with those of competing businesses and with industry averages. ▪ Today, most companies include in their annual reports comparisons of the important elements of their financial statements for recent years. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 15-10 Comparisons of Present and Past Financial Statements for Microsoft Corporation © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Financial Ratios (slide 1 of 3) ▪ Financial ratio – a number that shows the relationship between two elements of a business’s financial statements Measuring a Business’s Ability to Earn Profits ▪ Return on sales (or profit margin) – a financial ratio calculated by dividing net income after taxes by net sales Example for Baobab Art Supplies: R301 750 R4 510 000 = 0.067, or 6.7 percent The return on sales indicates how effectively the business is transforming sales into profits. A higher return is better than a low one. A low return on sales can be increased by reducing expenses and increasing sales. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Financial Ratios (slide 2 of 3) Measuring a Business’s Ability to Pay Its Debts ▪ Current ratio – a financial ratio computed by dividing current assets by current liabilities Example for Baobab Art Supplies: R1 820 000 R700 000 = 2.60 This means that Baobab Art Supply has R2.60 of current assets for every R1 of current liabilities. A high current ratio indicates that a firm can pay its current liabilities. A low current ratio can be improved by repaying current liabilities, by reducing dividend payments to stockholders to increase the firm’s cash balance, or by obtaining additional cash from investors. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Financial Ratios (slide 3 of 3) Measuring How Well a Business Manages Its Inventory ▪ Inventory turnover – a financial ratio calculated by dividing the cost of goods sold in one year by the average value of the inventory Average value of the inventory: (Beginning inventory + Ending inventory) ÷ 2 Example for Baobab Art Supplies: R3 340 000 R405 000 = 8.2 times per year Baobab Art Supplies sells its merchandise inventory 8.2 times each year, or about once every 45 days. The average inventory turnover for all firms is about 9 times per year, but turnover rates vary widely from industry to industry. The quickest way to improve inventory turnover is to order merchandise in smaller quantities at more frequent intervals. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.