Foundations of Business - Chapter 15 PDF

# Foundations of Business - Chapter 15: Using Management and Accounting Information ## Learning Objectives After completing this chapter, you will be able to: - Examine how information can reduce risk when making a decision. - Discuss management's information requirements. - Outline the five func...

# Foundations of Business - Chapter 15: Using Management and Accounting Information ## Learning Objectives After completing this chapter, you will be able to: - Examine how information can reduce risk when making a decision. - Discuss management's information requirements. - Outline the five functions of an information system. - Explain why accurate accounting information and audited financial statements are important. - Interpret a balance sheet. - Interpret an income statement. - Describe business activities that affect a firm's cash flow. - Summarize how managers evaluate the financial health of a business. ## 15-1: How Can Information Reduce Risk When Making a Decision? * **Information Rules**: Business people try to accumulate information rules to shorten the time spent analyzing choices, continuously looking for new rules that can be put to good use and looking to discredit old ones that are no longer valid. * **The Difference Between Data and Information**: * **Data**: Numerical or verbal descriptions that usually result from some sort of measurement. * **Information**: Data presented in a form that is useful for a specific purpose. * **Knowledge Management**: * **Database**: A single collection of data and information stored in one place that can be used by people throughout an organization to make decisions. * **Knowledge Management (KM)**: A firm's procedures for generating, using, and sharing important data and information. * **Making Smart Decisions**: * **Decision-Support System (DSS)**: A type of software program that provides relevant data and information to help a firm's employees make decisions. * **Expert System**: A type of computer program that uses artificial intelligence to imitate a human's ability to think. ## Table 15-1: Current Business Application Software Used to Improve Productivity | Software Type | Use | |--------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | Word Processing | Users can prepare and edit written documents and store them in the computer or on a memory device. | | Desktop Publishing | Users can combine text and graphics in professional reports, newsletters, and pamphlets. | | Accounting | Users can record routine financial transactions and prepare financial reports at the end of the accounting period. | | Database Management | Users can electronically store large amounts of data and transform the data into information. | | Graphics | Users can display and print pictures, drawings, charts, and diagrams. | | Spreadsheets | Users can organize numerical data into a grid of rows and columns. | ## 15-2: 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. **A Firm's Information Requirements**: Many firms are organized into five areas of management: | Area | Information Requirement | |----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | Finance | Ensure all stakeholders and government agencies have information needed to measure financial health of the firm. | | Operations | Concerned with present and future sales, inventory levels of work in process and finished goods, availability and cost of resources to produce goods and services. | | Marketing | Need to have detailed information about a firm's products and services and those offered by competitors. | | Human Resources | Must be aware of anything that pertains to a firm's employees. | | Administration | Responsible for the overall management of the organization. | **Costs and Limits of the System**: - Employees, managers, and executives can have too much information. - Worthless information, junk emails, and advertising also contribute to information overload. - The cost of computers, software, and related equipment can be staggering. - An MIS must be tailored to the needs of the organization it serves. ## 15-3: How Do Employees Use a Management Information System? - **Five Management Information System Functions**: The five functions of an MIS are to collect data, store the data, update the data, process the data into information, and present information to users. ## Figure 15-4: Typical Visual Displays Used in Business Presentations - The image shows a graph, a bar chart, and a pie chart. - The graph shows the sales of a company over several years. - The bar chart shows the profits of a company over several years. - The pie chart shows the sales figures for selected products of a company. ## Table 15-2: Typical Four Column Table Used in Business Presentations | Section of the Country | Number of Salespeople | Consumer Electronic Products ($) | Industrial Electronic Components ($) | |------------------------|-----------------------|------------------------------------|------------------------------------| | Eastern territory | 15 | 1,500,000 | 3,500,000 | | Midwestern territory | 20 | 2,000,000 | 5,000,000 | | Western territory | 10 | 1,000,000 | 4,000,000 | | **TOTAL** | **45** | **4,500,000** | **12,500,000** | ## 15-4: Why Accounting Information Is Important * **Accounting**: The process of systematically collecting, analyzing, and reporting financial information. * **Why Audited Financial Statements Are Important**: * **Audit**: An examination of a company's financial statements and the accounting practices that produced them. * **Generally Accepted Accounting Principles (GAAPs)**: An accepted set of guidelines and practices for U.S. companies reporting financial information and for the accounting profession. ## 15-5: The Accounting Equation and The Balance Sheet * **Assets**: The resources that a business owns. * **Liabilities**: A firm's debts and obligations. * **Owners' Equity**: The difference between a firm's assets and its liabilities. * **Accounting Equation**: Assets = Liabilities + Owners' Equity - For every kind of business, the total dollar amount for assets must equal the sum of its liabilities and owners' equity. - **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. - **Annual Report**: A report distributed to stockholders and other interested parties that describes the firm's operating activities and its financial condition. ## Figure 15-5: Personal Balance Sheet - The image shows a personal balance sheet for Marty Campbell. - It lists his assets, which include cash, a savings account, an automobile, a stereo, a television, and furniture. - It lists his liabilities, which include an automobile loan and a credit card balance. - It shows his net worth, which is his total assets minus his total liabilities. ## Figure 15-6: Business Balance Sheet - The image shows a business balance sheet for Northeast Art Supply, Inc. - It lists the company's assets, which are categorized as current assets, fixed assets, and intangible assets. - It lists the company's liabilities and stockholders' equity, which are categorized as current liabilities, long-term liabilities, and stockholders' equity. - It shows the total assets are equal to the total liabilities and stockholders' equity. * **Liquidity**: The ease with which an asset can be converted into cash. * **Current Assets**: Assets that can be converted quickly into cash or that will be used in one year or less. * **Fixed Assets**: Assets that will be held or used for a period longer than one year. * **Depreciation**: The process of apportioning the cost of a fixed asset over the period during which it will be used. * **Intangible Assets**: Assets that do not exist physically but that have a value based on the rights or privileges they confer on a firm. ## 15-6: The Income Statement * **Income Statement**: A summary of a firm's revenues and expenses during a specified accounting period. * **Revenues**: The dollar amounts earned by a firm from selling goods, providing services, or performing business activities. * **Gross Sales**: The total dollar amount of all goods and services sold during the accounting period. * **Net Sales**: The actual dollar amounts received by a firm for the goods and services it has sold after adjustment for returns, allowances, and discounts. ## 15-7: The Statement Of Cash Flows * **Statement of Cash Flows**: A statement that illustrates how the company's operating, investing, and financing activities affect cash during an accounting period. **Cash Flows from Operating Activities**: Addresses the firm's primary revenue source—providing goods and services. **Cash Flows from Investing Activities**: Includes the purchase and sale of equipment, land, and other assets and investments. **Cash Flows from Financing Activities**: Reports changes in debt obligation and owners' equity accounts. ## Figure 15-9: Statement of Cash Flows - The image shows a statement of cash flows for Northeast Art Supply, Inc. - It lists the company's cash flows from operating activities, investing activities, and financing activities. - It shows the net increase in cash for the year. - It shows the cash at the beginning of the year. - It shows the cash at the end of the year. ## 15-8: Evaluating Financial Statements * **Financial Ratio**: A number that shows the relationship between two elements of a firm's financial statements. **Measuring a Firm's Ability to Earn Profits**: * **Net Profit Margin (Return on Sales)**: A financial ratio calculated by dividing net income after taxes by net sales. **Measuring a Firm's Ability to Pay Its Debts**: * **Inventory Turnover**: A financial ratio calculated by dividing the cost of goods sold in one year by the average value of the inventory. **Measuring How Well a Firm 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. ## Group Activity - The image shows a group activity for a class. - It describes a scenario about Park Avenue Furniture, a company that has been experiencing financial difficulties. - It asks students to analyze the company's financial condition, discuss why the bank officer turned down the company's lone request, and prepare a detailed plan of action to improve the financial health of the company.