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  1. 1. Introduction to Management Accounting Chapter 1
  2. 2. Objective 1 Identify managers’ four primary responsibilities
  3. 3. Managers’ Responsibilities Setting goals and objectives Overseeing day-to- day operations Evaluating results of operations Directing Controlling Decision Making Planning
  4. 4. Objective 2 Distinguish financial accounting from management accounting
  5. 5. Primary Users? <ul><li>Management </li></ul><ul><li>Internal </li></ul><ul><li>Managers </li></ul><ul><li>Financial </li></ul><ul><li>External </li></ul><ul><li>Investors, creditors, government regulators </li></ul>
  6. 6. Purpose of Information? <ul><li>Management </li></ul><ul><li>Help managers plan, direct, and control business operations </li></ul><ul><li>Financial </li></ul><ul><li>Help investors and creditors make investment and credit decisions </li></ul>
  7. 7. Primary Accounting Product? <ul><li>Management </li></ul><ul><li>Any internal accounting report deemed worthwhile by management </li></ul><ul><li>Financial </li></ul><ul><li>General-purpose financial statements </li></ul>
  8. 8. What must be included? <ul><li>Management </li></ul><ul><li>Whatever management needs as long as benefits of using report exceeds cost of preparing it </li></ul><ul><li>Financial </li></ul><ul><li>Determined by GAAP </li></ul>
  9. 9. Underlying basis of the information? <ul><li>Management </li></ul><ul><li>Focus on future </li></ul><ul><li>Information on external and internal transactions </li></ul><ul><li>Financial </li></ul><ul><li>Based on historical transactions </li></ul><ul><li>External transactions </li></ul>
  10. 10. Information characteristic emphasized? <ul><li>Management </li></ul><ul><li>Relevance </li></ul><ul><li>Financial </li></ul><ul><li>Reliable and objective </li></ul>
  11. 11. Business unit? <ul><li>Management </li></ul><ul><li>Segments – products, geographical regions, customers </li></ul><ul><li>Financial </li></ul><ul><li>Company as a whole </li></ul>
  12. 12. How often prepared? <ul><li>Management </li></ul><ul><li>Depends on management needs </li></ul><ul><li>Financial </li></ul><ul><li>Annually and quarterly </li></ul>
  13. 13. Verification? <ul><li>Management </li></ul><ul><li>No independent audits </li></ul><ul><li>Internal audits may occur </li></ul><ul><li>Financial </li></ul><ul><li>Independent audits of publicly traded companies </li></ul>
  14. 14. Required by outside group? <ul><li>Management </li></ul><ul><li>No </li></ul><ul><li>Financial </li></ul><ul><li>Yes – SEC for publicly traded companies </li></ul>
  15. 15. Concern over how reports affect employee behavior? <ul><li>Management </li></ul><ul><li>Yes </li></ul><ul><li>Financial </li></ul><ul><li>Concern is about adequacy of disclosure </li></ul>
  16. 16. E1-10 <ul><li>Companies must follow GAAP in their ____________________ systems. </li></ul><ul><li>Financial accounting develops reports for external parties, such as __________ and _______________. </li></ul><ul><li>When managers evaluate the company’s performance compared to the plan, they are performing the __________ role of management. </li></ul>Financial accounting Creditors Shareholders Controlling
  17. 17. E1-10 <ul><li>__________ are decision makers inside a company. </li></ul><ul><li>___________________ provides information on a company’s past performance to external parties. </li></ul><ul><li>______________________ systems are not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system. </li></ul>Managers Financial accounting Management accounting
  18. 18. E1-10 <ul><li>Choosing goals and the means to achieve them is the __________ function of management. </li></ul><ul><li>_____________________ systems report on various segments or business units of the company. </li></ul><ul><li>____________________ statements of public companies are audited annually by CPAs. </li></ul>Planning Managerial accounting Financial accounting
  19. 19. Objective 3 Describe organizational structure and the roles and skills required of management accountants within the organization
  20. 20. Organizational Structure Board of Directors Chief Executive Officer Chief Operating Officer Chief Financial Officer Vice Presidents of various operations Treasurer Controller Internal Audit Audit Committee Board of Directors Chief Executive Officer Chief Operating Officer Chief Financial Officer Vice Presidents of various operations Treasurer Controller Internal Audit Audit Committee
  21. 21. Management Accountants <ul><li>Often part of cross-functional teams </li></ul><ul><li>Report to various vice-presidents of operations </li></ul><ul><li>Role is to analyze financial impact of business decisions </li></ul><ul><li>Internal consultants </li></ul>
  22. 22. Roles of Management Accountants <ul><li>Ensuring accurate financial records </li></ul><ul><ul><li>Helping to design information systems </li></ul></ul><ul><ul><li>Recording non-routine transactions </li></ul></ul><ul><ul><li>Making adjustments to financial records </li></ul></ul><ul><li>Planning, analyzing, and interpreting accounting data </li></ul><ul><li>Providing decision support </li></ul>
  23. 23. Required Skills <ul><li>Knowledge of financial and managerial accounting </li></ul><ul><li>Analytical skills </li></ul><ul><li>Knowledge of how a business functions </li></ul><ul><li>Ability to work on a team </li></ul><ul><li>Oral and written communications skills </li></ul>
  24. 24. E1-11 <ul><li>The _____ and the _____ report to the CEO. </li></ul><ul><li>The internal audit function reports to the CFO or _______ and the _____________. </li></ul><ul><li>The __________ is directly responsible for financial accounting, managerial accounting, and tax reporting. </li></ul><ul><li>The CEO is hired by the _____________. </li></ul>CFO COO CEO controller audit committee Board of Directors
  25. 25. E1-11 <ul><li>The __________ is directly responsible for raising capital and investing funds. </li></ul><ul><li>The __________ is directly responsible for the company’s operations. </li></ul><ul><li>Management accountants often work with __________________________. </li></ul><ul><li>The subgroup of the board of directors is called the _________________. </li></ul>treasurer COO cross functional teams audit committee
  26. 26. Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use its ethical standards to make reasonable ethical judgments
  27. 27. IMA <ul><li>Professional association for managerial accountants </li></ul><ul><li>Goal </li></ul><ul><ul><li>Advance management accounting profession </li></ul></ul><ul><ul><li>Educate society about role of managerial accountants </li></ul></ul><ul><li>Certifications </li></ul><ul><ul><li>Certified Management Accountant (CMA) </li></ul></ul><ul><ul><li>Certified Financial Managers (CFM) </li></ul></ul>
  28. 28. Ethics <ul><li>Statement of Ethical Professional Practice (IMA) </li></ul><ul><ul><li>Maintain professional competence </li></ul></ul><ul><ul><li>Preserve confidentiality of information </li></ul></ul><ul><ul><li>Uphold their integrity </li></ul></ul><ul><ul><li>Perform duties with credibility </li></ul></ul><ul><ul><li>Consult an attorney </li></ul></ul>
  29. 29. Steps to Resolve Ethical Dilemmas <ul><li>Follow company’s policies for reporting unethical behavior </li></ul><ul><li>If not resolved </li></ul><ul><ul><li>Discuss with immediate supervisor </li></ul></ul><ul><ul><li>Discuss with objective advisor </li></ul></ul>
  30. 30. E1-13 <ul><li>The ______ is the professional association for management accountants. </li></ul><ul><li>The institute offers two types of certification: The _____ and _____. </li></ul><ul><li>The __________ exam focuses on managerial accounting topics, economics, and business finance. </li></ul>IMA CMA CFM CMA
  31. 31. E1-13 <ul><li>The ______ exam focuses on financial statement analysis, business valuation, risk management, working capital policy, and capital structure. </li></ul><ul><li>The institute’s monthly publication, called ________________, addresses current topics of interest to managerial accountants. </li></ul>CFM Strategic Finance
  32. 32. E1-13 <ul><li>f. The institute says that approximately _____ percent of accountants work inside of organizations, rather than at CPA firms. </li></ul>85
  33. 33. Objective 5 Discuss trends in the business environment
  34. 34. Sarbanes-Oxley Act of 2002 <ul><li>CEO and CFO - responsible for financial statements, internal control system, procedures for financial reporting </li></ul><ul><li>Audit committee – independent and should include a financial expert </li></ul><ul><li>CPA firms – limited non-audit services for audit clients and periodic quality review </li></ul><ul><li>Stiffer penalties for white-collar crimes </li></ul>
  35. 35. Trends <ul><li>Shift toward service economy </li></ul><ul><li>Competing in global marketplace </li></ul><ul><li>Time-based competition </li></ul><ul><ul><li>ERP systems </li></ul></ul><ul><ul><li>E-Commerce </li></ul></ul><ul><ul><li>Just-in-Time Management </li></ul></ul><ul><li>Total Quality Management </li></ul>
  36. 36. Trends <ul><li>Cost-Benefit Analysis – weighing costs against benefits to help make decisions </li></ul>
  37. 37. Today’s Business Trends <ul><li>Shift toward a service economy </li></ul><ul><li>Global competition </li></ul><ul><li>Time-based competition </li></ul><ul><ul><li>Advanced information systems </li></ul></ul><ul><ul><li>E-Commerce </li></ul></ul><ul><ul><li>Just-in-Time management </li></ul></ul><ul><li>Total Quality Management </li></ul>
  38. 38. E1-16 <ul><li>To account for uncertainty in the amounts of future costs and benefits, we compute the ______________ by multiplying the probability of each outcome by the dollar value of that outcome. </li></ul><ul><li>To make a cost-benefit decision today, we must find the ______________ of the costs and benefits that are incurred in the future. </li></ul>expected value present value
  39. 39. E1-16 <ul><li>c. The goal of _______ is to meet customers’ expectations by providing them with superior products and services by eliminating defects and waste throughout the value chain. </li></ul>TQM
  40. 40. E1-16 <ul><li>d. Most of the costs of adopting ERP, JIT, expanding into a foreign market, or improving quality are incurred in the ________, but most of the benefits occur in the _______. </li></ul>present future
  41. 41. E1-16 <ul><li>e. _______________ is the time between buying raw materials and selling the finished products. </li></ul><ul><li>f. __________ serves the information needs of people in accounting, as well as people in marketing and in the warehouse. </li></ul><ul><li>g. Firms adopt __________ to conduct business on the Internet. </li></ul>Throughput time ERP e-commerce
  42. 42. E1-16 <ul><li>h. Firms acquire the ______________ certification to demonstrate their commitment to quality. </li></ul>ISO9001:2000
  43. 43. Objective 6 Use cost-benefit analysis to make business decisions
  44. 44. E1-18 <ul><li>1. What are the total costs of adopting JIT? </li></ul><ul><li>Employee training $13,500 </li></ul><ul><li>Streamline production process 37,000 </li></ul><ul><li>Supplier identification 8,000 </li></ul><ul><li>Total costs $58,500 </li></ul>
  45. 45. E1-18 <ul><li>2. What are the total benefits of adopting JIT? </li></ul><ul><li>Savings in warehouse expenses $97,000 </li></ul><ul><li>Lower spoilage costs 46,000 </li></ul><ul><li>Total benefits $143,000 </li></ul>
  46. 46. E1-18 <ul><li>3. Should Wild Rides adopt JIT? Why or why not? </li></ul><ul><li>Expected total benefits $143,000 </li></ul><ul><li>Expected total costs (58,500) </li></ul><ul><li>Excess of benefits over costs $ 84,500 </li></ul><ul><li>Wild Rides should adopt JIT because the expected benefits exceed the costs. </li></ul>
  47. 47. S1-8 $17 million $12 million $29 million Expected value of additional benefits: Outcome Benefits Probability Expected value Moderately successful $20 million  0.85 = Extremely successful $80 million  0.15 =
  48. 48. S1-8 <ul><li>Total benefits: </li></ul><ul><li>Benefits already realized $170 million </li></ul><ul><li>Expected value of additional benefits 29 million </li></ul><ul><li>Total expected benefits $199 million </li></ul><ul><li>Total costs $200 million </li></ul>
  49. 49. S1-8 <ul><li>The costs of $200 million just exceed the total expected benefits of $199 million. Under these circumstances, the quality program does not appear to have been a worthwhile investment. </li></ul>
  50. 50. End of Chapter 1