PowerPoint Chapter 1

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  • You might ask the following question to help illustrate the need for an accounting system. Can you weed a garden with a hockey stick or a baseball bat? Yes, you can but not very well since you are using the wrong tool. Accounting information systems are best at what they were designed to do. A traditional financial accounting systems is designed to support stewardship, not to support management decisions. If you want a system to support management decisions, you must redesign the accounting information system to provide information in a different form or to provide additional information. In the text, we introduce an example relating to British investors and a company in the far western part of the United States. How do financial, or regulated, accounting systems allow British investors to feel comfortable about investing in companies they will never see? It is because regulated financial accounting systems provide: Assurance of truth and fair representation by providing audited statements. Internal asset safeguards to support management and help assure that management is also under control. Information that allows comparison with similar investments or similar companies. Please not that all accounting systems must be regulated, even managerial accounting systems. Be regulated financial accounting systems, we mean the rules set by the SEC and the Government, and agreed upon GAAP standards that are formulated by industry practices and various professional and regulatory bodies. Management accounting systems must be controlled, but they are established and controlled by the company itself, so in essence they are unregulated.
  • Financial Accounting or Generally Accepted Accounting Principles (GAAP). These are accounting rules set by the Securities and Exchange Commission (SEC) for public companies and set by other bodies and industries for privately held companies. Provides the basis for traditional accounting information systems and internal controls. Publicly held or traded companies must be audited by Certified Public Accountants (CPAs) to assure that proper rules and standards are followed. Tax Accounting. This is the collection of data to meet rules set by Congress and enforced by the Internal Revenue Service (IRS). Fund Accounting. These are sets of accounting rules followed by government and some not-for-profit agencies. The goal of these systems is to assure that monies are collected and spent according to government regulation or other standards established by fund providers. This system tracks cashflows and spending constraints. The Cost Accounting Standards Board was established to provide rules for all government contractors to follow so that they would have the information necessary to comply with Federal laws. However, many of their techniques and methods have been adapted to industrial use for general cost accounting processes.
  • We think it is fair to explain our definition of value. We limit our definition of value to the creation of current and future cashflows. This ignores value to owner stakeholders that may not create cashflows. We expand this idea later in the text to discuss and define stakeholders as groups of individuals that can influence the value of an organization. This is an opportunity for the instructor to discuss the influence of personal value or preferences on the costs of operations. For example ‘If you like your job, you will work for less’. You may wish to use as a discussion question the following. What kinds of value to you think are important for managers to consider because they will influence future cashflows? Any of these activities will influence value (cashflows). Cashflows from customers. Cashflows paid for wages and materials. The image of the company will influence customer loyalty, thereby increasing or decreasing revenue. The training and working conditions of employees will influence the wages they demand, and their productivity levels.
  • Soft data. This is information, like forecasts, that cannot generally be auditied. It would include subjmective judgements. An example of soft data is the prediction or opinion that taking this accounting course will increase your cash earnings in the future. Hard data. This is information that meets audit standards. We are talking about historical data that can be supported by independent verification (counted). The hard data about this course would measure and report the types of jobs acquired by students after taking this accounting course. A more simple illustration of hard data is the cost of this course: the tuition, the books, and the opportunity cost of the time invested in this course. To properly evaluate decisions requires estimates of the future cashflow implications of these decisions. Rule based information usually requires that audit and reporting standards be met so that the data produced can be independently verified (audited). Thus they only report the past or historical information. To the extent that past is repeated, or indicative of the future, this is useful information. That is, if the hiring patterns of students who take this accounting course last year is repeated every year, then the hard data is useful when a student decides to take this course. You might ask for specific instances, based on experience, of the difference between hard and soft data.
  • Note: You can review as many of these questions as you wish. The basic concept we wish to illustrate and communicate is that different accounting systems are developed for different reasons. I 2 is an identical problem available for homework assignment to allow testing of this discussion to assure that students understand the concepts.
  • 1. CUSTOMER FOCUS : Companies try to provide differentiated products that have unique value. Information on the cost and value of unique features are needed. 2. QUALITY FOCUS : Means companies provide goods and services as specified to both internal and external customers. This requires information on the costs of quality and progress towards total quality management. 3. DELIVERY FOCUS : Means delivering goods and services as promised. The performance and costs of this goal needs to be monitored. 4. OUTSOURCING AND THE VIRTUAL COMPANY : Companies need to identify their ‘core’ competencies and outsource things they do not do well to other companies. This requires activity based measurement systems based upon quality, delivery and value-chain costs. 5. COMMUNICATIONS : This refers to the dramatic improvement in communications technology. Information is much more timely and available. 6. SHORTENING PRODUCT LIFE CYCLES : Short product life cycles force companies to manage product lines from the initial design stage more often. This requires new accounting systems to provide the support for this activity. 7. TEAM DEVELOPMENT : Teams working across functional groups are needed to efficiently and effectively manage dynamic environments. Accounting information is needed to establish priorities and communicate among functional groups. 8. DEREGULATION IN THE SERVICE SECTOR : With deregulation service industries need to make cost effective decisions that reflect the value of services to customers.
  • The Costs and Benefits of Better Decisions I like to relate this to games like football (or the weather for farming etc). If you were a gambler would you buy an information system that correctly predicted the winning sports team 60% of the time? Or, if you are a farmer dependent on the weather, what would you pay for information that improved weather predictions?   ANSWER: It would depend on how well I am predicting winners, or the weather, without the system. The real issue is how much will the new information improve my current decisions.   Key Point: The benefits from improved decision making information are set by the ‘value’ of better decisions! The cost versus benefit decision for the analysis of better information systems is different from situation to situation. Thus the form and use of managerial decisions systems may be different for each company.   S/P How would you determine what you would pay for an information system that accurately predicts future cashflows?   ANSWER: It would depend on the increased value of the decisions I would change because of the new information. If I’m already making the best decisions the added information does not change my decisions and is valueless!   S/P How would better information influence the risk of making decisions?   ANSWER: By reducing the chance of making a bad, value decreasing, decision.   One Set of Books for Many Different Uses   Using GAAP rules to meet stewardship goals may not meet the information needs for value adding decisions, decisions to improve operational efficiency, or decisions that provide increased economic benefits. Enhanced Information Quality for Better Decisions A properly designed and implemented management accounting system provides better quality information. The definition of better quality in this instance is more relevant information that provides the knowledge to make better business decisions.
  • PowerPoint Chapter 1

    1. 1. Management Accounting: A Road of Discovery
    2. 2. Management Accounting : A Road of Discovery James T. Mackey Michael F. Thomas Presentations by: Roderick S. Barclay Texas A&M University - Commerce James T. Mackey California State University - Sacramento © 2000 South-Western College Publishing
    3. 3. Chapter 1 What is Management Accounting? Accounting for Planning, Control, and Evaluation
    4. 4. Key Learning Objectives <ul><li>Discuss the differences between financial and management accounting information. </li></ul><ul><li>Describe eight modern management trends changing the role of accounting in organizations. </li></ul><ul><li>Contrast the four accounting certifications and discuss the role of ethics in management accounting. </li></ul><ul><li>Define the four types of accounting systems and relate them to their four organizational roles. </li></ul><ul><li>Explain stewardship and why the dominant goal of accounting systems historically has been financial reporting. </li></ul>
    5. 5. Why Do We Have Accounting Systems? <ul><li>Accounting systems are artifacts. They are created by men to help accomplish tasks. Audited statement reduce investors risk. </li></ul><ul><ul><li>Audited statements allow a company to borrow capital from someone else. </li></ul></ul><ul><ul><li>Records and internal financial controls safeguard the company’s assets </li></ul></ul><ul><ul><li>Balance Sheets allow the comparison of Assets, Liabilities and Owner’s Equity. </li></ul></ul><ul><ul><li>Income Statements describe the change in Owners’ Equity from operations. </li></ul></ul>
    6. 6. Needs Determine the Form of Accounting Data <ul><li>Managers need changing information to meet changing needs! </li></ul><ul><ul><li>Types of Accounting Systems </li></ul></ul><ul><ul><ul><li>Financial Accounting </li></ul></ul></ul><ul><ul><ul><ul><li>Rules and procedures </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Accounting information systems and internal controls </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Auditing </li></ul></ul></ul></ul><ul><ul><ul><li>Cost Accounting </li></ul></ul></ul><ul><ul><ul><ul><li>Product costing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Activity-based costing </li></ul></ul></ul></ul>
    7. 7. <ul><ul><ul><li>Management Accounting </li></ul></ul></ul><ul><ul><ul><ul><li>Decision support </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Organizational control </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cost management </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Profit management </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Investment management </li></ul></ul></ul></ul><ul><ul><ul><li>Tax Accounting </li></ul></ul></ul><ul><ul><ul><ul><li>Individuals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Partnerships and corporations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Estate and trusts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>International taxation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Special tax issues and topics </li></ul></ul></ul></ul>
    8. 8. <ul><li>Regulated Accounting Systems </li></ul><ul><ul><li>Financial Accounting or Generally Accepted Accounting Principles (GAAP). Provide the basis for traditional accounting information systems and internal controls. </li></ul></ul><ul><ul><li>Tax Accounting. This is the collection of data to meet rules set by Congress and enforced by the Internal Revenue Service (IRS). </li></ul></ul><ul><ul><li>Fund Accounting. An accounting system designed to provide governance information for government agencies and not-for-profit organizations. </li></ul></ul><ul><ul><li>Cost Accounting. This aspect of cost accounting is to comply with rules set by the Federal government for government contractors. Rules set by the Cost Accounting Standards Board (CASB). </li></ul></ul>
    9. 9. The Goal of Good Management is to Create Value <ul><li>Cost Management is applying the value criteria to every decision we make, every activity we perform, and every process we complete. </li></ul><ul><li>Modern accounting systems do not just evaluate good stewardship but must provide managers with the information managers need to improve value. </li></ul><ul><li>Management accounting systems are used to enhance both decision making and management control. </li></ul><ul><li>Management accounting systems do not need to be perfect, only ‘good enough’ to increase value. </li></ul>
    10. 10. The Three Management Functions <ul><li>Questions asked: </li></ul><ul><ul><li>What do I want to do? </li></ul></ul><ul><ul><li>How can I do it? </li></ul></ul><ul><ul><li>Am I getting it done? </li></ul></ul><ul><ul><li>How well did I do it? </li></ul></ul><ul><li>Management functions: </li></ul><ul><ul><li>Planning for the future (Strategic) </li></ul></ul><ul><ul><li>Planning for the future (Operational) </li></ul></ul><ul><ul><li>Monitoring and controlling the present </li></ul></ul><ul><ul><li>Evaluating the past </li></ul></ul>
    11. 11. Data Characteristics of Financial vs. Managerial Accounting <ul><li>Financial Accounting rules are set by users who agree among themselves on the regulations for (GAAP). This is hard data, objectively verifiable, that must meet audit criteria to be acceptable. It is therefore considered reliable . </li></ul><ul><li>Managerial Accounting rules are set within the company to accomplish management objectives related to adding value to the company. This is data that could be soft , or estimates, that must only improve the value of decisions more than the cost of information. Managerial accounting data must only be relevant for management decisions. </li></ul>
    12. 12. Another Issue <ul><li>‘The Invisible Hand of the market place’ assumes market prices can promote efficiency. A perfect market reveals all the information needed for purchasers to find the ‘best prices’ for goods or services. But what are the prices managers use to run a company? An example follows. </li></ul>
    13. 13. An Example <ul><li>The Sudbury Redi Mix company purchased a new ready mix truck last year. The following information pertains to this truck: </li></ul><ul><li>  </li></ul><ul><li>a.    On the Balance Sheet: </li></ul><ul><ul><li>Trucks and Equipment $200,000 </li></ul></ul><ul><ul><li>less: Accumulated Depreciation* 40,000 </li></ul></ul><ul><ul><li>Net Book Value $160,000 </li></ul></ul><ul><li>*This depreciation schedule is acceptable by the IRS for tax purposes. </li></ul><ul><li>  </li></ul><ul><li>b.   Blue Book Value: $150,000 </li></ul><ul><li>c.    Net cash flows expected from the additional truck over its service life is $300,000. </li></ul>
    14. 14. Questions <ul><li>Which financial numbers obey GAAP? </li></ul><ul><li>Why can these numbers be used by the IRS? </li></ul><ul><li>Why doesn’t the IRS use $300, 000 or $150,000 for tax purposes? </li></ul><ul><li>For what kind of decisions would the $150,000 be relevant? </li></ul><ul><li>For what kind of decisions would the $300,000 be relevant? </li></ul><ul><li>Why do we call the Net Book Value data hard? </li></ul><ul><li>Why do we call the Blue Book Value data soft? </li></ul><ul><li>If you own shares in Sudbury Company, which information do you want to use to estimate the value of your stock? </li></ul><ul><li>Different financial data is needed for different purposes or decisions!! </li></ul>
    15. 15. New Management Trends to Create Value <ul><li>Encourage Management Accounting Systems Redesign, for example. </li></ul><ul><ul><li>Customer focus </li></ul></ul><ul><ul><li>Quality focus </li></ul></ul><ul><ul><li>Delivery focus </li></ul></ul><ul><ul><li>Outsourcing and the virtual company </li></ul></ul><ul><ul><li>Communications </li></ul></ul><ul><ul><li>Shortening product life cycles </li></ul></ul><ul><ul><li>Team development </li></ul></ul><ul><ul><li>Deregulation in the service sector </li></ul></ul>
    16. 16. Managerial Accounting Systems: Unregulated <ul><li>Decision Support — Management accounting data has value if it improves management decisions. </li></ul><ul><li>Control Support — Management accounting data reports the results of management actions, thus it is useful for control if management behavior is influenced by the accounting reports. </li></ul><ul><li>WHAT GETS MEASURED GETS DONE! </li></ul><ul><ul><li>SUITABLE CONTROL MOTIVATES GOOD JUDGEMENT </li></ul></ul><ul><ul><li>GOOD JUDGMENT REQUIRES GOOD INFORMATION ! </li></ul></ul>
    17. 17. Characteristics of Management Accounting Systems <ul><li>Key Ideas: </li></ul><ul><ul><li>The costs and benefits of better decisions </li></ul></ul><ul><ul><li>One set of books for many different uses </li></ul></ul><ul><ul><li>Enhanced information quality for better decisions </li></ul></ul>
    18. 18. The Professional Management Accountant <ul><li>Professional Certifications </li></ul><ul><ul><li>Certified Public Accountant (CPA) </li></ul></ul><ul><ul><li>Certified Management Accountant (CMA) </li></ul></ul><ul><ul><li>Certified Internal Auditor (CIA) </li></ul></ul><ul><ul><li>Certified Information Systems Auditor (CISA) </li></ul></ul><ul><ul><li>Certified in Financial Management (CFM) </li></ul></ul><ul><ul><li>Chartered Accountant (CA) </li></ul></ul>
    19. 19. Ethical Responsibilities of the CMA <ul><li>Competence </li></ul><ul><li>Objectivity </li></ul><ul><li>Integrity </li></ul><ul><li>Confidentiality </li></ul><ul><li>Maintain professional knowledge and skills </li></ul><ul><li>Follow laws and regulations </li></ul><ul><li>Analyze all relevant data and provide complete information </li></ul><ul><li>Communicate all information fairly </li></ul><ul><li>Fully disclose all relevant information </li></ul><ul><li>Communicate favorable as well as unfavorable information including limitations of the information </li></ul><ul><li>Avoid apparent or actual conflicts of interest </li></ul><ul><li>Support attaining the legitimate goals of the organization </li></ul><ul><li>Avoid activities that will discredit the profession </li></ul><ul><li>Do not disclose confidential information unless legally obligated to do so </li></ul><ul><li>Do not allow subordinates to disclose confidential information </li></ul>
    20. 20. Professional Characteristics of The Management Accountant <ul><li>Most Important </li></ul><ul><ul><li>Work ethic </li></ul></ul><ul><ul><li>Analytical and problem solving skills </li></ul></ul><ul><ul><li>Interpersonal skills </li></ul></ul><ul><ul><li>Listening </li></ul></ul><ul><ul><li>Spreadsheet abilities </li></ul></ul><ul><ul><li>Understanding the business </li></ul></ul><ul><ul><li>Understanding bottom line implications of management decisions </li></ul></ul><ul><ul><li>Writing </li></ul></ul><ul><ul><li>Familiarity with business processes </li></ul></ul><ul><li>Least Important </li></ul><ul><ul><li>Interpreting financial statements </li></ul></ul><ul><ul><li>Measuring and reporting revenues and expenses </li></ul></ul><ul><ul><li>Accruals, deferrals, and adjusting journal entries </li></ul></ul>

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