TOPIC 1. Decision-Making, Planning and Control. Planning

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1 TOPIC 1 Nature & Role of Accounting Accounting is concerned with collection, analysis and communication of economic information Accounting information is useful to those who; o make decisions and plans about businesses, and o those who control those businesses 2 main roles; o Stewartship o Decision usefulness Accounting as an Information System Identify: Identify the relevant economic information Record: Record this information in systematic way Analyse: Analyse & interpret this information Report: Report this information to users Decision-Making, Planning and Control Planning Control Essential for business success Prudent decision-making closely linked to effective planning Covers both long-term and short-term scenarios Plans are normally adapted to changing circumstances Involves making decisions about the best course of action Process of making planned events actually occur Uses accountaing to compare planned outcomes with actual outcomes Enables managers to get the business back on track Planning and Control Process Step 1: Identify business objectives Step 2: Consider options Step 3: Prepare a long-term plan based on the most appropriate option(s) Step 4: Prepare a short-term plans (budgets) Step 5: Perform and collect information on actual performance

2 Step 6: Respond to divergences between plans and actuals, and exercise control Step 7: Revise plans (and budgets) if necessary Business Objectives 1. Maximise sales revenue - Sell as many products as possible 2. Maximise profit - Consider revenue & expense 3. Maximise return on capital employed - Consider profit and return on investment 4. Survival 5. Long-term stability 6. Growth - Balance short-term & long-term benefits 7. Satisfying all stakeholders - Difficult to balance 8. Achieve sustainable development - Particularly relevant/important for success now 9. Enhance/maximise the wealth of the business - Encompasses all other objectives Financial and Management Accounting Management accounting - Concerned with providing managers/owners with information required for day-to-day running of the business Financial accounting - Concerned with providing all other users with useful information Financial Accounting Management Accounting Focus Mainly external Internal only Nature of reports General purpose Specific purose Level of detail Broad overview Quite detailed Restrictions Accounting standards and other No restrictions regulations Reporting interval Mainly semi-annual or annual Whenever required Time horizon Mainly historical Both past and future Range of information Quantifiable in money terms; focus on objective and verifiable data Can contain non-financial information; less focus on objectivity and verifiability Main Financial Reports Income Statement - Measures and reports how much profit/loss is made in a period Statement of Financial Position/Balance Sheet - Shows overall net financial position at a point in time - Shows the assets of a business and the claim on those assets Statement of Financial Performance/Income Statement - Measures and reports how much wealth (profit) has been generated in a period Statement of Changes in Owner s Equity - Shows all changes in owner s interest in net assets from transactions during the period Statement of Cash Flows - Shows sources and uses of cash for a period

3 List the different business stuctures (SEE PAGE 63) Sole Traders/Proprietorships Advantages: Simple and inexpensive to establish and operate Minimal financial reporting regulations Ownership and management are normally combined Financial rewards flow directly to the owner Timely decision-making Disadvantages: Unlimited Legal liability owner bears all risks Limited access to funds Limited life Partnerships Advantages: Relationship existing between two of more persons carrying on a business with the aim of generating financial profit Established by a formal partnership agreeement or an informal arrangement between the parties Partnership maintains individual records of each partner s transactions according to: o Resource contributions (capital) o Resource withdrawals (drawings) o Share of undistributed profits (either current or retained earnings) Characteristics of Partnerships: No separate legal entity Limited life Unlimited liability Mutual agency: each partner is responsible for the actions of the other partners

4 Co-ownership of assets and profits Limited membership: up to twenty partners Increased regulation Companies Different company types; o Most common is company limited by shares, or limited company Characteristics; o Separate legal entity ownership and management also separate o Ownership broken down into shares owners are shareholders o Unlimited (perpetual) legal life o Limited liability shareholders only responsible to value of shares o Company ownership of assets o Company profits ultimately belong to shareholders (dividends) o Extensive membership Company Advantages: Separation of ownership and mangement Separate legal entity owners limited liability Greater access to funding Potential taxation advantages Potential increases in share values when listed on the ASX Disadvantages: Extensive regulation and public scrutiny Higher establishment costs Loss or dilution of original ownership control Disclosure, Accountability and Fairness Disclosure: Heart of good corporate governance About adequate/timely information being available to investors Accountability: Defining roles and duties of directors Establishing adequate monitoring process which may include external auditing Role of Directors, Accounting Standards & ASX Directors: Shareholder interests should be the guiding principle for a director s goverance decisions Accounting Standards: International Accounting Standards narrow management s range of methods for recording and reporting transactions, bringing about greater consistency ASX: Companies listed on the ASX (public companies) subjected to further rules specified by the ASX

5 Define Accounting The process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information. List the main user groups for a business entity. Internal groups: Owners, managers and employees External groups: Customers, competitors, government, community, investment analysts, suppliers and lenders. List the business objectives Maximisation of sales revenue Maximisation of profit Maximisation of capital employed Survival Long-term stability Growth Satisficing Achieving sustainable development Enhancing/maximisation of the wealth of the business Financial verses Management Accounting Management accounting relies on internal information and prepares reports for internal purposes Financial accounting prepares reports for end users The Main Financial Reports Statement of cash flows Statement of financial performance also know as the income statement or profit and loss Statement of financial position also know as the balance sheet Statement of changes in equity

6 TOPIC 2 REVENUE CYCLE: SALES AND COLLECTIONS Primary objective: o Provide the right product in the right place at the right time for the right price Information about revenue cycle activities flows to other accounting cycles e.g.: o The expenditure and production cycles o The human resources/payroll cycle o The general ledger and reporting function REVENUE CYCLE: Sales Order > Shipping > Billing > Cash Collection SALES ORDER ENTRY Performed by sales order department. Steps in the process include: o Take customer s order o Check customer s credit o Check inventory availability o Respond to customer inquiries (may be done by customer service or sales order entry) SHIPPING Process consists of two steps: o Picking and packing the order Picking done by warehouse dept. Packing done by shipping dept. o Shipping the order done by shipping dept. Both functions include custody of inventory and ultimately report to the Manufacturing manager The clerk records in accounting system: o The sales order number o The item numbers ordered o The quantities shipped This process: o Updates the quantity-on-hand field in the inventory master file o Produces a packing slip o Produces multiple copies of bill of lading BILLING Involves two tasks: o Invoicing notify customer of how/where to pay o Updating accounts receivable increased by sales, reduced by customer payments Accurate and timely billing is crucial Requires information from: o Shipping Department - items and quantities shipped o Sales - prices and other sales terms CASH COLLECTIONS

7 Final activity in revenue cycle Cashier handles customer remittances and deposits them in the bank o No deposit necessary if customer uses EFT Controls should be in place to discourage theft; o Accounts receivable personnel should not have access to cash (including cheques) REVENUE CYCLE INFORMATION NEEDS Information for operational tasks: o Customer inquiries, extending credit, inventory availability Information for strategic decisions: o Setting product/service prices, returns policies, credit terms, S/T borrowing needs, marketing Unlimited Reports: o Sales breakdown, profitability, cashflow, receivables ageing EXPENDITURE CYCLE: PURCHASING & PAYMENTS Primary objective: o minimize cost of acquiring & maintaining inventory, supplies, and services Information flows: o Primarily to/from suppliers (vendors) o From other cycles to expenditure cycle, e.g.: Revenue cycle, production cycle, inventory control o From expenditure cycle: When the goods and materials arrive to the parties that have requested them To general ledger and reporting Decisions made here include: o What level of inventory/supplies to carry? o What vendors provide best price, quality & discounts? o How can IT improve inbound logistics? o How to manage payments to maximize cash flow? Management has to evaluate efficiency and effectiveness of this cycle using data: o About events, resources & agents o That is accurate, timely and reliable EXPENDITURE CYCLE: Purchase Order > Order placed with Supplier > Receiving & Storing > Cash Payment ORDERING GOODS, SUPPLIES AND SERVICES Identifying what, when, and how much inventory to purchase from whom Inventory control is vital: o Weaknesses can create significant problems o Inaccurate records cause shortages o Use most appropriate method JIT (Just in time), MRP (Materials, requirments, planning), etc. Purchase order generated by purchase request triggered by; o The inventory control function; or o An employee noticing a shortage Purchase requisition internally identifies: