Presentation on theme: "1 Chapter 8 Controlling. 2 Advanced Organizer 3 Chapter Objective Describe some of the important elements for establishing financial controls Explain."— Presentation transcript:
1 Chapter 8 Controlling
2 Advanced Organizer
3 Chapter Objective Describe some of the important elements for establishing financial controls Explain balance sheets, income statements, ratios. Explain different non-financial control systems
4 Definition of Controlling compelling events to conform to plans -- Goetz Control techniques and actions are intended to insure, as far as possible, that the organization does what management wants it to do.
5 Steps in the Control Process 4. Corrective Action 2. Measuring Actual Performance 3. Comparing Performance with Standards 1. Establish Standards Planning Controlling
6 Steps in the Control Process Establish Standards –Technical: Quality, Quantity, MTBF –Market: Sales, ROI, Earning Expectation –Planning: Objectives, Schedules, Budgets, Policies –Safety: OSHA –EEO –Historical
7 Steps in the Control Process Establish Standardsby Benchmarking –Internal Benchmarking: productivity –External Benchmarking Financial Ratios Performance Metrics Best Practices Critical Success Factors Target Pricing Balanced Scorecard: new products, new projects, patents, new partners, new customers, new technology
8 Steps in the Control Process Measuring Actual Performance –Data collection and analysis –Time study, work sampling, performance rating Comparing Performance with Standards –Establish limits of tolerance –Note variations (deviation within limits) and exceptions (deviation outside limits) –Provide recognition and warning
9 Steps in the Control Process Corrective Action –Short-term: Consultants, temporary workers –Long-term: Training, modifying procedures and policies
10 Closed-Loop vs. Open-Loop Control Closed-loop control (also known as automatic or cybernetic control) monitors and manages a process by means of a self-regulating system. Open-loop control (or non-cybernetic control) requires an external monitoring system and/or an external agent to complete the control loop.
11 Timing of Control Feed-back control Screening or concurrent control Feed-forward (or preliminary or steering) control
12 Timing of Control Feedback Control (Output) –Measures system output and variance with predetermined standard –Adjusts system to maintain variance within a specified range
13 Timing of Control Screening Control (Concurrent) –Control applied concurrently with effort being controlled
14 Timing of Control Feed-forward Control (Steering or Preliminary) –Attempts to predict the impact of current actions/events –Current decisions are refined to facilitate goal attainment
15 Characteristics of Effective Control Effective Efficient Timely Flexible Understandable Tailored Highlight deviations Lead to corrective action
16 Types of Control Financial Human Resource Social
17 Financial Controls Financial statements provide the basic information for the control of cash and credit, which are essential to the survival of a company. The balance sheet The income statement The cash flow statement
18 Balance Sheet Balance sheet shows the firm's financial position at a particular instant in time (a financial "snapshot.) Total Assets = Total Liability + Owners Equity
19 Balance Sheet Assets are what the company "owns" Current assets (assets that can be converted into cash within a year) Fixed assets (property, plant, and equipment at original cost, less the cumulative depreciation of plant and equipment [but not land] and depletion of natural resources since they were purchased) Tangibles and Intangibles
20 Balance Sheet Liabilities are what the firm "owes" –Current liabilities (must be paid within a year) –Long-term debt Net worth or Equity –Original investment (what was paid in for common and preferred stock) –Retained earnings (the cumulative profits over the years after dividends are paid).
21 TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc., December 31, 2005 Assets Current assets Cash$150,000 Securities (at cost) 100,000$250,000 Accounts receivable 400,000 Inventories (at lower of cost or market) Raw materials and supplies 200,000 Work in progress 180,000 Finished goods 300, ,000 Prepaid expenses 30,000 Total current assets 1,360,000 Property, plant, and equipment4,500,000 Less accumulated depreciation 2,400,000 Net property, plant, and equipment 2,100,000 Total Assets $3,460,000
22 Liabilities and Stockholders' Equity TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc., December 31, 2005 Stockholders' equity Capital stock 500,000 Retained earnings1,460,000 1,960,000 Current liabilities Accounts payable$100,000 Installments due within 1 year 30,000 Federal income and other taxes 250,000 Other accrued liabilities 120,000 Total current liabilities 500,000 Long-term debt 1,000,000 Total Liabilities$1,500,000 Total liabilities and equity $3,460,000
23 Income Statement Income statement (also called a profit and loss or revenue and expense statement) shows the financial performance of the firm over a period of time (usually three months or a year).
24 Gross sales$3,200,000 Less returns and allowances 150,000 Net sales$3,050,000 TABLE 8-2 Income Statement Sterling Chemicals, Inc., December 31, 2005 Less expenses and costs of goods sold Cost of goods sold 2,000,000 Depreciation and depletion 250,000 Selling expenses 100,000 General and admin. expenses 200,000 2,550,000 Operating profit 500,000 Plus interest and other income 60,000 Gross income 560,000
25 Gross income 560,000 Less interest expense 20,000 TABLE 8-2 Income Statement Sterling Chemicals, Inc., December 31, 2005 Income before taxes 540,000 Provision for income taxes 260,000 Net income 280,000 Retained earnings January 1, ,500,000 1,780,000 Dividends paid 320,000 Retained earnings December 31, 20051,460,000
26 Cash Flow Statement Cash flow statement (or sources and uses of funds statement) shows where funds come from (net profit plus depreciation, increased debt, sale of stock, sale of assets) and what they are used for (plant and equipment, debt reduction, stock repurchase, and dividends).
27 Interest Payments to Debt Holders Int. on Debt Operating Costs Payments to suppliers, Employees, and others Operating Revenue Net Income Depr. Taxable Income After-tax Cash Flow Income Tax Div. RE Cash Flow Statement (Income Statement)
28 Depr. RE Disposal of Properties New Debt/ Capital Cash Flow Statement Increase in Working Capital Working Capital = Current Assets – Current Lib. Sources: Uses: Capital Expenditures Repayment of debt & equity Others
29 Uses Sources AssetsLiabilities The letters labeling the boxes stand for Uses, Sources, Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities. S U Cash Flow Statement A L + +
30 Ratio Analysis Financial ratios are ratios of two financial numbers taken from the balance sheet and/or the income statement. compared with average values for the industry the firm is in to evaluate relative financial health, and compared with earlier values from the same firm to evaluate trends.
31 Liquidity Ratios Liquidity ratios measure the ability to meet short- term obligations.
32 Leverage Ratios Leverage ratios identify the relative importance of stockholders and outside creditors as a source of the enterprise's capital.
33 Activity Ratios Activity ratios (also known as operating ratios) show how effectively the firm is using its resources.
34 Profitability Ratios Profitability ratios describe the organization's profit.
35 Budgets Financial budgets describe where the firm intends to get its cash for the coming period and how it intends to use it. Cash budgets Capital expenditure budgets Balance sheet budget
36 Responsibility Centers Expense or cost centers (expense budget) Revenue center (revenue budget) Profit centers (profit budget)
37 Budgeting Process Top-down approach Bottom-up approach Combination
38 Cost Accounting Product AProduct BTotal Production4,0001,0005,000 Direct Labor$40,000$10,000$50,000 Overhead$5,000 Set-up Cost$8,000 Total Cost$63,000 Unit Cost Allocating cost among products $4,000 $1,000 $4,000 $48,000 $15,000 $12 $15
39 Audits of Financial Data Audits are investigations of an organization's activities to verify their correctness and identify any need for improvement. accounting and financial systems and records internal or external.
40 Nonfinancial Controls Human Resource Controls To assure that human and organizational performance conform to expectations. Performance appraisal (individual) Management audit (group) (Figure 8-2) Human resource accounting (group) Social controls.
41 Human Resource Controls Amount of Supervision Productivity High Skills Low Skills Nonfinancial Controls
42 Non-financial Controls Social Controls Standards Comparison with outcomes Corrective action
43 Non-financial Controls Effectiveness of research activities Systems for release of drawing release Inventory control Quality control Project control