Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Using Management and Accounting Information

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives ① Examine how information can reduce risk when making a decision. ② Discuss management’s information requirements. ③ Outline the five functions of an information system. ④ Explain why accurate accounting information and audited financial statements are important. 15 2

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives (cont’d) ⑤ Read and interpret a balance sheet. ⑥ Read and interpret an income statement. ⑦ Describe business activities that affect a firm’s cash flow. ⑧ Summarize how managers evaluate the financial health of a business. 15 3

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Relevant information Better intelligence and knowledge Better decisions How Can Information Reduce Risk When Making a Decision? 15 4

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Relationship Between Information and Risk 15 5

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Can Information Reduce Risk When Making a Decision?  Information rules Based on situational experience provide guidance in handling similar situations or circumstances Changing conditions of business leads to continuously looking for new rules 15 6

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Can Information Reduce Risk When Making a Decision?  The difference between data and information Data: Numerical or verbal descriptions that usually result from some sort of measurement Information: Data that is used for a purpose, like comparing wages 15 7 © AUREMAR/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Can Information Reduce Risk When Making a Decision?  Knowledge management Database: Collection of data or information stored in one place that can be used by people in the organization for decision making Knowledge management: Firm’s procedures for generating, using, and sharing the data and information 15 8

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What is a Management Information System?  Management information system (MIS): Provides managers and employees with the information they need to perform their jobs effectively 15 9 © IMAGE SOURCE / ALAMY

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Information System (MIS) 15 10

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What Is a Management Information System?  Size and complexity of the system Must be properly sized to provide sufficient information resources © NAN728/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Information System Functions 15 12

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System?  Collecting data Internal sources – Managers, employees, minutes of meetings External sources - Customers, suppliers, financial institutions and banks © PIXSOOZ/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System? Cautions -Data from external sources can be expensive -Check for outdated or incomplete data -Check computer data if you disagree with it © YURI ARCURS/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System?  Storing data Method chosen to store data depends on the size and needs of the organization  Updating data The frequency depends on how fast they change and how often they are used. 15 © RIDO / SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System?  Processing data Transformation of data into a form that is useful for a specific purpose Statistics: Measure that summarizes a particular characteristic of an entire group of numbers © PATRICK LAROQUE/ ALAMY

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System?  Presenting information Business reports include: -Introduction -Body -Conclusions -Recommendations Visual displays and tables © ZERO CREATIVES/CULTURA/CORBIS

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Presenting Information 15 18

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System?  Making smart decisions Decision-support system (DSS): Software program that provides relevant data and information for decision making © BLEND IMAGES/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System? Executive information system (ELS): Computer-based system that facilitates decision- making by providing easy access to internal and external information © CARLOSSELLER/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do Employees Use a Management Information System? Expert system: Computer program that uses artificial intelligence to imitate a human’s ability to think © ETHAN MILLER/ GETTY IMAGES

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Accounting Information Is Important  Accounting: Process of systematically collecting, analyzing, and reporting financial information © DACOLOGY/ ALAMY

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Audited Financial Statements Are Important Audit: Examination of company’s financial statements and accounting practices Generally accepted accounting principles (GAAPs): Guidelines and practices for companies reporting financial information and for the accounting profession © EAST/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reform: The Sarbanes–Oxley Act of 2002  The SEC must establish an oversight board to police the accounting industry  Top executives must certify periodic financial reports and are liable for intentional violations of reporting requirements  Accounting firms cannot provide many types of non-audit and consulting services to the companies they audit  Auditors must maintain financial documents and audit work papers for five years 15 24

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reform: The Sarbanes–Oxley Act of 2002  Auditors, accountants, and employees can be imprisoned for up to 20 years and subject to fines for destroying financial documents and willful violations of the securities laws.  A public corporation must change its lead auditing firm every five years.  There is added protection for whistle-blowers who report violations of the Sarbanes–Oxley Act 15 25

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Types of Accounting  Managerial accounting: Provides information needed to make decisions about: Firm’s financing, investing, marketing, and operating activities  Financial accounting: Generates financial statements and reports for interested people outside an organization © SERGEJ KHAKMULLIN/ SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Types of Accounting  Additional special areas of accounting include Cost accounting Tax accounting Government accounting Not-for-profit accounting © DENIS OPOLJN/SHUTTERSTICK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Careers in Accounting  Qualities to be successful in accounting Responsible, honest, ethical Strong background in financial management Knowledge on computer and accounting software Communicate with people who need accounting information © DACOLOGY/ALAMY

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Careers in Accounting  Private accountant - Employed by a specific organization  Public accountant - Provides services to clients on a fee basis  Certified Public Accountant (CPA): Individual who has met state requirements for accounting education and experience and has passed a rigorous accounting examination 15 29

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Internet  The American Institute of Certified Public Accountants (AICPA) is the preeminent governing body of the profession. Its website includes online articles and publications, guidelines, career resources, and links to other sites important to the field of accountancy

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Accounting Equation and the Balance Sheet AssetsLiabilities Owners’ Equity  The accounting equation Assets: Resources that a business owns Liabilities: The firm’s debts Owners’ equity: Difference between assets and liabilities

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Accounting Equation and the Balance Sheet Double-entry bookkeeping system: Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation Annual report: Report distributed to stockholders and other interested parties that describes a firm’s operating activities and its financial condition 15 32

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Accounting Equation and the Balance Sheet  Balance Sheet: Summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period  Assets Liquidity: Ease with which it can be converted into cash Current assets: Can quickly be converted into cash or that will be used in one year or less Fixed assets: Will be held or used for a period longer than one year 15 33

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CLASS EXERCISE  Using the Balance sheet of Wipro, compare the balance sheets of two other companies of your choice and discuss their difference in profit/loss. lance-sheet/W 15 34

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Accounting Equation and the Balance Sheet Intangible assets: Do not exist physically but have a value based on the rights or privileges they confer on the firm © STEPHEN COBURN / SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Liabilities and Owners’ Equity  Current liabilities: Debts to be repaid in one year or less  Long-term liabilities: Debts that need not be repaid for at least one year Owners’ or stockholders’ equity -Sole proprietorships - Assets – liabilities = owners’ equity -Partnerships - Each partner’s share of ownership is reported separately in each owner’s name -Corporations - Stockholders’ equity Retained earnings: Profits not distributed to stockholders 15 36

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement  Summary of a firm’s revenues and expenses during a specified accounting period  Revenues: Dollar amounts earned by a firm from selling goods, providing services, or performing business activities Gross sales: Total dollar amount of all goods and services sold during the accounting period Net Sales: Actual dollar amounts received by a firm for the goods and services it has sold, after adjustment for returns, allowances, discounts 15 37

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement 15 38

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement  Cost of goods sold Gross profit -Firm’s net sales less the cost of goods sold Cost of goods sold Beginning inventory Net purchases Ending inventory

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement  Operating expenses: All business costs other than the cost of goods sold  Net income: Occurs when revenues exceed expenses  Net loss: Occurs when expenses exceed revenues 15 40

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CLASS EXERCISE  For each of the following accounts, indicate whether it belongs on a balance sheet or an income statement RENT CASH PATENT MORTGAGE PAYMENT NET INCOME SALARIES PAYABLE PURCHASE DELIVERY EQUIPMENT SALES COST OF GOODS SOLD COMMON STOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Statement of Cash Flows  Illustrates how operating, investing, and financing activities of a company affect cash during an accounting period 15 42

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements  Comparing financial data Comparisons are possible because of GAAP Gives general idea of a firm’s relative effectiveness and its standing within the industry © JACOB SILBERG/REUTERS/LANDOV

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Comparisons of Present and Past Financial Statements for Microsoft 15 44

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements  Financial Ratios: Numbers that show the relationship between two elements of a firm’s financial statements © ADAM GREGOR/SHUTTERSTOCK

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements Measuring a firm’s ability to earn profits -Firm’s net income after taxes indicates whether the firm is profitable -Return on sales: Financial ratio calculated by dividing net income after taxes by net sales Return on sales = Net income after taxes / Net sale

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements Measuring a firm’s ability to pay its debts -Current ratio can be used to evaluate a firm’s ability to pay its current liabilities -Current ratio: Financial ratio computed by dividing current assets by current liabilities Current ratio = Current Assets / Current Liabilities

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements Measuring how well a firm manages its inventory -Inventory turnover: The number of times the firm sells its merchandise inventory in one year Inventory Turnover = Cost of Goods Sold / Average Inventory

Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Internet  There are many online sources for obtaining company information and annual reports. Here are just two