1. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Exploring Media and e-Business

2. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 15-1Examine how information can reduce risk when making a decision. 15-2Discuss management’s information requirements. 15-3Outline the five functions of an information system. 15-4Explain why accurate accounting information and audited financial statements are important. 15-5Read and interpret a balance sheet. 15-6Read and interpret an income statement. 15-7Describe business activities that affect a firm’s cash flow. 15-8Summarize how managers evaluate the financial health of a business.

3. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. How Can Information Reduce Risk When Making a Decision  Four major resources managers need to operate a business: Information Material Human Financial  Information that helps managers reduce risk when making a decision

4. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Information and Risk  To improve the decision-making process and reduce risk, the information used by individuals and business firms must be relevant or useful to meet a specific need  Using relevant information results in better decisions

5. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Relationship Between Information and Risk  When the amount of available information is: High, managers tend to make better decisions Low, there is a high risk of making poor decisions

6. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

7. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Difference Between Data and Information  Data: Numerical or verbal descriptions that usually result from some sort of measurement  Information Data presented in a form that is useful for a specific purpose  Database A single collection of data and information stored in one place that can be used by people throughout an organization to make decisions  Knowledge management (KM) A firm’s procedures for generating, using, and sharing the data and information

8. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Making Smart Decisions  Decision-support system (DSS): Software program that provides relevant data and information for decision making  Executive information system (EIS): Computer- based system that facilitates decision-making by providing easy access to internal and external information  Expert system: Computer program that uses artificial intelligence to imitate a human’s ability to think

9. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Business Application Software  Integrated business application software combines many functions in a single package  Allows for linking of text, numerical data, graphs, photographs, audiovisual clips, etc.  Once data is entered in one application it can be used in another application  Once a user learns one application, it is easier to learn another in the package

10. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Current Business Application Software Used to Improve Productivity Data, information, databases, knowledge management, and computer software all become important parts of a firm’s management information system

11. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. What is a Management Information System?  Management information system (MIS): Provides managers and employees with the information they need to perform their jobs effectively  Many firms are organized into five areas of management: Finance Operations Marketing Human resources Administration

12. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Management Information System (MIS)

13. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Costs and Limits of the System  System must be properly sized to provide sufficient information resources  Each group needs relevant information that helps them make better decisions  A main goal of a firm’s IT officer is to make sure that a firm has the equipment necessary to provide information the employees need to make effective decisions—at a reasonable cost  Unused capacity and complexity increase the cost of owning and operating the system

14. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Every MIS must be tailored to the organization it serves and must perform five functions Five Management Information System Functions

15. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Collecting Data  Data should be relevant and accurate  Internal sources—Managers and employees, company records and reports, minutes of meetings, accounting data, sales data, HR data, production data  External sources—Customers, suppliers, bankers, trade and business publications, industry conferences, online computer services, government sources, firms specializing in gathering data  Cautions: The cost of obtaining data from some external sources can be quite high Outdated or incomplete data usually yield inaccurate information Check computer data if you disagree with it

16. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Storing and Updating Data  Storing data An MIS must be capable of storing data until they are needed Method chosen to store data depends on the size and needs of the organization  Updating data Manual updating—employee inputs fresh data into the database Automatic updating—MIS updates itself as data become available The frequency of updating data depends on how fast they change and how often they are used

17. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Processing Data  Data processing is the transformation of data into a form that is useful for a specific purpose  Most business data are in the form of numbers  Computer software can process large volumes of numbers quickly and their contents can be summarized  A statistic is a measure that summarizes a particular characteristic of an entire group of numbers

18. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Presenting Information  The method of presentation—reports, tables, graphs, or charts—must be appropriate for the information itself and for the uses to which it will be put  Business reports include: Introduction Body Conclusions Recommendations  A visual display may be a diagram that represents several items of information in a way that makes comparison easier

19. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Examples of visual displays include: Graphs Bar charts Pie charts Presenting Information: Visual Displays

20. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Presenting Information: Tables  A tabular display is used to present verbal or numerical information in columns and rows  Tables are most useful in presenting information about two or more related variables

21. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Why Accounting Information Is Important  Executives, managers, and employees rely on the firm’s accounting system to provide needed financial information  Accounting: Process of systematically collecting, analyzing, and reporting financial information  Accounting information can be used to answer questions about what has happened in the past and to help make decisions about the future

22. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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  An audit does not guarantee that a company has not “cooked” the books, it does imply that the company has followed GAAPs

23. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Fraud  Corporate accounting issues in recent years have forced many investors, lenders and suppliers, and government regulators to question motives behind accounting practices  Much pressure on corporate executives to look good to Wall Street analysts and investors  Ones hurt when companies report inaccurate or misleading accounting information Employees who lose their jobs Investors, lenders, and suppliers Not high-paid corporate executives

24. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sarbanes–Oxley Act To help ensure that corporate financial information is accurate and to prevent accounting scandals, Congress enacted the Sarbanes–Oxley Act in 2002; key components include: 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

25. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sarbanes–Oxley Act (continued) Additional key components include: Auditors must maintain financial documents and audit work papers for five years 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

26. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Different Types of Accounting  Managerial accounting: Provides information needed to make decisions about: Firm’s financing Investing Marketing Operating activities  Financial accounting: Generates financial statements and reports for interested people outside an organization

27. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Special Areas of Accounting Additional special areas of accounting include: Cost accounting Tax accounting Government accounting Not-for-profit accounting

28. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Careers in Accounting Qualities to be successful in accounting: Responsible, honest, ethical Strong background in financial management Knowledge of computer and accounting software Able to communicate with people who need accounting information

29. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Classifications of Accountants  Private Accountant Employed by a specific organization Services performed for the employer  Design its accounting information system  Manage its accounting department  Provide managers with accounting information, advice and assistance  Public Accountant Provides services to clients on a fee basis Self-employed or employee of an accounting firm

30. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Classifications of Accountants  Certified Public Accountant (CPA) Has met state requirements for accounting education and experience and has passed a rigorous accounting examination prepared by the AICPA Participates in continuing-education programs to maintain certification

31. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Accounting Equation  Assets = Liabilities + Owners’ equity Assets—the resources that a business owns (e.g., cash, inventory, equipment, and real estate) Liabilities—the firm’s debts Owners’ equity—the difference between assets and liabilities (what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities) Double-entry bookkeeping system—Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation

32. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Balance Sheet  A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period (also called statement of financial position)  Assets Listed in order of liquidity (ease with which an asset can be converted into cash) Current assets—can quickly be converted into cash or that will be used in one year or less Cash, marketable securities, accounts receivable, notes receivable, merchandise inventory, and prepaid expenses

33. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Balance Sheet: Assets  Assets (cont’d) Fixed assets—will be held or used for a period longer than one year  Land, buildings, and equipment  Depreciation—the process of apportioning the cost of a fixed asset over the period during which it will be used Intangible assets—do not exist physically but have a value based on the rights or privileges they confer on the firm  Patents, copyrights, trademarks, and goodwill

34. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Liabilities  Current liabilities—debts to be repaid in one year or less Accounts payable—short-term obligations that arise as a result of making credit purchases Notes payable—obligations that have been secured with promissory notes  Long-term liabilities—debts that need not be repaid for at least one year Mortgages, bonds, and long-term loans

35. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Owners’ or Stockholder’s Equity  For sole proprietorships Assets – liabilities = owners’ equity  For partnerships—Each partner’s share of ownership is reported separately in each owner’s name  For corporations—stockholders’ equity  Retained earnings—profits not distributed to stockholders

36. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Income Statement  A summary of a firm’s revenues and expenses during a specified accounting period Profit (cash surplus) Loss (cash deficit)  Revenues are the dollar amounts earned by a firm from selling goods, providing services, or performing business activities Gross sales—the total dollar amount of all goods and services sold during the accounting period Net sales—the actual dollar amounts received by a firm for the goods and services it has sold, after adjustment for returns, allowances, discounts

37. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Income Statements

38. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Goods Sold  The dollar amount equal to beginning inventory plus net purchases less ending inventory  Gross profit is a firm’s net sales less the cost of goods sold

39. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Operating Expenses and Net Income or Loss  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

40. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Statement of Cash Flows Illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period Cash flows from operating activities (providing goods and services) Cash flows from investing activities (purchase and sale of land, equipment, and other assets and investments) Cash flows from financing activities (changes in debt obligation and owners’ equity accounts)

41. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A statement of cash flows summarizes how a firm’s operating investing, and financing activities affect its cash during a specified accounting period. For Northeast Art Supply, the amount of cash at the end of the year reported on the statement of cash flows is $59,000—the same amount reported for the cash account on the firm’s balance sheet Example Statement of Cash Flows

42. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Evaluating Financial Statements Use accounting information to evaluate an investment Use common sense to interpret the numbers Financial statements should be audited by an outside source and be current Look for use of new strategies to reduce costs Determine the firm’s ability to pay its debts and borrow money in the future Look at how the numbers relate to each other Understand the financial ratios Read letters from top executives Examine the footnotes closely, look for red flags Examine the comparative data to analyze trends

43. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparisons of Present and Past Financial Statements for Microsoft Most corporations include in their annual reports comparisons of the important elements of their financial statements for recent years Source: Adapted from the Microsoft Corporation 2014 Annual Report, www.microsoft.com (accessed February 4, 2015).

44. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparing Data with Other Firms’ Data  Comparisons are possible because of GAAP  Managers can get a general idea of a firm’s relative effectiveness and its standing within the industry  Data are available from annual reports of public corporations  Industry averages are available from Dun & Bradstreet, Standard & Poor’s, industry trade associations

45. Copyright ©2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Ratios  Numbers that show the relationship between two elements of a firm’s financial statements  Can be compared with The firm’s own past ratios Ratios of competitors Industry averages  Information to calculate ratios is found on a firm’s balance sheet, income statement, and statement of cash flows