1. FOUNDATIONS OF BUSINESS
Fifth Edition
Chapter 15
Using Management and Accounting Information
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.

2. Learning Objectives (1 of 2)
15-1 Examine how information can reduce risk when making a decision Discuss management’s information requirements Outline the five functions of an information system Explain why accurate accounting information and audited financial statements are important Read and interpret a balance sheet.

3. Learning Objectives (2 of 2)
15-6 Read and interpret an income statement Describe business activities that affect a firm’s cash flow Summarize how managers evaluate the financial health of a business.

4. 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

5. 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

6. 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
More risk (Less information) ↔ Less risk (More information)

7. 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

8. The Difference Between Data and Information (1 of 2)
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

9. The Difference Between Data and Information (2 of 2)
Knowledge management (KM)
A firm’s procedures for generating, using, and sharing the data and information

10. 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

11. 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

12. Current Business Application Software Used to Improve Productivity (1 of 3)
Data, information, databases, knowledge management, and computer software all become important parts of a firm’s management information system
Word processing:
Users can prepare and edit written documents and store them in the computer or on a memory device.
Desktop publishing:
Users can combine text and graphics in professional reports, newsletters, and pamphlets.

13. Current Business Application Software Used to Improve Productivity (2 of 3)
Accounting:
Users can record routine financial transactions and prepare financial reports at the end of the accounting period.
Database management:
Users can electronically store large amounts of data and transform the data into information.
Graphics:
Users can display and print pictures, drawings, charts, and diagrams.

14. Current Business Application Software Used to Improve Productivity (3 of 3)
Spreadsheets:
Users can organize numerical data into a grid of rows and columns.

15. 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

16. Management Information System (MIS) (1 of 2)
After an MIS is installed, employees and managers can get information directly from the MIS without having to go through other people in the organization.
MANAGEMENT INFORMATION SYSTEM
Integrated database capable of receiving, organizing, summarizing, and calculating data and information and providing information to managers networked into the system.

17. Management Information System (MIS) (2 of 2)
Finance
Operations
Marketing
Human resources
Administration
Source: Adapted from Ricky W. Griffin, Management Mason, OH: Cengage Learning, 2013). Reprinted with permission.

18. 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

19. Five Management Information System Functions
Collects data
Stores data
Updates data
Processes data into information
Presents information to users
Every MIS must be tailored to the organization it serves and must perform five functions

20. Collecting Data (1 of 2) 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

21. Collecting Data (2 of 2) 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

22. 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

23. 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

24. 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

25. Presenting Information: Visual Displays (1 of 3)
Examples of visual displays include:
Graphs
Bar charts
Pie charts

26. Presenting Information: Visual Displays (2 of 3)

27. Presenting Information: Visual Displays (3 of 3)

28. Presenting Information: Tables (1 of 2)
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

29. Presenting Information: Tables (2 of 2)
Section of the Country
Number of Salespeople
Consumer Products ($)
Industrial Products ($)
Eastern territory 15
1,500,000
3,500,000
Midwestern territory 20
2,000,000
5,000,000
Western territory 10
1,000,000
4,000,000
TOTAL 45
4,500,000
12,500,000

30. 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

31. 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

32. 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

33. Sarbanes–Oxley Act (1 of 2)
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

34. Sarbanes–Oxley Act (2 of 2)
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

35. 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

36. Special Areas of Accounting
Additional special areas of accounting include:
Cost accounting
Tax accounting
Government accounting
Not-for-profit accounting

37. 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

38. Classifications of Accountants (1 of 2)
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

39. Classifications of Accountants (2 of 2)
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

40. 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

41. The Balance Sheet (1 of 2)
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)

42. The Balance Sheet (2 of 2) 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

43. The Balance Sheet: Assets
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

44. 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

45. 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

46. The Income Statement (1 of 3)
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

47. Income Statements (2 of 3)

48. Income Statements (3 of 3)

49. 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

50. 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

51. 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)

52. Example Statement of Cash Flows (1 of 2)

53. Example Statement of Cash Flows (2 of 2)
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

54. 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

55. 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, (accessed February 4, 2015).

56. 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

57. 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