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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

1/3/2019

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Accounting for Non-financial Managers Fourth Edition, 2016 John Parkinson with Charles Draimin

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Accounting for Non-financial Managers, 4e

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Contents Chapter 1:

Introduction

Section 1:

Financial Accounting for Scorekeeping

Chapter 2:

The Financial Statements

Chapter 3:

The Income Statement

Chapter 4:

The Balance Sheet (1): Assets

Chapter 5:

The Balance Sheet (2): Liabilities & Equity

Chapter 6:

The Statement of Cash Flows

Chapter 7:

Financial Statement Analysis © Captus Press Inc. All rights reserved.

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Contents Section 2:

Budgeting for Planning & Control

Chapter 8:

Budgeting

Chapter 9:

Cash Budgeting

Chapter 10: Budgetary Control Chapter 11: Cost Behaviour and Break-Even Analysis Chapter 12: Allocating Overhead: Activity-Based Costing and Product Costing.

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Contents Section 3:

Financial Decision Making

Chapter 13: Analysis of Short-Term Decisions Chapter 14: Sources of Capital Chapter 15: Long-Term Decision Making

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Contents Section 4:

Accounting for Personal Finance and Business

Chapter 17: Accounting and Personal Finance Chapter 18: Elements of Taxation for Individuals and Small Business

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In addition Glossary of Important Terms Index Student Self-Study Resource

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Student Self-Study Resource to accompany Accounting for Non-Financial Managers The first purchaser of this book is provided access* to additional interactive multiple-choice tests for self-assessment and review. Available online, the tests can be accessed using the information provided on the last page of the book. * Access to this site is subject to change without notice. Contact [email protected] if you have problem accessing the site.

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Chapter 1 Introduction: Learning Objectives: After studying this chapter you should be able to explain: • Who needs to know about accounting; • How accounting can be used to keep score; • How accounting can be used for attention directing. • How accounting can be used to support decisions

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Accounting: Who Needs It? All managers need a basic understanding of accounting. However, non-financial managers do not need to know about the detailed process of preparing accounting reports. They do need to understand the basic principles of accounting and how they are applied in so far as affects their own areas of responsibility.

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The marketing manager is proposing a marketing campaign to substantially increase product awareness. He is offering his audience the choice of several different ways of implementing the campaign. One of the product managers asks: “How will this appear in the financial statements?”

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Accounting for Non-financial Managers, 4e

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A knowledgeable answer: “Proposal A involves us buying a number of advertising trucks that would drive around the city with illuminated billboards. These purchases would appear in the balance sheet initially, and their amortization would appear in the income statement as expense. Proposal B involves renting advertising space on train and bus interiors, which would appear as an expense in the income statement, as incurred. Proposal A would initially reduce our liquidity ratios, and this may be a problem for investors, who will perceive us as a riskier investment. Proposal B would have minimal effect on liquidity ratios, but would, initially, reduce profits more. Both proposals are expected to increase profitability ratios in the medium term.” An uninformed answer: “Sorry, but I don’t know enough about financial statements to answer you now. I will have to get back to you on that.” © Captus Press Inc. All rights reserved.

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The human resources manager is called into her vice-president’s office. The human resource department budget is overspent by 12% in the month of March, and the VP asks: “What went wrong?”

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Accounting for Non-financial Managers, 4e

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A knowledgeable answer: “When I submitted the budget in October, it was quite clear that there were some uncertainties surrounding the issue of workload — issues over which I had no control. I indicated that the budget I had presented was contingent on the level of hirings and firings being approximately the same as in the previous year. As it happens, there has been a major reorganization in the Quebec region. The number of personnel we let go has increased by 50%, and hirings have also increased substantially. Given this change in workload, it is quite remarkable that we have been able to get by with only two additional staff members and an increase in spending of a mere 12%.” Uninformed answers: “Well, we needed the extra staff because we were overworked,” or: “my assistant prepared the budget: I’ll have to ask him and get back to you.” © Captus Press Inc. All rights reserved.

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The production manager is proposing the purchase of a new packaging machine. The existing packaging machine is reaching the end of its useful life and needs to be replaced because it is prone to breaking down. Additionally, more modern machines can do more sophisticated packaging, such as integrated full-colour printing and shrink-wrapping. He proposes to spend $100,000 on a state-of-the-art packaging machine that will serve the company’s needs for the next 10 to 20 years. The discussion is going well until someone asks: “Is it possible to lease the machine instead of buying it?”

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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A knowledgeable answer: “Yes, leasing is a possibility. We have a leasing quotation from the supplier. Based on an expected useful life of 10 years, the present value of the lease payments would be $120,000. If we assumed a longer life, the present value of the lease costs would be even higher. So, outright purchase is a better economic alternative. Additionally, the VP of Finance informed me that we have adequate cash available for capital investment at this time, and the machine purchase will not strain liquidity.” An uninformed answer: Although leasing is a possibility, he has no basis for comparing a capital investment with a series of lease payments, so he cannot decide which is better. © Captus Press Inc. All rights reserved.

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The above three scenarios show that managers need to have a basic understanding of accounting reports and accounting-oriented decision processes. They need this so that they can 1.

appear as intelligent, well-informed members of the management team (general background);

2.

to plan and control their own operating areas (budgetary control);

3.

they can deal with the financial implications of proposals they put forward (decision making).

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Accounting for Non-financial Managers, 4e

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As a manager, do you want to present yourself as someone who is informed and capable of making decisions appropriately? Alternatively, do you want to come across as a narrow specialist who understands his or her own discipline well, but has no knowledge of the wider issues of business? Today’s business environment suggests that the role of the narrow specialist is decreasing. Managers are expected to be able to “talk” accounting as the universal language of business.

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Structure of this book Section 1 starts out with a description of the main financial statements that are used in external company reporting. Section 2 deals with the preparation of budgets and their use as controls. Section 3, deals with accounting data as the basis for decision making. Section 4 deals with the special situation relating to “Not-For-Profit” entities. (Not covering) Section 5 deals with Personal Finance, Taxation and Small Businesses

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The first three sections conform to one popular classification of accounting that divides it into the following roles: • scorekeeping, • attention-directing, and • decision-making.

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Scorekeeping When a company publishes its income statement, balance sheet and cash flow statement, it is engaged in scorekeeping. That is, the company is reporting to shareholders and other interested parties how well (or how badly) it has performed. These reports are about the past. The income statement and cash flow statement cover a period of time that is now completed (the previous fiscal year). The balance sheet is a snapshot of the company at a point in time (usually the last day of the fiscal year). Scorekeeping is an exercise in stewardship for investors and creditors. © Captus Press Inc. All rights reserved.

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Investors: Holder of the shares of a company: they are the ultimate company owners. Creditors: People or organizations to whom the company owes money

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Forms of Business Ownership: Sole Proprietorship: A sole proprietor is an individual operating his or her own business. It is simple, but risky. Partnership: A partnership is two or more people operating a business together. It is slightly more complex than a sole proprietorship. It is necessary to trust one’s partners.

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Accounting for Non-financial Managers, 4e

Accounting for Non-financial Managers, 4e

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Private Limited Liability Company (llc): An llc is a formal organization that is legally separate from its owners: the owners own “shares” in the llc, but trading in shares is restricted.. It reduces the risk to owners. Public Limited Liability Company: This is like a private llc, but the shares may be bought and sold by the general public. Reporting is far more complex. Ownership (shareholders) is generally separate from control (which is done by the directors).

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Attention Directing Management by exception Step 1: Define the objectives; Step 2: Make plans that would accomplish the objectives; Step 3: Carry out the business operations in the plan; Step 4: Measure the results of operations; Step 5: Compare the results with the plans and the objectives Step 6a: If the objectives have been achieved, move on to the next iteration; Step 6b: If the objectives have not been achieved, instigate corrective action, then move on to the next iteration. © Captus Press Inc. All rights reserved.

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Accounting for Non-financial Managers, 4e

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The financial statements will direct attention to things that are happening “not according to plan” so that management can intervene.

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Decision Making The third role of accounting is to support decision making or problem solving. Decisions are the essence of business. When made correctly, they will ensure survival of the company and improve profitability. Conversely, when decisions are made incorrectly they will lead, sooner or later, to corporate failure.

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Steps in decision making: Step 1: Specify the problem or decision as precisely as possible; Step 2: Choose an appropriate decision technique. Step 3: Gather information; Step 4: Use the information and the technique to make the decision; Step 5: Implement the decision; Step 6: Evaluate the outcome.

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Financial Accounting: Preparation of financial statements for use by managers, investors and creditors. Management Accounting: Preparation of accounting reports for use within the company by managers. Auditing: Auditors are external professionals who check the internal control system and the published financial statements.

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Personal Financial Planning: Helps individuals with the financial dimension of their work, lives and retirement.

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Summary Accounting is the common language of business and is essential for communication in today’s market-driven economy. It is necessary that all managers are familiar with the terminology, with the benefits of useful accounting information, and with some of the problem areas where accounting information is less helpful or less clear than it could be. Accounting has a role in • scorekeeping (how well the company has performed); • attention directing (what the managers should be paying attention to); and • decision making (the financial implications of business choices). Accounting is carried out by financial accountants and management accountants within the company, and external auditors on behalf of shareholders. © Captus Press Inc. All rights reserved.

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