Copyright © 2006 Pearson Education Canada Inc. 11-1 Chapter 11 Understanding Accounting and...

11-1

Copyright © 2006 Pearson Education Canada Inc.

Chapter 11

Understanding Accounting and Information Systems

11-2 Copyright © 2006 Pearson Education Canada Inc.

Learning ObjectivesExplain the role of accountants and distinguish among the three types of professional accountantsDescribe the three basic financial statements and show how they reflect the activity and financial condition of a businessExplain how computing key financial ratios can help in analyzing the financial strengths of a businessExplain why businesses must manage information and show how computer systems and communication technologies have revolutionized information managementIdentify and briefly describe three elements of data communication networks – the internet, the World Wide Web, and intranets


Accounting Definitions

Accounting a comprehensive system for collecting,

analyzing, and communicating financial information

Bookkeeping recording accounting transactions

Accounting information system (AIS) An organized procedure for identifying,

measuring, recording, and retaining financial information


Users of Accounting Information

Business managers Set goals & budgets Develop plans Evaluate opportunities

Employees and unions To get paid To plan and receive

benefits

Government regulatory agencies

Protect investors’ interests

Investors and creditors Estimate returns,

future growth & credit risk

Taxing authorities Plan for tax

inflows Determine tax

liabilities Aid in collection


Financial AccountingThe process whereby interested groups are kept informed about the financial condition of the firm

Concerned with external users of information Consumer groups, unions, stockholders, government

agencies

Prepares income statements and balance sheets at regular intervals focusing on the activities of the company as a whole

Reporting financial data must conform to standard formats and procedures

Data are summarized to record financial transactions that have occurred in previous reporting periods (historical

reports)


Managerial AccountingInternal procedures that alert management to problems and aid them in planning and decision making Serves internal users Managers need information to make decisions

Reports to managers focus on individual units such as departments, projects, plants or divisionsProvides information to facilitate planning, forecasting and decision making


Professional AccountantsChartered Accountant (CA) An individual who has met certain experience

and education requirements and passed a licensing exam

Acts as an outside accountant for other firms

Certified General Accountant (CGA) An individual who has completed an education

program and passed a national exam Works in private industry

Certified Management Accountant An individual who has completed a university

degree, and passed a national Works in industry


Accounting ServicesAuditing Examination of financial records to ensure

proper procedures have been used Forensic accounting

Tracking down hidden funds in business firms (generally part of a criminal investigation)

Tax Services Preparing tax returns, tax planning

Management Consultant Services Advising from personal financial planning to

business planning


Accounting Tools

Journal A chronological record of a firm’s financial

transactions with a brief description of each transaction

Ledger Summations of journal entries, by

category, that show the effects of transactions on the balance of each account


The Accounting EquationAsset anything of economic value owned by a firm or

individual

Liability any debt owed by a firm or an individual to

others

Owners’ Equity any positive difference between a firm’s assets

& liabilities

Accounting Equation Assets = Liabilities + Owners’ Equity


Double-Entry Bookkeeping System

Every transaction must be entered in two ways how it affects assets & how it affects

liabilities and owners’ equity

The accounting equation is always kept in balance


Financial StatementsBalance sheet Summarizes a firm’s financial position on a

particular date Presents the accounting equation Assets, liabilities, owners’ equity

Income statement Indicates whether the firm has earned a

profit or suffered a loss Revenues and expenses

Statement of cash flows Firm’s generation, and use, of cash


The Balance Sheet


Current AssetsCash and assets that can be converted into cash within the yearAccounts receivable Amounts owed to the firm by customers

Inventory Cost of merchandise acquired for sale but

not yet sold

Prepaid expenses Supplies on hand and rent (other bills) paid

for coming period


Other Assets

Fixed assets Have a long-term use or value

Land, buildings, machinery

Depreciation Distributing the cost of a major asset over

its lifetime, deducted yearly

Intangible assets Patents, trademarks, copyrights, franchise

fees


Liabilities

Current liabilities Debts owed by the firm that must be

repaid within one year Accounts payable, wages payable

Long-term liabilities Debts owed by the firm and due in more

than one year


Owners’ EquityOwners’ holdings in the firm Retained earnings

A company’s net profits less dividends paid to

shareholders

Paid-in capital

Any additional money invested by owners

Common stock

value of shares in the company


Revenues

Monies received by a firm as a

result of Selling its product or service

Return on investments

Rent

Licensing fees


Revenue Recognition

The formal recording and reporting of revenues in financial statements once the earnings cycle is completed The sale is complete and the product

has been delivered The sale price to the customer has

been collected, or is collectable (accounts receivable)


Cost of Goods Sold and Gross Profit

Expenses directly incurred as a result of producing or selling the good or service during a given time periodGross profit

Gross profit (gross margin) =Revenues - cost of goods sold


Net IncomeOperating Expenses Costs incurred by a firm other than

those included in cost of goods sold

Operating Income Compares the gross profit from

business operations against operating expenses

Net Income A firm’s gross profit less its operating

expenses and income taxes


Statement of Cash Flows

Cash flows from operations Cash from buying and selling of goods and

services

Cash flow from investing Cash from investment activities

Receipts, bonds, stocks, property, equipment

Cash flows from financing Cash from financing activities

Dividends, borrowing or issuing stocks, repayment of borrowings


The BudgetA detailed financial plan for estimated receipts and expenditures for a period of time in the future


Analyzing Financial Statements

Key ratios are used to interpret & compare results of financial statements for firms and/or industriesRatios are classified into three groups Solvency ratios

Short-term and long-term Profitability ratios Activity ratios


Short-Term Solvency Ratios

Measure the company’s liquidity The higher the ratio, the lower the

risk of inability to pay

Current RatioCurrent Ratio Quick RatioQuick Ratio

Current AssetsCurrent Liabilities

Quick AssetsCurrent Liabilities


Long-Term Solvency Ratios

Measure the company’s ability to pay long-term debts the higher the ratio, the greater the risk of

inability to pay also known as Debt Ratios

Debt-to-Owners’ Equity Ratio:Debt-to-Owners’ Equity Ratio:

Debt Owners’ Equity


Profitability RatiosMeasure overall company profitability for potential investors the higher the ratio, the more profitable the firm

Return on Return on EquityEquity Earnings per ShareEarnings per Share

Net IncomeTotal Owner’s Equity

Net Income# Outstanding Common Shares


Activity RatiosMeasure how efficiently the company uses its resources the higher the ratio, the lower the risk of

inability to pay

Inventory Turnover RatioInventory Turnover Ratio

Cost of Goods SoldAverage Inventory


Information Management

Information managers are responsible for: Generating information Analyzing information Dissemination of information to

facilitate the decision-making process


Data vs. Information

Data raw facts and figures data are processed to become information

raw data about clients’ purchases, account balances

Information a meaningful and useful interpretation of

the data a printout showing whose accounts are up-to-date

and whose are overdue


Information Systems (IS)

An organized method of transforming data into information Necessary to determine what

information is needed and how it will be produced

Must ensure that access is available but restricted to individuals who need it

Used to facilitate decision making


The Evolution of IS

Isolated Technical Problems

Low-Level Management Problems

High-Level Management Problems

Organization-Wide Planning and Implementation


Electronic Information Technologies (EIT)IS applications based on telecommunications technologiesEIT uses networks of devices to communicate information electronically Cell phones, computers

Provide coordination and communication within the firmSpeeding up transactions with other firms Electronic conferencing Groupware


Data Communication Networks

Global networks that permit users to send electronic messages quickly and economically The internet The world wide web Internet service provider Web servers Browser Directories

• Search Engines

• Intranets

• Extranets

• Firewalls


New Options for Organizational Design: The Networked EnterpriseThe structure of business organizations is changing due to information technologies

Leaner organizations

More flexible operations

Increased collaboration (internal & external)

Networking and the virtual company

Greater independence of company and

workplace

Improved management processes

Enterprise resource planning


Networking for Mass Customization

Mass customization Producing large volumes of products

or services with a choice of features and options

Integrated networks are required to coordinate account information and to store information about preferences, etc.


Types of Information Systems

Top Level: Strategic IS

Mid-Level: Management IS

Knowledge Workers: Knowledge IS

First-Level: Operational IS

Matching Users to Systems


Major Systems by LevelOrganization

Function Business ProcessMarketin

gFinance

Production

Top-Level Manager Strategic Planning

Product Development

Order FulfillmentSupply Chain

Management

Mid-LevelManager

KnowledgeWorkers

First-LevelManagers


Systems for Knowledge Workers and Office Applications

Systems analysts Work with users to learn their requirements Design systems to suit their needs

Programmers Use various computer languages to write

the software

Operations personnel (data workers) Run a company’s computer system Make sure the right programs are run and

that the system is operating properly


Manufacturing Information Systems

Computer-aided manufacturing (CAM)Computer-integrated manufacturing (CIM)Computer-aided design (CAD)Systems increase productivity and can improve a firm’s global competitiveness


Other Information Systems

Management information systems (MIS) Systems that support an organization’s

managers by providing daily reports, schedules, plans, and budgets

Decision support system (DSS) Systems that help managers consider

alternatives when making decisions on complicated problems

Executive support systems (ESS) A quick-reference, easy-access application of IS

specially designed for upper-level management


Other Information Systems

Artificial intelligence (AI) Construction and/or programming of

computers to imitate human thought processes

Robotics The use of computer-controlled machines

that perform production tasks

Expert systems A A special form of AI program designed to

imitate the thought processes of human experts in particular fields


Databases and Program Software

Database A centralized, organized collection

of related dataApplication programs Word processing Electronic spreadsheets Database management Computer graphics Presentation software


Computer Applications for BusinessWord processing

Sophisticated text editing and layout programs to store, edit, and type letters, numbers, reports (Word)

Spreadsheet Electronic spreadsheets allow manipulation of

financial information (Excel)

Database management Maintains and monitors the data generated by a

business (Access)

Graphics High quality photographic layout, design and drawing

software (CorelDraw)

Presentation software Assembling graphics for visual displays, slides and

videos (Powerpoint)


Multimedia Communication Systems

Connected networks of communication appliances such as faxes, televisions, sound equipment, cell phones, printers, and photocopiers that may also be linked by satellite with other remote networksMultimedia technology Communications devices (cell phones, GPS,

PDAs) Communications channels ( wired and

wireless systems, satellite transmission)


System Architecture

Computers at different locations can function independently but are interconnected as well to allow for information exchange Wide area network (WAN)

networks that cover a vast geographic area may rely on telephone or satellite transmission

Local area network (LAN) a network that links a single office environment, a single building, or a small geographic area rely on hard wiring (cable)


Client-Server Systems

Client A computer that provides the services shared

by network users

Server Provides the services shared by network users

File servers & print servers

Client-server network Network composed of both clients (users) and

servers that allow clients to access various services without costly and unnecessary duplication

Copyright © 2006 Pearson Education Canada Inc. 11-1 Chapter 11 Understanding Accounting and...

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