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Transcript of Financial accounts for managers
2009
Financial Accounts for
Managers
INTERNATIONAL ACADEMY OF MANAGEMENT & ENTREPRENEURSHIP
[ T Y P E T H E C O M P A N Y A D D R E S S ]
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PM CS 105
Financial Accounts for Managers
COURSE OBJECTIVE: To expose students to the various accounting systems, accounting control
and linking the accounting system to the Management Decision Making.
MODULE 1:
Accounting Systems, Financial Accounting Corporate accounting management and accounting
information – Financial Analysis –Cash Flow and Fund flow statement Analysis – Accounting Cycle –
Trial Balance, income and expenditure statements, profit and loss accounts, balance sheet
MODULE 2:
Management Accounting: Basic framework – Classifications of manufacturing cost, cost accounting
systems, job order costing, and activity based costing, process costing, costing and the value chain –
Cost – Volume – Profit analysis – responsibility accounting and transfer pricing.
MODULE 3:
Capital budgeting decisions: Standards and variable costing – Production cost variance analysis –
Management control environment, responsibility control and responsibility accounting information
used in management control.
MODULE 4:
Budgeting – Operating budget, budget preparation, cash budget, capital expenditure budget – Control
reports – Use of control reports, Designing management accounting system
MODULE 5:
Analysis of financial performance of a firm:- Ratio analysis – Different types of ratios –
Interrelationship between ratios – Due – Point analysis, common size statement of inter and intra firm.
MODULE 6:
Responsibility Accounting-Meaning, Objectives and Types – Corporate Financial Statement-
Corporate Reports.
Assignments: 2 assignment for each module, needing solving of problems and / or analysis of
financial data / statement. (By Students for evaluation by faculty)
Seminar: One group seminar each by a group of 6 students ( 15 min each group) 2 Hours
Text Books: M.P.Pandikumar “Management Accounting”, Excel Books, New Delhi 1st Edition 2007.
References:
1. Khan & Jain, “Management Accounting”, Tata McGraw Hill Publication.
2. S.N.Maheswari & S. K. Maheswari, “Introduction to Financial Accountancy”, Vikas
Publication.
MODULE 1 What Accountancy is all about?
Any business is formed or exists for the purpose of generating profits and
thus increasing the value of the business firm. Towards this end the various
divisions of the business organization like sales, production, administration,
finance etc will play their respective roles and will work towards creation of the
much needed surplus in order to sustain the organization and ensure its growth.
The framework of accounting is based on various elements which are been
referred as
Accounting principles,
Accounting concepts
Accounting conventions.
Accounting principles
Accounting principles helpful l in recording the business transaction. The
entire business system is governed by these principles. The basic principle is
called as double entry principle, which says that every debit there is a
corresponding credit. All other principles based on this basic principle,
therefore it‟s golden principle of accounts
Expression generally accepted accounting principles are general guidelines
used to measure record and report financial affairs of a business.
Such principles of providing comprehensive a standardized body of theory
capable of handling various financial transactions. By assuring some degree
of uniformity and comparability.
There Are 3 Types of Accounts Principles
PERSONNAL ACCOUNT-
Dr. RECEIVER
Cr. THE GIVER
REAL ACCOUNT-
Dr.WHAT COMES IN
Cr. WHAT GOES OUT
NOMINAL ACCOUNT-
Dr. ALL EXPENSES/LOSSES
Cr. ALL INCOME/GAINS
Accounting concepts
The following are the important generally acctable concepts.
1. Entity Concept
2. Going concern Concept
3. Money measurement Concept
4. Cost Concept
5. Accounting period Concept
6. Dual Concept
7. Matching Concept
8. Realisation Concept
9. Balance sheet Equation Concept
10. Verification and Objective evidence Concept
11. Accrual Concept
Accounting conventions
The most commonly encountered convention is the "historical cost convention".
This requires transactions to be recorded at the price ruling at the time, and for
assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of
changing prices in the economy.
The other conventions you will encounter in a set of accounts can be
summarized as follows:
Monetary measurement
Accountants do not account for items unless they can be quantified in monetary
terms. Items that are not accounted for (unless someone is prepared to pay
something for them) include things like workforce skill, morale, market
leadership, brand recognition, quality of management etc.
Separate Entity
This convention seeks to ensure that private transactions and matters relating to
the owners of a business are segregated from transactions that relate to the
business.
Realization
With this convention, accounts recognize transactions (and any profits arising
from them) at the point of sale or transfer of legal ownership - rather than just
when cash actually changes hands. For example, a company that makes a sale to
a customer can recognize that sale when the transaction is legal - at the point of
contract. The actual payment due from the customer may not arise until several
weeks (or months) later - if the customer has been granted some credit terms.
Materiality
An important convention. As we can see from the application of accounting
standards and accounting policies, the preparation of accounts involves a high
degree of judgement. Where decisions are required about the appropriateness of
a particular accounting judgement, the "materiality" convention suggests that
this should only be an issue if the judgement is "significant" or "material" to a
user of the accounts. The concept of "materiality" is an important issue for
auditors of financial accounts.
Financial Accounting
It is a traditional method of accounting which supplies info, about the firm
during the past. Without efficient accounting system mgmt accounting can not
apply tools and techniques.
Eg:from the last year‟s financial statement the firm could plan the volume of
sales, volume of purchases, size of drs,crs expected stock of the firm, cash
required by the firm etc…,
Management accounting
Mgmt accounting involves the study of accounting information and
techniques that managers‟ use in analyzing such information is the
accounting system for making decisions of the enterprise. It furnishes the
necessary information to assist the business enterprise to make rational
decisions. To development of policies and procedures in order to meet the
day to-day commitment of the enterprise.
Definition of mgmt accounting: management accounting is concerned
with the efficient management of a business s through presentation of
mgmt of such information as will facilitate efficient and opportune
planning and control.
Thus mgmt accounting emphasizes on information. That mgmt requires
so as to make specific resource allocation.
Objectives of management accounting
1. To guide the mgmt to afford best possible services to customers,
suppliers, and investors and so on.
2. To control by compare the budgeted info. With actual performance. To
3. To analyze the financial and non-financial transactions of the enterprise.
4. To identify and analyze the reasons for the deviations, the variance
analysis is used as a tool to compare the actual with the plans.
5. To study the hidden information of the financial statements for the draft
of policies.
6. To fix the responsibilities for implementation of plans and budgets.
Difference b/w management & financial accounting
Financial accounting
management accounting
the objective of a/cing is to measure
and access the business result and
financial position of the firm
The objective of mgt a/c is to prepare
analytical and critical financial
statement to assist mgt to take decision
Fe nature of financial a/c ing is historic
outlook
the nature mgt a/cing is futuristic and
helps mgt for planning and decision
making for the future
fa is based on a/cing principles and
conversion
Mgt a/cing is not bound by constant of
generally accepted a/cing principles it
can frame rules and principles
regarding form and content of
information
3Fa use by out siders Mgt use by in the co
subject matter of fa considers business
as one entity
Ma each unit or department or
division is treated as separate entity
depends on mgt discretion
Cost accounting
any account of organization can be described by its cost so cost accounting is
considered as the back bone of mgmt accounting as it provides the analytical
tools such as budgetary control,standard.costing , .marginal costing , inventory
control, operating costing etc….,,which are used by mgmt to carry out the
operations of undertaking .
Cost Accountancy is that branch of Accountancy that is concerned with the
ascertainment and control of costs with a view to enhance managerial
efficiency.
Types of Cost
1. Total costs- These costs include all the direct costs plus the share of all
overheads that are associated with the product or service by the process of
apportionment and absorption.
2. Standard costs- These costs are predetermined according to management‟s
standards of efficiency for the purpose of comparison with actual costs as
and when they are incurred.
3. Marginal costs- A marginal cost includes only the prime or direct cost plus
those indirect costs or overheads that vary proportionately with the output.
The concept of marginal cost is very useful for the purpose of managerial
decision making
4. Conversion costs- The aggregate of the direct wages, direct expenses and the
manufacturing overheads that convert the raw materials into work in
progress and finished goods.
5. Differential costs – This is the change in the level of cost due to the change
in the level of activity.
6. Opportunity cost- This is the value of the benefit forgone by choosing a
course of action in preference to an available alternative.
7. Discretionary or policy cost- These are the costs that are incurred in
connection with the adoption and execution of the policies of management.
These costs are fixed in nature and have no relevance to the output.
8. Notional costs - These are those costs that are not actually incurred but at the
same time are considered in the ascertainment of the total costs in cost
accounts only. For example, depreciation of an asset which has outlived its
life but is still useful will have a notional charge of depreciation. Similarly
notional rent will have to be provided in cost accounts even if the premises
are owned by the business.
9. Joint costs - These are common costs that are not related to a particular unit
of a product or service but have to be distributed or apportioned to the
various departments on some realistic basis.
10. Period costs – These are those costs that do not vary with the change in the
level of output but which change only over a period of time on account of
factors like creation of capacity. Fixed costs fit into the definition of period
costs as only these costs change due to lapse of time.
11. Out of pocket costs- This includes the prime cost plus variable overhead that
is incurred due to increase in the level of output.
12. Relevant costs- These represent those costs that are to be incurred in the
future after planning the level of output.
13. Replacement costs- This is the cost of replacement of an asset based on the
current market value.
14. Shut down costs - The costs that will be incurred when the plant is not
functioning temporarily.
COST SHEET
Cost sheet include following items
Direct Material
Direct Labour
Direct Expenses
Prime Cost
Production Or Factory Overhead
Production Cost
Administrative Costs
Selling and Distributive Expenses
Total Cost of Sales
Profit
Sale Price
Financial Analysis
Financial analysis (also referred to as financial statement analysis or
accounting analysis) refers to an assessment of the viability, stability and
profitability of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use
of information taken from financial statements and other reports. These reports
are usually presented to top management as one of their bases in making
business decisions. Based on these reports, management may:
Continue or discontinue its main operation or part of its business;
Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the
production of its goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
Other decisions that allow management to make an informed selection on
various alternatives in the conduct of its business.
Cash Flow statement
Inflow and outflow of cash are found.
Analyses are in three different categories:-
Investing activity:- purchase and sale of fixed assets
Operating activity:- regular activity of the business, like raw material &
sales. Generally short term periods
Financing activity: - issue and repayment of share, debenture and loans.
Generally long term periods
Purpose of the Statement of Cash Flows
1. The organization‟s ability to generate positive future net cash flows.
2. The organization‟s ability to meet its financial obligations and pay
dividends.
3. The future needs of the organization for external financing.
4. The reasons for the difference between net income and the net cash flows
related to operating activities.
5. The effects of the organization‟s cash and noncash investing and financing
activities.
Fund flow statement
Fund flow statement takes cash + near cash assets.
The term „flow‟ means movement and includes both „inflow‟ and „outflow‟.
The term „flow of funds‟ means transfer of economic values from one asset
of equity to another
Flow of funds is said to have taken place when any transaction makes
changes in the amount of funds available before happening of the transaction
Accounting Cycle
The sequence of activities beginning with the occurrence of a transaction is known as the accounting cycle. This process is shown in the following diagram:
Steps in the Accounting Cycle
Identify the Transaction
Identify the event as a transaction and generate the source document.
Analyze the Transaction
Determine the transaction amount, which accounts are affected, and in which direction.
Journal Entries
The transaction is recorded in the journal as a debit and a credit.
Post to Ledger
The journal entries are transferred to the appropriate T-accounts in the ledger.
Trial Balance
A trial balance is calculated to verify that the sum of the debits is equal to the sum of the credits.
Adjusting Entries
Adjusting entries are made for accrued and deferred items. The entries are journalized and posted to the T-accounts in the ledger.
Adjusted
Trial Balance
A new trial balance is calculated after making the adjusting entries.
Financial Statements
The financial statements are prepared.
Closing Entries
Transfer the balances of the temporary accounts (e.g. revenues and expenses) to owner's equity.
The above diagram shows the financial statements as being prepared after the adjusting entries and adjusted trial balance. The financial statements also can be prepared before the adjusting entries with the help of a worksheet that calculates the impact of the adjusting entries before they actually are posted.
Trial Balance
Trial balance is a statement which is prepared to check the arithmetical accuracy
of the accounts. It will be prepared with the help of balances of different
accounts in ledger. or It can be prepared based on following principle.
Debit : All expenses, losses and assets
Credit : All Incomes, gains and liabilities
Profit and loss accounts
The purpose of the profit and loss account is to:
Show whether a business has made a PROFIT or LOSS over a financial
year.
Describe how the profit or loss arose – e.g. categorising costs between
“cost of sales” and operating costs.
A profit and loss account starts with the TRADING ACCOUNT and then takes
into account all the other expenses associated with the business.
Balance sheet
Asset side
Fixed assets
Investments
Current assets &loans ,advances
Miscellaneous expenditure to the extent not written off
Accumulated losses
Liability side
Share capital
Reserves and surplus
Secured loans
Unsecured loans
Current liabilities and provisions
Final account
Set of accounts that are prepared at the end of the financial period to
ascertain:financial resultsof the org (retail,wholesale,manufacturing,service)as
reflected by its profit earned or loss affected,financial position as affected by its
assets and liabilities.
Cash Book
Cash book is maintained to record the transactions, relating to the receipts and
payments of cash. There are many transactions in a business relating to the cash
which justify the maintenance of a separate book for this purpose. Moreover,
control on cash is very essential in a business house for which cash book
becomes an essential factor especially in order to avoid the embezzlement of
cash. If the business man is interested to know the balance of cash in hand or at
bank, even then cash book is to be manipulated. It is also maintained in order to
avoid the botheration of posting every item of receipt or payment of cash
individually to Cash Account in the ledger.
IS CASH BOOK A JOURAL OR A LEDGER?
Cash book plays dual role as a book of original entity as well as a ledger. It is a
subsidiary book because all cash transactions are first recorded in the cash book
and then from cash book posted to various accounts in the ledger. The recording
of transactions in the cash book takes the shape of a ledger account. As receipts
of cash are entered on the debit side and payment of cash on the credit side, so
there is no need of preparing cash account ledger. Therefore, cash book servers
the purpose of a ledger account.
From the above, it is clear, that cash book fulfils the functions of a subsidiary
book and ledger both.
KINDS OF CASH BOOK
There are three types of cash books which are maintained in business according
to its needs of convenience. These are :
o Simple cash book
o Two column cash book
o Three column cash book
o Multi columnar cash book.
In addition to the cash book, the various business houses may also maintain
petty cash book.
MODULE 2
Management Accounting
Management accounting combines accounting, finance and management with
the leading edge techniques needed to drive successful businesses.
Chartered management accountants:
advise managers about the financial implications of projects
explain the financial consequences of business decisions
formulate business strategy
monitor spending and financial control
conduct internal business audits
explain the impact of the competitive landscape
Difference b/w Financial & Management Accounting
Financial Accounting Managerial Accounting
» Reports to those outside the
organization owners, lenders,
tax authorities and regulators.
» Reports to those inside the
organization for planning,
directing and motivating,
controlling and performance
evaluation.
» Emphasis is on summaries of
financial consequences of past
activities.
» Emphasis is on decisions
affecting the future.
» Objectivity and verifiability of
data are emphasized. » Relevance of items relating to
decision making is
emphasized.
» Precision of information is
required. » Timeliness of information is
required.
» Only summarized data for the
entire organization is prepared. » Detailed segment reports about
departments, products,
customers, and employees are
prepared.
» Must follow Generally
Accepted Accounting
Principles (GAAP).
» Need not follow Generally
Accepted Accounting
Principles (GAAP).
» Mandatory for external reports. » Not mandatory.
Classifications of cost
1. According To Nature
a. Materials Cost
b. Labour Cost
c. Expenses 2. According to function
a. Production Cost
b. Selling & Distribution Cost
c. Administration Cost
d. RD Cost
3. According To Identifiably
a. Direct
b. InDirect 4. According To Behaviour
a. Fixed
b. Variable
c. Semi-Fixed Variable 5. According Association With Products
a. Product Costs
b. Period Costs 6. According to Controllability
a. Controllable Costs
b. Uncontrollable Costs 7. According To Normality
a. Normal Costs
b. Abnormal Costs 8. According To Time
a. Historical Costs
b. Pre-determined Costs 9. According To Relevance
a. Opportunity Cost
b. Relevant Cost
c. Shut Down Cost
d. Differential Cost
e. Imputed Cost
f. Out-Of-Pocket Cost
g. Marginal Cost
h. Replacement Cost 10. Other Costs
a. Conversion Costs
b. Avoidable Costs
c. Unavoidable Costs
Cost accounting systems
A cost accounting system requires five parts that include: 1) an input
measurement basis, 2) an inventory valuation method, 3) a cost accumulation
method, 4) a cost flow assumption, and 5) a capability of recording inventory
cost flows at certain intervals. These five parts and the alternatives under each
part are summarized in Exhibit 2-1. Note that many possible cost accounting
systems can be designed from the various combinations of the available
alternatives, although not all of the alternatives are compatible. Selecting one
part from each category provides a basis for developing an operational
definition of a specific cost accounting system.
Job order costing
Job-order costing is a cost system that is used to accumulate costs by jobs.
These jobs could also be called batches, as each job is generally a “batch” of
similar products. Each batch should be individualized in some way to make it
differentiated from other batches for it to be a separate job. If batches were all
identical, another type of costing would be more appropriate.
The Job-Order Costing Process
When a company operates using job-order costing, a specific set of events will
usually occur with each job. Generally, the process is as follows:
An order (or sales order) is received for the batch of products
A production order is issued from the sales order
Materials and labor are ordered and tracked for the set of products
Manufacturing overhead is allocated to the job using a predetermined rate
(usually per labor hour or per machine hour)
Actual manufacturing overhead will not affect the work-in-process
account, instead it is charged to a control account
Direct labor and materials are charged by the accountant to the work-in-
process accounts using the actual amounts incurred
These amounts are all tracked using a job-costing sheet, which will most
likely be in a computerized format and a subsidiary ledger is kept for
each job
Abnormal spoilage (spoilage that is above and beyond what would be
expected from the job) is considered a period cost and is reclassified from
the work-in-process account into a separate account so it can be
addressed by management.
Activity based costing
Activity Based Costing (ABC) is an alternative to the traditional way of
accounting. Traditionally it is assumed that high volume customers are
profitable customers. A loyal customer is also a profitable customer. And profits
will follow a happy customer. Studies about customer profitability have
unveiled that the above ideas are not necessarily true. ABC is a costing model
that identifies the cost pools, or activity centers, in an organization. It assigns
costs to products and services (cost drivers), based on the number of events or
transactions that are taking place in the process of providing a product or
service. As a result, Activity Based Management can support managers to see
how shareholder value can be maximized and how corporate performance can
be improved.
Historically, cost accounting models related indirect costs on the basis of
volume.
Typical benefits of Activity-Based Costing:
Identify the most profitable customers, products and channels.
Identify the least profitable customers, products and channels.
Determine the true contributors to- and detractors from- financial
performance.
Accurately predict costs, profits and resources requirements associated with
changes in production volumes, organizational structure and costs of
resources.
Easily identify the root causes of poor financial performance.
Track costs of activities and work processes.
Equip managers with cost intelligence to stimulate improvements.
Facilitate a better Marketing Mix
Enhance the bargaining power with the customer.
Achieve better Positioning of products
Process costing
Process costing is a term used in cost accounting to describe one method for
collecting and assigning manufacturing costs to the units produced. Processing
cost is used when nearly identical units are mass produced. (Job costing or job
order costing is a method used when the units manufactured vary significantly
from one another.)
Cost, Volume, Profit analysis
Cost volume profit analysis (CVP analysis) is one of the most powerful tools
that managers have at their command. It helps them understand the
interrelationship between cost, volume, and profit in an organization by
focusing on interactions among the following five elements:
1. Prices of products
2. Volume or level of activity
3. Per unit variable cost
4. Total fixed cost
5. Mix of product sold
Because cost-volume-profit (CVP) analysis helps managers understand the
interrelationships among cost, volume, and profit it is a vital tool in many
business decisions. These decisions include, for example, what products to
manufacture or sell, what pricing policy to follow, what marketing strategy to
employ, and what type of productive facilities to acquire.
MODULE 3
Capital budgeting decisions
In today‟s complex business environment, making capital budgeting decisions are
among the most important and multifaceted of all management decisions as it represents
major commitments of company‟s resources and have serious consequences on the
profitability and financial stability of a company. It is important to evaluate the proposals
rationally with respect to both the economic feasibility of individual projects and the relative
net benefits of alternative and mutually exclusive projects.
The growing internationalization of business brings stiff competition which requires a
proper evaluation and weightage on capital budgeting appraisal issues viz. differing project
life cycle, impact of inflation, analysis and allowance for risk. Therefore financial managers
must consider these issues carefully when making capital budgeting decisions.
Standards and variable costing
In modern cost accounting, the concept of recording historical costs was taken
further, by allocating the company's fixed costs over a given period of time to
the items produced during that period, and recording the result as the total cost
of production. This allowed the full cost of products that were not sold in the
period they were produced to be recorded in inventory using a variety of
complex accounting methods, which was consistent with the principles of
GAAP (Generally Accepted Accounting Principles). It also essentially enabled
managers to ignore the fixed costs, and look at the results of each period in
relation to the "standard cost" for any given product.
For example: if the railway coach company normally produced 40 coaches per
month, and the fixed costs were still 50,000/month, then each coach could be
said to incur an overhead of 1250 (50,000 / 40). Adding this to the variable
costs of 15,000 per coach produced a full cost of 16,250 per coach.
"Variable costing" refers to any costs within a manufacturing facility other
than direct material and direct labor. Manufacturing overhead includes such
things as indirect labor, indirect materials (such as manufacturing supplies),
utilities, quality control, material handling, and depreciation on the
manufacturing equipment and facilities.
"Variable" manufacturing overhead costs will increase in total as output
increases. An example is the cost of the electricity needed to operate the
machines that cut and sew the denim. Another example is the cost of the
manufacturing supplies (such as needles and thread) that increase when
production increases. In our example we assume that these variable
manufacturing overhead costs fluctuate in response to the number of direct
labor hours.
Production cost variance analysis
Variance Analysis is defined to be an analysis of the cost variances into its
component parts and the explanation of the same. It is that part of the process of
control which involves the calculation of a variance and interpretation of results
for identifying the causes thereof and also for pinpointing responsibility.
Variances are normally calculated for all the cost components such as Materials,
Labour and Overheads.
Example:
One unit of Product A requires TWO Kgs. of Material X at a price of Rs.5 per
Kg. Ten units of Product A was manufactured and 22 Kgs. of X was consumed.
The actual price was Rs.6 per Kg.
Computation of the cost variance:
For the actual production of 10 Units of A, the consumption at standard should
have been 20 Kgs. of X. With a standard price of Rs.5 per Kg. the total standard
cost for actual production works out to Rs.100; whereas the actual cost incurred
for the same level of production happens to be Rs.132 (22 Kgs. x Rs.6 per Kg.).
The above results in a total cost variance of Rs.32 Unfavorable.
Responsibility control
Everyone in an organization has responsibility for internal control to some
extent. Virtually all employees produce information used in the internal control
system or take other actions needed to effect control. Also, all personnel should
be responsible for communicating upward problems in operations,
noncompliance with the code of conduct, or other policy violations or illegal
actions.
Each major entity in corporate governance has a particular role to play:
Management: The Chief Executive Officer (the top manager) of the
organization has overall responsibility for designing and implementing effective
internal control. More than any other individual, the chief executive sets the
"tone at the top" that affects integrity and ethics and other factors of a positive
control environment. In a large company, the chief executive fulfils this duty by
providing leadership and direction to senior managers and reviewing the way
they're controlling the business. Senior managers, in turn, assign responsibility
for establishment of more specific internal control policies and procedures to
personnel responsible for the unit's functions. In a smaller entity, the influence
of the chief executive, often an owner-manager is usually more direct. In any
event, in a cascading responsibility, a manager is effectively a chief executive of
his or her sphere of responsibility. Of particular significance are financial
officers and their staffs, whose control activities cut across, as well as up and
down, the operating and other units of an enterprise.
Board of Directors: Management is accountable to the board of directors,
which provides governance, guidance and oversight. Effective board members
are objective, capable and inquisitive. They also have knowledge of the entity's
activities and environment, and commit the time necessary to fulfill their board
responsibilities. Management may be in a position to override controls and
ignore or stifle communications from subordinates, enabling a dishonest
management which intentionally misrepresents results to cover its tracks. A
strong, active board, particularly when coupled with effective upward
communications channels and capable financial, legal and internal audit
functions, is often best able to identify and correct such a problem.
Auditors: The internal auditors and external auditors of the organization also
measure the effectiveness of internal control through their efforts. They assess
whether the controls are properly designed, implemented and working
effectively, and make recommendations on how to improve internal control.
They may also review Information technology controls, which relate to the IT
systems of the organization.
Responsibility accounting information used in management control
Responsibility accounting is used to identify what parts of the organization have
primary responsibility for each objective, develop performance measures and
targets to achieve, and design reports of these measures by organization subunit
or responsibility center.
MODULE 4
Budget
An important instrument of the financial management used as aid in planning,
programming and control
A budget may be defined as a financial and quantitative statement, prepared and
approved prior to defined period of time, of the policy to be pursued during that
period for the purpose of achieving the given objective.
Budget: advantages
It is a tool for -
a) Quantitative expression of the planning
b) Evaluation of financial performance in accordance with plans
c) Controlling costs
d) Optimizing the use of resources
e) Directing the total efforts in to the most profitable channels
Types of budget
Sales budget
The sales budget is an estimate of future sales, often broken down into both
units and dollars. It is used to create company sales goals.
Production budget
Product oriented companies create a production budget which estimates the
number of units that must be manufactured to meet the sales goals. The
production budget also estimates the various costs involved with manufacturing
those units, including labor and material.
Cash Flow/Cash budget
The cash flow budget is a prediction of future cash receipts and expenditures for
a particular time period. It usually covers a period in the short term future. The
cash flow budget helps the business determine when income will be sufficient to
cover expenses and when the company will need to seek outside financing.
Marketing budget
The marketing budget is an estimate of the funds needed for promotion,
advertising, and public relations in order to market the product or service.
Project budget
The project budget is a prediction of the costs associated with a particular
company project. These costs include labor, materials, and other related
expenses. The project budget is often broken down into specific tasks, with task
budgets assigned to each.
Revenue budget
The Revenue Budget consists of revenue receipts of government and the
expenditure met from these revenues. Tax revenues are made up of taxes and
other duties that the government levies.
Expenditure budget
A budget type which include of spending data items..
Operating budget
A companyÂ‟s planned budget, which takes into account income and expenses
that the company is likely to produce through its current operations. An
operating budget lists expenses such as advertising, salaries, and general and
administrative expenses. The budget should be periodically compared with
actual expenses. The operating budget focuses solely on operating income and
expenses, in contrast with a companyÂ‟s overall budget, which includes items
such as income from investments and other non-operating items.
Why Prepare A Cash Budget?
A cash budget is important for a variety of reasons. For one, it allows you to
make management decisions regarding your cash position (or cash reserve).
Without the type of monitoring imposed by the budgeting process, you may be
unaware of the cycle of cash through your business. At the end of a year or a
business cycle, a series of monthly cash budgets will show you just how much
cash is coming into your company and the way it is being used. Seasonal
fluctuations will be made clear. A cash budget also allows you to evaluate and
plan for your capital needs. The cash budget will help you assess whether there
are periods during your operations cycle when you might need short-term
borrowing. It will also help you assess any long-term borrowing needs.
Basically, a cash budget is a planning tool for management decisions.
MODULE 5
Ratio analysis
Ratio analysis is the process of computing, determining and presenting the
relationship of items or group of items of financial statement .it also involve the
comparison and interpretation of those ratios and the use of them for future
projections. A ratio is a mathematical relationship between two relative item
expressed in quantitative from. This quantitative relationship may be expressed
in either of the following way:-
1. In proportion
2. In rate or time or coefficient
3. In percentage
Different types of ratios
Ratios can be classified into four broad groups:-
i. Liquidity ratios
ii. Profitability ratios
iii. Turnover ratios
iv. Solvency ratios
Due – Pont analysis
The Du Pont Analysis, also known as the Du Pont Identity or DuPont Analysis,
is a representation that splits Return On Equity (ROE) into three segments:
* Financial Leverage (calculated using an equity multiplier)
* Asset use efficiency (calculated using asset turnover)
* Operating efficiency (calculated using the profit margin)
Return on Equity or ROE is calculated with the help of the following formula:
ROE = (Net profit/Sales) × (Sales/Assets) × (Assets/Equity)
= (Profit margin) × (Asset turnover) × (Equity multiplier)
Common size statement
Common size financial statement is also known as percentage analysis. Profit
and loss account and balance sheet is considered. Common size ratios are used
to compare financial statements of different-size companies or of the same
company over different periods. By expressing the items in proportion to some
size-related measure, standardized financial statements can be created, revealing
trends and providing insight into how the different companies compare. A sale
is always 100% taken.
The common size ratio for each line on the financial statement is calculated as
follows:
Common Size Ratio = Item of Interest
Reference Item
For example, if the item of interest is inventory and it is referenced to total
assets (as it normally would be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory
Total Assets
The ratios often are expressed as percentages of the reference amount. Common
size statements usually are prepared for the income statement and balance sheet,
expressing information as follows:
Income statement items - expressed as a percentage of total revenue
Balance sheet items - expressed as a percentage of total assets
Example income statement
Common Size Income Statement
Income Statement Common-Size
Income Statement
Revenue 70,134 100%
Cost of Goods Sold 44,221 63.1%
Gross Profit 25,913 36.9%
SG&A Expense 13,531 19.3%
Operating Income 12,382 17.7%
Interest Expense 2,862 4.1%
Provision for Taxes 3,766 5.4%
Net Income 5,754 8.2%
MODULE 6
Responsibility Accounting
An accounting system that provides information
Relating to the responsibilities of individual managers.
To evaluate managers on controllable items.
Meaning
Focuses on providing financial information useful in evaluating efficiency and
effectiveness of managers or department heads, on the basis of financial
performance directly under their control
Objectives
managers are held responsible for the difference between the actual
performance and those budgeted;
the managers are closely involved in the planning and controlling of the
resources and
Has a Responsibility centre which is a division or department in the
organization for them to be responsible for their performance.
Types
Examples:
Cost centre: usually a production centre or service department.
Profit centre: individual departments of retail stores and branch offices of
banks.
Investment centre: subsidiary companies
Corporate Financial Statement
The corporate financial statements are the financial reports or formal record
of the financial and business activities of a firm.
The corporate financial statements actually give a summary of the financial
condition and profitability of the firm in both long and short term. The corporate
financial statements are generally complex in nature as they contain analysis
and discussion on the management decisions and financial statement notes. The
financial statement notes define each and every item in the balance sheet
besides describing cash flow statement and income statement in details.
The four basic types of corporate financial statements are:
* Income statement
* Balance sheet
* Statement of cash flows
* Statement of retained earnings
Corporate Reporting
The exact definition of corporate reporting differs depending on who you speak
to. However, throughout this web site we use the term „corporate reporting‟ to
relate to the presentation and disclosure aspects - as distinct from
accounting/measurement - of the following areas of reporting:
* Financial reporting
* Corporate governance
* Executive remuneration
* Corporate responsibility
* Narrative reporting
Financial reporting:- At the core of the corporate reporting model is the
financial reporting model, consisting GAAP-compliant financial statements and
accompanying notes.
Corporate governance: - Relates to the communication of processes by which
companies are directed and controlled. Levels of disclosure differ worldwide
but might include information on board composition and development,
accountability and audit and relations with shareholders.
Executive remuneration: - The communication of how executives are
remunerated, both in the short and longer-term, in order to deliver on their
company‟s strategic objectives.
Corporate responsibility:-Corporate responsibility includes the
communication about how companies are understanding and managing their
impact on people, clients, suppliers, society, and the environment in order to
deliver increased value to all our stakeholders.
Narrative reporting: - Narrative reporting is shorthand for the critical
contextual and non-financial information that is reported alongside financial
information so as to provide a broader more meaningful understanding of a
company's business, its market position, strategy, performance and future
prospects - including quantified metrics.