Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Introduction to Managerial Accounting Chapter 1 2

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Outback Steakhouse – Owns over 1400 restaurants in all 50 states and in 21 different countries – Annual sales have topped $3.9 billion, and operating income is over $152 million.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Outback Steakhouse Strategies – Outback won’t invest in a new restaurant unless the projected annual sales at least double the initial cost of location’s property, improvements, and equipment – Outback open only for dinner because it is found that the cost of replacing overworked managers and employees would exceed profits from lunch time business.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Outback Steakhouse Managers use managerial accounting information to guide their actions and decisions. These decisions include opening new restaurants, adding new items to the menu, or outsourcing the desserts to a local bakery. Management accounting information helps management decide whether any or all of these actions will be profitable

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. What is Managerial Accounting Financial accounting: – Focuses on providing stockholders and creditors with the information they need to make investment and lending decisions (the balance sheet, income statement, statement of shareholders’ equity, and statement of cash flow) Managerial accounting: – Focuses on providing internal management with the information it needs to run the company efficiently and effectively

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Objective 1 Identify managers’ four primary responsibilities 7

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Managers’ Responsibilities Setting goals and objectives Overseeing day-to-day operations Evaluating results of operations Directing Controlling Decision Making Planning 8

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Planning Setting goals and objectives and how to achieve them Examples of planning: Outback’s goals is to generate more sales. One strategy to achieve this goal is to open more restaurants, so management may plan to build and begin operating 25 new steakhouses next year. Managerial accounting translates these plans into budgets—the quantitative expression of a plan. Management analyzes the budgets before proceeding to determine whether its expansion plans make financial sense. 9

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Directing Overseeing company’s day-to-day operations Examples: Management uses product cost reports, product sales information, and other managerial accounting reports to run daily business operations. Outback uses product sales data to determine which menu items are generating the most sales and then uses that information to adjust menus and marketing strategies. 10

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Controlling Evaluating results of operations against plans and making adjustments as needed Examples: Outback uses performance reports to compare each restaurant’s actual performance against the budget and then uses that feedback to take corrective actions if needed. If actual costs are higher than planned, or actual sales are lower than planned, then management may revise its plans or adjust operations. Perhaps the newly opened steakhouses are not generating as much income as budgeted. As a result, management may decide to increase local advertising to increase sales. 11

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Decision Making Management is continually making decisions while it plans, directs, and controls operations Examples: Outback must decide where to open new restaurants, which restaurants to refurnish, what prices to set for meals, what entrees to offer, and so forth. Because Outback is in business to generate profits for its stockholders, management must consider the financial impact of each of these decisions. Managerial accounting gathers, summarizes, and reports cost and revenue data relevant to each of these decisions. 12

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Objective 2 Distinguish financial accounting from managerial accounting 13

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

E1-9A a.Companies must follow GAAP in their _________ systems. b.Financial accounting develops reports for external parties, such as __________ and _______________. c.When managers evaluate the company’s performance compared to the plan, they are performing the ____________ role of management. 15

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-9A d.__________ are decision makers inside a company. e._____________________ provides information on a company’s past performance to external parties. f.______________________ systems are not restricted by GAAP, but are chosen by comparing the costs versus the benefits of the system. 16

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-9A g.Choosing goals and the means to achieve them is the ____________ function of management. h._______________________ systems report on various segments or business units of the company. i.______________________ statements of public companies are audited annually by CPAs. 17

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Objective 3 Describe organizational structure and the roles and skills required of management accountants within the organization 18

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Organizational Structure Board of Directors Chief Executive Officer Chief Operating Officer Chief Financial Officer Vice Presidents of various operations TreasurerControllerInternal Audit Audit Committee Board of Directors Chief Executive Officer Chief Operating Officer Chief Financial Officer Vice Presidents of various operations TreasurerControllerInternal Audit Audit Committee 19

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Stockholders elect a board of directors to oversee the company. The board meets only periodically, so it hires a chief executive officer (CEO) to manage the company on a daily basis. The CEO hires other executives to run various aspects of the organization, such as the chief operating officer (COO) and the chief financial officer (CFO). The COO is responsible for the company’s operations, such as research and development (R&D), production, and distribution. The CFO is responsible for all of the company’s financial concerns. The treasurer and the controller report directly to the CFO. The treasurer is primarily responsible for raising capital (through issuing stocks and bonds) and investing funds. The controller is usually responsible for general financial accounting, managerial accounting, and tax reporting. The New York Stock Exchange requires that listed companies have an internal audit function. The role of the internal audit function is to ensure that the company’s internal controls and risk management policies are functioning properly. The internal audit department reports directly to a subcommittee of the board of directors called the audit committee. The audit committee oversees the internal audit function as well as the annual audit of the financial statements by independent CPAs.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Changing Roles of Management Accountants Impact of technology Ensuring accurate financial records Planning, analyzing, and interpreting accounting data Providing decision support 21

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Required Skills of Managerial Accountants Knowledge of financial and managerial accounting Analytical skills (critical thinking) Knowledge of how a business functions Ability to work on a team Oral and written communications skills 22

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-11A a.The _____ and the _____ report to the CEO. b.The internal audit function reports to the CFO or _______ and the _________________. c.The __________ is directly responsible for financial accounting, managerial accounting and tax reporting. d.The CEO is hired by the _________________. 23

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-11A e.The __________ is directly responsible for raising capital and investing funds. f.The __________ is directly responsible for the company’s operations. g.Managerial accountants often work with __________________________. h.The subgroup of the board of directors is called the _________________. 24

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use its ethical standards to make reasonable ethical judgments 25

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Institute of Management Accountants (IMA) Professional association for management accountants IMA’s functions Certification (CMA) Practice Development Education Networking Ethical Standards Public Education 26

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Institute of Management Accountants (IMA) The Institute of Management Accountants (IMA) is the professional association for management accountants. The goal of the IMA is to advance the management accounting profession primarily through certification, practice development, education and networking. The IMA issues one professional certifications: the Certified Management Accountant (CMA). You can find out more about the IMA and the certifications it offers at its Web site

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Summary of IMA Ethical Standards CompetenceConfidentiality IntegrityCredibility 28 The IMA Statement of Ethical Professional Practice requires compliance with 4 ethical standards: Maintain professional competence, preserve confidentiality of information, uphold integrity, and perform duties with credibility. Failure to comply with the standards may result in disciplinary action.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Ethical Behavior Means doing the right thing, regardless of consequences Examples of unethical behavior – Allowing reimbursement of false expense reports – Manipulating income – Performing tasks not qualified to perform 29

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Steps to Resolve Ethical Dilemmas Follow company’s policies for reporting unethical behavior If not resolved – Discuss with immediate supervisor – Discuss with objective advisor – Consult an attorney 30

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Unethical vs. Illegal Behavior Not all unethical behavior is illegal, but all illegal behavior is unethical. Unethical behavior includes: – Dishonesty – Unfairness – Lack objectivity – Irresponsible 31

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-12A a.The ______ is the professional association for management accountants. b.The institute offers a professional certification called the _______, which focuses on managerial accounting topics, economics, and business finance. 32

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-12A c. The institute find that people holding the ______ certification earn, on average, ______% more than those without the certification. d.The institute’s monthly publication, called ____________________, addresses current topics of interest to management accountants. 33

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-12A e. The institute says that approximately _____ percent of accountants work inside of organizations, rather than at CPA firms. 34

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Objective 5 Discuss and analyze the implications of regulatory and business trends 35

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Regulatory and Business Issues Sarbanes-Oxley Act of 2002 (SOX) International Financial Reporting Standards (IFRS) Extensible Business Reporting Language (XBRL) Shifting economy 36

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Sarbanes-Oxley Act of 2002 (SOX) Restore trust in publicly traded corporations, management, financial statements, and auditors CEO /CFO requirements: – Financial statements – Internal control structure – Annual assessment Independent audit committee Increases white-collar crime penalties 37

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. International Financial Reporting Standards (IFRS) Results of globalization – Consistent reporting standards needed worldwide – SEC is studying IFRS Current IFRS information: or 38

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Extensible Business Reporting Language (XBRL) Standardized tagging system for financial reports Advantages: – Decreases retrieval time – Decreases conversion time – Facilitates comparisons – Customizes information 39

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Shifting Economy Shift away from manufacturing toward service Managerial accounting has expanded 40

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Competing in Global Marketplace Barriers to international trade have fallen More accurate and timely information needed – The barriers to international trade have fallen over the past decades, allowing foreign companies to compete with domestic firms. As a result, managers need more accurate and timely information. Managers need to decide whether to expand sales and/or production into foreign countries. Companies can learn new management techniques from foreign operations. Firms that are not highly efficient, innovative, and responsive to business trends will vanish from the global market. However, global markets also provide highly competitive domestic companies with great opportunities for growth. 41

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Tools for Time-Based Competition Enterprise resource planning (ERP) E-commerce Supply-chain management Lean production Just-in-time (JIT) Total quality management (TQM) 42

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Enterprise Resource Planning (ERP) System that integrates a company’s functions, departments, and data Advantages Streamline operations Respond quickly to changes Replace separate software systems Disadvantage -- expensive 43

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E-Commerce Needed to survive in global economy E-commerce is needed to survive in a competitive, globally wired economy. Companies use the Internet in everyday operations such as budgeting, planning, selling, and customer service. 44

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply-Chain Management Exchange of information with suppliers Reduce costs Improve quality Speed the delivery – Supply-chain management is where companies exchange information with suppliers to reduce costs, improve quality, and speed delivery of goods and services from suppliers to the company itself. 45

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Lean Production A philosophy and business strategy of manufacturing without waste Lowers costs Increases competitive position – Lean production is both a philosophy and a business strategy of manufacturing without waste. The more waste that is eliminated, the lower the company’s costs will be. Why is this important? With lower costs, companies are better able to compete. One primary goal of a lean production system is to eliminate the waste of time and money that accompanies large inventories. 46

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Just in Time Inventory (JIT) Manufacture “just in time” to fill orders Reduces: – Raw materials inventory – Finished goods inventory – Storage costs – Handling costs (JIT) inventory philosophy was first pioneered by Toyota. By manufacturing product just in time to fill customer orders, and no sooner, companies are able to substantially reduce the quantity of raw materials and finished product kept on hand. This, in turn, reduces storage costs and handling costs 47

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. TQM : Total Quality Management Goal to provide customers with superior products and services Continually set higher goals for quality International Organization for Standardization (ISO) (TQM) is one key to succeeding in the global economy. The goal of TQM is to delight customers by providing them with superior products and services. As part of TQM, each business function examines its own activities and works to improve performance by continually setting higher goals. Many firms want to demonstrate their commitment to continuous quality improvement. The International Organization for Standardization (ISO), made up of 157 member countries, has developed international quality management standards and guidelines. Firms may become ISO 9001:2008 certified by complying with the quality management standards set forth by the ISO and undergoing extensive audits of their quality management processes. 48

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A a.________ is a language that utilizes a standardized coding system companies use to tag each piece of financial and business information in a format that can be quickly and efficiently accessed over the Internet. 49

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A b. _______________________________ involves the exchange of information with suppliers to reduce costs, improve quality, and speed delivery of goods and services from suppliers to the company and its customers. 50

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A c.The _______________________________ was enacted to restore trust in publicly traded corporations, their management, their financial statements, and their auditors. d.The goal of ___________________________ is to meet customers’ expectations by providing them with superior products and services by eliminating defects and waste throughout the value chain. 51

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A e.Most of the costs of adopting ERP, expanding into a foreign market, or improving quality are incurred in the _______; but most of the benefits occur in the _______. f.________________ is the time between buying raw materials and selling the finished products. 52

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A g._______________________________ serves the information needs of people in accounting as well as people in marketing and in the warehouse. h.Firms adopt _______________ to conduct business on the Internet. i.Firms acquire the _________________ certification to demonstrate their commitment to quality. 53

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A j.___________________ is a philosophy that embraces the concept that the lower the company’s waste is, the lower the company’s costs will be. k.______________________________________ is a data tagging system that enables companies to release financial and business information in a format that can be quickly, efficiently, and cost-effectively accessed, sorted, and analyzed over the internet. 54

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A l.The SEC is expected to require the adoption of _____________________________________ for all publicly traded companies within the next few years, which differs from the GAAP that companies are currently required to use. 55

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A m. Toyota first pioneered an inventory philosophy in which a product is manufactured ______________ to fill customer orders; companies are able to substantially reduce the quantity of raw materials and finished goods inventories. 56

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E1-15A n. ____________________________ is a management philosophy of delighting customers with superior products and services by continually setting higher goals and improving the performance of every business function. 57

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. End of Chapter 1 58