McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Business Processes and Accounting Information

2-2 What are the 3 Phases of the Management Cycle? Planning phase  Setting goals and objectives for business activities Performing phase  Completing the planned business activities and recording the results of those activities Evaluating phase  Providing information to interested users to assess the success of the business activities

2-3 What is a Business Process? Collection of activities that takes input and creates an output that is of value

2-4 What are the 4 Business Processes? Business organization and strategy process  Determines the plan of action for the company Operating processes (slide 6)(slide 6)  Profit-making activities of the company Capital resources processes  Financing and investing activities of the company (slide 7)(slide 7) Performance measurement and management process  Balanced scorecard (slide 8)(slide 8)

2-5 How does the External Environment Impact Strategy? Relatively certain external environment  Mechanistic structure  Efficiency strategy Relatively uncertain external environment  Organic structure  Flexibility strategy Back

2-6 What are the Operating Sub- processes? Marketing/sales/collection/customer service process  Resources provided Conversion process  Resources used Purchasing/human resources/payment process  Resources acquired Back

2-7 What are Financing and Investing Processes? Financing  Raising capital to support operating activities Investing  Creating the infrastructure to support operating activities Back

2-8 What is the Balanced Scorecard? Holistic approach to planning and measuring performance 4 perspectives  Financial (Slides 9 and 10)(Slides 9 and 10)  Internal (Slide 11-14)(Slide 11-14)  Customer (Slide 15)(Slide 15)  Learning and growth (Slide 16)(Slide 16)

2-9 What Measures are Used in the Financial Perspective? Return on investment ratio  Relationship between net income and assets Quick ratio  Relationship of liquid assets to current liabilities Return on owner’s equity  Relationship between net income and owner’s equity Gross margin  Relationship of gross margin to sales

2-10 Financial Perspective Continued Current ratio (Chapter 1) Debt to equity ratio (Chapter 1) Return on sales ratio (Chapter 1) Back

2-11 What Measures are Used in the Internal Perspective? Value-added versus nonvalue-added time  Customer response time—from when the customer places an order until the order is received Activity ratios (Slide 12) Quality (Slides 13-14)  Prevention  Appraisal  Internal failure  External failure

2-12 What are the Three Activity Ratios? Accounts receivable turnover  Days in the collection cycle Inventory turnover  Days in the selling cycle Accounts payable turnover  Days in the payment cycle

2-13 What are the Voluntary Types of Quality Costs? Prevention  Reducing the opportunity for error to occur Employee training, product and process design Appraisal  Finding errors as early in the process as possible Continuous inspection, testing

2-14 What are the Involuntary Types of Quality Costs? Internal failure  Correcting errors before the customer knows the error occurred External failure  Correcting errors after the customer knows the error occurred  Includes customer ill will Back

2-15 What Measures are Used in the Customer Perspective? Market share  Percentage of total sales in the market generated by a particular company Customer satisfaction  Surveys Customer loyalty  Growth, referrals, retention Back

2-16 What Measures are Used in the Learning and Growth Perspective? Research and development  $ spent, new products developed Employee growth  Training, continuing education Information systems  Technology Back

2-17 What are the 5 Procedures of Internal Control? Proper authorization Separating incompatible duties Maintaining adequate documentation Physically controlling assets and documents Providing independent checks on performance

2-18 What are the Internal Controls for Cash? Cash receipts  Separation of incompatible duties  Physical control Cash disbursements  Proper authorization  Separation of incompatible duties Bank reconciliation

2-19 What is a Bank Reconciliation? Comparing the accounting records of cash to the bank records of the checking account(s) 2 column bank reconciliation  Adjusts bank balance  Adjusts book (accounting records) balance

2-20 What are the Adjustments to the Bank Balance? Outstanding checks  Checks written by the company that have not been processed (yet) by the bank  Subtract from the bank balance Deposits in transit  Deposits made by the company that have not been processed (yet) by the bank  Add to the bank balance Errors made by the bank

2-21 What are the Adjustments to the Book (accounting) Balance? Interest earned  Interest-bearing checking accounts earn interest  Add to the book balance Service charges  Fees charged by the bank for services rendered  Subtract from the book balance NSF checks  Checks accepted by the company that “bounced” due to insufficient funds  Subtract from book balance Errors made by the company

Lecture Examples 1.A company has revenues of $450,000, cost of goods sold of $250,000, and operating expenses of $150,000. Its average current assets are $200,000 of which $75,000 is inventory and $20,000 are prepaid items. Of its liquid assets, 30 percent is cash and the remainder is accounts receivable. Its average total assets are $500,000 and its average total owners’ equity is $400,000. Seventy-five percent of its liabilities are current. Of the current liabilities, 80 percent is accounts payable. What are the return on investment, gross margin, quick, and return on owners’ equity ratios? What are the activity ratios and related days in the cycles?

Lecture Examples 2.A company just received its bank statement. According to the bank, the balance in the cash account should be $4, But according to the accounting records, the balance in the cash account is $4, After carefully comparing the check register to the bank statement, the following items were discovered: Deposit in transit$ Interest earned 5.47 NSF check Outstanding checks 1, Service charge on NSF check In addition, it was discovered that check #5567 which was written for $ was incorrectly recorded in the accounting records for $ What is the correct balance in the cash account?

Lecture Examples Answer: BankBook Recorded balance$4,678.65Recorded balance$4, deposits interest earned outstanding checks 1, NSF check Adjusted balance$3, service charge error* Adjusted balance$3, * error = $ $16.50 = $144.00