Copyright © 2006 Pearson Education Canada Inc Chapter 11 Understanding Accounting and Information Systems

Copyright © 2006 Pearson Education Canada Inc Learning Objectives Explain the role of accountants and distinguish among the three types of professional accountants Describe the three basic financial statements and show how they reflect the activity and financial condition of a business Explain how computing key financial ratios can help in analyzing the financial strengths of a business Explain why businesses must manage information and show how computer systems and communication technologies have revolutionized information management Identify and briefly describe three elements of data communication networks – the internet, the World Wide Web, and intranets

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc Financial Accounting The 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)

Copyright © 2006 Pearson Education Canada Inc Managerial Accounting Internal 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 divisions Provides information to facilitate planning, forecasting and decision making

Copyright © 2006 Pearson Education Canada Inc Professional Accountants Chartered 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

Copyright © 2006 Pearson Education Canada Inc Accounting Services Auditing 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc The Accounting Equation Asset 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc Financial Statements Balance 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

Copyright © 2006 Pearson Education Canada Inc The Balance Sheet

Copyright © 2006 Pearson Education Canada Inc Current Assets Cash and assets that can be converted into cash within the year Accounts 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc Owners’ Equity Owners’ 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

Copyright © 2006 Pearson Education Canada Inc

Copyright © 2006 Pearson Education Canada Inc Revenues Monies received by a firm as a result of Selling its product or service Return on investments Rent Licensing fees

Copyright © 2006 Pearson Education Canada Inc 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)

Copyright © 2006 Pearson Education Canada Inc 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 period Gross profit Gross profit (gross margin) =Revenues - cost of goods sold

Copyright © 2006 Pearson Education Canada Inc Net Income Operating 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc The Budget A detailed financial plan for estimated receipts and expenditures for a period of time in the future

Copyright © 2006 Pearson Education Canada Inc Analyzing Financial Statements Key ratios are used to interpret & compare results of financial statements for firms and/or industries Ratios are classified into three groups Solvency ratios  Short-term and long-term Profitability ratios Activity ratios

Copyright © 2006 Pearson Education Canada Inc Short-Term Solvency Ratios Measure the company’s liquidity The higher the ratio, the lower the risk of inability to pay Current Ratio Quick Ratio Current Assets Current Liabilities Quick Assets Current Liabilities

Copyright © 2006 Pearson Education Canada Inc 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 Owners’ Equity

Copyright © 2006 Pearson Education Canada Inc Profitability Ratios Measure overall company profitability for potential investors the higher the ratio, the more profitable the firm Return on Equity Earnings per Share Net Income Total Owner’s Equity Net Income # Outstanding Common Shares

Copyright © 2006 Pearson Education Canada Inc Activity Ratios Measure how efficiently the company uses its resources the higher the ratio, the lower the risk of inability to pay Inventory Turnover Ratio Cost of Goods Sold Average Inventory

Copyright © 2006 Pearson Education Canada Inc Information Management Information managers are responsible for: Generating information Analyzing information Dissemination of information to facilitate the decision-making process

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc The Evolution of IS Isolated Technical Problems Low-Level Management Problems High-Level Management Problems Organization-Wide Planning and Implementation

Copyright © 2006 Pearson Education Canada Inc Electronic Information Technologies (EIT) IS applications based on telecommunications technologies EIT uses networks of devices to communicate information electronically Cell phones, computers Provide coordination and communication within the firm Speeding up transactions with other firms Electronic conferencing Groupware

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc New Options for Organizational Design: The Networked Enterprise The 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

Copyright © 2006 Pearson Education Canada Inc 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.

Copyright © 2006 Pearson Education Canada Inc Types of Information Systems Top Level: Strategic IS Mid-Level: Management IS Knowledge Workers : Knowledge IS First-Level: Operational IS Matching Users to Systems

Copyright © 2006 Pearson Education Canada Inc Major Systems by Level Organization FunctionBusiness Process MarketingFinanceProduction Top-Level Manager Strategic Planning Product Development Order Fulfillment Supply Chain Management Mid-Level Manager Knowledge Workers First-Level Managers

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc 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

Copyright © 2006 Pearson Education Canada Inc Databases and Program Software Database A centralized, organized collection of related data Application programs Word processing Electronic spreadsheets Database management Computer graphics Presentation software

Copyright © 2006 Pearson Education Canada Inc Computer Applications for Business Word 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)

Copyright © 2006 Pearson Education Canada Inc 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 networks Multimedia technology Communications devices (cell phones, GPS, PDAs) Communications channels ( wired and wireless systems, satellite transmission)

Copyright © 2006 Pearson Education Canada Inc 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)

Copyright © 2006 Pearson Education Canada Inc 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