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 are the 4 Business Processes? Business Process: a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer 1.Business organization and strategy process  Determines the plan of action for the company  The long-term plan for using resources— physical and human 2.Operating processes  Profit-making activities of the company

What are the 4 Business Processes? 3.Capital resources processes  Financing and investing activities of the company  Involve the purchase and sale of long-term assets and other major items used to achieve the business’s strategy  E.g. purchasing equipment and buildings that a company expects to use over a period of years is an investing process while actually using the buildings and equipment to provide a product or service to customers is an operating process

What are the 4 Business Processes? 4.Performance measurement and management process  Balanced scorecard— translates a company’s strategy (from the business organization and strategy process) into measurable objectives (for the operating and capital resources processes)

2-6 How does the External Environment Impact Strategy? Relatively certain external environment  Efficiency strategy: focus is primarily on the reduction or containment of costs, improvement in productivity and penetration of their products and services in the market due to their low cost  Mechanistic structure: activities and employees are arranged by functions (marketing, human resources, production/operations, finance, and accounting)

How does the External Environment Impact Strategy? Relatively uncertain external environment  Flexibility strategy: adapts to changing market conditions by developing new products/services, markets and technologies  Organic structure: activities and people are arranged in cross-functional teams—that is, a team consists of employees from marketing, human resources, production/operation, finance, and accounting

2-8 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

2-9 What are Financing and Investing Processes? Financing— activities involving obtaining and repaying cash and other capital resources  Raising capital to support operating activities Investing— activities involving purchasing and selling of long-term debts  Creating the infrastructure to support operating activities

2-10 What is the Balanced Scorecard? Holistic (financial health) approach to planning and measuring performance 4 perspectives  Financial: concerned with the financial health of the company  Internal  Customer  Learning and growth

2-11 What Measures are Used in the Financial Perspective? Return on investment ratio  Relationship between net income and assets  Net Income / Average Total Assets  Quick ratio  Relationship of liquid assets to current liabilities  Cash + Short-term investments + Receivables / Current Liabilities  Gross margin  Relationship of gross margin to sales  Gross margin / Sales

2-12 Financial Perspective Continued Current ratio (Chapter 1) Debt to equity ratio (Chapter 1) Return on sales ratio (Chapter 1)

Internal Perspective The part of the balanced scorecard concerned with the internal operations of the company Time Measurements: one way companies monitor time Value-added time: time spent on activities that add value to the company’s products/services or processes e.g. time spent producing iPhones Nonvalue added time: e.g. time spent moving raw materials such as circuits from the storeroom to the factory

2-14 What Measures are Used in the Internal Perspective?  Customer response time— from when the customer places on order until the order is received  Order response time: the time that elapses between when the customer places an order and the order is assigned to production  Processing time: the time it takes to actually manufacture the order  Queue time: any time during the process when the order is waiting for processing  Storing time: the time that passes between when the order is finished processing and when it is shipped  Shipping time: the time it takes to deliver the order to the customer

What Measures are Used in the Internal Perspective? Activity ratios Quality  Prevention  Appraisal  Internal failure  External failure

2-16 What are the Three Activity Ratios? Accounts receivable turnover: measures the speed the company is receiving cash from its customers  Days in the collection cycle  Sales / Avg. A/R = Turnover  365 / Turnover = Days Inventory turnover: speed the company sells its inventory at  Days in the selling cycle  Cost of sales / Avg. Inventory = Turnover  365 / Turnover = Days

What are the Three Activity Ratios? Accounts payable turnover: measures the speed the company pays its obligations to suppliers  Days in the payment cycle  Cost of sales / Avg. A/P = Turnover  365 / Turnover = Days

2-18 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

2-19 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  E.g. companies who sold pet food with contaminated wheat gluten from China that resulted in kidney failure and death for a number of pets

2-20 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

2-21 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

2-22 What are the 5 Procedures of Internal Control? The set of policies and procedures designed to meet 3 objectives: a)Promote operational efficiency b)Ensure the accuracy of accounting information c)Encourage management and employee compliance with applicable laws and regulations

What are the 5 Procedures of Internal Control? 1.Proper authorization: people responsible for certain activities have the authority to enforce the policies associated with the activities e.g. Apple might assign the authority for determining which customers can pay on account to one person and that person is accountable 2.Separation of duties: business transactions should be divided into 4 phases 1.Approval 2.Execution 3.Custody 4.Recording—entering transactions into accounting system

What are the 5 Procedures of Internal Control? 3.Maintaining adequate documentation: allows managers to trace transactions e.g. pre-numbering documents and limiting access to authorized employees 4.Physically controlling assets and documents: limit access but unauthorized personnel e.g. use cash registers that produce a written receipt and record of transactions, locking storerooms, using fireproof safes; fences around company buildings and storage lots, passwords for electronic data

What are the 5 Procedures of Internal Control? Providing independent checks on performance: have another employee who was not involved in the original activity check the work e.g. an independent person compares the amount recorded as cash receipts in the accounting records with the records of the bank Independent checks guard against intentional theft and fraud and also reveal cases where employees perform certain procedures incorrectly

2-26 What are the Internal Controls for Cash? Cash receipts physically safeguard cash by using a cash register For each sales transaction one copy of a sales slip is given to the customer who provides an independent check An independent person compares the amount of money in the register at the end of a shift with the recorded sales

What are the Internal Controls for Cash? Cash disbursements  Proper authorization—only make payments for items the business has approved  Separate duties of cheque writing, signing, mailing, keeping accounting records and payments have been authorized

What are the Internal Controls for Cash? Bank reconciliation: a control procedure performed to adjust the recorded cash amount and to reflect any differences between its cash balance and the bank balance according to the bank Bank statement shows beginning and ending balance of the account according to the bank’s books; total amount deposited; total amount withdrawn and any additional charges against or additions to the account according to the bank

2-29 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

2-30 What are the Adjustments to the Bank Balance? Outstanding cheques  Cheques 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

2-31 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 cheques  Cheques accepted by the company that “bounced” due to insufficient funds  Subtract from book balance Errors made by the company

Bank Reconciliation Example

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 (books), the balance in the cash account is $4, After carefully comparing the cheque register to the bank statement, the following items were discovered: Deposit in transit$ Interest earned 5.47 NSF cheque Outstanding cheques 1, Service charge on NSF cheque 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 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?