Business Processes and Accounting Information. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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1 Chapter 2 Business Processes and Accounting Information McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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 2-2

3 Business Processes Collection of activities that takes input and creates an output and is valued.

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

5 How does the External Environment Impact Structure and Strategy? Relatively certain external environment Mechanistic structure Efficiency strategy Focus on cost reduction Relatively uncertain external environment Organic structure Flexibility strategy Focus on changing market conditions 2-5

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

7 What are Financing and Investing Processes? Financing Raising capital to support operating activities Obtaining cash or other resources to pay for investments in long-term assets, repay creditors and provide return to owners Investing Creating the infrastructure to support operating activities Purchasing equipment and buildings that a company expects to use over a period of time 2-7

8 What is the Balanced Scorecard? Translates a company s strategy into financial and nonfinancial measures of performance. Holistic approach to planning and measuring performance 4 perspectives Financial Internal Customer Learning and growth 2-8

9 Financial Perspective Financial Measures Critical to the survival of a company Must create profits to remain attractive to investors and creditors

10 What Measures are Used in the Financial Perspective? Return on investment ratio Relationship of net income to average total assets Quick ratio Relationship of liquid assets to current liabilities Excludes inventory and other current assets that may not be liquid enough to meet short-term obligations. Return on owners equity Relationship of net income to average owners equity Gross margin Relationship of gross margin (sales minus cost of goods sold) to sales 2-10

11 What Measures are Used in the Financial Perspective? Cont. Current ratio (Chapter 1) Debt to equity ratio (Chapter 1) Return on sales ratio (Chapter 1) 2-11

12 Internal Perspective Examining the internal processes of the company paying particular attention to the quality and time

13 What Measures are Used in the Internal Perspective? Value-added versus nonvalue-added time Value-added Time spent on activities that add value to the company s products/services or processes Nonvalue-added Time spent on activities that do not add value to the company s products/services or processes Customer response time From when the customer places an order until the order is received 2-13

14 What are the Three Activity Ratios? Accounts receivable turnover 2-14 Days in the collection cycle Sales / Average Accts Rec = Turnover 365 / Turnover = Days Inventory turnover Days in the selling cycle Cost of Sales / Average Inventory = Turnover 365 / Turnover = Days Accounts payable turnover Days in the payment cycle Cost of Sales / Average Accts Pay = Turnover 365 / Turnover = Days

15 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 2-15

16 What are the Involuntary Types of Quality Costs? Internal failure Correcting errors before the customer knows the error occurred Rework; spoilage; downtime External failure Correcting errors after the customer knows the error occurred Warranties, lawsuits, customer ill will 2-16

17 Customer Perspective Monitoring the customer bases focusing on customer growth and customer satisfaction

18 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 2-18

19 Learning and Growth Perspective Analyzing the company s ability to ensure its future focusing on employee growth and institutional learning

20 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 2-20

21 Internal Control System Set of policies and procedures designed to meet three objectives: Promote operational efficiency Ensure the accuracy of accounting information Encourage management and employee compliance with applicable laws and regulations

22 What are the 5 Procedures of Internal Control? Proper authorization Certain people authorized to do certain things Know who is responsible for policy function Separating incompatible duties Individuals with access to accounting records should not also have access to cash Four phases - approval, execution, custody, recording Maintaining adequate documentation Records must be kept, and accounting system must be working properly 2-22

23 What are the 5 Procedures of Internal Control? Cont Physically controlling assets and documents Assets should be kept under lock and key and records should be backed-up and kept in a safe place Fences, storage, passwords, firewalls Providing independent checks on performance Employees should be supervised Have an employee who was not involved in the original activity check the work

24 What are the Internal Controls for Cash? Cash receipts Separation of incompatible duties Physical control Cash disbursements Proper authorization Separation of incompatible duties Bank Statement Report sent by the bank showing transactions for a period 2-24

25 What is a Bank Reconciliation? Adjustment to reflect any differences between a company s cash balance and the cash balance according to the bank 2 column bank reconciliation Adjusts bank records and book (accounting records) to the same balance 2-25

26 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 2-26

27 What are the Adjustments to the Book (accounting) Balance? 2-27 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

28 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. Return on investment Gross margin Quick Ratio Return on owners equity ratio

29 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. Accounts Receivable Turnover Inventory Turnover Accounts Payable Turnover

30 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?