Chapter 1 The Accounting Function (Task 1) Flashcards
Purposes of management information
3 of them
Accounting information is a source of management information that helps with all three.
Planning - looking forward and planning the operations of the organisation. Need detailed info on past, present and forecast. Include the preparations of budget.
Control - concerned with plans are being met and achieved. Make comparisons between budget and actual achievements. See if corrective action needs to be taken place.
Decision Making - how to achieve organisations goals and what the strategic direction will be as well as day to day running of the business.
Types of decision making
Long term - These help with the strategic goals of the organisations.
Such as:
Which markets do we sell our products in?
Which products do we prioritise?
They are decisions about the whole organisation and will consider reaching goals in around 5-10 years time.
Short term - These help with the day to day running of the business.
Such as:
Which suppliers do we use?
What should the selling price of our units be?
Do we need to use overtime?
These short term decisions help towards reaching our long term goals.
Obviously, the decision made will depend on the size of the organisation.
Gross profit percentage
Formula
(Gross profit / revenue)*100
Gross profit = Revenue - cos
Operating profit percentage
(Operating profit / revenue)*100
Operating profit = revenue - overheads
Return on capital employed (ROCE) or primary ratio
Operating profit / Capital employed
Capital employed = Total assets - current liabilities
measures how efficiently the company uses its assets
Current Ratio
Current Assets / current liabilities
Quick Ratio
(Current assets - inventory) / current liabilities
Inventory holding period and turnover
( Inventory / Cos ) * 365
Shows average number of days inventory is held before its sold
Cost of sales / average inventory shown as the number of times a year inventory is turned over
Receivables collection period
( Trade receivables / revenue ) * 365
Use credit sales if possible, shows average number of days customers take to pay
Payables payment period
Trade payables / cos * 365
Shows average number of days it takes the business to pay suppliers
Gearing
non current liabilities / (Equity + non current liabilities) * 100
measures the percentage of debt to the the total financing , high gearing means less likely to lend company more money
ACCURATE Information
Accurate - Information need to be as accurate as is required by the user.
Complete - We need the full picture to make good decisions
Cost Effective - is the cost worth it?
Understandable - The format, detail and presentation of information must be in a style which is understandable by the user.
Reliable - The source of the information may determine how reliable it is.
Accessible - The user should be able to access the information in the required level of detail.
Timely - Information must be provided in a timely manner for effective decisions to be made.
Easy to use - Presentation and format can influence the ease of use, as well as the language and level of detail
3 types of financial function
Financial accounting
Cost accounting
Management accounting
Management accounting and the financial function - Financial accounting
Recording summarising and presentation of financial information
This is the statutory accounts. It enables the control of receivables and payables.
Backwards looking
for External audiences - Information will be provided internally but available to external parties such as:
Banks
Shareholders
Trade associations
Auditors
Government departments
Customers
Suppliers
Management accounting and the financial function - Management accounting
The production of financial reports to assist management with planning, control and decision making.
This includes:
Budgeting
Performance appraisal
Material usage
Labour usage
Cash control
cost centre
department or location for which costs can be ascertained
Revenue centre
department or location for which revenue can be ascertained
Profit centre
department or location for which costs and revenue can be ascertained
investment centre
department or location for which costs, revenue and investments can be ascertained
Examples of services within and outside the organisation - accounting function
Checking expenses
Petty cash claims
Internal audit
Calculation and payment of wages
Trade reference checks
Completion of forms and returns
Information for decision making
What is management information?
Examples of information they receive?
Information used by management to allow them to effectively carry out their role. They receive internal information from each department:
Numbers of products sold
Cost of materials
Wages of staff for month
They receive information from external sources:
Statistics (Government)
Competitor details
They use historic (past) information and what future (what is expected to happen) information.
Management information - organisational requirements
The beauty of management information is that there is no fixed format and no set requirements. Management information must be useful to its users.
It will vary from business to business. Organisational requirements depend upon:
-The size of the organisation
Who needs to know what and in how much detail?
-Their strategic goals
What information do they need to meet their aims?
-Legislation and regulation.
What are they required to hold information about? What are they allowed to hold information about?
Purpose of management information - Planning
In order to achieve its objectives, an organisation must undertake effective planning.
Management spend a lot of time looking forward and planning future operations.
To allow them to do this, they need detailed information for the past, present and forecast. Such as:
Production schedules (how much of each type of unit to make)
Resource requirements (amount of staff / materials required)
They will also require budgets created from information provided by the accounting function.
Purpose of management information - Control
Are plans being met and achieved?
Comparisons will be made between budgets and actual results. (Variances)
This will show whether corrective action needs to be taken.
Budgetary Control Reports
Used to report on budgets, actual figures, commitments and variances.
Data v information
Data:
Raw facts, numbers or transactions in the accounting system of a business - unprocessed
Could be all of the sales invoices issued to customers in a year
Large amount of unstructured, meaningless rubbish that managers would not be interested in looking at.
Information:
Data processed in a way that is meaningful to the person looking at it.
This could be a summary of the sales invoices giving gross, net, VAT and product breakdown
Could be a monthly breakdown of sales by product
Primary v secondary data
Primary data
Data that you have gathered yourself for a specific purpose
You could have spoken to customers or staff
This can be tailored to your individual requirements as the source of data will be known.
Very reliable as it is “from the horses mouth”
Very expensive and time consuming to gather
Secondary data
Data gathered by someone else that you are now using for your own purposes.
-Government statistics
Could be old and out of date or not specific for your needs.
Not very reliable as it is gathered by someone else
Cheaper and quicker to obtain that primary data.
Management accounting and the financial function - Cost accounting
Recording and preparing information on the costs incurred within an organisation.
It aids cost control decisions.
It aids management decide on:
Which products to sell
How much to charge for them.
If something costs too much to make.
What information could the finance department receive from other departments?
HR/Personnel
Sales
Production
HR / Personnel
New employees joining the business.
Their working hours and salary.
Benefits and overtime working.
Used by finance to prepare payroll, prepare budgeted labour costs and available labour resources.
Sales
Each sale that takes place so that finance can raise an invoice.
Receivables can be monitored and chased up when they become due.
Enables calculation of total sales figures.
Identify volume of each product sold and when.
Helps with forecasting and budgets.
Inventory control
Production
Amount of raw materials used.
Number of labour hours worked.
Volume of units produced.
Allows comparison of actuals to budgets.
Allows control of inventory.
Allows calculation of payroll.
