Chapter 1 The Accounting Function (Task 1)

Question 1

Purposes of management information

3 of them

Accounting information is a source of management information that helps with all three.

Answer 1

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.

Question 2

Types of decision making

Answer 2

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.

Question 3

Gross profit percentage

Formula

Answer 3

(Gross profit / revenue)*100

Gross profit = Revenue - cos

Question 4

Operating profit percentage

Answer 4

(Operating profit / revenue)*100

Operating profit = revenue - overheads

Question 5

Return on capital employed (ROCE) or primary ratio

Answer 5

Operating profit / Capital employed

Capital employed = Total assets - current liabilities

measures how efficiently the company uses its assets

Question 6

Current Ratio

Answer 6

Current Assets / current liabilities

Question 7

Quick Ratio

Answer 7

(Current assets - inventory) / current liabilities

Question 8

Inventory holding period and turnover

Answer 8

( 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

Question 9

Receivables collection period

Answer 9

( Trade receivables / revenue ) * 365

Use credit sales if possible, shows average number of days customers take to pay

Question 10

Payables payment period

Answer 10

Trade payables / cos * 365

Shows average number of days it takes the business to pay suppliers

Question 11

Gearing

Answer 11

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

Question 12

ACCURATE Information

Answer 12

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

Question 13

3 types of financial function

Answer 13

Financial accounting
Cost accounting
Management accounting

Question 14

Management accounting and the financial function - Financial accounting

Answer 14

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

Question 15

Management accounting and the financial function - Management accounting

Answer 15

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

Question 16

cost centre

Answer 16

department or location for which costs can be ascertained

Question 17

Revenue centre

Answer 17

department or location for which revenue can be ascertained

Question 18

Profit centre

Answer 18

department or location for which costs and revenue can be ascertained

Question 19

investment centre

Answer 19

department or location for which costs, revenue and investments can be ascertained

Question 20

Examples of services within and outside the organisation - accounting function

Answer 20

Checking expenses
Petty cash claims
Internal audit
Calculation and payment of wages
Trade reference checks
Completion of forms and returns
Information for decision making

Question 21

What is management information?

Examples of information they receive?

Answer 21

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.

Question 22

Management information - organisational requirements

Answer 22

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?

Question 23

Purpose of management information - Planning

Answer 23

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.

Question 24

Purpose of management information - Control

Answer 24

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.

Question 25

Budgetary Control Reports

Answer 25

Used to report on budgets, actual figures, commitments and variances.

Question 26

Data v information

Answer 26

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

Question 27

Primary v secondary data

Answer 27

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.

Question 28

Management accounting and the financial function - Cost accounting

Answer 28

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.

Question 29

What information could the finance department receive from other departments?

HR/Personnel
Sales
Production

Answer 29

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.