Enviro Flo Case Study Flashcards
Accounting
The provision of information about aspects of the performance of, and resources held or controlled by an entity to a particular
group of people with an interest, or stake in the organisation, we can call these parties stakeholders (include internal and external).
The role of accounting
The broad role of ‘accounting’, and of an organisational report is to inform relevant ‘stakeholder’s about the extent to which the actions for which an organisation is deemed to be responsible have actually been fulfilled.
Accountability
Accountability is concerned with the relationships between
groups, individuals, organisations and the rights to information that such relationships entail. Simply stated, accountability is
the duty to provide an account of the actions for which one is
held responsible. The nature of the relationships and the
attendant rights to information are contextually determined by
the society in which the relationship occurs.
The two duties of accountability
- To undertake certain actions to meet stakeholders
expectation - To provide a reckoning or ‘account’ of those actions to the stakeholders
Accountability model
Assessments or decisions that need to be made as part of
the process of reporting aspects of an organisation’s
performance: WHY, WHO, WHAT, HOW
WHY
Why would an entity disclose information?
• to comply with legal requirements;
• an ethically motivated desire to ensure that the organisation benefits
society
WHO
Who are the stakeholders to whom the accounts will be
directed?
• Motivated by managerial reasoning and strategising
reporting to those who hold and exercise the greatest
economic power
• Motivated by ethical/moral reasoning the reports direct towards those stakeholders most affected by the operations of the
WHAT
What types of disclosures will be made?
This all really depends upon judgements we make about the organisations responsibilities and accountabilities. The broader perspective we take of organisational responsibilities and stakeholders, then the broader our ‘accounts’ become.
HOW
How should the information be disclosed?
The production of an account/report that addresses or stakeholders’ information needs. Various reporting frameworks and conventions are available and can address different aspects of performance
Non financial accounts
If an organisation is considered to be accountable for its water
consumption, or its greenhouse gas emissions, then such ‘accounts’ may be presented in physical (non-monetary) terms. They might be used both internally and externally.
Organisation
A collection of people who work toward a common
goal or objective
2 types of organisations
For profit
Not for profit
For profit
‘for-profit’ organisations are those that are created to generate profits typically for owners (shareholders).
Not for profit
‘Not-for-profit’ organisations, by contrast, are organisations
that are established to satisfy particular needs such as education and environmental protection.
Ownership types of organisations
Sole trader
Partnerships
Company - private, public, group
Sole trader advantages
easy set up
absolute control
no specific accounting requirements
Sole trader disadvantages
Unlimited liability
Limited life
Sole risk bearer (and profit recipient)
Partnerships advantages
easy set up
sharing of risks and profit
reports do not have to comply to accounting standards
Partnerships disadvantages
Mutual agency - each partner is an agency of the business
unlimited liability
limited life- will often discontinue on departure of a partner
Company advantages
Separate legal entity
Limited liability
indefinite life
Company disadvantages
More complicated to form
Might have to comply with accounting standards depending on size of company
Private compnay
In Australia, private companies are denoted by “Pty Ltd”. Often family owned or amongst a small shareholder group;Not permitted to offer shares
to the public. In Australia,
restricted to 50 shareholders
Public company
The most common form of public companies are those that offer their shares to the public and the obligation of shareholders is restricted to any amount unpaid on those shares. There is a separation between ownership and control in public companies. Public companies have quite a significant number of reporting obligations. This raises
various monitoring and reporting issues.
Supply chain
the network between an organisation and its
suppliers as necessary to produce and distribute a
specific good or service. Organisations often outsource aspects of their operations to other unrelated organisations –
these are part of the ‘supply chain’
Resources
A resource can be broadly defined as something that has
value in the sense that it allows an entity to accomplish
an activity so as to achieve a desired outcome. Organisations will use or rely upon a variety of ‘resources’ when performing their operations
Externalities
Impacts that an entity has on parties external to the
organisation where such parties did not agree to or take part in the activities causing the externality. Externalities can be viewed as positive externalities (benefits) or negative externalities (costs)
Accountable organisation
an organisation
that has the responsibility to provide accounts to its stakeholders
Sole trader
Sole trader is where one individual controls and manages a business and is responsible for
all of its debts. In a sole trader, the owner is also typically the
manager. A sole trader is not a separate legal entity so business is not separate to the
person’s non-business affairs. As such, the business is not separately taxed but the
earnings are included in the total earnings of the owner.
Sole trader flexibility
A sole trader is not difficult to set up. Apart from having to comply with tax requirements,
there are generally no specific accounting requirements applying to sole traders. Sole
traders do not have to apply accounting standards and can be flexible with their reporting,
but they still need to do accounting.
Partnerships
A partnership exists when two or more people come together with a common purpose and
usually for the purpose of making a profit. The profit would generally be shared according to the ‘partnership agreement’.
Unlimited liability
Like a sole trader, there is unlimited liability and all partners are liable for the debts incurred. That is, if there are not enough assets within the partnership to satisfy
obligations, then the personal assets of each partner may be used to satisfy the debt;
Internal perspective of measurement
That is, from an ‘internal’ perspective, managers want to make informed decisions to
achieve particular goals. They need information to do this.
External perspective of measurement
For example, from an ‘external’ perspective, investors in a company might want to
know about the profits, resources, and liabilities of the company so that they can evaluate the security of their investment and the prospects for future dividends and
capital growth. A bank might also want to know about the profits, resources, and liabilities of a borrower so that it can assess the likelihood that a loan will be repaid.
LSO’S and regulations
Large organisations are required by accounting regulations to report the same types of financial accounting information to external stakeholders.
Management accounting
A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking”. what information is collected and used will depend on the objectives/mission of the organisation, the types of resources being used, the values/ethics of the managers, and so forth. Accounting for management purposes is a process based on professional judgment and the internal aspect of accounting is generally considered to be ‘unregulated’
Factors that influence external reporting
Regulation
Stakeholders needs/demands
Manage powerful stakeholders
Manage perceived legitimacy
Increase manager wealth
Location/culture
Regulation
Some things are reported because there is no alternative – the organisation ‘has to’ or otherwise face sanction.For example, taxation authorities will require various reports of a financial nature. Other government departments might require information about different environmental matters (for example, emissions of some substances, creation of some forms of waste) or social matters (such as aspects of occupational health and safety). Some forms of organisations, for example companies, will have quite extensive financial reporting requirements as imposed by corporations’ law.
Stakeholders needs and demands
Managers might also believe that different stakeholders have ‘rights-to-know’ about particular aspects of the organisations’ performance. Owners (shareholders of companies) of the business require information so as to enable them to monitor their investments.
Manage powerful stakeholders
The production of particular accounts might be undertaken for strategic business reasons so as to manage those stakeholders who have the power to influence the operations of the organisation. (Think sweatshops, other controversies that led to organisational change)
Manage perceived legitimacy
Organisations will change their external reporting around the time of particular crises. Reporting which is reactive to crises is more about organisational survival than about ‘true’ accountability.
Increase wealth
For example, managers might have shares in an organisation, or have bonuses linked to ‘profits’. If they produce particular information or accounts this might increase share price, and their own wealth. That is, there could always be private, self-interest incentives for managers to produce particular accounts or results.
Location
The location of an organisation. Some cultures have greater demand for information (or transparency) than others or have different expectations in relation to ‘performance’.
Three types of internal/external reporting
Financial reporting
Social reporting
Environmental reporting
Financial reporting
Financial accounts are generated through the process of ‘financial accounting’.The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Large companies must follow IFRS (International Financial Reporting Standards)
Social reporting
Social accounts are generated through the process of social accounting. Social accounting will provide information about an organisation’s interaction with, and associated impacts upon, particular societies. Social and environmental performance is not generally addressed by the financial accounting standards released by the IASB. The Global Reporting Initiative’s Sustainability Reporting Guidelines provide a number of ‘indicators’ against which organisation can report.
Environmental reporting
Environmental accounts are generated through the process of environmental accounting. Environmental accounting can address an organisation’s impact on living and non-living natural systems. The Global Reporting Initiative’s Sustainability Reporting Guidelines provide a number of ‘indicators’ against which organisation can report.
Factors that influence internal reporting examples
personal values, stakeholder pressure, their basis of remuneration, the scarcity of and/or the ecological importance of the resources they are using, their professional and educational background.
Sustainability Reporting
Addresses the three aspects of reporting (financial, social and environmental)
The separation between management accounting and financial accounting
In this course we will not provide an artificial delineation
between management accounting and financial accounting. This separation is artificial: Product ‘cost’ has relevance to stakeholders inside and outside the organisation. Planning occurs before we report the results: Discussing financial accounting prior to other aspects of ‘accounting’ seems to be inconsistent with reality. Much of the information that is necessary for managing a
business also has relevance to stakeholders not directly
involved in the management of the organisation.
Planning
‘Planning’ is central to managing a business. Planning should be a continuous process which should start well before an organisation commences operations. The plan provides a benchmark against which future
performance can be assessed. Factors such as the organisation’s mission, resources and the expectations of stakeholders need to be considered.
Planning for value creation
An organisation would be expected to create ‘value’ for various stakeholders. The value creation should ideally occur in an ecologically and socially sustainable and responsible manner. Value creation requires clear vision, strategy, and planning. Value creation relies upon well functioning corporate governance.
Porter’s Value chain
Porter (1985) describes the sequence of activities undertaken by an organisation as a ‘value chain’. Well performing organisations create relatively more value from the various steps involved in acquiring and transforming resources into products and
services.
INBOUND LOGISTICS OPERATION OUTBOUND LOGISTICS SALES AND MARKETING SERVICING
4 support activities in the value chain
Admin, finacne infrastructure
Human resources management
Product & Tech development
Procurement
Output of the value chain
Value added, decreased costs, better profit margin
Inbound logistics
E.g. quality control, receiving, raw materials control, supply schedules
Operation
E.g. manufacturing, packaging, production control, quality control, maintenance
Outbound logistics
E.g. finishing goods, order handling, dispatch, delivery, invoicing
Sales and marketing
E.g. customer management, order taking, promotion, sales analysis, market research
Servicing
E.g. warranty, maintenance, education and training, upgrades
Admin, finance infrastructure
E.g. legal, accounting, financial management
Human resources management
E.g. personnel, lay recruitment, training, staff planning
Product & Tech development
E.g. product and process design, production engineering, market testing, R&D
Procurement
E.g. supplier management, funding, subcontracting, specification
What roles do professional accountants in business perform?
- As creators of value
- As enablers of value
- As preservers of value
- As reporters of value
The accountants role in organising
Encouraging and rewarding the right behaviours. Allocates resources to add value and achieve goals.
Structures incentives to align behaviour with organisational goals.
Enablers of value
As enablers of value, by informing and guiding managerial and operational decision making and implementation of strategy for achieving sustainable value creation, and the planning, monitoring, and improvement of supporting processes.
Preservers of value
As preservers of value, by ensuring the protection of a sustainable value creation
strategy against strategic, operational, and financial risks, and ensuring compliance with
regulations, standards, and good practices.
Reporters of value
As reporters of value, by enabling the transparent communication of the delivery of sustainable value to stakeholders’.
Creators of value
As creators of value, by taking leadership roles in the design and implementation of
strategies, policies, plans, structures, and governance measures that set the course for delivering sustainable value creation.
Things shareholders might find valuable
Maximisation of dividends, maximisation of share value.
Things local employees might find valuable
Payment of wages, safe and healthy work environment, promotion and training opportunities, reputation of the organisation.
Things employees in offshore supply factories might find valuable
A safe and healthy work environment, ‘liveable’ wages.
Things customers might find valuable
Low price, high quality, positive social impact, positive environmental impact,
reliable after sales service.
Things local communities might find valuable
Contribution to local community activities, safe place of work for local residents, low social and environmental impacts.
Things suppliers might find valuable
Reliable payment, ongoing support for the products/services of the supplier.
Life cycle analysis
Evaluates a product or service across its entire life
(from ‘cradle to grave’). Addresses some of the social or environmental impacts generated across the lifecycle of the product or service. Identifies areas where improvements can be made. One form of LCA has been referred to as ‘Eco Balance’
Life cycle costing analysis
What aspects are to be included and what not? For some Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective
option among different competing alternatives to purchase, own, operate,
maintain and, finally, dispose of an object or process, when each is equally appropriate to be implemented on technical grounds.
Balanced scorecard
Originally developed by Kaplan and David Norton as a performance measurement framework that added strategic non-financial performance measures to the traditional financial measures essentially “Balancing” the performance measurement.
The four perspectives of performance in regards to the balanced scorecard
Financial
Customer
Business processes
Innovation and learning
The view is that a focus on customer, business processes, and innovation and learning in turn leads to better financial performance outcomes.
Consideration of costs
An important aspect of performance measurement is the considerations of the costs being incurred.
• the costs of the goods or services they supply – determines an
adequate price.
• An inaccurate pricing system can result in inappropriate prices.
• In terms of costs we can consider various cost concepts:
Cost Concepts
Relevant costs
Variable costs
Fixed costs
Relevant costs
Relevant costs: are those that will change as a result of a particular decision. They can include both fixed and variable costs. They will occur in the future.They will differ between alternative course of action. They will be influenced by factors such as the mission of
the organisation, its culture, its stakeholders’ expectations, and so forth.
Variable costs
These are the costs that change as a result of changing production or service volume. They will occur in the future. They relate to particular activities. What we include as variable costs will be influenced by what costs management believes are relevant. Variable costs do not need to be restricted to quantifiable/financial costs.
Fixed costs
Generally considered to be
those costs that do not change in a particular period as the volume of production or services changes. They might be fixed only over a particular (relevant) range of activities. They do not have to be just financial.
Contribution margin in financial terms
• The total contribution margin = total sales revenue - the total
variable costs
• The contribution margin per unit = the revenue per unit - the
variable costs per unit.
Contribution margin
Calculating the contribution margin per unit allows us to
determine how much the sale of each item of product or
service contributes to the financial profit. All things being equal, items with a high turnover would be
expected to have a lower contribution margin per unit than items with a lower turnover.
Break even point
The break even point occurs:
• When the total financial costs equal the total financial
revenues (profit is zero).
• It is calculated by dividing the total fixed costs by the
contribution margin per unit.
Break even point graph
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Target financial profit
Organisations will often have a target profit in mind when performing their operations. this takes into account various factors including expectations of owners, the risks inherent in the operations and opportunity costs of alternative options.
Target financial profit calculation
The business can determine the required units of products or service required to be sold,
to generate a required profit. To do this the following formula is used
Required units of products = (target financial profit + total
fixed costs) ÷ contribution margin per unit
EXAMPLE OF HOW THE BSC CAN LEAD TO BETTER FINANCIAL PERFORMANCE
a focus on innovation and learning should lead to more efficient (less costly) processes which can lead to better (and less expensive) products and
happier customers which in turn will lead to improved financial performance.
Eco balance example
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