Financial Results Control Systems Flashcards
Describe the advantages of financial results control systems?
- easy to evaluate for-profit firms by outsiders
- comparable measures
- summary measures that are inexpensive
- complex organizations do not need to track their actions: “management-by-exception”
What core elements do financial results control systems have?
- Financial responsibility centers
- Planning and budgeting systems
- Incentive contracts
Describe the different types of cost centers.
- standard cost center: comparing standard with actual cost
- discretionary cost center: budget level of expenditures, largely subjective
What is the major output of a planning and budgeting system?
A written plan that clarifies the company objectives, strategies and performance targets
- reflection on future
- motivation to discuss plans with others
- prepare projections
- motivation to be committed to achieve objectives
name and describe the main purposes of planning and budgeting systems
- Planning
- Coordination
- Top management oversight
- Motivation
What is a “feedforward control”?
Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems
What is a “feedforward control”?
Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems
What does strategic planning typically involve?
involves senior executive managers
analysis of past and future to:
- define vision and mission
- understand present position
- define types of (core business) activities
What are the typical characteristics of budgeting targets?
typically in financial nature and on annual basis
match the firms responsibility center structure
Name and describe the different types of performance targets.
- model based, historical: derived from predictions of performance
- fixed vs flexible: flexible also in terms of relative to others
- internal vs external (e.g. benchmarks)
How much influence should subordinates have in setting their targets?
bottom-up and top-down planning
What are the major criticisms concerning the planning and budgeting process?
- rife with politics and gameplay
- produce only incremental thinking
- centralize power
- separate planning (thinkers) from execution (doers)
- many costs and far too few benefits
Name and describe the several types of management control benefits.
- Informational: effort-directing benefit, signal which areas are important
- Motivational: effort-inducing benefit
- Attraction and retention of personnel
What non-control purposes do incentive systems also serve?
- make compensation more variable with firm performance
- can affect company tax payments
What has to be decided in designing an incentive system?
- inventive formula
- shape of the incentive function
- size of the incentive pay
Name and describe the different categories financial measures can fall in.
- Summary measures: multiple performance areas
- Disaggregated financial measures: e.g. revenues, expenses
- Combination of financial measures
What is the primary objective of for-profit organizations?
maximize value of the firm
- increasing size of future cash flow
- reducing risk of future cash flow
- accelerate the timing of cash flow
How can the value of an economic asset be calculated at any specific time?
by discounting the future cash flow that the company is expected to generate
Name the different types of financial performance measures.
- Market measures
- Accounting measures
- Return on investment
- Residual income
What are the advantages and limitations of market measures?
Advantages:
- precise, timely, objective, understandable, cost effective
Limitations:
- market not always informed, not always reflective of performance
- can only be affected by top few managers
- only available for publicly traded firms
In which forms can accounting measures come?
- residual measures (profit measures): EBIT, EBITDA, net income, residual income
- ratio measures (return measures)
What are the advantages and disadvantages of accounting measures?
What are the advantages and disadvantages of accounting measures?
What are the advantages and disadvantages of accounting measures?
Advantages:
- understandable, inexpensive, satisfy many measurement criteria
- congruent with profit goal of for-profit organisations
Disadvantages:
- not always a good indicator of firm value (profits and stock correlate commonly on long terms)
- transaction oriented: changes in value hidden
- ignore the cost of equity capital
- ignores risk, focuses on past
Define the term “corporate governance”
set of mechanisms and processes that help to ensure that companies are directed and managed to create values for their owners while fulfilling responsibilities to their shareholders
What were the explicit goals of the SOX-Act?
improve the transparency, timeliness and quality of financial reporting
What are the key provisions of the SOX-Act?
- senior company managers need to confirm to have read annual and quarterly financial statements
- external auditing industry became highly regulated
What are the key provisions of the SOX-Act?
- senior company managers need to confirm to have read annual and quarterly financial statements
- external auditing industry became highly regulated
What is stated in SOX-Act Section 404?
mandated an evaluation of the effectiveness of a companies’ internal controls by
management
external auditor
What are the main control responsibilities of the board of directors?
- safeguarding equity investors, ensuring that management maximizes value
- ensuring that employees act in legal an socially responsible manner
Name and describe the important situational factors that influence both, the design of the MCS and its effectiveness.
- environmental uncertainty: political and economic climate, actions of competitors, suppliers, regulators
- multinationalism: multidimensional organizational problem (national culture, local institutions, local business environments)
- organizational strategy: corporate strategy, business strategy
What effects does uncertainty have on MCS?
action and result controls are harder to use
What is a “diversification strategy”?
Corporate strategy to determine what business to be in and how resources should be allocated among those businesses
What is a “competitive strategy”?
business strategy how to compete in its industry and how to get a competitive advantage to its competitors:
cost leadership
differentiation strategy (innovation)
