The Role of Accounting Information in Strategic Decision Making (Session 1)

Question 1

Measuring, Monitoring, & Motivating Performance

Answer 1

1) Compare Actual Operating Results
- Specific performance objectives
- Progress toward long-term goals

2) Reward Employees
- Performance Evaluation
- Bonuses or other compensation

3) Report to Stakeholders
- Internal Reporting
- External Reporting

4) Provide Information for Evaluation of Organizational
- Vision
- Core Competencies
- Strategies
- Operating Plans

Question 2

4 Levers of Control

Answer 2

1) Core Values (Belief Systems)

2) Risks to Be Avoided (Boundary Systems)

3) Strategic Uncertainties (Interactive Control Systems)

4) Preset Goals (Diagnostic Control Systems)

Question 3

Belief Systems

Answer 3

Belief systems inspire and direct employees to take actions that are
consistent with the organizational vision

Question 4

Belief Systems - Vision Statement

Answer 4

A vision statement is a theoretical description of what the organization
should become.

Question 5

Belif Systems - Mission Statement

Answer 5

A mission statement is a high-level declaration of the organization’s purpose.

Question 6

Belief Statement - Core Values

Answer 6

A core values statement is a summary of the beliefs that define the
organization’s culture

Question 7

Boundary Systems

Answer 7

Boundary systems establish limits on individual behaviour. Common
boundary systems include codes of conduct and budgets, which limit
specific behaviours, and also include procedures for ensuring compliance.

Question 8

Diagnostic Control Systems

Answer 8

• Managers establish preset goals that must be achieved for the
  organization’s strategy to be successful
• Diagnostic control systems measure, monitor, and motivate employees to
  achieve preset goals.

Question 9

Interactive Control Systems

Answer 9

• Interactive control systems are
  recurring sets of information that
  demand attention from managers at
  many levels.
• The information requires them to
  communicate interactively and
  stimulates debates about what the
  information means, leading to new
  insights about strategic challenges
  and opportunities

Question 10

Cost Accounting and Decision Making

Answer 10

• Cost accounting involves the process
  of tracking, recording, analyzing, and
  determining the cost of an
  organization’s project, process, or
  activity.
• Cost accounting helps managers
  understand the costs of operating a
  business so that they can use the
  information to make sound business
  decisions, particularly to reduce the
  company’s costs and to improve its
  profitability and productivity.

Question 11

Financial Accounting

Answer 11

The process of preparing and reporting financial information that is used most frequently by decision-makers outside the organization, such as shareholders and creditors

Question 12

Management Accounting

Answer 12

The process of gathering, summarizing, and reporting financial and nonfinancial information used internally by managers to make decisions

Question 13

Cost Accounting

Answer 13

Cost accounting includes both financial and non-financial information and is used for both financial and management accounting

Question 14

Information Systems

Answer 14

Information gathered from inside the organization & outside of the organization –> Databases and software

Databases and Software acts as a resource for External Reporting and Internal Reporting

Question 15

Relevant Information

Answer 15

• Relevant information helps decision-makers evaluate and choose among
  alternative courses of action
• Information is relevant if:
  –> It concerns the future
  –> It varies across the alternatives

Question 16

Relevant Cash Flows

Answer 16

Relevant cash flows = incremental cash flows; that is, they occur under one
course of action or decision alternative but not under another.

o Such cash flows are also called avoidable cash flows because they are avoided if the course of action or decision alternative is not taken.
o They are relevant because they help managers distinguish among alternatives

Question 17

What is the other name for relevant cash flows?

Answer 17

Avoidable Cash Flows

Question 18

Why are relevant cash flows, relevant?

Answer 18

Because they help managers distinguish among alternatives

Question 19

Irrelevant Cash Flows

Answer 19

• Irrelevant cash flows = unavoidable cash flows, occur regardless of which course
  of action or decision alternative is chosen.

o They are irrelevant to a specific decision because they do not help managers
choose among alternatives

Question 20

Business Risk

Answer 20

• Business risk is the possibility that an event could occur and interfere
  with an organization’s ability to meet strategic goals or operating
  plans.

Question 21

What is Enterprise Risk Management (ERM)

Answer 21

Enterprise risk management (ERM) is a process that uses experts to
advise managers to continually identify, assess, mitigate, and
monitor relevant business risks in a comprehensive and integrated
way.

Question 22

Biases

Answer 22

• Biases are systematic distortions in judgment

Question 23

Information Bias

Answer 23

o Errors in judgment caused by data that are consistently
overestimated, underestimated, or misrepresented.

Question 24

Cognitive bias:

Answer 24

o Errors in judgment caused by the way people’s minds process
information.

Question 25

Predisposition Bias:

Answer 25

o Errors in judgment caused by preferences, attitudes, or emotions
that prevent objective analysis.

Question 26

Higher-Quality Decision

Answer 26

• Decision quality refers to the
  characteristics of a decision that affect
  the likelihood of achieving a positive
  outcome.
• Uncertainty and bias reduce decision
  quality.
• On average, higher quality decisions
  have more positive outcomes resulting
  from better information as well as
  better decision processes.

Question 27

Path to Higher-Quality Management Decisions

Answer 27

Higher-Quality Information –> Higher-Quality Reports –> Higher-Quality Decisions