2 paragraphs Discussion Accounting

WMBA 6050: Accounting for Management Decision Making Week 1 Weekly Briefing

Welcome to Week 1! This week is an introduction to the world of accounting. Accounting is often called the language of business. Just as individuals need to speak the same natural language in order to communicate, those in the business environment need a common language in order to communicate about sales, production, marketing budgets, profitability, financial analysis, strategic planning, etc. This week: In terms of the specific Learning Objectives, you will:

Determine how managers ensure accurate financial data Apply corrective steps managers may take related to unethical behavior Analyze the differences between financial and managerial accounting Analyze annual reports

In terms of the course-level Learning Outcomes, you will:

Evaluate various accounting measures and their relevance to a wide range of stakeholders

Employ managerial accounting approaches and information to make effective decisions

Demonstrate effective communication skills to present accounting information to stakeholders

Apply accounting principles ethically and appropriately to personal and professional contexts

Financial and Managerial Accounting The first topic for this week centers on the differences between financial accounting and managerial accounting. As noted previously, there are four basic financial statements. These statements and any supplemental materials are the final products of financial accounting. Their preparation follows prescribed rules and regulations and you will notice many similarities in the actual statements when you look at them as part of your review of some annual reports. These reports are used by all of the various stakeholders: investors, creditors, governmental entities, regulatory agencies, employee unions, etc. The commonality of these stakeholders is that they are outside of the company. They are not privy to the inner workings of the organization. Managerial accounting pertains to the reports that are prepared for internal use. These reports do not follow prescribed rules and regulations. They can take any form that is helpful to the users. They might be daily sales reports by salesperson or territory, production reports, budget reports showing actual costs against budgeted costs, or any

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other report that provides needed information to those within the organization such as the vice president of operations, the controller, department managers, etc. All of the users of managerial reports are employees of the company. Annual Reports Annual reports differ from company to company, but there are some items that must appear in the annual reports of all publicly traded companies. (A publicly traded company is one that has shares of stock which may be purchased by the public and traded freely either on a stock exchange or via the over-the-counter market.) These items include:

1. The Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may have heard it called the MD&A. Management will discuss the company’s financial performance, plans for the future, trends, risks, and anything else that management considers important.

2. The four basic financial statements. Although financial information may be

present in many places in an annual report, the four basic financial statements only appear once. The content of the four basic financial statements will be discussed in a moment.

3. Footnotes to the financial statements. The footnotes contain information that

is needed to understand the financial statements, but cannot be included in them as it is either non-financial information, such as the method used to value inventory, or it does not fit into the prescribed format of the financial statements such as the calculation of the pension plan expense.

4. The report of the independent auditors will either immediately precede or

follow the four basic financial statements. The auditors’ report provides an opinion regarding whether or not the financial statements are presented fairly and without material misstatements.

The Four Basic Financial Statements Now that you have an understanding of the fundamental items in an annual report, it is time to focus more intently on the four basic financial statements.

1. The income statement—This statement must be prepared first. It shows all of the revenues earned and expenses incurred during a specific period of time such as a quarter or a year. The expenses are subtracted from the revenues to yield net income which is often called “the bottom line” as it used to be the last line on the income statement. Often, today, you will see earnings per share information on the income statement following the net income. Other names for the income statement include statement of earnings, statement of operations, profit and loss

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statement, statement of revenue less expenses, and consolidated statement of income.

2. The statement of stockholders’ equity—This statement is prepared next as it

includes the net income calculated on the income statement. This statement reflects the changes that have taken place to the equity of the company over the same period of time as the income statement. This statement might also be called the statement of stockholders’ equity and retained earnings. If there are no changes in the shares of stock issued by the company, the statement might be called a statement of retained earnings. The retained earnings of a company represent the earnings of the company that were not paid out as dividends. If the financial statements were prepared for an entity that includes more than one company or division, this statement would be called a consolidated statement of stockholders’ equity.

3. The balance sheet—This statement is prepared after the statement of

stockholders’ equity as it contains the equity position of the company. The name “balance sheet” was derived from the accounting equation (assets = liabilities + equity). The equation must be in balance. All assets must equal the sum of all liabilities and equity. The statement gives a snapshot of the company on a specific date such as December 31st of a particular year. Other names for the balance sheet are statement of financial position, consolidated balance sheet, or consolidated statement of financial position.

4. Cash flow statement—The last statement prepared is the cash flow statement.

This statement uses information from all of the other statements. Its purpose is to show the inflows and outflows of cash during the same time period as shown on the income statement and the statement of stockholders’ equity. It will reflect cash provided by the operations of the business, investment activities, and financing activities.

As mentioned above, the balance sheet is a reflection of the accounting equation: assets = liabilities + equity. Assets are those items which a company owns such as cash, accounts receivable, furniture and fixtures, and inventory. Liabilities show what a company owes to others such as accounts payable, loans payable and mortgages. The equity section contains information on the company’s stock as well as the earnings retained by the company. Inaccurate or Fraudulent Accounting Many people believe that because the assets shown on the balance sheet equal the liabilities and equity on the balance sheet, and the financial statements have been audited, that everything is accounted for properly. This is not necessarily true. Fraud can be committed by company employees and not caught by the auditors. Internal controls are in place to try and stop fraudulent activity, but they can sometimes be circumvented, especially by upper management. For example, if the company president

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receives a bonus based on company earnings, and the current year earnings have not reached the target level, the president might want to boost earnings just enough to receive that bonus. He decides that he will make an entry into the computer system that will show that one of the company’s best customers placed an order for the needed amount. He will also override the internal controls to show that the order was shipped. He figures he can reverse it all in the following year and since the customer places so many high dollar amount orders, this one will not be noticed. He will get his bonus this year and he will straighten it all out next year. He has committed fraud, and it may or may not be caught in the year-end audit. Unethical behavior whether committed by the president of the company or an employee in a lower level position is costly to the company and its stakeholders. This week, you will discuss what to do if you see fraud being committed in your company. You have now been introduced to some of the basic accounting terms that make up the language of business. As you delve into Week 1 now and move into other topics in future weeks, you will continue to build your accounting vocabulary. If there is a word or phrase that you do not understand, be sure to ask your instructor what it means. Just as with natural language, as your accounting vocabulary grows so will your ability to speak and use the language of business.

WMBA 6050: Accounting for Management Decision Making