Chapter 15 Using Management and Accounting Information

Chapter 15: Using Management and Accounting Information 15-1: How Can Information Reduce Risk When Making a Decision? o Examine how information can reduce risk when making a decision. o Information produces knowledge and empowers managers and employees to make better decisions. Because of the volume of information they receive each day and their need to make decisions on a daily basis, businesspeople use information rules to shorten the time spent analyzing choices. Although many people use the terms data and information interchangeably, there is a difference. Data are numerical or verbal descriptions that usually result from some sort of measurement. Information is data presented in a form that is useful for a specific purpose. A database is a single collection of data and information stored in one place that can be used by people throughout an organization to make decisions. Management information experts now use the term knowledge management (KM) to describe a firm’s procedures for generating, using, and sharing the data and information. To aid the decision-making process, managers and employees can use a decision-support system (DSS), expert system, and business application software to make decisions and to report data and information. 15-2: What Is a Management Information System? o Discuss management’s information requirements. o A management information system (MIS) is a means of providing managers with the information they need to perform their jobs as effectively as possible. The purpose of an MIS (sometimes referred to as an information technology system or simply an IT system) is to distribute timely and useful information from both internal and external sources to the decision makers who need it. The specific types of information managers need depend on their area of management and level within the firm. The size and complexity of an MIS must be tailored to the information needs of the organization it serves. 15-3: How Do Employees Use a Management Information System? o Outline the five functions of an information system. o The five functions performed by an MIS system are collecting data, storing data, updating data, processing data into information, and presenting information. Data may be collected from internal sources and external sources. An MIS must be able to store data until they are needed and to update them regularly to ensure that the information presented to managers and employees is accurate, complete, and timely. Data processing is the MIS function that transforms stored data into a form useful for a specific purpose. Finally, the processed data (which now can be called information) must be presented for use. Verbal information generally is presented in the form of a report. Numerical information most often is displayed in graphs, charts, or tables. 15-4: Why Accounting Information Is Important o Explain why accurate accounting information and audited financial statements are important. o Accounting is the process of systematically collecting, analyzing, and reporting financial information. It can be used to answer questions about what has happened in the past; it also can be used to help make decisions about the future. The purpose of an audit is to make sure that a firm’s financial statements have been prepared in accordance with generally accepted accounting principles (GAAPs). To help ensure that corporate financial information is accurate and in response to accounting scandals, the Sarbanes-Oxley Act was signed into law. Although many people think all accountants do the same thing, typical areas of expertise include managerial, financial, cost, tax, government, and not-for-profit. A private accountant is employed by a private firm. A public accountant performs accounting work for various individuals or firms on a fee basis. Most accounting firms include on their staffs at least one CPA. 15-5: The Accounting Equation and the Balance Sheet o Read and interpret a balance sheet. o A balance sheet (sometimes referred to as a statement of financial position) is a summary of a firm’s assets, liabilities, and owners’ equity accounts at the end of an accounting period. This statement must demonstrate that the accounting equation is in balance. On the balance sheet, assets are categorized as current, fixed, or intangible. Similarly, liabilities can be divided into current liabilities and long-term liabilities. For a sole proprietorship or partnership, owners’ equity is shown as the difference between assets and liabilities. For corporations, the owners’ equity is the total value of stock when issued plus retained earnings that have accumulated to date. 15-6: The Income Statement o Read and interpret an income statement. o An income statement is a summary of a firm’s revenues and expenses during the specified accounting period. On the income statement, the company’s gross profit is computed by subtracting the cost of goods sold from net sales. Operating expenses and interest expenses then are deducted to compute net income before taxes. Finally, income taxes are deducted to obtain the firm’s net income after taxes. 15-7: The Statement of Cash Flows o Describe business activities that affect a firm’s cash flow. o Both the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) require all publicly traded companies to include a statement of cash flows in their annual reports. This statement illustrates how the company’s operating, investing, and financing activities affect cash during an accounting period. The information in this statement helps employees, investors, and other interested people to evaluate the financial health of a business. Together, the cash flow statement, balance sheet, and income statement illustrate the results of past decisions and the business’s ability to pay debts and dividends as well as to finance new growth. 15-8: Evaluating Financial Statements o Summarize how managers evaluate the financial health of a business. o The firm’s financial statements and its accounting information become more meaningful when compared with the company’s corresponding information from previous accounting periods, for competitors, and for the industry in which the firm operates. Such comparisons permit managers, employees, lenders, investors, and other interested people to pick out trends in growth, borrowing, income, and other business variables and to determine whether the firm is on the way to accomplishing its long-term goals. A number of financial ratios can be computed from the information in a firm’s financial statements. These ratios provide a picture of a firm’s profitability, its ability to pay its debts, and how often it sells its inventory. Like the information on the firm’s financial statements, these ratios can and should be compared with corresponding information for previous years, for competitors, and for the industry in which the firm operates.