Financial Results Control Systems

Question 1

Describe the advantages of financial results control systems?

Answer 1

• 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”

Question 2

What core elements do financial results control systems have?

Answer 2

• Financial responsibility centers
• Planning and budgeting systems
• Incentive contracts

Question 3

Describe the different types of cost centers.

Answer 3

• standard cost center: comparing standard with actual cost
• discretionary cost center: budget level of expenditures, largely subjective

Question 4

What is the major output of a planning and budgeting system?

Answer 4

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

Question 5

name and describe the main purposes of planning and budgeting systems

Answer 5

• Planning
• Coordination
• Top management oversight
• Motivation

Question 6

What is a “feedforward control”?

Answer 6

Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems

Question 7

What is a “feedforward control”?

Answer 7

Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems

Question 8

What does strategic planning typically involve?

Answer 8

involves senior executive managers

analysis of past and future to:

• define vision and mission
• understand present position
• define types of (core business) activities

Question 9

What are the typical characteristics of budgeting targets?

Answer 9

typically in financial nature and on annual basis

match the firms responsibility center structure

Question 10

Name and describe the different types of performance targets.

Answer 10

• 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)

Question 11

How much influence should subordinates have in setting their targets?

Answer 11

bottom-up and top-down planning

Question 12

What are the major criticisms concerning the planning and budgeting process?

Answer 12

• rife with politics and gameplay
• produce only incremental thinking
• centralize power
• separate planning (thinkers) from execution (doers)
• many costs and far too few benefits

Question 13

Name and describe the several types of management control benefits.

Answer 13

• Informational: effort-directing benefit, signal which areas are important
• Motivational: effort-inducing benefit
• Attraction and retention of personnel

Question 14

What non-control purposes do incentive systems also serve?

Answer 14

• make compensation more variable with firm performance
• can affect company tax payments

Question 15

What has to be decided in designing an incentive system?

Answer 15

• inventive formula
• shape of the incentive function
• size of the incentive pay

Question 16

Name and describe the different categories financial measures can fall in.

Answer 16

• Summary measures: multiple performance areas
• Disaggregated financial measures: e.g. revenues, expenses
• Combination of financial measures

Question 17

What is the primary objective of for-profit organizations?

Answer 17

maximize value of the firm

• increasing size of future cash flow
• reducing risk of future cash flow
• accelerate the timing of cash flow

Question 18

How can the value of an economic asset be calculated at any specific time?

Answer 18

by discounting the future cash flow that the company is expected to generate

Question 19

Name the different types of financial performance measures.

Answer 19

• Market measures
• Accounting measures
• Return on investment
• Residual income

Question 20

What are the advantages and limitations of market measures?

Answer 20

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

Question 21

In which forms can accounting measures come?

Answer 21

• residual measures (profit measures): EBIT, EBITDA, net income, residual income
• ratio measures (return measures)

Question 22

What are the advantages and disadvantages of accounting measures?

Question 23

What are the advantages and disadvantages of accounting measures?

Question 24

What are the advantages and disadvantages of accounting measures?

Answer 24

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

Question 25

Define the term “corporate governance”

Answer 25

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

Question 26

What were the explicit goals of the SOX-Act?

Answer 26

improve the transparency, timeliness and quality of financial reporting

Question 27

What are the key provisions of the SOX-Act?

Answer 27

* senior company managers need to confirm to have read annual and quarterly financial statements * external auditing industry became highly regulated

Question 28

What are the key provisions of the SOX-Act?

Answer 28

* senior company managers need to confirm to have read annual and quarterly financial statements * external auditing industry became highly regulated

Question 29

What is stated in SOX-Act Section 404?

Answer 29

mandated an evaluation of the effectiveness of a companies' internal controls by management external auditor

Question 30

What are the main control responsibilities of the board of directors?

Answer 30

* safeguarding equity investors, ensuring that management maximizes value * ensuring that employees act in legal an socially responsible manner

Question 31

Name and describe the important situational factors that influence both, the design of the MCS and its effectiveness.

Answer 31

* 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

Question 32

What effects does uncertainty have on MCS?

Answer 32

action and result controls are harder to use

Question 33

What is a “diversification strategy”?

Answer 33

Corporate strategy to determine **what business** to be in and how **resources** should be allocated among those businesses

Question 33

What is a “competitive strategy”?

Answer 33

business strategy how to compete in its industry and how to get a competitive advantage to its competitors: cost leadership differentiation strategy (innovation)