Review questions - session 1 Flashcards
R1. What is management? List and explain the five functions of management.
- Foresight and planning
The planning function involves setting up plans and forecasts for the future. Plans deal with events and states that can be influenced, whereas forecasts deal with uncontrollable factors. - Organizing
Managers must organize the resources of a business, meaning they arrange the different elements of an organization into a purposeful and efficient order or structure. - Commanding and Leading
It is defined as influencing people to reach a desired goal. While commanding rather emphasizes the communication of goals and tasks, leading is broader and includes additionally influencing people through a deliberately chosen structure. - Coordinating
Coordinating implicates that managers must harmonize and integrate the structures, the processes, and the activities performed by the people in a company. Only through coordination can a company ensure that the resources are utilized most efficiently to reach the organization’s goals. - Monitoring
Monitoring means checking if an organization’s activities are consistent with its targets and goals. Managers want to make sure that things evolve in the intended manner. Deviations from targets have to be observed and reported so that appropriate corrective actions and initiatives can be taken.
R2. What is accounting?
Accounting denotes the system that records, analyzes, and reports all business transactions of a company in a systematic and comprehensive manner in order to provide useful information to users.
R3. What is the job of an accounting system?
It records business transactions. A transaction is any event that affects the stocks and flows of goods and resources such as inventories and machines. An accounting system records these flows and stores the stocks of goods and resources. The information is continuously gathered, processed, and finally reported to the users of accounting information.
R4. What is control? List and explain the conceptual elements of control.
Control is a device, a system, or an activity which helps you to influence an object.
In order to control an object, you need at least the following elements:
1. A detector or sensor – a device that measures what is actually happening
2. An assessor – a device that determines the difference between the planned or expected and the actual situation
3. An effector – a device that influences the process if the assessor indicates the need to do so (also called “feedback”)
4. A communication network – devices that transmit information between the other three elements
R5. Define management control.
Management control is a set of activities, systems and processes by which managers influence other members of the organization to implement the company’s strategies. While management deals with getting people together for a desired goal, control makes sure that management actually reaches this goal.
R6. What is strategy?
Strategy is the sum and combination of all intended activities to bring about a desired future. Simply speaking, it is the plan or route to reach the goal(s) of a company.
R7. Define management accounting.
Management accounting is an important tool for management control. It is the main information source for managers and provides essential information for decision making. It is the language to communicate past performance and future targets. Consequently, management accounting is the internal information system that supports the management control function.
R8. What are the core elements of management control?
- Operational planning:
Management control translates a strategic plan into an operating plan. A strategy is by nature rather general, top-down, and includes few concrete instructions. An operational plan is more detailed and guides as to what has to be done, when, and by whom. - Budgeting:
A budget is the financial expression of an operational plan. Budgeting is a process that is carried out at regular intervals with the aim of having a formal document outlining the financial targets for the next period.
Resource allocation (capital budgeting): - Allocating resources means moving the limited funds to those activities and projects of a company that create the highest value.
- Performance measurement:
Performance measurement includes collecting feedback by comparing own performance with historical figures or with competitors (external benchmarks). - Evaluation and employee compensation:
Management control must align company goals with personal goals of managers and employees. A commonly used concept is to install monetary incentives. Personal performance targets are defined and mutually agreed. When a target is achieved, the employee receives a monetary compensation such as an annual bonus.
R9. Explain the role of a controller within an organization.
The controller is responsible for supporting managers by analyzing options, planning ahead, monitoring past performance, and coordinating activities in order to ensure goal achievement.
R10. What is financial accounting?
Financial accounting is responsible for processing the basic accounting data further in order to prepare reports that are useful to external decision makers.
R11. Distinguish between management accounting and financial accounting with regards to the following factors:
a. Information users
b. Purpose of information
c. Focus and time dimension
d. Obligation for preparation
e. Type of report, regulation
f. Presentation of accounting information
g. Verification
h. Level of detail
i. Frequency
financial accounting
a. Information users:
External – investors, creditors, suppliers, government and tax authorities
b. Purpose of information:
Help investors, creditors, and others make investment, credit, and other decisions
c. Focus and time dimension:
reliability, objectivity, and focus on past
d. Obligation for preparation:
Mandatory
e. Type of report, regulation:
Financial statements restricted by accounting standards (IFRS, US GAAP, HGB, …)
f. Presentation of accounting information:
Content and format highly standardized across companies
g. Verification:
Annual independent audit by certified public accountants
h. Level of detail:
Summary reports primarily on the company as a whole
i. Frequency:
At least on annual basis, sometimes quarterly
management accounting:
a. Information users:
Internal - all management functions within the company
b. Purpose of information:
Help managers plan and control business operations
c. Focus and time dimension:
Relevance and focus on the future
d. Obligation for preparation:
Not mandatory
e. Type of report, regulation:
Internal reports not restricted by accounting standards - tailored to specific decisions
f. Presentation of accounting information:
Not standardized, individual contents and formats
g. Verification:
No independent audit
h. Level of detail:
Detailed reports on parts of the company (products, customers, market segments, etc)
i. Frequency: varying, often on a weekly or monthly basis
R12. Define the concept of a performance measurement system.
A performance measurement system can be defined as a set of metrics, brought into a logical or mathematical relationship, used to quantify the success of a business organization. A valid performance measurement system is a very powerful instrument of management control.
Examples of performance measurement systems:
- The DuPont system
- The balanced scorecard
- Value-based measurement
- Single KPIs
R13. Explain why ethical conduct in accounting and management control is of great importance.
- Accounting fraud often has extremely severe consequences, unfortunately not only for the perpetrators.
- The quality of accounting reports is difficult to evaluate for readers. Users have no visible indication to doubt the correctness of accounting reports. The same applies to internal accounting and reporting processes. Managers need to rely on the data and analyses prepared by controllers.
