CHAPTER 21

3. MARKETING

3.1 What Is Meant By 'Marketing'?
- according to the Institude of Marketing, marketing is the management process that identifies, anticipates and supplies customer needs efficiently and profitably

3.2 The Marketing Mix
Product - anything offered for attention, acquisition, use or consumption
Place - outlets, geographic areas, and distribution channels
Promotion - advertising, publicity, sales promotion
Price - price levels, discounts, allowances, payment terms, credit policy

3.3 Product Issues
~Product definition
- core/generic product - benefit or problem solving service
- actual product - tangible product or intangible service that serves as the medium for receiving core products
- augmented/extended product - measures taken to help the customer put the actual product to use

~ Product positioning
- comparison with our competitors

3.4 Pricing Issues
Cost - the price must be high enough to make a profit
Customers - what are they willing to pay
Competition - comparison of prices with competitors
Corporate objectives

Pricing tactics:
- cost plus pricing - the cost per unit is calculated and then a mark-up added
- penetration pricing - a low price is set to gain market share
- perceived quality pricing - a high price is set to reflect an image of high quality
- price discrimination - different prices are set for the same product in different markets
- going rate pricing - prices are set to match competitors
- price skimming - high prices for new products are dropped to increase demand
- loss leaders - a product sold at a loss to attract customers
- captive product pricing - used when customers must buy 2 products. first is cheap, second is expensive

CHAPTER 20

10. THE PURPOSE OF ORGANISATIONAL CONTROL

~safeguard company's assets - if assets are stolen or damaged, the company will have to spend money to replace them
~ efficiency - inefficient business practices are a waste of the company's money
~ prevent fraud - fraud means the loss of valuable resources belonging to the company/shareholders
~ prevent errors - errors can lead to losses in efficiency or a loss of assets

11. WHY CONTROLS IN SYSTEMS ARE IMPORTANT

Purchasing
~ Safeguard company's assets - ensuring that only goods that have been received are paid for and the goods are in good condition
~ Efficiency - ensuring the best price is negotiated before buying
~ Prevent fraud - preventing purchasing staff accepting payments from suppliers to persuade them to purchase from that supplier
~ Prevent errors - ensuring the correct amount is charged by suppliers and that all purchases are recorded

Sales
~ Safeguard company's assets - ensuring good are only sold to customers who are likely to pay
~ Efficiency - ensuring orders are processed promptly
~ Prevent fraud - ensuring there is no theft od cash from customers
~ Prevent errors - ensuring the correct quantity of goods is despatched and invoiced

Wages
~ Safeguard company's assets - ensuring that cash wages cannot be stolen
~ Efficiency - ensuring that people are only paid for overtime when necessary
~ Prevent fraud - ensuring that there are no 'ghost' employees

Cash
~ Safeguard company's assets - ensuring cash is kept safe from theft
~ Efficiency - ensuring cash is banked promptly so as to gain interest
~ Prevent fraud - ensuring employees do not claim for expenses not incurred
~ Prevent errors - ensuring the entries in th cash book are correct

Inventory
~ Safeguard company's assets - ensuring inventory is kept free from damage
~ Efficiency - ensuring inventory is only produced when it can be sold quickly
~ Prevent fraud - ensuring inventory cannot be stolen from employees
~ Prevent errors - ensuring costs of finished goods are calculated properly

Chapter 23

1. The meaning of internal control and internal check

Internal control- Process designed and effected by management to provide reasonable assurance about the achievement of the entity;s objectives with regard to :
-reliability of financial reporting
-effectiveness and efficiency of operations
-compliance with applicable laws and regulations

Internal check - element of internal control, concerned with ensureing that no single task is executed from start to finish by only one person. Each individual's work is subject to an independent check by another person in the course of that other person's duties

Chapter 22

1. The meaning of internal auditing and external auditing

Internal auditing- Independent activity, established by management to examine and evaluate the organisation's risk management process and systems of control and to make recommendations for the achievement of company objectives

External auditing- independent examination of evidence from which the financial statements are derived, to give the reader the truth and fairness of state of affairs which they disclose.

2. The purpose of internal and external audit

- A legal requirement to produce true and fair annual financial statements

2.1 Internal audit
-Part of organisational control of business.
-Ensure efficient and orderly running of the business

Role of internal auditor:
-Set corporate objectives
-Design and monitor performance measures for these objectives

Corporate governance:
-A properly functioning internal audit department is part of good corporate governance
-Enable management perform proper risk assessments

Function of internal audit in the context of corporate risk management:
-Manage basic data to identify risjs
-Identify techniques for priortising and managing risks
-Report on effectiveness of rish management solutions

Structure and operation of internal audit function
-Annually review the need for one
-Annually review its scrope of work
-Staffed with qualified experienced staff

Scope of internal audit:
-Review internal controls and financial reports
-Review management systems
-Carry out special management
-Conducting operational reviews

Limitations of internal audit:
-Only succeed if it is properly staffed and resourced
-If internal audit identify fraud, they may unwilling to disclose it for fear of the repercussions

Limitations can be reduced if an audit committee:
-Sets work agenda
-Receives interal audit reports
-Able to ensure the internal audit is properly resourced
-Has a"Voice" at main board level

Chapter 23 Internal Financial Control

Chapter 23 Internal Financial Control

Part 1 The Meaning of Internal Control and Internal Check

Part 2 The Purpose of Internal Control

To help management achieve the entity's objectives, especially in terms of ensuring:

-The orderly and efficient conduct of the business

-The safeguarding of assets

-The prevention and detection of fraud and error

-The accuracy and completeness of the accounting records

-The timely preparation of reliable financial information

Why do companies need internal controls?

Internal controls are there to prevent risks occurring or to minimise the impact of risks. Even when controls are in place documents may still get lost of portable assets may go missing. The level and extent of internal controls required depend on what the risks are if such controls fail. It is particularly important that stringent controls exist where there are associated legal requirements.

Chapter 22 Internal and external audit

Chapter 22 Internal and External Audit

Part 2 The Purpose of Internal and External Audit

2.1 Internal Audit

2.2 External Audit

-Purpose - to report his opinion on whether the financial statements give a true and fair view in accordance with an identified financial reporting framework.

-Secondary Objectives - Encourages the employees of the company to document their work properly and dissuade them from fraud as their work may be inspected by external auditors. Also to suggest improvements.

Advantages of an External Audit

-Disputes between management may be more easily settled.

-Major changes in ownership may be facilitated if past accounts contain an unqualified audit report.

-Applications to third parties for finance may be enhanced by audited accounts.

-The audit is likely to involve an in-depth examination of the business and so may enable the auditor to give more constructive advice to management on improving the efficiency of the business.

Disadvantages of an External Audit

-The audit fee.

-The audit involves the client's staff and management in giving time to providing information to the auditor. Professional auditors should therefore plan their audit carefully to minimise the disruption which their work will cause.

Part 3 The Difference Between Internal and External Audit

Internal auditing

• role - advise management on whether the organisation has sound systems of internal controls to protect the organisation against loss.
• legal basis - not a legal requirement. The combined code on corporate governance recommends that if a listed company does not have an internal audit department.
• scope of work - determined by management. It covers all areas of the organisation, operational, financial
• approach - increasingly risk-based; assess risk; evaluate systems of controls; test operation of systems; make recommendations for improvements
• responsibility - to advise and make recommendations on internal control and corporate governance.

External auditing

• role - provide an opinion to the shareholder on whether the financial statements give a true and fair view.
• legal basis - legal requirement for large companies, public companies and many public bodies.
• scope of work - determined by the auditor in order to carry out his statutory duty on report, financial focus.
• approach - increasingly risk-based; test underlying transaction that form the basis of the financial statements.
• responsibility - to form an opinion on whether the financial statements give a true and fair view.

Chapter 21 The Relationship of Accounting with Other Business Functions

Chapter 21 The Relationship of Accounting with Other Business Functions

Part 2 Production
-plan and oversees the production of goods
-it liaises with the accounting departments:

• cost measurement, allocation, absorption - measures quantities of materials and time used, cost allocated and absorbed to calculate production costs based on advice given.
• budgeting - decide how many items of what type are to be produced. cost of producing will be determined by accounting and production department and incorporated into the overall budget.
• cost v quality - discuss the features that can be included in products and the raw materials that should be used. discuss which better quality and features justif the extra costs and discuss how to maximise the quality and profit
• inventory - liaise with the inventory section to ensure that there are sufficient raw materials in stock for the production that is planned.

Part 4 Service Provision

-Companies very often provide services to customers.

Charge-out rates

-This is the hourly rate which the company charges clients. It should be higher than salary, as it should include a share of overheads. However, if the charge-out rate is too high customers will not use the service.

Estimating Costs

-Problems arise in determining the amount of overhead to be included in the charge-out rate. Also, if the service takes longer to provide than expected, the company may not be able to pass on the extra cost.

Problems Measuring Benefits

-Market conditions may mean that the charge-out rate contains a very low profit element. The company may question whether it is worth carrying out these services. The problem is that the benefits are intangible and not easy no measure, but nevertheless real.

A company with effective service provision has happier customers that are more likely to buy from the company in future leading to lower selling costs. But it is hard to measure these benefits.

Chapter 20 Financial Systems and Procedures

Chapter 20 Financial Systems and Procedures

Part 1 Terminology

System

• a group of independent but interrelated elements comprising a unified whole.
• a process for obtaining an objective.

Policy

• a guiding principle

Procedure

• a series of acts
• a set sequence of steps

Guideline

• a recommended approach for conducting a task

Part 2 Advantages of Having a Formal Procedure

• all transaction will be recorded in the same way, and the required information will be recorded in the correct places.
• The best practice, the most efficient way of recording transactions
• staff can refer to the written procedures
• new staff can be trained more quickly
• auditors can follow transaction more easily
• staff can record transactions more quickly and efficiently
• transactions which have not followed the procedure, which could be errors or frauds, may be identified more easily.

Part 3 Designing Financial Procedures

Sales systems

• objective - to record the value of sales to each customer and the amount outstanding to be collected.
• outputs - an analysis of sales by data and product type. a report showing amounts owing from receivables and how long outstanding.
• inputs - customers place orders by fax and by telephone
• sequence of events : oder received --> goods despatched --> invoice sent to customer --> invoice sent to customer --> sale recorded in accounts --> payment received from customer --> outstanding amounts followed up

odering state of the system

• objective - to receive and process orders quickly and accurately, to ensure that goods are only despatched where the amount charged will be collectable.
• outputs - instruction to despatch department to despatch goods, instruction to accounting department to invoice (charge for) goods.
• inputs - note of telephone call, fax
• what could go wrong - details of orders may be lost, details of orders may not be passed on to despatch and/or invoicing, order may be processed from customer who is unwilling/unable to pay

Part 4 Procedures Manuals

• companies will collate the formal procedures within each system into a procedure manual.
• a good procedure manual will contain sufficient detail to enable staff to understand the procedures they should carry out with minimal supervision and verbal instruction
• manual will normally contain a flowchart of each system. It enables an overview of the system to be easily gained.
• the diagram will be accompanined by detailed narrative notes, explaining in words the docment flows and the checks to be performed at early stage.
• procedure manual should be very specific as to who should perform each task, when and how frequently - this helps to ensure that staff fulfil their tasks on a timely basis and the controls performed by appropriate people
• manual should included specimens of each document referred to.

Part 5 The Purchasing Cycle

Part 6 The Sales Cycle

Part 7 The Wages Cycle

Part 8 The Cash System

8.1 The Receipts System

-Cheques are received from credit customers. (recorded in the cash book and customer's personal account)

-Cashier pays the cheques into the company's bank account

-Controls must be in place to ensure that the cheque cannot be misappropriated before it is paid into the bank.

-Some Customers may pay money directly into the company's bank account.

8.2 The Payments System

-Companies pay their suppliers (usually monthly by cheque)

-A cheque requisition is prepared for each payment.

-Cheques for a large amount of money will usually require two signatories.

8.3 The Petty Cash System

-Companies will need to keep a certain amount of cash on hand to pay for small expenses. (Postage stamps, biscuits)

-A cheque will be made out to cash, to generate the initial cash for the system.

-As staff claim against the petty cash system, they complete vouchers.

-At regular intervals a further cheque is made out to cash to replenish the petty cash which has been spent. Supervisor then inspects.

Part 9 The Inventory System

-The production decides on the required inventory purchases.

-The goods are received and are stored in the raw materials store.

-When goods are required for production, a Materials Requisition Form is completed by the production manager.

-The goods are then made into 'Work in Progress' (Partially complete goods)

-Record is made of the quantity removed from inventory upon goods sold.

-Year-end - All inventory will be counted and valued.

Part 10 The Purpose of Organisational Control

Part 11 Why Controls in Systems are Important

Part 12 Automated Systems

-Computerised systems used by most of the organisation.
-Have following features:
a)Uniform processing of transactions
b)Lack of segregation of functions
c)Potential for data to be corrupted easily
d)Potential for increased management supervision

Part 13 A Comparison of Manual and Automated Systems

Manual System:
Advantages
-Low capital cost
-No computer experience required
-Easy to correct errors
-Ledgers are portable
-Can review transactions
Disadvantages
-Slower at performing calculations
-More calculation errors
-Analysis of information is more time-consuming
-Less easy to audit

Automated Systems:
Advantages
-Quicker
-Can perform complex calculation
-Few errors
-More security
-Easier to sort and analyse data
Disadvantages
-Capital cost
-Training cost
-Less easy to correct errors
-Systems can crash

Chapter 18 The Accounting Profession

Chapter 18 The Accounting Profession

1. The history of accounting

• Accounting records were used by ancient traders, farmers to control their assets, monitor their costs, collect payments and calculate earnings.
• In 1494, Luca Pacioli (Italian Monk), codified existing bookkeeping practice.
• Accounting increased in importance as the predominant form of business entity.
• Due to separation of ownership and management, accountants were required to produce and interpret financial information to enable shareholders to make decisions.
• Accounting standard were developed to make the comparison between different companies become easier.
• The growth in computerisation saw a reduction in traditional bookkeeping work, and globalisation required advice on many areas in addition to accounting.
• Today the accounting profession is a multimillion dollar industry, and gives clients advice on wide range of business issues.

2. The role of accounting within the business

Function- Business development
Financial information required- Past setup costs, expenses, revenues, in order to estimate for new project. Mix of fixed/ variable costs, in order to determine breakeven point.

Function- Sales
Financial information required- Credit history of, and types of, customers to establish whether a new customer is creditworthy. Price charged in the past and impact on quantity sold

Function- Production
Financial information required- Cost of labour, materials and overheads. COst of buying rather than making components.

Function- Marketing
Financial information required- Prices charged in past and by competitiors. Available budget. Costs of production,

Funtion- Human resources
Financial information required- Salaries, pay rises, training budget

Funtion- Strategy
Financial information required- Cash flow forecasts, budget, past information, profitability by product, trends in sales and profits.

3. The purpose of the accounting function

sales invoices

• external and internal users
• accounting department- recording in ledger
• customers- recording in customers' ledger, paying for goods.

Ledgers

• internal users
• accounting department- preparing financial statements at the year end.

Financial statements

• external users
• shareholders- deciding whether to buy/ sell/ hold shares
• lenders- deciding whether to lend
• employees- assessing likelihood of redundancy, considering whether pay rise is reasonable.

Cost information

• internal users
• accounting department- calculating production costs, making decisons as to whether to make or buy components, determining prices.

Chapter 19 Accounting and Finance Functions

Chapter 19 Accounting and Finance Functions

Part 1 The Formulation, Implementation and Control of Policy and Performance

The accounting function has an important role to play in helping management to:

-Formulate policy

-Implement policy

-Control performance

Planning is the establishment of objectives, and the formulation, evaluation and selection of the policies,

strategies, tactics and action required to achieve them.

A Budget is a plan expressed in quantitative (normally financial) terms for either the whole of a business or

for the various parts of a business for a specified period of time in the future.

Budgetary Control is the establishment of budgets relating the responsibilities of managers to the requirements of a policy, and the continuous comparison of actual with budgeted results.

Part 2 The accounting and reporting functions in business

The sequence of steps taken :
Transaction--->Day Books--->Ledger accounts--->Financial statements

main books of prime entry:
-Purchases Day Book
-Sales Day Book
-Cash Book
-Petty cash book
-Journal

The main financial statements produced each year are:
-Balance sheet : Showing assets owned and liabilities owed and how net seetes are financed
-Income statement : Showing revenues earned and costs incurred,leading to the net profit or loss for the year
-Cash flow statement : Summarising the cash receipts for the year and cash payments paid out to help readers of the accounts to understand the liquidity of the business

Part 3 The Management Accounting and Performance Management Functions

Management Accounting
- for internal use
- to aid planning, comtrolling and decision making
- no legal requirements
- management decide on the information that they require and the most useful way of presenting it
- financial and non-financial information
- time period is historical and forward-looking

Financial Accounting
- for external use
- to record the financial performance in a period and the financial position at the end of the period
- limited companies must produce financial accounts
- format and content of financial accounts must follow accounting standards and company law
- mostly financial information
- mainly a historical record

Examples of decision making that management accountants can help management with are:
- breakeven analysis
- key factor analysis
- pricing decisions
- investment appraisal

Budgetary control involves two elements:
~ Planning - setting of various budgets for the appropriate future period
~ Conrol - comparison of the plan in the form of the budget with the actual results achieved for the budget period

Part 6 Investment appraisal and financing viable investments

Investment appraisal : long-term investment decisions

Advantages of issuing new ordinary shares:

• dividens can be suspended if profits are low, whereas interest payments have to be paid each year.
• bank will typically require security on the company's assets before it will advance a loan

Advantages of raising loan finance:

• Interest payments are allowable against tax, whereas dividend payment are not an allowable deduction against tax.
• No charge is required in the ownership of the company, which is governed by who owns the shares of the company.

Part 7 Management of working capital

Company must also decide on the appropriate level of investment in short term net assests, i.e.

Inventory

• advantage of large balance - customers are happy since they can be immediately provided with good
• advantage of small balance - low holding costs. Less risk of obsolescence costs

Trade receivables

• advantage of large balance - customers are happy since they like credit.
• advantage of small balance - less risk of bad debts. good for cash flow.

Cash

• advantage of large balance - creditors are happy since bills can be paid promptly.
• advantage of small balance - more can be invested elsewhere to earn profits.

Trade payables

• advantage of large balance - perserves your own cash
• advantage of small balance - suppliers are happy and may offer discounts