Accounting Related LinkedIn Networks

LinkedIn is a bit awkward to use as a networking tool and has recently started to copy some of the more usable elements of Facebook. Still, it does have its uses for keeping in touch with your business network.

Here are a few AICPA groups on LinkedIn.com worth checking out:

AICPA
AICPA Conferences
AICPA Trusted Business Advisor(sm) Solutions
CPA
Young CPA Network

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What is the Job Design Framework for Information Systems?

The job design framework (Pearlson & Saunders, 2005) is used by information technology professionals to assess how emerging technologies can affect work within the organization. The goal is maximum effectiveness of the information system within the organization.

The relatively simple framework of job design questions enables the linking of information system decisions with organizational strategy. Hence, key characteristics of jobs are designed with respect to information systems to facilitate performance, effectiveness, and overall satisfaction of the worker. The following questions are asked:

What tasks are to be completed? What are the outcomes, inputs, and transformation of the inputs into outputs?

How will the tasks be performed? Specialist? Computer?

Who will complete the tasks? What skills? What department? What workgroup?

Where will the tasks be performed? Locally? Remotely? Dispersed group?

How can information systems increase performance, effectiveness and satisfaction of those performing the tasks? How can humans and information systems work together? How will information technology transfer be accepted and even embraced?

Reference

Pearlson, K. E. & Saunders, C. S. (2005). Managing and using information systems. A strategic approach (3rd ed.). Hoboken: John Wiley & Sons.

Peachtree and Quickbooks Video Accounting Training

TeachUComp, Inc. (Home page, n.d.) features low-cost video training for basic accounting, Peachtree and Quickbooks.

Basic Accounting -- covers the bookkeeping aspects of the accounting cycle separate from any specific computerized solution in 3 hours and 92 video lessons.

Peachtree Training -- explains how to exploit the power of this classic accounting package in 8 hours and 122 video lessons.

Ouickbooks Training -- explains how to setup Quickbooks with enough detail to make the software powerful enough to facilitate the early stages of your company's growth.

Reference

TeachUComp (n.d.). Home page. Retrieved September 21, 2009 from http://www.teachucomp.com

Understanding Accounting Ledger (Debit / Credit) Entries

Financial Statement	Account Type	Normal Balance	To Increase	To Decrease
Balance Sheet	Assets	Debit	Debit	Credit
Balance Sheet	Liabilities	Credit	Credit	Debit
Balance Sheet	Equity	Credit	Credit	Debit
Income Statement	Revenue	Credit	Credit	Debit
Income Statement	Gains	Credit	Credit	Debit
Income Statement	Expenses	Debit	Debit	Credit
Income Statement	Losses	Debit	Debit	Credit

Bernard Madoff Ponzi Scheme Video

Since this is an general MBA content blog, I thought you might enjoy watching the PBS Frontline video about the Bernie Madoff Ponzi Scheme. I've introduced this video into several of the courses I teach as a springboard for discussions about accounting, information systems, and quantitative reasoning. This is an optional activity that takes about an hour. Students need high bandwidth Internet.

I ask students to try to identify what went wrong with "Wall Street" to allow Mr. Madoff to run such a fraudulent enterprise and evade detection for decades, including some of the following questions:

Did you notice that Madoff's investment firm had a fake information system that was used to produce simulated trades and client statements?

Who was to blame? Investors? Accountants? SEC Regulators? News Media? Mr. Madoff's Employees? Fund Managers? Who?

Do you see how helpless investors can be when even truthful information is reported by publicly-traded companies...?

Here is the link:

http://www.pbs.org/wgbh/pages/frontline/madoff/

Accepting Proposals with Positive Contribution Margins

A bird in the hand is worth two in the bush, as the common expressions goes, but is that true in all cases. It is common in small and medium-sized businesses to accept proposals from the sales force that offer positive contribution margin, regardless of other operational aspects. In effect, these orders cover variable costs and are at production / sales levels above break-even. That is, fixed costs are covered. However, it is possible to create problems by accepting all orders are above break-even, without thinking about the big picture. For example, the pricing strategy (such as a market penetration strategy) may set the quoted price far above the level of positive contribution. In this case, sales management and company management will want to be judicious with respect to the price they accept in the case of volume discounts. Why? It is possible that large quantity orders at higher prices (and therefore higher contribution margins) may be in the sales pipeline that will be far more profitable for the company. It is possible that excess capacity could be used fulfilling orders with lower profitability. Simply accepting orders priced above break-even does not maximize profitability without some careful sales management.

Personal Finance Cash Flow Analogy

Without business-related accounting experience, it sometimes can be difficult to understand the relationship between cash flow and net income, and the need for prudent managers to think about both. Your personal finances can provide an interesting analogy. Clearly, we can continue to get "cash flow" from credit cards, in the form of purchases and cash advances, but without earnings (i.e., net income) one won't be able to pay even the minimum payment on the credit card loans, which would be an outflow of cash. If you were to maintain your check book on Quicken (or use QuickBooks as overkill), this relationship between income earned and cash received would be obvious. Still, one could earn money by working for a business, but without the receipt of payment for that work, cash is not realized. Hence, net income is important but cash flow is a necessity as well.

Enterprise Information Systems: The Problem of Integration

The time and attention of humans is required to integrate the information created, analyzed, and stored by departmental functions. Many impediments to accounting information system integration within the enterprise are easily identifiable, the chief of these being the existence of disconnected information systems that are native to individual functional areas of the organization. These native, function-based information systems are not integrated in any automated sense; instead, cross-functional information systems are integrated by the ultimate software system: people.

Of course, the entire organization must grow to survive, and business process growth inevitably requires storage and retrieval of additional information in departmental database servers, the nexus of business process growth. Such inter-departmental integration challenges are common, as managers require performance reporting that reflects a highly fluid business environment. Even the information systems within departmental functions can grow and morph to introduce intra-departmental integration challenges.

Integration can be partially achieved by integrating similar types of systems and finally the reporting output from those systems (Dunn, Cherrington, & Hollander, 2005). Information system planning can reduce the number and scope of information pockets stored in the various functional silos within the business enterprise by building systems from scratch or obtaining enterprise wide accounting systems. The key concept to understand in information system integration is to re-engineer business processes along with concomitant accounting information systems from the ground-up and avoid partial patching of information systems to achieve necessary integration. However, the low hanging fruit in accounting system re-engineering may be simply capturing and recording the same information with shorter elapsed time and fewer inaccuracies, not necessarily re-engineering the entire business process. The trade-offs seem a matter of project scope.

Reference

Dunn, C., Cherrington, J.O., & Hollander. A.S. (2005). Enterprise information systems: A patterned-based approach, 3rd edition. New York: McGraw-Hill/Irwin.

Accounting Assumptions, Principles, and Constraints: A Short Review

Now, let’s backtrack a little to a short review of accounting theory to consider a few concepts useful to the process of extracting meaning from financial statements. All the accounting rules behind Generally Accepted Accounting Principles (GAAP) may seem overly complicated but they can be understood mostly as a complex give and take between the following accounting assumptions, principles, and constraints (Keiso, Weygandt, & Warfield, 2002). By the way, these concepts underpinning how financial statements are constructed really help unite the themes of most MBA-level financial accounting courses.

Accounting Assumptions

Economic Entity – the financial statements assume that we are dealing with a single organization, but this gets tricky when we want to slice and dice the financial statements to understand what is happening with a particular product or division within the organization.

Going Concern or Continuing Operations – we assume that the economic entity has a meaningful past and future for purposes of recording costs of assets and inventory, and decision making based on those costs in the present.

Monetary Unit – we keep score with money and we typically ignore inflation and deflation of currencies; the value and unit of currency is assumed to be stable, unless we are transacting with international divisions that use other currencies besides the U.S. Dollar.

Accounting Periods –we assume that it makes sense to have monthly, quarterly, and annual accounting periods where we stop to assemble financial statements. Fiscal years sometimes don’t align with calendar years.

Accounting Principles

Historical Costs – assets (and liabilities) are typically reported at the historical cost and then adjusted with fair market value when the needs of reporting require it. However, the cost of an asset 10 years ago does not reflect what it is worth to another buyer or the cost of replacement.

Revenue Recognition – we record revenues when they are realized (i.e., we become aware) and earned (i.e., we do or ship something). This is one of challenges that accrual-based accounting is trying to solve. Just because we received cash from a sales order doesn’t mean that we did everything we had to do to earn the revenue or ship the product. Also, we may have sold something but not received cash.

Matching Expenses to Revenues – we match expenses to the revenues, so recorded profit in the income statement is based on the best fit of revenues and expenses. This is another feature of accrual-based accounting; expenses are aligned with associated revenues in the same or future accounting period. For example, most fixed expenses for buildings and equipment must be depreciated to align the expense with the revenue that was earned.

Full Disclosure – in general, accountants record and report every bit of information in the numbers and footnotes of financial statements that fairly represent the activities of the business entity in that accounting period. That is fine and dandy but for decision-making we want to leave out or add things that are relevant to the decision we are making.

Accounting Constraints

Cost and Benefit Paradox – there is a very real cost to recording and reporting accounting information. Hence, some potentially important events relevant to a business may not be disclosed because it was too expensive or cumbersome to gather the data. We must read between the lines of financial statements and add information to which we have access in order to make the best decisions.

Materiality – small financial events are not as important large financial events to the typical, reasonable reader of financial statements. That makes sense but our decision making process may be different from the typical user of financial statements as understood by the accounting folks; some small financial event may not be disclosed even though it is very relevant to our decision.

Industry Practice – one size does not fit all when reporting financial activities. Some industries have peculiar products/services or have special ways of distributing the products/services to customers, so we cannot understand an Internet retailer the same way we would analyze and automobile manufacturer.

Conservatism – to avoid investor misinterpretation of assets and income, accountants choose accounting methods that do not overstate what the business owns or the profits achieved. Again, this is an important consideration for financial reporting, but we need to modify the notion somewhat to make decisions about the business between accounting periods.

Important! As an MBA-level manager, it will be your responsibility to challenge the assumptions behind accounting principles and constraints, when interpreting financial statements to make decisions. It is incumbent upon MBAs to logically and judiciously tweak available financial information to make sound financial or investment decisions that put our organizations ahead of the competition.

Reference

Keiso, D, Weygandt, J, & Warfield, T. (2002). Intermediate Accounting, 11th Ed. New York, New York: John Wiley & Sons.