Learning Objectives

Notes

What is management accounting?

• provides information to managers/insiders to help them with their decision making;
• is a support function--intent is to aid management not drive management;
• the management process must be understood before accounting, particularly management accounting, can make sense. A manager performs these functions: planning (outline steps to move toward objectives); organizing (utilize human and other resources to carry out established plans); directing (oversee daily operations to assure things are running smoothly); controlling (assure each part of the organization is carrying out what it was intended to do - compare reports to original plans and take appropriate corrective action); and decision making (make rational choices among alternatives);
• strategic planning: planning to achieve a company's long-term objectives (all companies should set and work toward objectives);
• analysis of the benefit of the decision and comparison of it to the cost of the alternatives (e.g., is the profit greater than the cost?).

How does accounting information help the manager?

• to plan effectively: budgets (desires and goals of management in quantifiable terms) and performance reports (compare budgeted information to actual information for a specific period of time)
• to direct operations: examine cost/price relationships to develop marketing/advertising strategies, determine appropriate sales and inventory levels, examine the costs of storage and handling, etc.
• to solve problems: determination of an appropriate relationship between cost and price for forecasting, etc.

The teacher may lead a discussion with the class on "What is Management Accounting?" (Indicate functions and how the manager performs these functions.)

Students could work through a decision-making process to focus on how important decision making is to managers.

Steps for students to experience:

1. Define problem
2. Identify alternatives
3. Accumulate information for alternatives
4. Choose the best alternative.

This activity may be done in small groups. The decision to make may be to choose the band/entertainment for the next school dance, the next school assembly, etc.

What is the role of a controller?

• manager in charge of the accounting department
• "controls" by reporting and interpreting data needed for decision making
• may oversee the work of others and the preparation of reports
• often provides advice for top management
• provides assistance in the preparation of budgets
• support function.

Financial accounting reports what has happened in the past (historical data), is for external users, is very precise information that follows rules (GAAPs), and is mandatory for businesses.

Management accounting:

• data used internally by the manager for day-to-day operations
• places emphasis on the future -- prediction of costs and revenues of alternative courses of action
• emphasizes the relevance and flexibility of data -- information must be relevant to the problem at hand rather than follow a set of rules. Managers need to make good estimates and do not necessarily need to follow a set of rules (GAAPs)
• places more emphasis on non-monetary data and estimates with less emphasis on precision
• emphasizes segments or departments of the organization rather than the whole; for example, departments, divisions, etc.
• draws heavily on disciplines other than accounting; for example, economics, statistics, organizational behaviour, etc.
• is not mandatory -- a company is completely free to do as much or as little management accounting as it wishes. The most important question is: "Is the information useful?"
• What are the similarities between management accounting and financial accounting?
  • management accounting relies on financial accounting information (unbiased, support material)
  • both are concerned with responsibility or stewardship to the organization: financial accounting has responsibility to the whole company while management accounting is concerned with responsibility for parts (costs and revenues)
  • both require accounting information that must be relevant, timely, and accurate.

   

After an introduction to management accounting, students may be able to see reasons why management accounting skills are becoming more important. Some reasons may be:

• increased business competition locally and globally
• cost-price squeeze
• greater access to information due to technology.

Students should note the importance of management accounting for aboriginal people, given the increased local control through First Nations self-government. Management Accounting also plays a part in managing financial resources acquired through the Canadian Aboriginal Economic Development Program (CAED).

In Module 1, Objective 1.8, students briefly discussed the professional accounting designations including CGA, CA, CMA, etc. In each of the first two professional designations, elements or classes of management accounting are required. The third group, Certified Management Accountants, specializes in management accounting.

Students at the senior level of accounting in the secondary school may spend some time going over the content of each of the programs: analyzing management, financial, cost accounting and other areas of the programs to make themselves aware of the emphasis within each program.

How does management accounting apply to small business? Do businesses have to be large to analyze departments or divisions or can a small business use management accounting to formulate pricing policies, analyze costs, budget, etc.?

Students may research an accounting career path of their choice and be given the opportunity to present their research to the class in the medium of their choice. For example, a display or handout may be prepared.

Group research: research, prepare an oral presentation, and set up a display of materials and information on each of the professional accounting designations.

Representatives or members from each of the organizations may be invited to the class to discuss aspects of their professional designation. (It is possible that one individual would be able to describe all the required aspects of each professional designation.)

Students may examine actual businesses in the community or they may come up with examples of where management accounting may be used in local businesses.

Learning Objectives

Notes

In financial accounting, the term "cost" was an expenditure to realize some good or service. It may have been money spent, a service provided, etc. Cost accounting becomes a base for both financial and management accounting. Although cost accounting is not referenced directly, some aspects are discussed.

Costs are incurred in service firms, merchandising firms, and manufacturing firms. Manufacturing firms are more complex and are defined as being companies that convert raw materials into finished products. They are concerned with production as well as marketing and administration.

In management accounting, "cost" is used in many ways. We will divide costs into manufacturing costs, non-manufacturing costs, and labour costs.

The manufacturing costs of a product have three distinct classifications: Direct Material, Direct Labour, and Manufacturing Overhead. Students need to understand the differences and may discuss these costs with a local business or perhaps with students engaged in Entrepreneurial activities or classes.

The non-manufacturing costs of a product can be classified in two ways:

• Marketing or selling costs: include all costs needed to get the product into the hands of the customer. Examples: advertising, shipping, sales travel, commissions, salaries, etc.

• Administrative costs: include all costs that cannot be directly included in manufacturing costs or in marketing or selling costs. These costs tend to serve the whole organization not just manufacturing, sales, etc. Examples: general accounting, office support staff, public relations, etc.

As technology changes, overhead is becoming the fastest growing expenditure while direct labour costs are decreasing. In some instances, they may be lumped together and treated as a conversion cost. However, to understand and control labour costs, the following breakdown may assist:

1. Direct labour (can be directly traced to a certain product or project). Examples: factory-worker salaries, accountant wages in an accounting firm.
   
   
2. Indirect labour (not directly traceable). Examples: janitors, supervisors, materials handlers, engineers, security guards, maintenance workers, etc. A further breakdown of indirect labour costs include idle time, overtime premiums, and labour fringe benefits. These will be discussed below:

• Idle time: is the workers' time that accumulates during machine breakdowns, material shortages, power failures, receiving directions from superiors, etc. Idle time may not be assigned to one job, but as part of manufacturing overhead to be assigned to all production. Can idle time be prevented or reduced through good planning? How much idle time should be built into a plan?
  

• Overtime premium: If overtime can be directly identified with one project or product, it becomes a direct cost. Because jobs are completed in a random order, overtime becomes indirect labour costs instead of direct labour. Should we assign all the overhead costs to a job just because it was worked on at the end of the day when the overtime was put in? Should overtime be built into a management plan? What is more important -- meeting deadlines or incurring additional labour costs? Can a concern for human resources enter into this discussion?
  
  
• Labour fringe benefits: employment costs paid by the employer. These are hidden costs to the employee and the public. The cost of employing a person does not end at the amount of gross wage as is seen in Module 5. The employer must match Canada Pension Plan (CPP), contribute to Employment Insurance (EI) and Workers' Compensation, and may contribute to company pensions, hospital plans, etc. Firms usually treat these costs as manufacturing overhead but may assign a portion to direct labour. Indirectly these costs are charged back to the consumer in the manufacturing overhead.
  
  
• Labour and overhead combined are called the conversion costs of the firm. The conversion cost may be considered the cost of taking an original product and modifying it into a final product.

A debate or discussion may take place around the issue(s): should employers participate in matching employee hospitalization plans, company pension plans, dental plans, and other fringe benefit issues? What is the "cost" to the employer versus the "cost" to the employee? What about sharing profits by way of benefits? For a variation of the above activity, students may role play employees and management negotiating labour fringe benefits.

What is an opportunity cost? It is the cost of rejecting one alternative for another. For example, if Robin's Donuts decides to produce lemon coated doughnuts instead of chocolate covered doughnuts, the managers should consider the opportunity cost (profit lost on the chocolate donuts). Sometimes companies and managers become so caught up in special projects, they may overlook other important alternatives.

Opportunity costs are not entered into the accounting records. They are management decisions made which in the long run, affect the accounting records and, in the process, may use accounting records to assist managers in their decisions.

What is a sunk cost? It is a cost previously incurred and which would not be considered in a management situation. It becomes irrelevant in the decision making process because it cannot be recaptured or decreased. For example, the initial cost of the school or of the sports equipment currently owned are irrelevant in deciding to run next year's sports program.

Review the Cost of Goods Sold portion of the merchandising firm from Module 2. Students should be quite familiar with the meaning of each line.

Give students a simple income statement from a merchandising firm and that from a manufacturing firm. Note that a Schedule of Cost of Goods Manufactured is often prepared for summarization on the income statement. This exercise may then include giving the student a schedule along with the income statement for a manufacturing firm.

Have students compare and find the differences and similarities between the two statements. They should note that the Cost of Goods Sold section on the manufacturing income statement comes from the manufacturing costs that have been incurred in producing a product. These include direct costs, direct labour, and manufacturing overhead. Both firms' statements have beginning inventories however, the beginning inventory in a manufacturing firm has both raw materials inventory and a finished goods inventory.

Learning Objectives

Notes

Costs can be classified in another manner. This classification uses changes in behaviour during periods of activity. During planning, a manager should be able to determine if the cost is fixed or variable and should be able to predict the percentage of rise or fall of the total variable cost. This information is important to the planning, controlling and decision-making process of the firm. Students may note that cost behaviour is obtained from the accounting records of the firm.

Variable costs: are called variable because the total cost varies in direct proportion to the activity level. Some examples of activity level may include the number of units produced, the number of units sold, and the hours worked. Students should be given some examples of activity bases that variable costs can be "variable with". Some activity bases may include: the number of miles driven, the number of papers delivered, the number of letters prepared in a day, the number of beds occupied in a hospital or the number of pizzas made in a evening.

How many variable costs will a company have? A manufacturing firm will have many variable costs. A service organization such as a school or hospital will have few variable costs due to its function. A service firm such as a dry cleaning establishment will have variable costs dependent on its level of activity. Remember that there may be a number of activity bases within an organization in which a manager may be concerned.

Fixed costs: Total fixed costs do not change regardless of the activity level within a certain range (relevant range). They relate more to a passage of time such as a year than to the number of units produced. Since costs are fixed, the cost per unit will decrease with increased activity. For example, if the insurance on a delivery vehicle is $600 per year, the fixed cost per delivery would be as follows:

100 deliveries/year: $600/100 = $6.00/delivery

500 deliveries/year: $600/500 = $1.20/delivery

1,200 deliveries/year: $600/1,200 = $0.50/delivery

Other examples of fixed costs include rent, depreciation, insurance, and management salaries.

Managers usually refer to total fixed cost in planning rather than the fixed cost per unit. A manager may adjust fixed costs by reducing staff, reducing advertising campaigns, closing down a portion of the operation, etc. An example of the differences between management styles and decision making may be seen in times of recession when one manager may decide to lay off employees while another may keep employees on a full or partial payroll even if there is little work to be completed.

Today, there is a trend toward more fixed costs than variable costs because of increased automation and stabilized labour contracts.

Relevant range: is the activity level of cost behaviour within a band or range in which assumptions relative to cost behaviour would be valid. Students should know that within the relevant range, assumptions can be made because variable costs and activity can be considered relatively stable which allows assumptions to be made without a significant loss in accuracy. Variable cost and activity are directly related over relevant range. (i.e., no large cost increases such as hiring an additional employee, etc.)

Students need to be aware of the importance of mixed costs to managers because they are common to many businesses.

Mixed costs: contain both fixed and variable elements. For example when leasing a car, a monthly fee (fixed) may have to be paid up to a certain monthly distance. Once one exceeds that distance, a variable cost of 10¢ a kilometre may have to be paid. Other examples of mixed costs may include: electricity, heat, telephone, repairs, and maintenance.

When examining mixed costs, students may be introduced to the high-low method and the scattergraph methods of breaking mixed costs into the variable and fixed cost elements. This treatment should be basic such that students may determine how management would handle these costs. An example is given in Appendix C.

Other methods for determining the various elements of mixed costs such as least squares or regression analysis may not be suitable for students at this level.

Review the definition of cost behaviours as being how a cost may rise or fall during changes in business activity. Give examples of fixed costs and of variable costs in different applications.

Why are cost behaviours important to the manager? The manager must plan and control variable, fixed, and mixed costs and needs cost data organized to facilitate management decision-making process.

How can cost information be organized to facilitate management decision making? A new format for the income statement called the contribution approach is set up. The contribution approach to the income statement organizes information in terms of cost behaviour. This approach to organizing costs is valuable to the internal decision-making process.

What is the contribution margin?

• Sales Revenue - Variable Costs = Contribution Margin.
  The contribution margin is the amount remaining from sales after variable expenses are deducted. It is needed to pay fixed expenses and then considered for profit. Students should know that the contribution margin is exhibited in the contribution approach to the income statement.

How does the contribution approach to the income statement compare to the traditional approach? How will the costs be divided between variable and fixed? Students should note that the contribution income statement is geared at cost behaviour whereas the traditional approach is functional.

This particular section of the module may be introduced by having students compare a contribution income statement with a traditional income statement. The students should understand all the terms presented, namely variable and fixed costs, so that they may use this example as an advanced organizer or outline to refer to as the new explanations of costs are presented.

Cost-volume-profit (CVP) analysis involves examining the relationship between prices, volume (level of activity) and the costs involved with earning a net income. This analysis helps the manager predict the break-even point in sales (where total sales revenue = total expenses) and the levels of profitability or loss of increased or decreased activity.

CVP analysis is a key part of many decisions a manager will make. It studies the relationship of prices of products, volume of sales or production, the per unit variable costs, the total fixed costs, and the mix of products sold. Many management decisions can be made from the CVP analysis. Students should synthesize this at the end of this unit.

To facilitate student learning in this objective, students should have a good understanding of the terms sales revenue, variable costs, fixed costs and net income which are necessary elements of the CVP analysis equation as shown below:

Sales Revenue - Variable Costs - Fixed Costs = Net Income (Profit)

This equation forms the basis upon which all CVP analysis is established. Essentially, the CVP analysis equation is exhibited in the contribution income statement section which has been examined previously. As CVP analysis is mathematical, students should realize that a manager may solve for any one of the above factors, given information on the remaining factors. A number of variations of this equation may be introduced.

For example, review with the students the concept of contribution margin.

Sales revenue - variable costs = contribution margin

The students may be asked to relate the concept of contribution margin to CVP analysis and realize that the first two items in the CVP equation is the contribution margin as follows:

Sales Revenue - Variable Costs - Fixed Costs = Net Income (Profit)

Contribution Margin - Fixed Costs = Net Income

At this level, teachers are cautioned to use simple examples to illustrate CVP analysis. The focus here is on the power of this planning tool and not necessarily on mathematical manipulations.

Teacher hint: choose the numbers and then design the problem to go with the numbers.

See Appendix D for a sample case study.

Sales, variable expenses and contribution margin may be referred to in percentages rather than dollar amounts. The percentage of the contribution margin of sales revenue (always 100 percent) is referred to as the contribution margin (CM) ratio. After the CM percentage or ratio is calculated, it may be applied to expected or future sales projections. Thus, students should realize that this becomes a powerful planning tool for managers. Not only can they apply the ratio/percentages to total sales, but they can predict the amount of variable expenses, fixed expenses, and net income.

How will managers use this tool?

• to select product lines with the highest contribution margin ratio to recover fixed costs and to generate maximum profit

• to achieve a target net income, to determine how much product or service, knowing the CM ratio, are needed to meet a projected income

• to see the effects of changing fixed costs

• to see the effects of changing variable costs

• to see the effects of changing selling prices

• to see the effects of changing management strategies.

Students may be given the opportunity to look at many different decision-making scenarios and to examine the different effects of changes in variables.

Teachers may provide students with a case study similar to that given in Appendix D in which different variables may be held constant so that the students may see what happens when other variables change (increase sales price, decrease sales price, increase variable costs, decrease variable costs, etc.) This could be an individual performance test item.

Break-even Analysis is one part of CVP analysis that students should examine. There are two methods of calculating the break-even point: by unit amount and by dollar sales. See Appendix D.

Learning Objectives

Notes

What is profit planning? As mentioned earlier, financial accounting is concerned with past events and historical information. Management accounting focuses on the future. Profit planning is a process by which a number of budgets are prepared in planning for the future. Management compares the budget with actual results in order to determine any corrective actions that may be necessary.

What is a budget? A budget is a detailed plan outlining the inflow of revenue and the outflow of expenses over a period of time in the future. A budget is a plan usually expressed in quantitative terms either in units or in dollars. There are usually smaller budgets for departments or projects that may or may not be part of a larger consolidated budget.

Students could list and discuss reasons businesses budget.

Do the students budget? How would they prepare a budget? Do they have income? Certainly they have expenses! Students may plan a budget such as for a trip -- project their share of the gas, lodging, food costs, souvenirs, miscellaneous, etc. A budget could cover the current school year -- grade 12 -- anticipating income and expenses. Students should be aware that the time period covered by the budget is different in each of the two examples given above.

See Appendix E for sample budgeting problems.

From the reasons for budgeting, students may be able to arrive at several advantages of budgeting. They may include:

• to formalize planning
• to serve as objectives or goals to be used for evaluative purposes subsequent to the project
• to perceive potential problems such as money, time, resources, etc.
• the communication/coordination of the entire organization.

Students may determine other advantages.

What is planning? Planning is the process of developing future objectives and goals, and preparing the budget(s) to accompany those objectives and goals. It can be a time intensive task, and it prepares for the control phase of budgeting.

Controlling is the action taken after making a comparison of actual results with the budget. Management ensures that the objectives and goals set down in the planning stage are carried out. Activities should be monitored and corrective action taken if actual results differ from those suggested in the objectives. The budget becomes the standard by which managers measure revenues and expenses.

There can be no control without effective planning. Examples may be given to students.

The master budget is the budgeted financial statements and the subordinate schedules. It is comprised of many specialized budget schedules such as the five given below. These are by no means inclusive, but are thought appropriate at the secondary level of education.

To work through these five budgets, students may be divided into groups to choose a company in the community or a project in the school to which they may apply the budgets. The size of the project and/or product lines must be kept small. The purpose of the exercise is to understand the applicability of the various kinds of budget schedules using simple numerical calculations. As each budget is explained and learned, it may be applied to the simulation. For example, the situation should be kept simple such as sales in the school store or the products on the shelves at the local barber/beauty shop.

1. Sales or Revenue Budget:

• is the first schedule prepared because many other schedules are dependent on it
• shows expected sales and units of production
• is the key to the entire process
• uses expected selling price to extend unit sales to revenues
• is often started by individual sales persons or managers predicting sales in their own area for the next period of time
• an aggregate sales budget is influenced by economic conditions, pricing decisions, competition, marketing programs, etc.

Students may project sales through a group case study/project.

2. Purchases (Inventory) Budget:

• this budget and/or the next (cost of goods manufactured budget) would be the second budget prepared
• is applicable for a merchandising or manufacturing firms only
• projects the quantity of goods to be purchased for the designated budget period
• follows the basic format of the cost of goods sold section of the income statement.

3. Cost of Goods Manufactured Budget:

• using the sales budget as a guide, projects how to best produce the items expected to be sold
• is applicable to a manufacturing firm only
• production runs would be scheduled; labour, material, and overhead would be estimated (each of these may have an individual budget).

Students may project either inventory purchases or cost of goods manufactured in a group case study/project.

4. Selling and Administrative Expense Budget:

• anticipates selling and administration expenses from the sales and inventory/cost of goods manufactured budgets
• may include the budgets of various individuals or groups involved in selling and administration
• the two budgets may be divided: the selling budget would include marketing costs, salaries, etc. and the administrative budget may include many costs not applicable to manufacturing or selling (often these are fixed costs).

The students may project selling and administrative expense budgets for a group case study/project.

5. Cash Budget:

• cash is a major concern of a company -- management of cash is crucial to meeting debt obligations as they come due without having excess cash idle
• major goal of all organizations is liquidity -- pay all debts when they come due; (students should be reminded of a Module 1 concept that income/profit does not necessarily mean cash --the net income and net cash flow of a business may be very different)
• purpose of cash budget: to optimize cash balances; having enough cash to meet liquidity needs and not having so much cash that profitability is sacrificed (for example, excess cash should be earning interest)
• one of the useful management tools
• pulls together other budgets
• sections: receipts, disbursements, cash excess/deficiency, and financing.

Review the definition of a master budget and the five types of budget schedules studied previously in this module.

Define budgeted income statements and budgeted balance sheets.

Review the management process: planning, organizing, directing, controlling, and decision making. The control aspect of the management process compares actual reports to original plans or budgets. One of the manager's tasks is to control operations and ensure that actual results meet the budget.

A performance report compares budget amounts and actual results. Variances are the differences between actual and budgeted results. Why may there be variances?

They may occur as a result of a manager's performance or because of product/market/economic conditions.

Other possible causes of variances:

• skill of workers
• cooperation of workers
• poor supervision
• rate paid to workers
• improperly set equipment
• overtime required/paid
• faulty equipment
• work interruptions.

A guest from the community may be invited to the class to speak on budgeting and variances from budgeted amounts. The speaker may be able to relate real-life situations to the students which may help the students to internalize the complexity that could be present in the business world.

Which variances should concern managers?

• a variance equal to a standard percentage of the budget such as a variance of five percent from budget (under or over budget). For example, an advertising expense which is five percent less than the budgeted amount may be damaging to profits
• a variance which recurs
• variances out of the control of the manager such as utility rates and taxes. These variances will require adjustments to the budget
• some items such as repair and maintenance cost variances may produce short-run savings but cause long-range loss of profitability and as such have a low investigation standard.

Corrective action which may be undertaken may be discussed. This discussion may include the following actions: adjusting the budget, adjusting the labour force, controlling purchasing, selling more, adjusting the price, or doing nothing.

Review aspects of the master budget. It is a budget that projects only one level of activity -- sales or units of production -- where actual costs are compared against budgeted costs.

Define a flexible budget and discuss steps in preparing one.

If spreadsheet software is available, setting up a budget is a good application to be completed on the computer. Students must set up cells, input formulas, and observe changes as budgeted figures are revised. Observe changes in net income/loss at each level. Simple variations may include: selling price, fixed costs, variable administration expenses, etc.

Learning Objectives

Notes

Review the functions of financial accounting (reports what

happens -- historical data) and management accounting (uses financial data to aid in making day to day operating decisions). Review objective 3.3 in this module, if necessary. Management accounting depends to some extent, on financial accounting data. The purpose of this last foundational objective in Module 3 is to show specifically how prepared financial data can be used for management decisions.

Financial statements are one of the instruments that help guide business decisions. The two financial statements used at this level are the Balance Sheet and the Income Statement.

Someone reading financial statements for analysis purposes must understand accounting, terminology, and the meaning of each component of the statements. As an informed reader of financial statements, a student will be able to determine the actual amount of income/loss, and realize that generally accepted accounting principles have been applied if statements have been audited or otherwise verified. From this, students will be able to design and run a series of tests, the result of which will be of aid to insiders and outsiders in decision making.

Analysis establishes relationships and points out changes and trends. The analysis section in this guide will include two components: comparisons and ratios.

Analysis techniques can be applied to the financial statements of aboriginal ventures such as the Kitsaki Development Corporation Annual Reports.

Other sources of information include:

• SaskNative Economic Development Corporation (SNEDCO)
• Federation of Saskatchewan Indian Nations (FSIN) affiliates.

Step 5 of the Accounting Cycle in Modules 1 and Module 2 outlined to students what financial statements do and do not say. Before beginning financial statement analysis, a review of what financial statements say and for whom may be completed in the classroom.

The Income Statement lists sources of revenue and expired costs or expenses. It matches revenue to expenses for the period of time. It does not predict future profitability, but it may be used for comparison purposes. Net income/loss is only an approximation and does not infer cash availability.

A balance sheet gives the reader a detailed summary of assets, liabilities, and owners' equity on a specific date. Each category may be used for further analysis. The balance sheet does not show how profits were made or where they may have been distributed.

Comparisons are one of the tools used for financial statement analysis. Primary users of comparisons are insiders (managers, owners, controllers, and others). Comparisons focus on trends and percentage changes. They may compare stages within one company's life or they may compare one company to another, etc. They may also focus on trends in revenue and expenses. Comparisons may be shown in graphical or numerical format.

Comparisons to be included:

Comparative Balance Sheets, Comparative Income Statements, and Common-Size statements. (A common-size statement shows separate items as a percentage rather than in dollar amounts.)

What are the base amounts? What is the purpose of a common-size statement? What is revealed? How would various insiders use some of the comparison data? For example, how should a manager interpret a slight increase in net sales from one month to another? Is it caused by an increase in the number of units sold? An increase in the price? A decrease in sales returns and allowances? Are there any other causes? How has technology and the use of the computer affected the financial analysis of a company? Discuss how a spreadsheet or an accounting software package (for example, general ledger, accounts payable, accounts receivable, and others) can assist in financial analysis. What types of information can the software provide?

Once students have learned the techniques of comparative analysis, they should be able to suggest reasons why the deviations may have occurred.

Managers (internal users) are the prime users of comparison analysis while creditors and external users tend to be the prime users of ratio analysis. External users may include creditors, investors, government agencies, etc. Only elementary analysis will be introduced here.

Teachers could build a file of sample financial statements collected from the community to make student activities seem more realistic.

In pairs or small groups, students may be given samples of financial statements from different organizations in the community or from other resources. As the students are introduced to each of the ratios, they may perform the test on their small business. At the end of this unit, students may prepare a journal writing in which they may be asked to predict the future of their business or make recommendations.

A ratio is a comparison of one component to another. Therefore, ratio analysis is the comparison of one aspect of a financial statement to another; for example, comparing the amount of cash to total assets.

Suggested ratio techniques to be introduced to students may include:

Short-term indicators (usually a year):

• Current Ratio: How is it calculated? Why is it important? What is an approximate good or poor ratio for a range of businesses? How does one resolve a poor ratio?

• Quick Ratio or Acid Test Ratio: What are quick assets? What is the purpose of calculating quick assets? What is considered a short period of time for creditors to receive money? How is the ratio calculated? What is a desirable/undesirable ratio? What can be done to improve a poor ratio?

• Inventory Turnover: What is inventory turnover? What is a reasonable expected turnover for various products; for example, a can of tomato soup versus a diamond necklace. What is the purpose of calculating turnover? How is the ratio calculated? What are the implications of a product that does not turn over often, of a product that has not turned over as often as last year, etc.?

Accounts Receivable Collection Period: How is it calculated? What is a reasonable collection period: compare various types of businesses (farm machinery sales versus stationery supply company); relate to terms on invoice (2/10, n/30); and, others. What is a usual rule of thumb (1 ½ times the usual credit period)? What are the implications of not receiving payments of accounts receivables on time? What is the appropriate approach to handling companies who do not pay promptly?

Long-Term Indicators (usually longer than a year):

• Debt and Equity Ratios: What is a debt? What is the proportion of total debt (liabilities) to total assets? How is the debt calculation completed? What is equity? How is the equity calculation completed? What portion of assets have been bought using borrowed money? What portion of the assets belong to the owners? What is a desirable/undesirable ratio? Can owners start and operate businesses without accumulating debt? What parties would be interested in debt and equity ratios?

• Return on Owner's Equity: A business is an investment as any other. What are the interest rates on various savings accounts at the bank? What is the rate of return on the business investment (owner's equity)? How is it calculated? What is a reasonable rate of return? What was the rate over several years of business? Does the state of the economy affect the rate of return (several types of businesses may be used for comparison; for example, a real estate business versus a food store)? Can a business just take the Capital or Owner's Equity out of a business?

• Markup: What is markup (average markup for all goods sold)? Where is it shown on the Income Statement (Gross Margin/Sales)? What does Gross Margin/Sales mean (net sales - cost of goods sold but before expenses)? How is markup calculated? What types of firms is this applicable to? Before students can make a judgement, they should know the proportion of gross margin that goes to expenses and that which remains for net income.

• Return on Net Sales: What is rate of return (net income) and what are net sales? How is it calculated? Why is the rate of return more significant than the total amount of net income over several time periods? How does this calculation affect the rate of return on owner's equity calculation?

In pairs or small groups, students may be given samples of financial statements from different organizations in the community, or from other sources. As students are introduced to each of the ratios, they may perform the test on their sample business. At the end of the unit, students may prepare a journal writing in which they may be asked to predict the future of their business or make recommendations.

As a summary to this module, students may review the management accounting concepts presented and describe how applicable financial analysis techniques may assist in that particular process.

For example, when reviewing the functions of management accounting (planning, organizing, directing, controlling, and decision making), students may suggest an analysis that may support that function.

When reviewing budgeting, two questions that students may be asked are:

• How can trends or percentage changes help with the preparation of budgets?

• Of what use can a comparison of the actual financial statement to the projected budget for the same period be?

Concept mapping: Students may map the terminology, concepts, financial analysis, etc. to the functions of management accounting. Students may generate the items to be included in their maps or the items may be given to the students on a sheet. If desired, the items may be placed on slips of paper and students could put their map together like a puzzle. Teachers may assess the content of the map noting the relationships students have chosen. Did the student understand the concepts? Did the student understand the process?

To summarize student learning in this module, the teacher may guide students by asking questions structured to determine their level of understanding of the content within this module. For example, students may be required to develop and support explanations on how the inventory turnover ratio may assist the controlling aspect of management or how trends may help with budgets.