Business Decision Making

Lecture Notes: Business Decision Making, SAB, BBA -2 Business Decision Making The Language Of Business: (Accounting) This lecture is organized around the practical applications of basic bookkeeping and accounting concepts by providing their concise definitions and explanations. The aim is to develop an understanding of how to solve bookkeeping and accounting problems in the computing world. The basic concepts of the bookkeeping cycle will be covered first. The objectives are: • Understand why accounting information is important in making business decisions. • Describe the nature of a Balance Sheet. • Explain the accounting meaning of assets, liabilities, and equity. • Identify the components of a Balance Sheet. • Analyze business transactions and relate them to changes on the Balance Sheet. Understanding Accounting & Decision making process The purpose of accounting is to provide useful information in an effective, relevant, and reliable way for a wide variety of decisions. Anyone involved in making financial decisions of any kind – business or personal – should have a clear understanding of the principles of bookkeeping and accounting. The purpose of bookkeeping and accounting is to provide information concerning the financial position of an on-going business. This information is needed by not only bookkeepers and accountants but also owners, managers, creditors, and governmental agencies. An individual person who earns a living by recording the financial activities of a business is known as a bookkeeper, while the process of classifying and summarizing business transactions and interpreting their effects is accomplished by the accountants. The bookkeeper is concerned with techniques involving the recording of transactions, and the accountant's objective is the use of data for interpretation. The book keeping and accounting technique involves: A. The Nature of Accounting 1. Accounting is a process of identifying, recording, summarizing and reporting economic information to decision makers. 2. Financial accounting focuses on the specific needs of external (outside) decision makers, such as shareholders, suppliers, banks, and government agencies. 3. Financial statements, the output of the accounting process, are the result of the accountant’s ability to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their financial effect on an organization.

Inst: Dr. Mohammed Yousuf Khan

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Lecture Notes: Business Decision Making, SAB, BBA -2 B. Accounting as an Aid to Decision Making 1. Accounting information is useful to anyone who must make decisions that have economic consequences. Managers, owners and investors all use accounting information to make decisions. 2. Accounting information may be used to help predict future effects of decisions, confirm or reject, by evaluating performances or by indicating the financial implications of choosing one plan over another. C. Financial and Management Accounting 1. Financial and managerial accounting uses financial data related to a particular entity, and share many of the same accounting procedures. The difference between the two is their use by different types of decision makers. 2. Managerial accounting serves internal (inside) decision makers. 3. Accounting, through financial statements, performs a scorekeeping function. It answers the questions of: What is the financial picture of the organization on any given day? How well did it do during a given period? 4. There are three major financial statements: The balance sheet focuses on the financial picture as of a given day. The income statement The statement of cash flows focus on performance over time. 5. The annual report is a document prepared by management and distributed to current and potential investors to inform them about the company’s past performance and future prospects. Components of the Balance Sheet: The Balance Sheet A balance sheet is what accountants call a financial statement. The balance sheet shows the financial position of a business at a particular point in time. It is also known as the statement of financial position or statement of financial condition. A typical balance sheet might appear as shown in the following Figure:

As you can see, the balance sheet has two counter-balancing sections, which form the accounting equation: Assets = Liabilities + Owners’ Equity (i.e. Net Worth) Inst: Dr. Mohammed Yousuf Khan

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Lecture Notes: Business Decision Making, SAB, BBA -2 Example Consider the following business activities or events of a typical firm: - the firm owned assets of $100,000 - the firm owed creditors $80,000 (i.e. liabilities) - the firm owed the owner $20,000 ( i.e. net worth) The accounting equation would be: Assets = Liabilities + Owners' Equity $100,000 = $80,000 + $20,000 We shall call any business event that changes the amount of assets, liabilities, or owners' equity a business transaction.

Practical Test 1. Given any two known elements of the accounting equation, the third can be logically computed. Determine the missing amount in each of the accounting equations below. Assets = Liabilities + Owners' Equity 1) $7,200 = $2,800 + $______ 2) $7,200 = $_____ + $4,400 3) $_____ = $2,800 + $4,400 4) $20,000 = $5,600 + $______ 5) $18,000 = $_____ + $6,600 6) $_____ = $4,280 + $8,420 2. Classify each of the following as elements of the accounting equation using the following abbreviations: A = Assets; L = Liabilities; C = Capital. 1) Cash 2) Accounts payable 3) Owners' Investment 4) Accounts receivable 5) Land It is the competitive pressure which force corporate managers to make good decision to improve profitability for their business survival. For this, manager seeks any strategies to give their companies the competitive advantage. Most of these strategies involve computers and information technology (IT). The intelligent use of available technology and information’s can make the difference between profitability and failure. IT can give a company ready access to a world market, improve product and service quality, reduce cost, increase productivity, aid communication between employees and hence improve company morale.

Inst: Dr. Mohammed Yousuf Khan

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Lecture Notes: Business Decision Making, SAB, BBA -2 Decision making at manager levels: The main job of the manager is to increase the efficiency/productivity by creating more sophisticated reports. The manager must use all the resources at their disposal to meet the objectives and perform the management function of planning, organizing, leading and controlling. The corporate resources for the manager are money, materials (including facilities and equipment), people and information. All these resources become input to various functional units. Management Information System (MIS): MIS increases the efficiency of the managerial activity. It manipulates the data received from transaction processing system and creates the managers specific required reports. MIS is a set of S/W tools that enable manager to gather information about a department or entire organization. Different level of MIS produces several different types of reports. The manager can make two type of decision at this stage: • A routine decision: is one that is made regularly repeatedly. For example, a monthly decision about what to order to re-stock inventory. • A structured decision: is one that has a clear and replicate method for reaching a solution. For example, figuring out, which customer should receive overdue notices? Consider an example of an air line MIS. An airline MIS does much more than keep track of flight information’s. • • -

It closely monitors departure and arrival times so that ground crew activities can be coordinated. Complies and produces many kind of information needed by the management like: The number of passenger miles flown Profit per passenger on a particular flight Average number of empty seats Percent of arrivals on time etc.

Inst: Dr. Mohammed Yousuf Khan

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