MA DIS - 6
SUNILCIS2016
ManagerialAccounting11.pptxManagerial Accounting
Ravindra Reddy Daggula
Managerial Accounting
August 23, 2020
Introduction
Throughout this week I have learned many essential topics on managerial accounting.
In this presentation we will look at the key concepts of both chapter11 and 12.
First we will look at the topic “Decentralized organizations.”
Second we will consider the several aspects Cash Flows Statements.”
What are Decentralized Organizations?
Decentralized organizations assign to the administrators of different divisions of the enterprise policy taking and organizational roles.
For instance, universities are sometimes partitioned by discipline with a specific manager and/or dean accountable for each discipline
Retail organizations are also split into divisions, having one area manager.
Service businesses are also separated by sector type, with an accounting company split into auditing and tax.
he term used to describe this type of organizational structure is decentralized organizations. Decentralized organizations delegate decision-making and operational responsibilities to the managers of each segment of the organization. (Segments are often called divisions or subunits.) For example, universities are often segmented by discipline with one manager, or dean, responsible for each discipline (physical education, social sciences, business, etc.). Retail companies are often segmented by region, with one manager responsible for each region. Service companies are often segmented by service category, with one manager responsible for each category (e.g., an accounting firm divided into audit and tax). Decentralization is not limited to a particular type of organization, and most organizations that have grown in size and complexity decentralize to some extent.
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Reasons to Decentralize
Organizations often choose to decentralize when expanding.
If the amount of goods sold rises, one manager or team of managers will be disproportionately accountable for running the entire company (O’Grady, 2019).
When activities expand and become increasingly complicated, organizations begin to decentralize.
Decentralization does not only concern a single entity, but also to a large degree decentralizes other organizations of growing scale and sophistication.
Organizations often decentralize out of necessity as they expand. The responsibility of one manager, or group of managers, to run the entire organization can become overwhelming as the number of products offered increases.
For example, Game Products, Inc., began by selling two board games to several retail stores in the northeast United States. The company did not need to decentralize at that point because it offered only two products and the geographic region in which it sold those products was limited.
A few years later, Game Products expanded sales to Canada and the southeast Unites States, while also venturing into the computer games industry by purchasing a small maker of computer games. Although operations were not decentralized at this time—all decisions were still made at headquarters—top management was beginning to feel the strain of trying to manage two segments of the company. The decision-making process was cumbersome and slow, and the company began to miss market opportunities that would have increased sales and profits.
Two years later, Game Products decided to enter the sporting goods market, and top management and the board of directors agreed that decentralization was critical to the future success of the company. As a result, they assigned a manager to run each division. This change allowed top management to concentrate on high-level issues. such as long-range strategic planning, and it placed the decision making in the hands of managers who were intimately familiar with the operations of their individual divisions.
Although Game Products ultimately decided to decentralize operations, there are advantages and disadvantages to decentralizing. Figure 11.1 "Decentralized Versus Centralized Organizations" illustrates how operations would look at Game Products, Inc., if operations were decentralized or if they remained centralized.
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Advantages of Decentralizing Operations
Organizations such as Gaming Products continue to decentralize with their industries growing and gradually diverse.
Below are some of the key advantage of Decentralizing Operations:
Increased Expertise
Quicker Decisions.
Refocus of Top Management Responsibilities
Motivation of Local Managers
Organizations like Game Products tend to decentralize as their operations grow and become more complex. The advantages of decentralizing are as follows:
Increased Expertise. Rather than having one manager, or a group of managers, trying to make decisions for a wide range of products, decentralized organizations delegate decision-making authority to local managers who have expertise in specific products.
Quicker Decisions. By having increased expertise and decision-making authority, local managers are able to make decisions quickly without having to wait for the approval of the organization’s top management.
Refocus of Top Management Responsibilities. With local managers focusing on issues important to the specific segment, top management is able to delegate the day-to-day decision-making responsibilities and focus on broader companywide issues, such as long-range strategic planning.
Motivation of Local Managers. Managers who are given more responsibility, and the control necessary to manage their responsibility, tend to be more motivated than those who simply follow the orders issued by top management. In addition, a decentralized structure provides a means to train local managers for promotion to the next level of management.
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Disadvantages of Decentralizing Operations
Decentralization effects are not necessarily optimistic (Appiah, 2017).
Below are some of the key advantage of Decentralizing Operations:
Duplication of Services
Conflict of Interest
Loss of Control.
The results of decentralizing operations are not always positive. Three disadvantages of decentralizing are as follows:
Duplication of Services. Organizations that decentralize often duplicate administrative services, such as accounting and computer support. That is, each segment may have its own accounting department and computer support department when these services might be provided more efficiently through one companywide department.
Conflict of Interest. Managers who are evaluated solely with respect to their divisions have no incentive to make a decision that benefits the organization as a whole at the expense of the manager’s division. For example, a local manager may decide to purchase raw materials from an outside supplier even though another division within the company can produce the same materials at a lower cost. (To make matters worse, the other division’s manager may refuse to sell the materials at a reduced price because she is evaluated based on her division’s profits!) The appendix to this chapter discusses this issue in greater detail.
Loss of Control. Perhaps one of the most difficult decisions facing small, fast-growing organizations is whether to continue to expand and decentralize or to limit growth and remain highly centralized. Decentralization will lead to a loss of control at top management levels, which can have negative consequences for the organization’s reputation if local managers struggle to maintain the level of quality that customers expect. Decentralized organizations are only as good as the local managers who are given decision-making authority.
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Cash Flows Statement
This offers reports on cash collection and financial transfers as well as reconciles the currency difference over a specific time.
Clearly stated, the cash flow statement shows the origins of the income and where it goes for a given amount of time.
If the actual cash purchases are held in a check ledger for one year, assume you have hundreds of purchases for one year (e.g. signed checks and transfers for the paycheck).
The Cash Flow Report describes all transfers rather than displaying each discrete account in a structured chart..
The statement of cash flows provides cash receipt and cash payment information and reconciles the change in cash for a period of time. Cash receipts and cash payments are summarized and categorized as operating, investing, or financing activities. Simply put, the statement of cash flows indicates where cash came from and where cash went for a period of time.
Assume you keep track of your individual cash transactions for an entire year in a check register (e.g., checks written and paycheck deposits) and suppose you have hundreds of transactions for the year. Rather than showing every single transaction in a formal report, the statement of cash flows summarizes these transactions. For example, all cash receipts from paychecks are added together and shown as one line item, all cash payments for rent are added together and shown as one line item, all cash payments for food are added together and shown as one line item, and so on. The goal is to start with the beginning of the year cash balance, add all cash receipts for the year, subtract all cash payments for the year, and find the resulting end-of-year cash balance. Although the formal statement of cash flows is not quite this simple, the concept is the same.
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Cash Flow Activities
Cash flows are often classified in three key activities (Paolone, 2020):
Operating activities
Investing activities
Financing activities
Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.
Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.
Investing activities include cash activities related to noncurrent assets. Noncurrent assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)
Financing activities include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)
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Preparation of the Cash Flows Statements
In order to prepare a cash flows statement , many pieces of details are needed for such adjustments..
Calculating the adjustments in each account on the balance sheets between the end of the past year and the end of the current year is necessary.
The details on the current year's income statement is required to continue translating net profit on the basis of an accrual to a cash base as seen on the cash flow statement 's financial activity portion.
Additional details, including the cash dividends received as well as the expenses for long-term assets sold, is necessary to complete cash flow.
Several pieces of information are required to make these adjustments in preparing the statement of cash flows:
Balance sheets for the end of last year and end of the current year are needed to calculate the amount of change in each balance sheet account. These changes in balance sheet accounts are needed to prepare certain parts of the statement of cash flows.
Income statement information for the current year is needed as the starting point for converting net income from an accrual basis to a cash basis, which is shown in the operating activities section of the statement of cash flows.
Other information is needed to complete the statement of cash flows, such as cash dividends paid and the original cost of long-term investments sold.
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Characteristic the Cash Flows Statements
A statement of cash flow that contains a company's short-term monetary profit and expenses offers accounting details which is not found in most financial documents, such as balance sheets and revenue documents.
Every cash flow statement spans a certain duration, typically one year or one fifth, and defines all cash income streams over that time (Kent & Bu, 2020).
This also determines where a business invests its funds, and offers useful insight about recurring financial commitments such as wages and monthly debt interest.
A variety of specific cash flow reporting types are appropriate with accounting principles.
The statement of cash flows was created due to a lack of cash flow information on the income statement, balance sheet, and statement of owners’ equity. The income statement shows revenues and expenses using the accrual basis of accounting, but it does not indicate how much cash was received for revenues or paid for expenses. The balance sheet shows assets, liabilities, and owners’ equity at a point in time, but it does not show how much cash was received or paid for these items. The only cash information provided on these statements is the change in cash from the end of last period to the end of the current period derived from the cash line item on the balance sheet (often called cash and cash equivalents).
Owners, creditors, and managers wanted more cash flow information. They often asked such questions as: Why did cash go down? How much cash was received related to net income? How much cash was paid for the purchase of equipment? How much cash was received from issuing bonds? As a result of the demand for more cash flow information, the FASB formally created the statement of cash flows in 1987 (Statement of Financial Accounting Standard No. 95, which can be found at http://www.fasb.org). Most companies are now required to prepare the statement of cash flows along with the other three statements.
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Numerical Example
Here is the example of Cash Flow Statement of ABC company:
Conclusion
Decentralized organizations have benefits that include growing knowledge in-region, quicker judgments, more time invested in top management and improved incentive for group managers.
It is essential to notify the reader of the company cash situation in the cash flow analysis.
In order for a organization to survive, it must should have enough capital.
You need cash to cover the bills, transfer bank fees, pay taxes and purchase new properties.
References
Appiah, S. (2017). Decentralized organizations as multi-agent systems-a complex systems perspective. Technical report.
Kent, R. A., & Bu, D. (2020). The importance of cash flow disclosure and cost of capital. Accounting & Finance, 60, 877-908.
O’Grady, W. (2019). Enabling control in a radically decentralized organization. Qualitative Research in Accounting & Management.
Paolone, F. (2020). Concluding Remarks: The Importance of Cash Flow Statement. In Accounting, Cash Flow and Value Relevance (pp. 69-81). Springer, Cham.
