Introduction to accounting.
Decision making and the role of accounting
Learning Objectives:
Discuss the nature of decisions and the decision making process.
Outline the range of economic decisions made in the marketplace.
Apply information to make basic economic decisions.
Exercise 1.6 Factors in making a business decision
Consult the business section of a local newspaper, or the The Australian Financial Review, or a business journal, such as BRW (Business Review Weekly), and find an appropriate article detailing an important business decision that has been made in the last month. Based on the article, determine the factors that were taken into account in arriving at the decision. Discuss the effects that such a decision will have on various interested parties or stakeholders.
Factors to be taken into account in arriving at a business decision include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Nature of the business entity.
Goals of the business entity.
Resources available to the entity.
Parties involved in the decision-making process.
The management level required for the decision to be made.
Possible gains or losses anticipated to be experienced by the business entity.
Possible alternatives which could be employed by the business entity.
The best or worst case scenario for the entity in adopting a certain business decision. Identifying all possible groups both internal and external to the business entity who may be affected.
Identifying the stakeholders (i.e. parties for whom or on whom the decision will have a positive or negative impact).
Exercise 1.7 Factors in making a government decision
Consult a local newspaper, the The Australian Financial Review, or a business journal, such as BRW, and find an appropriate article detailing an important federal government decision in the last month.
Based on the article, determine the factors that were taken into account in arriving at the decision.
Discuss the effects that such a decision will have on various interested parties or stakeholders.
Factors to be taken into account in arriving at a government decision include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
The nature of the government decision.
The government policy dictating the decision.
The political impact of the decision.
Identifying all parties affected by the government decision.
Identifying all the stakeholders (i.e. parties to which the decision will have a positive or negative impact).
Identifying any particular lobby or special interest groups involved with the issue.
Identifying the available funding or resources available for the government decision. How is the government initiative to be funded?
Identifying the cost of the initiative.
Page 1
10.
11.
12.
13.
14.
Was the decision made in a consultative manner?
Was there much political debate or commentary?
Possible gains or losses anticipated to be experienced by the community.
Possible alternatives which could have been employed by the government.
Was the resultant decision considered to be the most efficient use of community resources? Exercise 1.8 Economic decisions made by management
List examples of economic decisions that the following people would need to make with the use of accounting information:
A marketing manager
A production manager
The Chief Executive Officer of a national football league
The manager of a second-hand clothing charity.
Marketing manager: Decisions about which marketing tools (e.g. radio, TV, billboards, brochures, sponsorships etc.) are most effective in promoting the company’s products/services; the best times to put advertising (e.g. which times on TV or radio); how much to spend on advertising; whether it is beneficial to conducts surveys for customers about the products/services.
Production manager: Decisions about appropriate production staff levels; appropriate plant and machinery capacity to meet customer’s demands; costs of raw materials, labour and overhead, such as electricity, in order to make the appropriate goods; where to get the best suppliers of materials with reasonable price; costs of occupational health and safety; how to improve the efficiency of the production process (e.g. acquiring new machinery).
Chief Executive Officer of a national football league: Decisions about the venue selection and costs for football matches; ticket pricing for football matches in different venues and for special events
(such as grand final); possible breaches of the salary cap imposed on football clubs; possible implementation of new rules or abolition of certain existing rules; annual membership fees; sponsorship enticements and entitlements; selection of new players for the national draft; addition of new football clubs within the league.
Manager of second-hand clothing charity: Decisions about the pricing of second-hand clothing; appropriate locations and display equipment for clothing stores; the cost of collection systems to receive donated clothing; the cost of mending any suitable clothing items; the cost of disposing of any unsuitable items; overheads such as electricity, insurance; the costs of full-time employment and the management of volunteers.
Page 2
Exercise 1.10 Setting up a business
Luigi and Gina Cicello have decided to lease some newly built premises for the purpose of opening a seafood outlet. They intend to provide a wide range of different products, including a variety of seafood for sale and take-away fish and chips.
Required
Discuss the types of economic decisions that they will be required to make, and the information that they will need to make those decisions. Distinguishing non-economic and economic information, identify non-economic decisions that they will also be required to make. Discuss why Luigi and Gina may require the services of an accountant.
Examples of economic decisions they will need to make include:
the cost of leasing suitable premises (long-term or short-term);
the cost of purchasing suitable quantities of different types of seafood from local and overseas suppliers;
import and quarantine costs for exotic items;
minimisation of wastage, and disposal costs;
storage costs, including cold storage and freezers;
transport facilities to bring merchandise from the markets to the store (e.g. cooling van) and the cost of transport (e.g. petrol);
staff wages and training;
cost of display equipment, refrigerators, cooking equipment, electricity, and cash registers; selection and development of a suitable accounting system;
tax implications, including income tax, GST, import duties;
assessment of actual financial performance, in relation to budgeted performance.
Examples of non-economic decisions they will also be required to make include:
location of the seafood outlet;
the range of seafood demanded by their local resident;
where to get best suppliers for fresh products with reasonable price;
import and quarantine policy (e.g. whether there are certain types of seafood that cannot be imported);
where to hire experienced staff;
determination of hours open for business (do they also open on weekends or public holidays?); whether to have ‘specials’ on certain days to attract more customers.
Based on the above list or any appropriate additional items suggested by students, consider the information needed to make such decisions and then discuss in class whether/where accounting may be expected to provide such information.
Of the economic decisions that Luigi and Gina need to make as listed above, there might a number of factors that Luigi and Gina have not considered, particularly those related to development of accounting systems, tax issues, and financial performance assessments. Therefore, Luigi and Gina may require the services of an accountant to assist them in decision-making by providing relevant information related to certain issues.
Page 3
Second Hour Activity: Decision Analysis ‘Explore Engage” pp.27-28.
Choosing an accountant for a small business
After reading the following extract on the winner of the 2012 Best StartupSmart Awards for a service company, list the factors that would be important for someone like the owners of Explore Engage in making a decision about which accounting firm to employ. Also list the services that a business such as Explore Engage is likely to require of its accountant.
The winner of the 2012 Best Services Start-up in the 2012 Best Startup Smart Awards was Explore
Engage. Profiled on the StartupSmart’s website (www.startupsmart.com.au), the company profile reads as follows:
Explore Engage specialises in augmented reality (AR) and interactive applications for mobile devices such as iPhones and tablets. It is also in the process of developing a pair of AR glasses. The company defines AR as real-time animation superimposed on each user’s real-time view of the world, usually imposed through a camera device. AR solves marketing and utility problems by contextualising data or images for an informative or entertaining simulation, feedback, brand recall, in situ placement and a mixed reality. In doing so, it can assist in decisionmaking or simply create a ‘magical experience’.
Explore Engage is an international leader in AR, providing 3D experiences across advertising, marketing, gaming, retail and property. ‘We saw an opportunity in the Australian market as there was no one specialising in
AR. Also, with the emergence of the smartphone, we now have the capabilities to do AR,’ Crane says. ‘There was a need for advertisers, general consumers, B2B and B2C companies to use augmented reality.’
The three founders funded the business by ‘chasing down clients’ and completing projects. They also received investment once it was established. O'Brien says the founders ‘invested heavily from our own funds, gained seed funds and won projects to drive significant growth over the last 12 months.’
While cashflow proved to be the most challenging part of starting the business, the best part of starting up is the ‘ability to say you have started your own business and that it is going well’.
Explore Engage is now looking to take its technology to the international stage. ‘We are developing a pair of
AR glasses that will change the way people consume media globally and interact day to day,’ Crane says. ‘[Our goal is to] become one of the top three AR companies in the world.’
Source: StartupSmart 2012, StartupSmart Awards 2012, www.startupsmart.com.au.
Factors that would be important in deciding which accounting firm to employ include: past experience with the industry the business is in;
experience in advising small businesses, particularly in strategy analysis as Explore Engage is preparing to take its business to international market;
ability to think for the small business owner and to pre-empt potential difficulties;
having worked with clients in the past who knew little or nothing about accounting and being able to communicate with them without using accounting jargon;
reasonably convenient;
prepared to drop in on the business regularly to see how things are going rather than waiting for the client to come to them with problems;
ability to think for the client on financial and accounting issues;
good at tracking cash flow and foreseeing any problems in this area as this is proved to be the most challenging part of starting the business for Explore Engage, and is often what leads to small business failure;
ability to organise the financial structure of the business to achieve the best outcomes for the owner in terms of limited legal liability and in minimising tax;
experience in dealing with financial institutions on behalf of clients.
having listed the things that Explore Engage requires of its accountant, the owners of Explore
Engage need to have an interview with a potential accounting firm and to ask them to provide examples of how they have achieved the things they require of them with other clients in the past.
Page 4
Services that a business such as Explore Engage are likely to require of its accountant include:
taxation services including business activity statements and the GST;
completing statutory returns for government agencies;
management consulting services;
possibly advising on computer hardware and software needs for tracking work and invoicing customers and maintaining accounting records;
setting up benchmarks and KPIs to measure business performance;
assessment of risk;
monitoring cash flow needs and budgeting services; and
possibly negotiating with financial institutions.
