Lecture 13, Financial Accounting, part 4

Lecture 13, Financial Accounting, part 4

November 13, 2019 0 By Kody Olson


alright so in terms of what we have left
to talk about related to accounting there’s really kind of just one closing
thought that I have added here towards the end and that is we primarily have
been talking about financial accounting but let’s come back to and at least just
talk about cost accounting for a moment and as we’ve already observed cost
accounting primarily focuses on managing and allocating costs. So, it’s about an
organization getting a true picture of their costs and and you might think that
that’s not maybe not that hard for them to do but in fact it’s very very
challenging and it it incorporates a lot of things that can give companies
significant headaches for example we recently have gone through a period in
this country where oil prices have fluctuated quite wildly well if we’re a
company that uses a lot of oil or oil derivative products in making our
products or even in logistics moving things around that kind of variation in
the market prices could have a dramatic impact on what we need to charge our
customers in order to break even well what happens if we need to charge higher
prices but the market is unwilling to pay those higher prices but we really
face some very challenging decisions as an organization and so we want to make
sure that as best we can we not only understand our current cost position but
we have a forward look to that as well where we might employ some people that
would assist with this that might be more economically focused and more
market scanning focused and help us analyze various trends because this is
an area that can really be a key strategic driver of competitiveness for
our company or it could be an area where we could be out competed by those other companies and our industry now in terms
of the information handling portion of cost accounting really all of the
details of our financial transactions in our company is captured in financial
accounting so all cost accounting has to do in order to get the data it needs is
be able to leverage the information that is already in the system for the sake of
financial accounting and and the mechanism for that is is pretty
straightforward companies engage in various business processes and as those
processes occur costs are incurred and we have already observed that those
costs would be captured in various financial accounting documents or fi
documents that are kicked out periodically by steps in our business
processes so we have the ability to capture that information as processes go
along but there are times when we might need kind of a little bit more detail
for example instead of just capturing the financial accounting implications of
something that happened in a given step we might want to accrue all of the costs
associated with the execution of an entire process and then at the end of
that process settle those records to something that would enable us to do
some cost accounting reporting and calculations apart from that companies
need a way of figuring out how they’re going to consider and think about costs
within their organization and so a very commonly employed mechanism in most
organizations is the concept of a cost Center and a cost center is a cost
accounting entity so it’s an it’s an organizational entity in terms of
organizational data and it allows us to track and capture costs based on where
an organization those costs were incurred so to give you an example of
that here in a university setting each department in a university would be
classified as a cost Center and so the people that work in that department
would have their salaries charged against that cost Center resources that
are consumed all of those things would be kind of captured in terms of a given
set of cost centers and then report it up throughout the organizational
hierarchy to allow us to better understand costs associated with
different facet of the organization a good metaphor to think of when you think
of a cost Center is to kind of imagine a giant sponge and the way this is
typically treated in an organization is if we are going to engage in cost
accounting then every expense that we have as an organization is going to be
assigned to a cost center so a great example of that and we’ll just keep this
very general at this point and talk about it in more detail later in the
semester we are currently sitting in Nick’s Hall Nick’s Hall as a building
contains let’s see I think we contained four different cost centers we have i TS
which is primarily on the fourth floor of this building we have the department
of computing which is primarily on the fourth floor of this building we have
the college of nursing which is primarily on the third and a second and
third floors we have the I think it’s the Department of Appalachian studies
which has part of the first look oh and then there’s another one we have the
what’s called the health center that’s part of the first floor so there are
five cost centers in this particular building well we talked last time about
depreciation well I have no idea what it costs to build this building and given
its age the building itself is probably paid for but I do know not that long ago
this building was renovated this used to be the library
and it was turned into the building as it sits now when the other library was
built so let’s just say hypothetically that the university spent 25 million
dollars renovating this building and now this particular asset is is potentially
going to be depreciated if you will and so we determine as a university you know
we’re going to charge the cost of this building is about 1.5 million dollars a
year and then we also have costs associated with building up keep that
we’ll just say it’s about half a million dollars a year and then we have things
like electricity and water and other things that are consumed in this
building so when we put a calculator to it let’s say the cost of this building
to the University every year is three million dollars well every cost has to
be assigned to a cost Center so the university would say okay nursing is
here computing is here Appalachian studies is here the health clinic is
here and I TS is here and and just to make it nice and simple we’re just going
to divide this equally among them so the nurses get charged 600,000 as do we as
do all of the other entities here and we have now allocated the costs to various
cost centers that occupy the building that’s the concept here of all of our
costs as an organization are captured in terms of a cost Center so when the
department of computing goes out and buys paper to put in printers that’s
going to be reflected in our cost center and so on an annual or quarterly or
whatever reporting period we want to use basis the university can say okay how
much is it costing us for the computing department to exist and of course you
can imagine that then that could be paired with things like okay well how
much is the computing depart bringing in and they look at tuition and
other things that are generated by the department and you can do a very quick
calculation to see is a given Department kind of bringing in more than they’re
costing the university the construction of these cost centers deciding what’s a
cost Center and what things are grouped together to be a singular cost Center
and deciding how to disperse costs among the cost Center is a huge matter of
contention and most organizations because costs tend to be like a real
world giant game of hot potato nobody wants them okay so typically there has
to be organizational rules or some entity that says you might not like it
but this is the way this is going to be reported and so cost centers allow us a
way of measuring and monitoring things in that fashion these this cost
accounting reporting is considered to be master data focused on controlling so
this is kind of interesting a moment ago I made the observation that cost centers
are really an example of organizational data I don’t think that’s an incorrect
statement but you could also see where their entities within these cost centers
that would be master data that would be focused on on controlling and the point
that I made a moment ago is really the key here if we are going to do cost
accounting then every expense every cost that we incur as an organization is
going to have to be assigned to a cost Center so we have to decide exactly how
it is we are going to do that you can imagine for an example an organization
that makes many different kinds of products and so some costs would be
assigned to one product line where other costs would be assigned to other product
lines and we have to figure out how to allocate those in a way that that would
be fair I mentioned a moment ago the idea of as a process goes on we capture
all of the costed data associated with that process
well what I was describing there’s the concept of a cost object now don’t get
cost centers and cost objects confused with one another a cost Center is
typically associated with an organizational entity much like we were
describing a moment ago in terms of the various university departments a cost
object is simply a document that captures costs until such a time as they
are settled to various cost centers so imagine a business process that goes on
such as the production process and let’s assume that in our given example here
the production process involves an extended period of work going on in many
different work centers over an extended period of time and so what happens is
when the process begins we begin accumulating costs okay these were the
raw materials that were allocated to the project and these were some of the other
things that were allocated and then over time various people work on the process
and so their time is recorded and maybe there’s other things that incur costs as
the process continues so as the process goes from step to step to step to step we have a cost object which is a document that just accrues all of the
costs accumulates all the costs and in the production process that i’ve been
using as an example here that’s the role of a production order remember the
production order is what authorizes the factory to begin work well there’s a
very nice metaphor if you can imagine that every job had a physical piece of
paper associated with it and anytime someone worked on that job they wrote
down their name and their time and then at the end of the job someone would sit
down with a calculator and tabulate all of that to figure out how much manpower
was expended that’s exactly what the production order does but it does so in
an automated fashion as people record their work on jobs as
equipment scans various things in and out of different work centers all of
those costs can be accumulated and then at the very end we could say okay the
cost of this particular production run was this much money and this are the
results of the production run and therefore we can do things like actually
calculate a unit cost or other things of that sort and so what happens here is is
these costs are captured in terms of these cost objects the cost objects then
get allocated to cost centers and in keeping with my metaphor from a moment
ago of hot potato the cost centers have the ability to reallocate their costs to
other cost centers so what do I mean by that well here’s a good example the help
center well no let’s not use the health centers example let’s use ITS as an
example we observed a moment ago that ITS was going to hypothetically be
charged six hundred thousand dollars for the use of this building well here’s the
thing about ITS they are a true cost center in that they generate lot of
expenses but they don’t make any money they don’t generate any revenue at all
so what ITS will do is they will in turn say we provide services to all the
different departments in this organization so therefore based on that
every one of the department’s is going to be charged 50 thousand dollars a year
for our services and so they take the costs that have been handed to them and
they cut them up into pieces and they allocate them out to other places in the
organization under the theory that you know the computing department uses
computers and employs the services of the help desk and network technicians
and so on and so they should pay a share of the costs associated with it so
that’s why we create what you’ve done in your labs is you
create these cost Center hierarchies which give us a way of taking costs and
over time kind of allocating them throughout our organization to get a
true picture of what it actually costs for us to engage in certain activities
that is about a 10 minute overview of a concept that people that are cost
accountants will take multiple University classes on and talk about in
great detail because this can be a very interesting job that people have in
organizations to work in cost accounting and it is very very very non-trivial any
questions about this okay the last thing to mention here is just a comment about
reporting in the context of financial accounting pretty much what you are
looking at is is two kinds of reporting we have the day-to-day information
display to people in our organization based on information revolving around
the general ledger how much are our current accounts payable what’s the
status of our account with a particular vendor all of that is going to be
captured in our general ledger or various subsidiary ledgers and of course
we have transactions as we’ll look at in a moment that allow us to actually look
at that information the other thing of course is financial statements financial
statements here we’re talking about balance sheet income statement statement of cash flows and so on that is something that you have to configure in
your organization and what’s kind of interesting is the current lab sequence
that I have you going through you do not actually create a financial statement it
is something that really actually takes a few hours of work to do
with the merit being that once you’re done you only have to create at one time
but what you do when you set up these financial statements is you think in
terms of okay a balance sheet the balance sheet captures assets
liabilities and equity so which accounts go where on the balance sheet and how do
I want things perhaps summarize maybe I want these five accounts added together
and showing up as one line item that the user can then drill down into for more
information you have a lot of wizards and report builders to help you create
this but it does take a pretty long period of time for you to actually
create that so we don’t do that but you’ve all seen these before if you can
remember back to your experience with erp sim where you could run transaction
f01 and actually look at the income statement and balance sheet now as far
as the account information here you can go in and you can look at the balance of
any particular account and then if it has been enabled in the account and this
is an optional thing you can go through and drill down and from the summarized
balance you can continue to drill down until you actually see the original fi
document but as I’ve noted here this is something that a company specifically
has to say that they want to be able to do if you don’t want to support that
functionality then users can look at account balances but not actually
drilled out I don’t really know why you would go to the effort of having a
system like this and not supporting drill down but maybe for security or
other purposes you just don’t want your people accessing records in that fashion
let me show you an example of what I’m talking about here let’s go back into
our ERP system here so give me a moment to get that started and get us logged in no apparently I am logged on in my
office as well and apparently I just chose the wrong of the two options Okay, this is the one I wanted okay and I’m not going to navigate through the menu
here I’m just going to type in the transaction code and so I want to look
at the balance of a particular account and I can look this up of course and so
I’m going to look at my cash account so I’ll drill down here and and tell it
which general ledger I want to work with here and the account I want is my bank
account and i asked specify my company code because of course we could have
multiple organizations using the same chart of accounts and then this is the
year 2016 so so when i execute that this shows me my balance of the account now
notice a few things here we see debits and credits broken out separately and
then the balance here so if you think about it bank account is an asset
account so debits are what we would generally consider good that’s the
equivalent of our cash growing so this says in the month of August we had
debits of 209,000, credits of 24,000 which is the equivalent of our having an
increase in our cash of 185,000 and then we go into September and you
can see we haven’t done a lot of transactions here against this account
in September we’ve just debited the account for a whopping two dollars here
and so we see our current balance so we have columns here for every month. What’s
month 13? What’s that it’s a closing period or reconciliation period and it
just so happens that would we configured our organization we said we wanted 12
reporting periods 12 months plus 1 closing period there’s nothing that says
we have to do it that way we could want we could elect to do quarterly
closing in which case we would have 12 months and four quarters so we would
actually have 13 14 15 and 16 sitting here and they would just show up in this
manner that you see it here and those closing periods would would be
essentially thought of his months now in keeping with what I mentioned just a
moment ago okay I want details here I want details about these $24295 worth of of credits yes yeah I say
normally the way you do it is you try and keep one through twelve
corresponding to the actual calendar months and then the closing months get
tacked on to the end I know here at ETSU the final annual closing happens in in
months 17 so I think they’re doing 1 through 12 13 14 15 and 16 for quarterly
and then 17 for year-end but you have flexibility there in your organization
so if I want more information on these credits I just double click on that and
here are all of the financial accounting documents that resulted in the balance
that we see here and I could say oh well this guy right here remember we have
things like here’s document types so potentially if we worked with this every
day we would probably know what those document types were right off i’m
guessing that essay has to do with sales i don’t recall off the top of my head
would kz stands for and if i wanted more information I could highlight a line and
click on the little glasses here and this would take me to the actual
document here where we see the seven hundred and fifty dollars here and we
could of course look at other elements of this but most notably we could click on the little hat here and see actually is not
the hat that I want it’s the mountains that I want that show me that actually
this is a transaction from spy gear where spy gear paid me 745 dollars
against their account and and we put it in our bank account here so I can drill
down and go back as far as I would like here there’s no further drill down here
possible we’re kind of at the end of the line but I can start with any given item
in my summary here and drill back to the source document that rolls up to that so
this is an example of the kind of day to day reporting that’s available to me
within my financial accounting reporting financial statements we can generate
lots of different financial statements which means that we could generate a
version of our balance sheet for the sake of publishing it in our annual
report and because we’re doing it that way we have certain requirements that
come to us by way of law but we probably want to disclose as little as we
possibly can about the inner workings of our organization so we are going to
highly summarize things where we can do so but a balance sheet that’s created
for internal use might break things out to a much finer grain of detail well
financial statement her shins enable me to do that I could say show me a balance
sheet for my annual report show me a balance sheet for distribution to my
board of directors show me a balance sheet for distribution to my plant
managers and that’s where we can get into we can create these with as much or
as little detail as we want and the system supports us
generating multiple variations same source data but just going to be
different in how things are summarized and presented generally speaking the
documents that we’re talking about here are the balance sheet the income or
profit and loss statement and the statement of cash flows and as I have
indicated usually the format for these documents and what level of summarizing
I’m going to be able to do and not to do is captured in things like generally
accepted accounting principles IRS guidelines SEC and so on you know we’re
not going to be able to say assets and report one lump sum amount and have that
be it you know we can’t have a three-line balance sheet that would be
assets liabilities equity end of statements you know we are going to be
required to break that out in a little bit more detail and the ins and outs of
that are nothing we certainly want to take on in this class and i’m sure they
change to one degree or another on a semi-regular basis so that’s the merit
of something like this if a law or requirement changes and we have to go in
and adjust our method of presentation doesn’t it all change the data capture
we can go back in well after the data is captured and just explain how we want
the output to be crafted by the system this is important because we do have
laws now like sarbanes-oxley that’s going to require our CEO and our CFO to
certify the accuracy of these reports I’m operating under the presumption that
neither of them want to go to jail so they will want these reports to be
accurate and in every way compliant with the law and so one of the reasons why
companies are willing to invest money in systems of this sort is to make sure
that they are in compliance it’s basically throwing money at a given
problem in order to make sure we have a good solution yes sir nonprofits now it may not be universal
among all nonprofits but I know nonprofits once they get to a certain
size still file with the IRS they just don’t have to pay any money but they do
have to do IRS filings every year because the government wants to keep
track of money especially now in this era where money is so tightly tracked as
a way of doing things like trying to prevent terrorist activities and so on
so yet even organizations that don’t have to pay taxes III don’t know that a
non-profit would have to report to the SEC but I do know that they have to
report to the IRS other questions all right so this slide that is at the end
of your deck illustrates exactly what we just looked at where we start with being
able to look at an account balance and then we can drill down and look at
actual line items and from there we can actually see the originating fi document
that actually shows us the general ledger entities so this kind of
traceability is very important in an organization and I can tell you one
group that as a whole really likes this is this makes auditing activities much
much much easier for us to be able to isolate perhaps an area that we want to
dig into in more detail and be able to step through and see all of the
transaction history here makes the role of an auditor much easier one thing that
that I can’t show you in the system because we haven’t created anything that
would leverage this and our lab work is we talked about assets and asset
management and depreciation and so on there’s actually a specialized
transaction in the system called the asset Explorer where if you set up an
asset as an asset in the system you can launch the asset Explorer and it will
show you the history of the asset it will show you when you bought
it how much you paid perhaps any additional investments and upkeep of
that asset that would be capitalized and that it will show you all of the past
depreciation postings and we’ll show you future planned depreciation postings and
it gives you the ability as well to do kind of a what-if analysis to see which
depreciation schedule you might want to employ for a given asset class and so
the asset explorer is a tool in the system that allows the people that are
making these kinds of decisions to to look at this keep in mind that the way
this will typically be handled in an organization is we have a lot of things
we put into the system when the asset is acquired but then the depreciation run
is like just a batch transaction that gets run once a year and typically in a
closing period and our example here period 13 that would go through and
apply all of the depreciation expenses as as are warranted based on the
decisions that we have made in regards to our different assets and so I believe
this that is the end of our discussion in financial accounting any questions
about anything that we have talked about today or prior to this before we hasten
on to our next topic yes let me go here and then I’ll go here so yes sir that’s right all that is
totally optional now I don’t know why you would spend money on a tool like SIP ERP and not do cost accounting but you don’t have to it’s not legally required
so it’s not a required facet of the system yes sir sarbanes-oxley and I
don’t know that I can give you a very thorough description of it but
sarbanes-oxley came out of the era when there were a lot of companies that were
engaged in financial accounting and governmental reporting that was
fundamentally fraudulent one organization that kind of was the poster
child for this was Enron and Enron looked very profitable on paper they attracted
a lot of investors but fundamentally they actually had no value it was all a
bunch of lies essentially and when that became public knowledge an awful lot of
people lost an awful lot of money but the people who perpetrated the crime
wound up with a lot of money and very little legal liability and so laws were
passed that said you know if something like this happens the people that are
involved in it should face jail time as a penalty and so sarbanes-oxley requires
companies when they file statements with the government to have various people
that are signing those documents that if those documents turn out to be
fraudulent those people could potentially go to jail and so it kind of
ups the ante and actually associating not just civil penalties like fines but
actual jail time with fraudulent activities and so sarbanes-oxley is
really a set of various laws a at trying to curb business fraud and
applying steep penalties to the people who perpetrate them so you hear a lot in
the news these days about you know companies potentially being called
before Congress or drawn into court and and people potentially going to jail
really before sarbanes-oxley jail was never on the table you could be charged
with fraudulent accounts your money could be taken from you but I think the
mindset was some people were willing to roll the dice and say hey if I get
caught the worst thing I have to do is just give back my money well now they’re
looking at more than that so that’s the idea there other questions