Controllership: The Work of the Managerial Accountant (Controllership)

CONTROLLERSHIP......Page 4
ABOUT THE AUTHORS......Page 8
ACKNOWLEDGMENTS......Page 9
PREFACE......Page 10
CONTENTS......Page 12
PART 1 THE BROAD MANAGEMENT ASPECTS OF CONTROLLERSHIP......Page 28
Tasks of the Accounting Function......Page 30
Role of the Accounting Function......Page 32
Role of the Controller......Page 33
Impact of Ethics on the Accounting Role......Page 34
Evolving Role of Accounting......Page 36
Variations on the Title......Page 38
Control Function......Page 39
Accounting Function......Page 40
Additional Controller Functions in Smaller Companies......Page 41
Controller’s Job Description......Page 43
Relationship of the Controller to the Chief Financial Officer......Page 45
Future Changes in the Controller’s Origins and Responsibilities......Page 46
Managing Explosive Growth......Page 47
Understanding What Chief Executive Officers Want......Page 50
Develop and Communicate a Compelling Finance Agenda......Page 51
Build a Commitment to Change within Finance......Page 53
Change Executive Management Practices......Page 56
Enlist the Support of the Chief Executive Officer......Page 57
Mobilize the Organization......Page 58
Institutionalize Continuous Improvement......Page 59
Committee on Accounting Procedure......Page 62
Financial Accounting Standards Board......Page 63
Government Accounting Standards Board......Page 64
Accounting Standards......Page 65
Opinions: Accounting Principles Board......Page 66
Interpretations: FASB......Page 68
Statements of Financial Accounting Standards: FASB......Page 71
Statements of Financial Accounting Concepts: FASB......Page 80
Technical Bulletins: FASB......Page 81
Purpose of Cost Accounting Information......Page 84
Input: Data Collection Systems......Page 85
Processing: Data Summarization Systems......Page 87
Processing: Job Costing......Page 89
Processing: Process Costing......Page 93
Processing: Standard Costing......Page 96
Processing: Direct Costing......Page 98
Processing: Throughput Costing......Page 100
Processing: Activity-Based Costing......Page 103
Processing: Target Costing......Page 106
Outputs: Cost Variances......Page 107
How to Use Ratios and Trends......Page 112
A Caveat......Page 113
Measures for Profitability......Page 115
Measures for the Balance Sheet......Page 117
Measures for Growth......Page 121
Measures for Cash Flow......Page 123
Measures for Nonfinancial Performance......Page 124
Setting Up a System of Ratios and Trend Analyses......Page 137
Objectives......Page 142
Responsibility for Internal Controls......Page 143
Examples of Internal Controls......Page 144
When to Eliminate Controls......Page 146
Types of Fraud......Page 148
Preventing Fraud......Page 149
How to Deal with a Fraud Situation......Page 152
Foreign Corrupt Practices Act......Page 153
Reporting Relationships......Page 156
Composition of the Audit Committee......Page 157
Role of the Audit Committee......Page 158
Internal Audit Objectives......Page 159
Internal Audit Activities......Page 161
Managing the Internal Audit Function......Page 163
9 Globalization: Complexities and Opportunities......Page 166
Impact of Global Trade on Segments of the U.S. Economy......Page 167
Determining and Implementing Successful Global Strategies......Page 169
Organization Structure in a Global Enterprise......Page 170
Virtual Corporation......Page 172
Technical Aspects of the Controllership Function under Globalization......Page 173
Recruiting Sources......Page 186
Factors to Consider when Recruiting......Page 189
Factors to Consider When Promoting......Page 190
Importance of Reduced Turnover......Page 191
Importance of Developing Career Plans for Employees......Page 194
Importance of Communications with Employees......Page 196
How to Motivate Employees......Page 198
11 Controller’s Role in Investor Relations......Page 200
Communication Vehicles for Investor Relations......Page 201
Investor Relations Message Recipients......Page 202
Information Needs of the Financial Analyst......Page 203
Disclosure Policy......Page 205
Organization Structure for Investor Relations......Page 206
Role of the Controller and Other Principals......Page 207
Changes in the Capital Markets......Page 209
PART 2 THE PLANNING FUNCTION OF CONTROLLERSHIP......Page 212
12 Business Plans and Planning: Interrelationship of Plans, Strategic Planning......Page 214
Time as Related to Planning......Page 215
Planning Period: How Long Is "Long Range"?......Page 216
Strategic Plan: An Overview......Page 217
Basic Elements in Any Plan......Page 218
Planning Process......Page 219
Plan Guidelines......Page 221
Who Should Do the Planning?......Page 222
Strategic Planning: An In-Depth Review......Page 223
Environmental Analysis......Page 225
Critical Success Factors......Page 226
Business Mission or Purpose......Page 227
Long-Range Business Planning Objectives......Page 229
Developing Strategies......Page 232
Role of the Controller......Page 235
Improving the Strategic Planning Process......Page 237
Key Elements Of A Strategic Plan......Page 238
Contrast Of Strategic Plan (Financial Aspects) with the Annual Plan......Page 239
Capital Investments......Page 240
Risk Analysis......Page 241
Objectives of the Long-Range Financial Plan......Page 242
Representative Financial Content of a Long-Range Plan......Page 243
Illustrative Financial Exhibits in the Plan Presentation......Page 244
Role of the Controller......Page 257
Profit Planning Defined......Page 260
Planning Benefits......Page 261
Coordination Benefits......Page 262
Control Benefits......Page 263
Annual Planning Cycle: Illustrative......Page 264
Supportive Financial Statements and Budgets......Page 265
Sales Budget......Page 266
Purchases Budget......Page 267
Inventory Budget......Page 268
Statement of Estimated Income and Expense......Page 270
Statement of Estimated Financial Condition......Page 272
Approval of Budget......Page 273
Controller’s Role: A Key Player......Page 274
Management Approval of the Plan......Page 280
Basic Approach in Profit Planning......Page 282
Break-Even Chart......Page 283
Changes in Sales Revenue......Page 285
Changes in Sales Mixture......Page 286
Changes in Sales Price......Page 287
Changes in Costs......Page 288
Analysis by Product......Page 289
Application of Cost–Volume–Profit Analysis......Page 290
Selecting the Most Profitable Products......Page 292
Increased Sales Volume to Offset Reduced Selling Prices......Page 293
Advisability of Plant Expansion......Page 294
Break-Even Analysis to Evaluate a Forecast......Page 296
Workable Statement of Income and Expense......Page 298
Statistical Techniques for Planning......Page 299
Financial Analysis of Unacceptable Operating Results......Page 304
More Sophisticated Analyses......Page 321
16 Taxation Strategy......Page 322
Accumulated Earnings Tax......Page 323
Mergers and Acquisitions......Page 324
Net Operating Loss Carryforwards......Page 325
Nexus......Page 326
Project Costing......Page 327
S Corporation......Page 328
Sales and Use Taxes......Page 329
Transfer Pricing......Page 330
Unemployment Taxes......Page 332
PART 3 PLANNING AND CONTROLLING OPERATIONS......Page 334
Meaning of Accounting/Statistical Control......Page 336
Need for Standards......Page 337
Definition of Standards......Page 338
Advantages of Standards......Page 339
Relationship of Entity Goals to Performance Standards......Page 340
Types of Standards Needed......Page 341
Trend to More Comprehensive Performance Measures......Page 345
Benchmarking......Page 347
Balanced System of Performance Measures......Page 348
Setting the Standards......Page 349
Use of Standards for Control......Page 350
Procedure for Revising Standards......Page 353
Recording Standards......Page 354
Management Use of Standard Costs......Page 355
18 Planning and Control of Sales......Page 356
Sales Management Concerns......Page 357
Controller’s Assistive Role in Sales Management Problems......Page 358
Controller’s Independent Role in the Planning and Control of Sales......Page 360
Sales Analysis......Page 361
Sales Planning: Basis of All Business Plans......Page 365
Steps in Developing the Near-Term Sales Plan/Budget......Page 366
Methods of Determining the Sales Level......Page 368
Useful Sources of Forecasting Information......Page 371
Forecasting the Business Cycle......Page 372
Sales Standards......Page 377
Sales Reports......Page 381
Product Pricing: Policy and Procedure......Page 382
Definition......Page 398
Factors Increasing the Difficulty of Cost Control......Page 399
Marketing Expense Analysis......Page 400
Types of Analyses......Page 401
Planning Marketing Expenses......Page 413
Special Comments on Advertising and Sales Promotion Expense......Page 419
Marketing Expense Standards......Page 424
General Aspects of Manufacturing......Page 430
Direct Material Costs: Planning and Control......Page 435
Labor Costs: Planning and Control......Page 443
Nature of Manufacturing Expenses......Page 452
Responsibility for Planning and Control of Manufacturing Expenses......Page 453
Proper Departmentalization of Expenses......Page 454
Variations in Cost Based on Fixed and Variable Costs......Page 455
Variations in Cost Based on Direct Labor......Page 456
Variations in Cost Based on Batch Size......Page 458
Variations in Cost Based on Overhead......Page 460
Variations in Cost Based on Time......Page 462
Cost Estimation Methods......Page 463
Normal Activity......Page 466
Allocation of Indirect Production Costs......Page 467
Budgetary Planning and Control of Manufacturing Expenses......Page 469
Revision of Manufacturing Expense Budgets......Page 473
Securing Control of Overhead......Page 476
Other Aspects of Applying Budgetary Control......Page 478
Other Control Procedures......Page 480
Role of the Controller......Page 481
Reports for Manufacturing Executives......Page 482
Research and Development Activities......Page 490
R&D Activities in Relation to Corporate Objectives......Page 491
Integration of R&D with Other Functions......Page 492
Accounting Treatment of R&D in Financial Statements......Page 493
Elements of R&D Costs......Page 495
Role of the Financial Executive in R&D......Page 496
Determining the Total R&D Budget......Page 497
Information Sources on R&D Spending......Page 498
Establishing the R&D Operating Budgets......Page 499
Detailed Budgeting Procedure......Page 503
Other Control Methods......Page 504
Effectiveness of R&D Effort......Page 508
23 Financial Planning and Control in a Service Company......Page 514
Organizational Considerations......Page 515
Data Classification......Page 516
Cost Accounting in a Service Organization......Page 517
Planning System......Page 519
Strategic Planning......Page 525
Components of G&A Expense......Page 526
Control over G&A Expenses......Page 527
Reducing G&A Expenses......Page 532
Budgeting G&A Expenses......Page 536
25 Payroll......Page 538
Compensation......Page 540
Federal Income Taxes......Page 542
Medicare Tax......Page 544
Payroll Taxes for Employees Working Abroad......Page 545
Remitting Federal Taxes......Page 546
Payroll Deductions for Unpaid Taxes......Page 547
Unemployment Insurance......Page 548
PART 4 PLANNING AND CONTROL OF THE BALANCE SHEET......Page 554
26 Planning and Control of Cash and Short-Term Investments......Page 556
The Cash Forecast......Page 557
Cash Collections......Page 569
Cash Disbursements......Page 573
Internal Control......Page 574
Reports on Cash......Page 577
Cash Flow Ratio Analysis......Page 580
Impact of New Information Technology and Organizational Structures......Page 581
Investment of Short-Term Funds......Page 582
Granting Credit to Customers......Page 586
Customer Margin Analysis......Page 588
Collections Task......Page 589
Measurement of Accounts Receivable......Page 591
Control over Accounts Receivable......Page 593
Budgeting for Accounts Receivable Balances......Page 595
Costs and Benefits of Carrying Inventory......Page 598
Role of the Controller......Page 600
Material Requirements Planning Systems......Page 602
JIT Manufacturing Systems......Page 603
Inventory Reordering Systems......Page 607
Obsolete Inventory......Page 608
Reducing Inventory......Page 610
Inventory Cutoff......Page 611
Budgeting for Raw Materials......Page 612
Budgeting for Work-In-Process......Page 617
Budgeting for Finished Goods......Page 618
Significance of Proper Inventory Valuation......Page 622
Emphasis on the Cost Basis......Page 623
Inventory Characteristics and Effect of the Valuation Base......Page 624
Selection of the Cost Base......Page 625
Departure from the Cost Base......Page 626
Federal Income Tax Considerations in Valuing Inventories......Page 627
Other Inventory Valuation Problems......Page 628
Inventory Reserves......Page 629
30 Accounting and Reporting for Selected Investments and Employee Benefit Plans......Page 630
Relevant Financial Accounting Standards......Page 631
Role of the Controller......Page 632
Accounting Records for Selected Investments......Page 633
Accounting and Disclosure Requirements and Practices for Employee Benefit Plans......Page 636
Impact of Capital Expenditures......Page 650
Controller’s Responsibility......Page 651
Capital Budgeting Process......Page 652
Establishing the Limit of the Capital Budget......Page 653
Information Supporting Capital Expenditure Proposals......Page 654
Methods of Evaluating Projects......Page 655
Payback Method......Page 656
Accountants’ Method......Page 657
Discounted Cash Flow Methods......Page 659
Hurdle Rates......Page 663
Cost of Capital—A Hurdle Rate......Page 664
Foreign Investments......Page 665
Classifying and Ranking Proposed Capital Projects......Page 666
Board of Directors’ Approval......Page 668
Project Authorization......Page 672
Postproject Appraisals or Audits......Page 675
Other Aspects of Capital Expenditures......Page 676
Liabilities Defined......Page 686
Direct Liabilities......Page 687
Illustrative Provisions of Credit Agreements......Page 689
Planning the Current Liabilities......Page 693
Standards to Measure and Control Current Liabilities......Page 694
Risks of Too Much Debt......Page 695
Standards for Debt Capacity......Page 696
Bond Ratings......Page 697
Contingencies......Page 698
Managing Liabilities: Some Practical Steps......Page 699
Accounting Reports on Liabilities......Page 700
Internal Controls......Page 701
33 Management of Shareholders’ Equity......Page 712
Role of the Controller......Page 713
Return on Equity as Related to Growth in Earnings Per Share......Page 714
Cost of Capital......Page 715
Components of Cost of Capital......Page 717
Calculating the Cost of Debt......Page 718
Calculating the Cost of Equity......Page 719
Calculating the Weighted Cost of Capital......Page 721
Dividend Policy......Page 722
Long-Term Debt Ratios......Page 724
Long-Term Equity Planning......Page 725
Other Considerations......Page 731
PART 5 FINANCIAL AND RELATED REPORTS......Page 736
Rules of Reporting......Page 738
Margin Reports......Page 741
Cash Reports......Page 746
Capacity Reports......Page 755
Payroll Reports......Page 757
Graphical Report Layouts......Page 764
35 Reports to Shareholders......Page 770
General Contents of the Annual Report......Page 771
Report of Management’s Responsibilities......Page 782
Importance of Form......Page 784
Other Reports to Shareholders......Page 785
Information for Security Analysts and Investment Advisors......Page 786
36 Securities and Exchange Commission......Page 788
Securities Exchange Act of 1934......Page 789
Trust Indenture Act of 1939......Page 790
Regulation S-X......Page 791
Regulation S-K......Page 794
Regulation FD......Page 795
SEC Forms......Page 796
EDGAR Filing System......Page 800
Going Private Transaction......Page 802
PART 6 COMPUTER SYSTEMS AND RELATED TECHNOLOGY......Page 804
37 Selecting a Financial Information System......Page 806
Ways to Define Systems Requirements......Page 807
Existing System Documentation......Page 809
Joint Sessions......Page 810
Preparing the Request For Proposal......Page 812
Distribution of the RFP......Page 813
Review of the Vendor’s Completed Proposal......Page 815
Demonstration......Page 819
Cost of the System......Page 820
Appendix: Vendor Evaluation Criteria......Page 821
Testing Duration......Page 824
Test Scenarios......Page 825
Sign-Off Criteria......Page 826
Testing Participants......Page 827
Testing Considerations......Page 828
Testing Packaged Financial Systems......Page 829
Test Strategy......Page 830
Inadequately Trained End Users......Page 842
Staff Retention......Page 843
Lack of an Established Escalation Process......Page 844
Changing Management Reporting Requirements......Page 845
ERP Systems......Page 846
Integration of the ERP and EAM Systems......Page 847
Grouping Approach......Page 848
42 Systems Performance Management......Page 850
Define Your Organization’s Performance Methodology......Page 851
Six Essential Steps: A Performance Methodology......Page 852
Performance Details......Page 854
Flow of Performance Information within the Organization......Page 855
43 Information Security Systems......Page 858
Types of Security Threats......Page 859
Basic Security Principles......Page 860
Components of an Effective Security Program......Page 861
Enterprise Security Strategies......Page 867
Controller’s Role in Information Security......Page 868
44 Enforcing Information System Security Policy......Page 870
Creating an Enforceable Information System Policy......Page 871
Implementing Information System Security Policy......Page 872
After an Information System Security Infraction Occurs......Page 873
e-Commerce Architectures......Page 878
Critical Security Measures......Page 881
46 Digital Signatures......Page 888
Digital Signature Technology Overview......Page 889
Demand for Digital Signature Technology......Page 893
Legal Issues......Page 894
47 Change Management......Page 896
Defining the Change Management Challenge......Page 897
48 Project Risk Management......Page 906
Project Risk Categories......Page 907
Project Risk Management Approach......Page 908
49 Effective Project Communications......Page 914
Communication Strategy......Page 915
Communication Campaign Definition......Page 918
Communication Plan......Page 922
50 How to Implement a Successful CRM Solution......Page 926
Clearly Communicate the Change Imperative......Page 927
Building a Winning Team......Page 928
Prepare for the Worst......Page 929
51 Organizations Large and Small Embrace Shared Services......Page 930
About the Survey......Page 931
Business Case......Page 932
Implementation......Page 933
Customer Relations......Page 935
Next Steps......Page 938
PART 7 SOME ADMINISTRATIVE AND SPECIAL ASPECTS OF THE CONTROLLER’S DEPARTMENT......Page 940
52 Financial Planning and Analysis for Acquisitions, Mergers, and Divestments......Page 942
Relation of Acquisitions to Corporate Objectives......Page 943
An Overview of the Acquisition Cycle......Page 944
Acquisition Criteria......Page 946
Sources of Acquisition Information......Page 947
Acquisition Team......Page 948
Evaluating the Prospect: In-Depth Analysis......Page 949
Objectives of Financial Analysis......Page 955
Valuation of an Acquisition......Page 956
Comparing the Values......Page 965
Multinational Business Valuation......Page 966
Leveraged Buyouts(LBOs)......Page 968
Accounting for a Business Combination: Purchase Method......Page 970
Tax Considerations in Acquisitions and Mergers......Page 974
Financial Impact of an Acquisition......Page 976
Financial Report on a Potential Acquisition......Page 977
Mistakes by Management......Page 989
Effective Integration......Page 991
Divestments......Page 992
Process Centering......Page 994
Partnering......Page 996
Internet......Page 1000
ISO 9000......Page 1003
Paperless Office......Page 1004
Electronic Cash......Page 1007
Virtual Corporation......Page 1009
Data Warehousing......Page 1011
Manufacturing Resource Planning......Page 1012
Integrated Distribution Management......Page 1015
Just-In-Time......Page 1020
Product Design......Page 1024
Computer-Integrated Manufacturing......Page 1028
Sixty-Six Best Practices......Page 1032
Selecting the Fiscal Year......Page 1048
Selecting the Number of Interim Reporting Periods......Page 1049
Value of Interim Reports......Page 1051
How to Achieve a Fast Close......Page 1052
Typical Fast Closing Schedule......Page 1056
Reconciling Accurate Reporting against a Fast Close......Page 1060
Finding a Supplier......Page 1062
General Advantages of Outsourcing......Page 1064
Function-Specific Advantages of Outsourcing......Page 1066
Risks of Outsourcing......Page 1067
Contractual Issues......Page 1069
Outsourcing Costs......Page 1071
Personnel Issues Related to Outsourcing......Page 1073
Management of Outsourcing Suppliers......Page 1074
58 Preparation and Maintenance of Manuals......Page 1080
Work Steps for Constructing a Procedures Manual......Page 1081
Suggested List of Procedures......Page 1084
Maintaining Accounting Manuals......Page 1086
Specifications for Maintenance of Manuals......Page 1087
Physical Construction of the Manual’s Binder......Page 1088
Creation and Storage of the Master Manual Copy......Page 1089
Creation and Maintenance of the Distribution Mailing List......Page 1090
Physical Distribution Process......Page 1091
Issuances to New Employees......Page 1092
Benefits of Using Electronic Manuals......Page 1093
Disadvantages of Using Electronic Manuals......Page 1095
Electronic Manual with Embedded Hypertext......Page 1096
Electronic Manual with Advanced Indexing Features......Page 1099
Electronic Manual with Built-In Help Information......Page 1100
Writing Tips for Electronic Manuals......Page 1101
Example of Comprehensive Electronic Manual Features......Page 1102
Using the PDF Format for Electronic Files......Page 1103
Maintaining an Electronic Manual......Page 1104
Record-Keeping Costs......Page 1106
Record-Keeping Policies and Procedures......Page 1107
Required Tax Records......Page 1111
Computer-Based Record Keeping......Page 1113
Differences Between Perpetual and Periodic Inventory Systems......Page 1116
Setting Up a Perpetual Inventory System......Page 1118
Auditing and Measuring a Perpetual Inventory System......Page 1121
Physical Inventory Procedure......Page 1122
Physical Inventory Complications: The Cutoff......Page 1125
Reconciling Inventory Variances......Page 1126
Obsolete Inventory......Page 1127
How to Avoid the Inventory Tracking Problem......Page 1128
61 Tax Records and Procedures......Page 1132
Tax Organization......Page 1133
Centralized Tax Department......Page 1134
Functions of the Tax Manager......Page 1135
Tax Records in General......Page 1136
Tax Information Records......Page 1137
Internal Revenue Code and Record Requirements......Page 1138
Differences Between Income Tax Accounting and Book Accounting......Page 1140
Other Taxes......Page 1141
Special Tax Reports......Page 1142
Risk Management Policies......Page 1144
Risk Management Procedures......Page 1145
Manager of Risk Management......Page 1148
Types of Insurance Companies......Page 1149
Claims Administration......Page 1150
Insurance Files......Page 1151
Annual Risk Management Report......Page 1152
Compound Interest (Future Amount of 1 at Compound Interest Due in N Periods)......Page 1154
Future Amount of Ordinary Annuity of 1 per Period......Page 1155
Index......Page 1162