Week 1 Assignment:

Using Accounting Information for Decision Making—Financial Information and Budgets

Prepared by: Replace this text with your name.

Date: Replace this text with the submission date.

Walden University

WMBA 6050: Accounting for Management Decision Making

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 Financial Information for Decision Making

Strategic planning and prudent financial management are vital for the success of any

enterprise. Consequently, successful organizations are always making and revising their strategic

plans to guide them in the attainment of their visions. AMcarParts Inc. needs to establish solid

strategic plans that will allow the firm to attract and retain competent human resources, achieve

its long-term and short-term plans, and ensure prudent management of resources. Creating a

perfect strategic plan requires proper budgeting that is based on realistic forecasts of the firm’s

internal and external environment. Besides, a budget often requires a review of a company’s

financial statements—income statement, statement of stockholders’ equity, statement of financial

position (also known as a balance sheet), and statement of cash flows.

Financial Statements

Income Statement

It refers to a financial report that shows an organization’s incomes and expenses over a

specified financial period. The financial report is typically prepared quarterly or annually. The

income statement shows the organization’s revenues and expenses, enabling the management to

establish the activities that generate the most sales and the profit margin realized from the sale

(Alexander, 2018). An income statement usually has the following information:

Revenues. The amount of money the business received from its operations such as from sales,

commissions, or royalties, in a reporting period.

Expenses. The amount of money the organization spent in a particular period.

Cost of goods sold (COGS). The total cost is directly linked to the particular product or service

offered by the company.

Gross profit. Revenue less the cost of goods sold.

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Operating income. Gross profit less non-operating expenses.

Income before taxes. Operating income less non-operating expenses.

EBITDA. Earnings before interest expense, depreciation, taxes, and amortization.

Depreciation. The value lots of the firm’s assets, inventory, and equity in the financial period.

Net income. Income before taxes less tax expenses.

Earnings per share [EPS]. The net income divided by the total outstanding shares.

Statement of Stakeholders’ Equity

The statement of stakeholder’s equity is also called the statement of stockholder’s equity.

It is an account on the organization’s balance sheet that is composed of share capital and retained

earnings (Wahlen et al., 2017).

The components of stockholder’s equity are:

Share capital. It refers to the amount the organization has received from its shareholders

for its operation.

Retained earnings. The amount that the firm has earned from its operations and retained

in the entity by not issuing out the incomes to shareholders as dividends.

Dividends. The amount of income that the entity issues to shareholders. Dividends

reduce the available retained earnings.

Net income. The amount generated by the firm after paying all expenses. Net incomes increase

retained earnings.

Statement of Financial Position

The statement of financial position records all the assets, liabilities, and equity of an

organization as of the specified reporting date. Importantly, the balance sheet provides valuable

data needed for evaluating the financial condition of an organization (Wahlen et al., 2017). For

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example, financial analysts can determine the solvency levels of the firm by calculating the debt

to equity ratio. The typical line items of the balance sheet are: assets (cash, accounts receivable,

inventory, fixed assets, and other assets), liabilities (accounts payables, accrued expenses, debt,

sales tax liability, income tax payable), and equity (common stock, additional paid-in capital,

retained earnings).

Statement of Cash Flows

It is a financial statement that has a record of all cash inflows and cash outflows of an entity

(Alexander, 2018). Cash inflows are sources of revenues received by an entity and cash outflows are all

payments made for the firm’s activities and investments ( Alexander, 2018). A cash flow statement has

three main sections:

 Operating activities cash flow. It has records of cash flow from the primary revenue-

generating activities of the entity (Wahlen et al., 2017). For example, any cash flow

derived from current assets or current liabilities.

 Investing activities cash flow. It has records of cash inflow or outflow from the

acquisition or disposal of long-term assets/ investments.

 Financing activities cash flow. It has records of activities that lead to changes in the

amount and structure of the contributed equity capital or borrowings of the entity

(Wahlen et al., 2017).

Strategic Planning

Strategic planning is a crucial process in an organization, where senior management

defines the entity’s vision, goals, and objectives. A strategic plan also highlights how the goals

are to be achieved for the entity to achieve its vision. Strategic plans represent mid-term to long-

term goals that span from three years to ten years or more (Shim et al., 2012). Firms can

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periodically revise their strategic plans to adapt to the changing business environment, industry

standards, or regulatory conditions.

Strategic planning is valuable for the success of any organization because guides how to

achieve the entity’s goals and objectives. To achieve its core duty of guiding an organization, a

strategic plan has four critical aspects: mission, goal, alignment with short-term goals, and

evaluation. Mission- every strategic plan should start by declaring the entity’s mission to ensure

all stakeholders are aware of its aspirations (Weygandt et al., 2018). Alignment with short-term

goals- strategic plans always relate directly to short-term plans by effectively guiding the

management in their everyday decision-making to allow the realization of mid-term and long-

term goals. Evaluation- strategic plans act as a measuring tool for assessing an organization’s

level of attainment of its plans.

Importance of a strategic plan:

1. It provides an entity with a sense of direction.

2. The process of making a strategic plan entails a detailed study of the market, which

provides an entity with a competitive advantage.

3. Strategic planning allows a firm to be competitive by informing it about business trends

and available and potential new opportunities in the market.

4. Strategic planning allows for effective allocation of resources leading to higher

productivity and operational efficiency.

5. Strategic plans provide an overview of the entity’s objectives and plans, which helps in

attracting investors.

6. It informs the management of risks in the market enabling to effective implementation of

measures to minimize risks (Alexander, 2018).

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 Budgeting

Budgeting is the systemic development of the financial projections of a company to attain

the organization’s strategic plan. A budget shows the realistic estimates of revenues and

expenses of an entity over a specified period. In an organization, a budget allows for the efficient

allocation of resources to attain desirable levels of operations and achieve its strategic plans

(Weygandt et al., 2018). Essentially, a budget is a financial plan for a particular period.

The budget development process entails incorporating some assumptions for the planned

financial period. A budget notes the assumptions made and how various calculations were

derived. Usually, organizations first develop the sales budget because it is impossible to plan for

expenses in the subsequent budget without a realistic estimate of the entity’s cash flows

(Weygandt et al., 2018). All budgets are then compiled in the master budget, which also includes

the forecast of cash inflows and outflows, budgeted financial statements, and financing plan.

After a review of the budget by senior management, the board of directors approves or requests

for improvement of the master budget.

A budget has various benefits to any organization, which are:

1. It allows the management to monitor and assess its performance.

2. It informs the organization on key activities that it should prioritize

3. It leads to prudent spending of resources by minimizing waste.

4. It helps a firm to prepare for emergencies (Bragg, 2017).

Forecasting

Forecasting is a scientific method of using historical data as inputs to predict the future

direction/ performance of an organization. Corporations use forecasting when creating their

budgets to make informed estimates of their expenses and revenues (Shim et al., 2012). Usually,

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the expenses and revenues are based on demand levels of goods and services and the general

inflation rates in the economy.

Key Differences between a Forecast and Budget

 A budget is developed to meet the organization’s goals, such as quarterly growth.

However, the forecast examines if the entity will actually achieve the desired target in the

specified timeline.

 The budget content is on specific goals, such as the number of units to sell and costs,

however, a forecast shows the expectations such as likely sales volumes or operating

expenses.

Responsibility Centers

A responsibility center is a semi-autonomous functional entity that strives to attain some

pre-defined objectives. Responsibility centers manage specific activities for revenues generation,

expenses, or invested funds (Weygandt et al., 2017). Importantly, responsibility centers allow for

easy and efficient management of an organization (Weygandt et al., 2017). There are various

types of responsibility centers including cost centers, profit centers, and investment centers.

Cost Centers. It is a center that is exclusively responsible for incurring and managing costs. The

cost center’s main duty is to monitor expenses effectively eliminating wasteful or unnecessary

procedures (Weygandt et al., 2017). A cost center does its duty by supervising, allocating, and

segregating various functions to minimize costs. For example, the janitorial department.

Profit Centers. It is a division of a company whose main duty is to generate profits by managing

revenues and expenses. An example of a profit center is the product line. The core parameter of

evaluating managers is profit centers is the profitability of the division (Zimmerman, 2020). A

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key concern in profit centers is always the sharing of overhead costs such as utility bills,

insurance, and security costs, which can be incurred by more than one department.

Investment Centers. An investment center is primarily interested in the returns of investment

(ROI) of shareholders’/investors’ capital (Weygandt et al., 2017). An example of an investment

center is a subsidiary firm. Although generating incomes to ensure positive ROI is important,

there is always a risk that managers can be tempted to focus on short-term goals rather than long-

term and sustainable goals with lasting but slow returns.

Budget for AMcar Parts Inc.

AMcarParts, Inc.

Budgeted Income Statement (Template)

For the Upcoming Year

Revenues $ 318,500,000

Operating Expenses

Salaries and Wages $ 176,750,000

Payroll taxes, etc. 70,700,000

Supplies 14,272,500

Delivery Fleet 5,522,000

Communications 551,250

Insurance 2,172,500

Office supplies 204,750

Miscellaneous 2,055,200

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 272,228,200

Operating Income 46,271,800

Other Income/Expense

Interest expense 1,980,000

Income Before Income Taxes 44,291,800

Provision for Income Taxes 9,744,196

Net Income $ 34,547,604

Notes

Line Item Notes

The revenues and expenses are forecasted to change according to the following assumptions.

The revenue is expected to decrease by 2%.

Salaries for all employees are expected to increase by 1%

Payroll taxes are 40% of salaries and wages.

The cost of supplies including hardware will increase by 10%

Gas maintenance for delivery vehicles will increase by 10%

Cost of the company’s communication plan will increase by 5%

Liability insurance for vehicles increase by 10%

Cost of office supplies will increase by 5%

Miscellaneous expenses are expected to increase by 12%.

There will be no change in interest expense for purchase of delivery fleet.

There will be no change in the rate of income tax.

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 References

Alexander, J. (2018). Financial planning & analysis and performance management (1st ed.).

Wiley.

Bragg, S. (2017). Budgeting (4th ed.). Accounting Tools Inc.

Shim, J. K, Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond (4th ed.). John

Wiley & Sons.

Wahlen, J., Baginski, S., & Bradshaw, M. (2017). Financial reporting, financial statement

analysis, and valuation: Strategic perspective (9th ed.). Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2017). Managerial accounting: Tools for

decision makers (8th ed.). Wiley.

Zimmerman, J. L. (2020). Accounting for decision making and control (10th ed.).

McGraw-Hill/Irwin.

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