Paper F1 Accountant in Business (AB)

1. THE BUSINESS ORGANISATION

The need for organisations Organisations are social arrangements for the controlled performance of collective goals Two or more people working together in a structured way. Organisations use systems (e.g. swiping in when entering office) and procedures (e.g. cash handling rules) to regulate staff behaviour All organisations pursue certain goals and these are considered to be over and above individual aspirations

Types of organisation

Profit seeking organisations

Main objective is wealth maximisation which can be expanded into • to continue in existence (survival) • to maintain growth and development • to make a profit

Not for profit organisations

Do not see profit as their main objective • seeking to satisfy particular needs of their members or the sectors of society that they have been set up to benefit • include hospitals, charities, government organisations and mutual organisations

The roles of organisational functions

Departments and their roles

HR –dealing with staff issues Finance – financial reporting, treasury and management accounting Admin – back office supporting functions Services and enquiries – customer services, dealing with complaints Marketing – product design, pricing, distribution and promotion Production finished goods and in the process – converting supplies into adding value Purchasing acquiring input materials and negotiating trading terms R & D and – developing improving products

Planning Levels Strategic •Long term •Looks at the whole organisation Tactical •Medium term •Looks at the department/divisional level Operational •Short term •Concerned with the day to day running of the organisation

2. ORGANISATIONAL STRUCTURE

Type

Entrepreneurial Functional Divisional Geographical Matrix Different Structural Types

Rationale

Typical in small owner managed companies. Departments are based on common specialisation. Best suited to companies operating in a stable environment with few products. Each product or group of products set up as a separate division. Activities are grouped according to location.

A combination of the functional and divisional.

Dual reporting lines

Centralisation/Decentralisation

Centralised structure

The upper levels of an organisation ’s hierarchy retain the authority to make decisions

Decentralised structure

The authority to take decisions is passed down to units and people at lower levels. Can lead to extra costs in obtaining information Better motivation due to increased training and career path

3. ORGANISATIONAL CULTURE

Organisational Culture A set of norms of behaviour. Formal and informal rules A set of shared values and dominant beliefs Organisational Culture Symbols and symbolic actions

Handy ’s cultural Types

Power

Found in smaller entrepreneurial organisations One major source of influence (the founder)

Role

Common in bureaucratic organisations (e.g. Government) Emphasis on position within the hierarchy

Task

Project based, creative work Nothing is allowed to get in the way of achieving the goals

Person

Built around educated and articulate individuals specialists with a common interest –

Schein – 3 levels of culture Artefacts • The aspects of culture that can be easily seen e.g. the way that people dress Espoused values • The strategies and goals of the organisation including company slogans etc.

Basic assumptions and values • difficult to identify as they are unseen and exist mainly at the unconscious level

Hofstede - 5 cultural traits Individualism v collectivism Uncertainty Power distance Masculinity v femininity Confucianism v dynamism

2.LEADERSHIP, MANAGEMENT AND SUPERVISION

Theories of management Classical theories Human relations school Modern approaches • Taylor • Fayol • Elton Mayo • Mintzberg • Drucker

Authority, responsibility and power concepts • Authority is a legitimate right to give orders • Responsibility is an obligation placed on a person to fulfil a task • Power is an ability to exert influence. Sources can be legitimate, reward, coercive, referent or expert • Delegation is a process of transferring authority to a subordinate

Trait Theories – Early studies focused on personality Transformational Theories – focus on change management

Bennis , Heifetz

Leadership Contingency Theories – No one leadership style is right for every set of circumstances

Fiedler, Adair

Behavioural Theories – focus on human relationships

Blake and Mouton, Ashridge

Leadership

5. INDIVIDUAL AND GROUP BEHAVIOUR IN BUSINESS ORGANISATIONS

Individual and Group Behaviour Individual or team/group Passive Behaviour Aggressive Assertive

6. TEAM FORMATION, DEVELOPMENT AND MANAGEMENT

Teamwork • A team is a formal group, it has a leader, a distinctive culture and is geared towards a final result • The purpose of a team is to solve complex problems • Teams provide synergy, cooperation and coordination of activities

Team • Share a common goal • High level of commitment • Team spirit • Healthy competition • Can be multi skilled or multi disciplinary Team v Group Group • Interests change frequently • Membership is often temporary • People negotiate and accommodate • Politics is common

Leader

Shaper Plant Monitor evaluator Resource-investigator The company worker The team worker The finisher The expert Team Theories - Belbin

Co-ordinator

Promotes activity dominant Thoughtful and thought provoking Criticises other ideas Extrovert, networker Administrator, organiser Concerned with relationships within the groups The progress chaser As required by the project

Team theories - Tuckman Forming Storming Norming Performing

7.MOTIVATION

Overview of Motivation • Motivation is the internal psychological process of initiating, energising, directing and maintaining goal directed behaviour (Buchanon and Huczynski, 1997) • It is the urge to achieve goals or the drive to excel • Satisfaction on the other hand is about being content and not seeking new achievements

Content theories of Motivation • •

Maslow ’s hierarchy of needs

– individuals have a hierarchy of personal needs that can be satisfied in a set order of priority in the workplace

Herzberg two factor theory

– hygiene factors deal with non-job related features e.g. working conditions, policies and procedures. Motivators are mostly non financial and will encourage people to work harder

Maslow ’s hierarchy of needs Self fulfilment • Challenging job, creative task demands, achievement in work Ego • Merit pay increase, high status job title Social Safety/Security Basic/Physiological • Compatible work group, friendships at work • Job security, fringe benefits • Basic salary, safe working conditions

Herzberg ’s two factor theory of motivation Dissatisfied and demotivated

H

No longer dissatisfied but not yet motivated

M

Satisfied and motivated

McGregor ’s Theory X and Y Theory X • Human beings have an inherent dislike of work and will avoid it if possible • People must be coerced, controlled, directed or threatened with punishment to get them to contribute towards organisational objectives • People prefer to be directed, wish to avoid responsibility and want security above all else Theory Y • Physical and mental effort in work is totally natural, people not only accept but seek responsibility.

• Staff will exercise self direction and self control to achieve objectives to which they are committed • People possess a high level of imagination and creativity in the solution of organisational problems

Process Theories • • The Vroom expectancy model

Force = Valence x Expectancy

• Force is the strength of a persons motivation • Valence is the strength of an individual’s preference for an outcome • Expectancy is the probability of success

Incentive Schemes • Reward systems should attract and retain staff, encourage desirable behaviour and reflect the nature of the job • Financial motivators include salary and bonus • Non financial motivators include feedback, participation and autonomy

8. INFORMATION TECHNOLOGY

Information and Data • Data is a collection of symbols, raw facts and transactions that have been recorded but not yet processed. It could be quantitative or qualitative • Information is data that has been processed in such a way that it becomes meaningful • Information is used for decision making at the strategic, tactical and operational levels

Qualities of good information

T

imely

E

asy to Use

A

ccurate

C

omplete Good information

C

ost effective

A

daptable

R

elevant

U

ndersta ndable

• Intranet • Extranet • Database • Spreadsheet Computerisation

Sources of information • Internal information includes customer records, employee records, inventory and product specifications • External information includes invoices, letters, statements from 3 rd parties etc • External information can also be obtained through marketing research, legal updates and government data

Types of information system Transaction Processing System (TPS) •Looks at individual transactions •Routine reporting e.g. Payroll •Used by junior management •Concerned with recording and basic processing Management Information System (MIS) • Converts data from TPS into information • Used by middle management •Generates ad-hoc reports •Concerned with monitoring performance and coordination Executive Information System (EIS) •Concerned with monitoring business results and general business conditions • flexibility in data reporting, including drill down facility •Includes data from internal and external sources •Used by senior management Decision Support System (DSS) •Modelling tool which requires significant expertise to use •Performs what if analysis •Supports semi structured and unstructured decisions •Includes statistical instruments Expert System (ES) •For e.g. Bank loan approval •Contains a knowledge database •Can be used at any management level •Relies on a set of rules to solve a problem •Can be used to automate manual processes

9.POLITICAL AND LEGAL FACTORS

Political Factors Political environment includes: • the political system and ideology • the role of the government in the economy • the risk of political instability • foreign trade relationships Political systems operate on a global, national and local level

Data protection

Legal Factors

Health and safety Employment law

10. MACROECONOMIC FACTORS

Economic factors •

Microeconomics

is the study of the economic behaviour of individual consumers, firms and industries •

Macroeconomics

considers aggregate behaviour and the study of the sum of individual economic decisions.

Factors affecting the level of business activity • consumer and business confidence in the economy • aggregate demand: AD = C + I + G + X – M • availability of capital • use of resources such as technology • government policy on spending and taxation • exchange rate movements

Trade Cycle • A series of fluctuations in the rate of growth of real (inflation adjusted) GDP over its long-run trend • Recession • Depression • Recovery • Boom • Government tries to smooth pattern out

Key economic terms • Economic growth • Inflation • Unemployment • Balance of payments • Fiscal economic policy • Monetary policy

11. SOCIAL AND TECHNOLOGICAL FACTORS

Social Factors • Population (e.g. birth rate and growth) • Wealth (e.g. high disposable income) • Education (e.g. skilled staff thrive in knowledge economy) • Health (e.g. obesity, HIV) • Cultural trends (social structure, buying patterns, values, attitudes, tastes) • Affected by government policy

Technological factors Impact of technology on: • organisational structure (e.g. downsizing, outsourcing) • products (e.g. sophisticated features) • production processes (e.g. automation) • society (e.g. ecommerce, home working)

12.COMPETITIVE FACTORS

Competition – Porter’s generic strategies • • •

Cost leadership

: to become the lowest cost producer and enjoy a superior margin

Differentiation

: demanding a premium for perceived added value of the product

Focus

: Serving a niche market Being ‘stuck in the middle’ is a recipe for disaster

Porters 5 Forces Threat of New Entrants Power of Buyers Competitive Rivalry Power of Suppliers Threat of Substitutes

Activity

Inbound logistics Operations Outbound logistics Marketing and sales Service Porter ’s Value Chain – primary activities

Description

Receiving, storing and handling raw materials Transformation of raw materials into finished goods Storing, distributing and delivering finished goods to customers Market research and the 4 P ’s All activities occurring after the point of sale e.g. training, repair

Porter ’s Value Chain – support activities

Activity

Firm infrastructure Technology HRM Procurement

Description

How the firm is organised How the firm uses technology How people contribute to competitive advantage Purchasing, not just limited to materials

13. STAKEHOLDERS

Stakeholders Internal Connected Stakeholders External Conflict

Mendelow ’s stakeholder mapping Low Minimal Effort Keep Informed Power High Low Keep Satisfied Level of Interest Key Players High

14. COMMITTEES IN BUSINESS ORGANISATIONS

Committees A committee is a group of people officially delegated to perform a function and who are given appropriate authority.

Types of committees: • Ad-hoc • Standing • Sub-committee • Joint

Types of Committees continued • Executive • Steering • Work safety • Ethics • Audit • Remuneration

15. BUSINESS ETHICS

Business ethics • Ethics is the analysis of right and wrong and associated responsibility • Business ethics is the systematic study of moral matters pertaining to business, industry or related activities, institutions or practices and beliefs • Two approaches to ethics, either a compliance-based approach or an integrity based approach

Code of professional conduct ACCA ’s code of ethics: • Integrity • Objectivity • Professional competence and due care • Confidentiality • Professional behaviour

16. GOVERNANCE AND SOCIAL RESPONSIBILITY

Board of Directors • At least half of the board should comprise independent non-executive directors (NED ’s) who do not engage in day to day execution of management decisions • NED’s contribute to strategy formulation, monitor performance reporting, ensure robust financial controls and determine executives remuneration

Corporate Governance • The system by which companies are directed and controlled • UK – Combined Code is principles based, company must ‘comply or explain ’ • USA – Sarbanes Oxley is rules based (i.e. law) with personal liability of company officers

Social Responsibility • Social responsibility is a duty to all stakeholders of the company to make decisions in such a way that takes into account the interest of the environment and society as a whole • Benefits include, attracting customers, reducing operational risks and retaining employees

17. LAW AND REGULATION GOVERNING ACCOUNTING

Regulations covering accounting function Responsibility to: • Companies House (for filing of accounts) • Tax Authorities (e.g. HMRC for VAT, PAYE) • Financial Services (e.g. stock exchange for listed co ’s) • Office of national statistics (e.g. business statistics)

Bodies governing the accounting function • International Accounting Standards Committee foundation, parent entity of: • International Accounting Standards Board (IASB) • International Financial Reporting Interpretation committee (IFRIC) • Standards Advisory Council (SAC)

Other bodies • Accounting Investigation and Discipline Board (AIDB) • Financial Reporting Review Panel (FRRP) • Professional Oversight Board for Accountancy (POBA) • Recognised Supervisory and Qualifying Bodies (e.g. ACCA, ICAEW)

18. THE ACCOUNTING PROFESSION

The role of accounting within the business • Not a ‘stand alone’ function • Interacts with other departments and is one of the central functions of business • Financial information is a fundamental requirement in decision making

Purpose of accounting function • Produces financial information that will be used to make decisions • May be produced for users outside the company e.g. sales invoices, financial statements • May be produced for users inside the company e.g. ledgers, cost information

19. ACCOUNTING AND FINANCE FUNCTIONS

Modern accounting function Structure of accounting function: • Financial Accounting (maintaining books and records, preparing accounts) • Management Accounting (appraisal, budgeting) • Treasury (cash management, tax affairs) • Auditing (reviewing financial reports and internal controls)

Recording of transactions Transactions Day Books Ledger accounts Financial statements

20. FINANCIAL SYSTEMS AND PROCEDURES

Stages in: • Sales cycle • Purchasing cycle • Wages cycle • Cash system • Inventory system Financial Procedures

Purpose

Safeguard company ’s assets Efficiency Prevent fraud Prevent errors The purpose of organisational control

Why important

If assets are stolen or damaged the company will have to spend money to replace them Inefficient business practices are a waste of the company ’s money Fraud means the loss of valuable resources belonging to the company Errors can lead to losses in efficiency (time spent correcting) or a loss of assets (e.g. paying for goods that weren ’t received)

21. THE RELATIONSHIP OF ACCOUNTING WITH OTHER BUSINESS FUNCTIONS

Coordination between accounting and other business functions Purchasing Production HR IT Customer Services Marketing • Establishing credit terms • Monitoring payments • Cost measurement and overhead allocation • Budgeting • Recruitment and training expenditure • Reward plans, tax efficient benefit packages • Systems design and development • Improving access to information • Pricing additional services • Assessing costs of product failures • Advertising budgets • Product pricing

Marketing • Defined by the Institute of Marketing as ‘the management process that identifies, anticipates and supplies customer needs efficiently and profitably ’ • Key emphasis on customer needs • Marketing research, product development, distribution and promotion all important

Marketing Mix

Product Place Promotion

• Advertising, personal selling, publicity, sales and promotion techniques

Price

• This includes product features, durability, design, brand name, packaging, warranties and guarantees • Choice of distribution channels, transportation, outlet management, stocks and warehouses • Price levels, discounts, allowances, payment terms and credit policy

22. INTERNAL AND EXTERNAL AUDIT

Internal and External Audit • Internal auditing is an independent activity, established by management, to examine and evaluate organisational risk, management processes and control systems and make recommendations for improvements • External auditing is an independent examination of the financial statements to see whether they give a true and fair view of the company ’s affairs

Roles Legal Basis Scope of Work Approach Status Internal and External Audit differences

Internal Audit

Advises management on the strength of internal controls and protecting the organisation against loss Not a legal requirement, but highly recommended by The Combined Code Determined by management Evaluates and recommends improvements to controls Company employees

External Audit

Provides an opinion to the shareholders on whether the financial statements give a true and fair view Legal requirement for most companies and public bodies Determined by auditing standards Tests items and transactions in the financial statements Independent accountants

23. INTERNAL FINANCIAL CONTROL

Internal Controls Internal Control is a process designed and initiated by management to provide reasonable assurance about the achievement of the entity ’s objectives with regards to: • reliability of financial reporting • effectiveness and efficiency of operations •compliance with laws and regulations Internal controls are checks on day to day transactions. They are managements responsibility.

Components of Internal Control Control Environment • Overall attitude of management to internal controls Risk assessment process • How the company identifies and responds to risk Information Systems • Procedures to process transactions and maintain control over assets, liabilities and balances Control Activities • Policies to ensure management directives are carried out Monitoring of controls • Assessment of internal control performance over time

Categories of Internal Control

A

uthorisation

P

hysical Controls

A

ccounting Reconciliations Internal Controls

C

omparison

C

omputer Controls

M

aintaining a trial balance

A

rithmetical Controls

Types of Control Preventative • segregation of duties • screening of new personnel Detective • reconciliation • supervision Corrective • data back ups • follow up procedures

24. FRAUD

Fraud • Fraud is an intentional act involving the usage of deception to obtain an unjust or illegal advantage. It is a criminal offence • Prerequisites include: dishonesty, motive and opportunity • Fraud could be committed by management, employees or third parties

Examples of fraud Management fraud • window dressing • misappropriation of assets Employee fraud • teeming and lading • skimming schemes Third party fraud • false billing • advance fee fraud

Implications of fraud • Company collapse • Adverse publicity • Reduced profits • Qualified audit report since financial statements do not give a true and fair view • Distorted performance results make it hard for managers to make business decisions

Responsibility for preventing fraud

Directors

• Required by the combined code to maintain a sound system of internal control

Employees

• An implied duty to act honestly and report suspected actual fraud • Specific duties in employment contract

External Auditors

• No duty to find fraud but may act as a deterrent • If financial statements materially affected by fraud, audit report will be qualified

IT systems security Risks to data: • Human errors • Technical malfunction (e.g. systems crash) • Natural disasters (e.g. fire, flood) • Sabotage or espionage • Malicious damage

Principles of data security • Use individual and complex passwords • Secure communication channels (e.g. fire walls) • Back up information on a regular basis • Have a contingency plan • Physical security for documents • Policy on suspicious emails

25. RECRUITMENT AND SELECTION

Recruitment and selection • Recruitment is the process of generating a supply of possible candidates for positions within an organisation • Selection is choosing from a number of candidates the one most suitable for the specified position

Recruitment process

Importance of R&S

• New recruit will be technically competent and able to perform the job

Consequences of poor R&S

• High staff turnover •Wasted advertising budget • Effective R&S reduces the need for retraining •Loss of management time dealing with unsuitable candidates • Employee will bring in ideas and enhance productivity •Costs and demoralising effects of dismissal •Candidate will get on well with existing team •Increased workload on existing staff if new recruit makes mistakes •Process will comply with legal requirements reducing employee disputes • Potential effect on efficiency of operations

Job Analysis • The process of collecting all relevant information about the position • This information is then summarised into: 1.Job description 2.Person specification 3.Job evaluation

Selection Process Selection tools include: • Interviews • Tests (e.g. aptitude, proficiency) • Assessment centres • References from previous employer

• Face to face • Successive Interviews • Group interviews • Panel interviews Types of Interview

Equal opportunities and Diversity • Equal opportunities is normally delivered through legislation which is aimed at giving all people an equal chance to be treated fairly in all aspects of employment • Diversity relates to valuing everyone as an individual and recognising the differences as contributing factors of business success

Equal Opportunities legislation Equal pay • Aims to eliminate differentials in pay and terms and conditions of employment between people in similar positions Sex discrimination • Prohibits discrimination on the grounds of sex and marital status. Identifies four forms of discrimination: direct, indirect, victimisation and harassment Racial discrimination Disability discrimination Age discrimination • Outlaws discrimination on the grounds of colour, race, ethnic or national origin. Exemptions include genuine occupational qualifications • Companies must make a reasonable adjustment to accommodate special requirements of disabled staff • Prohibits unjust age discrimination, removes compulsory retirement age

26. REVIEW AND APPRAISAL OF INDIVIDUAL PERFORMANCE

Appraisal • Appraisal is a regular and systematic review of performance and assessment of potential with an aim of producing an action programme to develop both work and individual • Its purpose is to review performance, potential and pay

Objectives of appraisal

From organisational point of view

• Establishes the results staff are expected to deliver •Identifies training and development needs •Encourages communication •Aids personnel planning •Creates a supportive organisational culture

From individual point of view

•Determines future promotional activities •Gives recognition for work well done •Serves as a basis for increase in remuneration •Formal opportunity to ask for guidance •Chance to contribute to goal-setting process

Barriers to effective appraisal • Appraisal seen as a confrontation • Appraisal seen as a judgement • Appraisal seen as just a chat • Appraisal seen as bureaucratic ‘form filling ’ • Appraisal just an annual event, no substance • Appraisal just looks at recent events, ignores everything else

Fair Features of an effective appraisal system Relevant Appraisal system Participative Serious Efficient

27. TRAINING, DEVELOPMENT AND LEARNING

Learning

Formal

• Undertaken deliberately when individuals consciously ‘learn’ and ‘study’ • Highly structured

Informal

• Usually intentional but not highly structured • Examples include self-directed learning, networking, coaching and mentoring

Incidental learning

• A by-product of some other activity, e.g. learning from mistakes or trial and error • Learning may be taken for granted, tacit or unconscious

Kolb ’s experiential learning theory

Experience

(planned or accidental)

Active experimentation

(trying out learning in another situation)

Observation and reflection

(actively thinking about the experience)

Abstract conceptualisation

(generalising from reflections)

Activists Honey and Mumford ’s learning styles • open to new experiences • ‘hands on’, enjoy teamwork and role-plays Reflectors • prefer to observe others before taking action • Cautious, likely to adopt a ‘low profile’ Theorists • need to understand underlying principles • Learn best in a classroom environment Pragmatists • keen to deal with real situations • learn best ‘on the job’

Training Training, development and education • Planned and systematic modification of behaviour through learning events which enables individuals to achieve a high level of knowledge, skills and competence Development • Growth of a person’s ability and potential through learning and educational experiences Education • Process of developing knowledge, skills and character required in all aspects of life

Follow up- how successful is the training programme?

Stages in training and development Identifying training and development needs Training planning Implementation of plans

Features of a Learning Organisation • adapts to change • encourages questions and experimentation • sees mistakes as part of learning • supports risk-taking and initiative • knowledge shared openly and willingly • people committed to continuous professional development

28. IMPROVING PERSONAL EFFECTIVENESS AT WORK

Preparing a personal development plan

Stage 1 -

analysis of current position, strengths and weaknesses and areas for development

Stage 2 –

setting goals to cover: performance in the existing job and future changes in the organisation and role

Stage 3 –

Draw up an action plan to achieve the goals

Effective time management influences Culture Management Style Colleagues influence

Time management

Nature of the work Staff demands Individual’s personal skills Individual’s personality

Barriers to effective time management

Barriers

•Frequent interruptions •Unpredictable nature of the job •Having to travel long distances •Bureaucratic procedures •Putting things off

Ways to overcome barriers

•Be assertive •Distinguish between urgent and important •Multi-task •Focus on effectiveness •Promise yourself a reward on completion

Coaching Coaching, counselling and mentoring • Trainee is put under the guidance of a more experienced member of staff Counselling • Problem solving, helping people to help themselves Mentoring • A more senior employee supports and guides the trainees through personal and career development

29. EFFECTIVE COMMUNICATIONS AND INTERPERSONAL SKILLS

Response Communication process Sender Decoded message Receiving the message Medium Encoded message

Effective communication

Barriers to effective communication

•Different cultures and languages •Noise and distortion •Information overload •Assumptions and prejudice •Conflict between individuals

Ways to overcome the barriers

•Provide training on cultural awareness •Choose the most effective communication channel •Prioritise and focus •Be open minded •Rise above the differences

Communication patterns

1. Centralised:

• Wheel • Chain • Y

2. Decentralised:

• Circle • All channels