The purpose of this meeting is to discuss the financial reports generated by the external accounting department and how the can be used by the Vice President of Operations and operations staff to make better decisions. It is understood that the external financial reports are not used by Operations at this time. The goal of this discussion is to understand what information is currently provided in these reports, and make recommendations to Operations regarding how information in these reports can be utilized to achieve the department’s goals of increased profitability, improved customer service, and business expansion.
The external accounting department generates quarterly reports that comply with the generally accepted accounting principles (GAAP). Publicly owned corporations such as Claire’s Antiques are required by the Securities and Exchange Commission (SEC) to provide financial reports to stockholders. The four main financial statements provided to stockholders are the incoming statement, the balance sheet, the statement of stockholder equity, and the statement of cash flows (Gitman, 2009).
The income statement summarizes the operating results of the company during the specified period. Although it is common to generate these reports monthly for use by internal management, it is a requirement that quarterly statements be made available to stockholders. The income statement provides high-level details regarding the revenue earned by the company minus costs, operating expenses, taxes, and dividends. Each expense is subtracted individually so that report readers can understand how the company is being affected by each expense. The final result of the income statement provides information regarding how much revenue was earned per share (EPS) and how much dividends were earned per share (DPS). This information is especially useful to current and potential investors (Gitman, 2009).
The balance sheet presents the company’s standings in terms of assets and liabilities. Assets include items that are fairly liquid, such as cash, securities, and inventory, as well as fixed assets such as buildings, machines, and vehicles. Liabilities are also presented in short- and long-terms. For example, accounts payable are liabilities that should be resolved in short order. Payments for long-term debt, such as leases, are not due in the current fiscal year. Finally, the balance sheet illustrates the stockholders’ equity in the company, including any retained earnings that have been reinvested in the company. The statement of stockholders’ equity is a detailed accounting of all transactions that occurred during the specified period. Although the major elements of stockholders’ equity are detailed in the balance sheet, the statement of stockholders’ equity restates those elements and lists transactions that affected the overall results (Gitman, 2009).
The final report required by the SEC is the statement of cash flows. This report summarizes incoming and outgoing cash flows for the specified period. This report gives stockholders an idea of how money moved in and out of the company. Items that appear on the statement of cash flows include increases in accounts payable and receivable, increases and decreases in inventory, and dividends paid (Gitman, 2009).
Although these financial accounting reports are important to the company, much of the information presented in these reports is not as useful to internal audiences such as workers and managers. Financial accounting reports focus on past activity, but provide little information that can assist decision makers in the company. These reports focus solely on financial factors, and leave out important operational influences such as processes and technology (Atkinson, Kaplan, Matsumura, & Young, 2007). Therefore, although the financial accounting reports generated by the external accounting department are useful, certain information must be highlighted to make these reports useful to Claire’s Antiques’ operations department.
In order to make decisions regarding the operations of Claire’s Antiques, the Vice President of Operations needs reports that highly the operational and physical aspects of the company. Although the financial reports hint at some of these issues, especially those related to production costs and operating expenses, they provide no measure of how effectively and efficiently these expenses are being utilized. In order to deliver on Claire’s Antiques value proposition. Currently, Claire’s Antiques tries to deliver value to its customers by providing a quality product at an affordable price. Since consumer preferences are important to this value proposition, Claire’s Antiques must manufacture its products quickly and maintain a low inventory so that it will not be caught with unsalable excess inventory. Therefore, it is recommended that the Vice President of Operations receive two reports in addition to the quarterly financial statements.
The first new report is based on the financial reports generated by the external accounting department. It utilizes a cross-sectional analysis of the company’s inventory turnover ratio. The inventory turnover ratio measures the activity of the company’s inventory. It is generated by dividing the cost of products sold by the amount of existing inventory (Gitman, 2009). For the health of Claire’s Antiques, it is important to keep this number high since inventory on hand can result in a loss of customer preferences change. Unfortunately, this ratio is fairly meaningless without the aid of a cross-sectional analysis.
A cross-sectional analysis compares financial ratios of the company with the ratios of other companies in the same industry. Dun & Bradstreet generate a list of these ratios in their annual Almanac of Business and Industrial Financial Ratios. Although the numbers of specific companies might be of interest to Claire’s Antiques, it is just as useful to look at the industry as a whole and compare Claire’s Antiques. Generally, these ratios are provided as median values and upper and lower quartiles (Gitman, 2009).
One final interesting fact about the inventory turnover ratio is that it can be used to compute the average number of days of inventory on hand. If the inventory turnover ratio is divided into 365, the result is the average number of days of inventory on hand for the specified period. If the ratio of sales to inventory is high meaning high sales and low inventory, than the average sale days of inventory will be low. If this number is too low, it may indicate that the company is not keep enough inventory on hand (Gitman, 2009).
The final recommended report for the Vice President of Operations is a cost-volume-profit (CVP) analysis. This report will give the operations department an idea of how expensive each product line is and how it contributes to the overall profitability of the company. Although the operations department is not directly responsible for decision making regarding what products will be sold, the Vice President of Operations can use this information to decide which product lines need to be examined for process improvements (Atkinson et al., 2007). Although this information cannot be generated from the financial accounting reports, it is of vital importance to the effectiveness and efficiency of the operations department.
Atkinson, A. A., Kaplan, R. S., Matsumura, E. M., & Young, S. M. (2007). Management accounting (5th ed.). Upper Saddle River, NJ: Pearson.
Gitman, L. J. (2009). Principles of managerial finance (12th ed.). Boston: Pearson.