HIGH TECH THERE’S SOMETHING WRONG OUT THERE
What is bugging high tech? FrClmevery corner of the industry’ modemsto microchips to database software- companie~ ha~e stunried Wali Street In’receni weeks with warnings of d’,sapPOlntlngearnings most cases, companies·have cited sp’cial circumstance mishaps or production snafus- and assured. invest.ors that the high-tech engine behind, so many capital gains is not slowing Buts~me Industry veterans. fear that a siowdo~n ciJliid be coming. ;’The1e’s just something wrong out . .there,” says Stephen Luczo, president of Se~gate Technologv Inc., which in ‘Dec~mber said it would shutter one planUn Ireland and postpone expansion of another. liMy ‘sense Is that things are slowing down, but all our biiJ customers ~re saying demand Is great. Someone isn’t teiii og the truth. n So, even as demand r.emains strong. mlny tompanies are living through the weird experience of a prof-. , ilIess prosperity. Disk-drive ieader Seagate lost $240 million in its first quarter, ended Oct. 3: Rival Western Digital Corp. expects only to break even in its second qua~er, ending Dec.. 27, and Quantum Corp. on Oec:’10 anncuneed that .quarterly earnings would fall by about half, to around $50 ,million, despite record sales. On Dec. 15, chipmaker Micron Technology Inc. announced that quarterly earnings had fallen 53%, to $9.6million,despite 31% revenue growth, ~hile Cypress Semiconductor Corp. lowered expectations
from a slight profit to breakeven. Network equipment maker Cabletron Systems Inc. has announced plans to layoff 600 workers following disapp~lnUngearnings. ‘ What could bring down such highfliers?Beyond an overall economic downturn, analysts now worry .. , about how upcom.ing technology will sell. The industry ‘depends on a periodic injection of new features to . . . get customers excited. The nexUhing on the horizon is Windows 98, which has been scheduled to ship by mid-year. Many industry executives have been questioning whether the new Microsoft Corp. operating system can drive new sales the way Windows 95 did. Now,with Microsoft embroiled in litigation that might apply to Wing8, delivery could slip. At the same time, many corporations are focusing their computer budgets not on new gear but on’fixing their software to work beyond 1999. Already, analysts have cited spending on the Year 2000 bug as a reason for slower spending on some of Oracle’s products
Accounting: Information for Decision P.4aking
Profits, quarterly earnings, break even, revenue growth, sales-all of these are accounting
terms used in Business Weekto describe the situation facing high-tech companies in
late 1997. Accounting. is truly the language of business. It is used to describe important events affecting companies. Sometimes ,the information communicates good news … sometimes bad news. In ‘any event, these and other terms that we will learn about in this text communicate very important information to investors, creditors, managers, and others who have an interest in the financial well-be!ng of companies.
ACCOUNTING INFORMATION A MEANS TO AN END
The title of this book is Accounting: The Basis for Business Decisions. This title was carefully selected to communicate to students, before studying the contents of this book, that the primary purpose of accounting is to provide information that is useful fer decision making purposes. From the very start, we emphasize that accounting is not an’ end. but rather it is a means to an end. The final product of accounting information is the decision that is ultimately enhanced by the use of accounting information. whether ‘that decision is made by owners, management. creditors, governmental regulatory bodies, labor unions. or the many other groups that have an interest in the financial performance of an enterprise.
Because accounting is widely used to describe all types of business activity. it is sometimes referred to as the language of bus;lfess. Costs, prices. sales volume. profits, and return on investment are all accounting measurements. Investors. creditors, managers, and others who have a financial ‘interest in an enterprise need a clear understanding of accounting terms and concepts if they are to understand and communicate about the enterprise. While our primary orientation in this text is the use of accounting information in business, we must emphasize that accounting information is also used by govern- ‘ mental agencies, nonprofit organizations, and individuals in much the same manner as it is by business organizations.
Accounting from a User’s Perspective
Many people think of accounting as simply a highly technical field practiced only by professional accountants. In, reality, nearly everyone uses accounting information daily. Accounting information is simply the means by which we measure and communicate, economic events-Whether you manage a’ businesa.make investments, or monitor how you receive and use your money, you are working with accounting concepts and accounting information.
Our primary goal in this book is to develop your ability to understand and use accounting information in making economic decisions. To do this, you will develop an understanding of the’ following:
• The nature of economic activities that accounting information describes
• The assumptions and measurement techniques involved in developing accounting information
• The information that is most relevant for making various types of decision
The diagram at the bottom of the previous page illustrates how economic activities now into the accounting process, which produces counting information, which is used liy decision makers in making c decisions and taking specitic actions, which result in economic activities, and so on
Types of Accounting Information
Just as .there are many types of economic decisions, there are many types of accounting information. The tennsfinancial accounting, management accounting, and tax accounting often are used in describing three types of accounting information lb! are widely used in the business community.
Financial Accounting Financial accounting
refers ‘0 information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). Accountants use the term financial ‘positioll to describe an entity’s financial resources and obligations at one point in time and the term results of operations to describe its financial activities during the year.
Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. Such decisions are important to society, as they determine which companies and industries will receive the financial resources necessary for growth. and which will not
Financial accounting information also is used in income tax returns. In fact, financial accounting information is used for so many different purposes that it often is called “general- purpose” accounting information.
Management (or managerial) accounting involves the development and interpretation of accounting information intended specifically to aid management in running the business. Managers use this information in setting the company’s overall goals, evaluating the performance of departments and individuals. deciding whether to introduce a new line of products. and inmaking virtually all types of managerial decisions.
A company’s managers .and employees constantly need such information in order to’ run and control daily business operations. For example, they need to know the amount of money in the company’s bank accounts, the types and quantities of merchandise in the company’s warehouse, and the amounts owed to specific’ creditors. Much management accounting information ts financial in nature but has been’ organized in a manner relating directly to the decision at hand. However, management accounting information often includes evaluations of nonfinancial factors, such as political and environmental considerations, product quality, customer satisfaction, and worker productivity,
The preparation of income tax returns is a specialized field within. accounting. To a great extent, tax returns are based. on financial accounting information. However, the information often is adjusted or reorganized to conform income tax . reporting requirements.
The most challenging aspect of tax aeceuntlng is not the preparation of an income tax return, but tax planning. Tax planning means anticipating the tax effects of business transactions arid structuring these transactions in a manner that will minimize the income tax burden.”
Focus of This Text
In this textbook, we, begin by introducing the basic concepts of financial accounting: These discussions emphasize both the process of financial reporting to investors and creditors and the usefulness ‘of financial information to an organization ‘s management and employees. In later chapters. ‘our emphasis shifts to management accounting and the use of accounting information in specific types of managerial decisions.
Major income tax conceptsare discussed atvarious points throughout the text. Comprehensive coverage of income taxes, however, is deferred to more advanced accounting courses. .
Remember that the fields of financial, management, and tax accounting are closely related. Thus we often address financial reporting requirements. management’s information needs, and income tax considerations within a single chapter. Our emphasis throughout this text will be on the accounting information developed in profit-oriented business organizations;
An accounting system consists of the personnel, procedures, devices, and records used , by an organization (1) to develop accounting.information and (2) to communicate this information to decision makers. The design and capabilities of these systems vary greatly from one organization to the next. In very small businesses, the accounting system may consist of little more than ‘a cash register, a checkbook, and an annual trip to an incometax preparer. large businesses, an accounting system includes computers, highly.trained persormel, and accounting reports that affect the daily operations of every department.
But in every case, the basic purpose of the accounting system remains the same: to meet the organization’s needs for accounting information as efficiently aspossible Many factors affect the structure of the accounting system within a particular ‘organization. Among the most important are (1) the company’s needs for accounting information and (2) the resources available for operation of the system. ” Viewing accounting as an information system focuses attention on the information accouriting provides, the users of the information, and tHesupport for financial decisions that is provided by the information. These relationships are depicted in the chart on page 8. While some of the terms may not be familiar to you at this early point in your study of accounting.’ you wiiI be introduced to them more completely as we proceed
through this textbook. Observe, ho~evcr. that the information systt;m produces the information presented in the middle of the diagram-cost and revenue determination, assets and liabilities. and cash flows. This information meets the needs of users of the information- investors. creditors, managers, and so on-and supports many kinds of financial decisions-performance evaluation and capital allocation, among others. These relationships are consistent with what we have already learned-namely, that accounting information is intended to be useful for decision-making purposes.