Controllership

Steven M. Bragg, CPA, CMA, CIA, CPIM, (Centennial, CO) has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He is the author of over 25 books primarily targeted toward controllers and their needs. Bragg received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine.

• About the Author xviiPreface xixPart I the Broad Management Aspects of Controllership 1Chapter 1 Accounting in the Corporation 3Tasks of the Accounting Function 3Role of the Accounting Function 5Role of the Controller 6Impact of Ethics on the Accounting Role 7Evolving Role of Accounting 10Chapter 2 Controller’s Responsibilities 13Variations on the Title 13Planning Function 14Control Function 15Reporting Function 15Accounting Function 16Additional Controller Functions in Smaller Companies 17Controller’s Job Description 19Relationship of the Controller to the Chief Financial Officer 21Chapter 3 Cost Accounting and Costing Systems 23Purpose of Cost Accounting Information 23Input: Data Collection Systems 24Processing: Data Summarization Systems 27Processing: Job Costing 29Processing: Process Costing 34Processing: Standard Costing 38Processing: Direct Costing 40Processing: Throughput Costing 43Processing: Activity-Based Costing 48Processing: Target Costing 50Outputs: Cost Variances 52Chapter 4 Ratio and Trend Analysis 57How to Use Ratios and Trends 57A Caveat 58Measures for Profitability 60Measures for the Balance Sheet 62Measures for Growth 66Measures for Cash Flow 68Measures for Nonfinancial Performance 70Interrelationship of Ratios 85Setting Up a System of Ratios and Trend Analyses 85Chapter 5 Internal Control Systems 89Objectives 89Responsibility for Internal Controls 90Examples of Internal Controls 92When to Eliminate Controls 102Types of Fraud 104Preventing Fraud 105How to Deal with a Fraud Situation 109Chapter 6 Internal Audit Function 113Reporting Relationships 113Role of the Audit Committee 116Internal Audit Objectives 117Internal Audit Activities 119Chapter 7 Recruiting, Training, and Supervision 123Recruiting Sources 123Factors to Consider when Recruiting 125Factors to Consider When Promoting 127Importance of Reduced Turnover 128Importance of Developing Career Plans for Employees 132How to Motivate Employees 134Chapter 8 Controller’s Role in Investor Relations 137Objectives of the Investor Relations Function 137Communication Vehicles for Investor Relations 138Investor Relations Message Recipients 138Information Needs of the Financial Analyst 139Information Needs of Other Groups 141Providing Guidance 141Forward-Looking Statements 144Organization Structure for Investor Relations 146Role of the Controller and Other Principals 147Part II the Planning Function of Controllership 151Chapter 9Business Plans and Planning: Interrelationship of Plans, Strategic Planning 153Business Planning Defined 153Framework for Business Planning 154Time as Related to Planning 154Planning Period: How Long Is “Long Range”? 155System of Plans 156Strategic Plan: An Overview 156Corporate Development Plan 157Operations Plan 158Basic Elements in Any Plan 158Planning Process 159Plan Frequency 161Plan Guidelines 162Supplemental Planning: Alternative Scenarios 162Planning Timetable or Schedule 163Strategic Planning: An In-Depth Review 163Environmental Analysis 165Critical Success Factors 167Business Mission or Purpose 168Long-Range Business Planning Objectives 170Developing Strategies 174Strategies and the Planning Period 177Role of the Controller 177Chapter 10 Financial Impact of the Strategic Plan: Long-Range Financial Plan 181Key Elements of a Strategic Plan 181Capital Investments 182Risk Analysis 183Objectives of the Long-Range Financial Plan 184Consolidation and Testing Process 185Illustrative Financial Exhibits in the Plan Presentation 186Role of the Controller 193Chapter 11 Profit Planning: Annual Plan 201Purpose of Budgeting 201Planning Benefits 202Coordination Benefits 203Control Benefits 205Problems with the Annual Plan 205Annual Planning Cycle: Illustrative 206Supportive Financial Statements and Budgets 208Sales Budget 209Production Budget 210Purchases Budget 210Direct Labor Budget 211Manufacturing Expense Budget 211Inventory Budget 212Operating Expense Budget 212Capital Expenditures Budget 213Cost of Goods Sold 213Statement of Estimated Income and Expense 214Cash Budget 214Statement of Estimated Financial Condition 216Approval of Budget 218Linking the Bonus Plan to the Budget 218Controller’s Role: A Key Player 219Management Approval of the Plan 223Chapter 12 Profit Planning: Supporting Financial Analysis for the Annual Plan 225General Comments on the Cost-Volume-Profit Relationship 225Breakeven Chart 226Changes in Sales Revenue 228Changes in Sales Mixture 228Changes in Sales Price 230Changes in Costs 231Analysis by Product 232Application of Cost-Volume-Profit Analysis 235Selecting the Most Profitable Products 236Increased Sales Volume to Offset Reduced Selling Prices 236Most Profitable Use of Scarce Materials 237Advisability of Plant Expansion 238Some Practical Generalizations 239Program Evaluation Using Discounted Cash Flow 240Financial Analysis of Unacceptable Operating Results 243More Sophisticated Analyses 258Chapter 13 Taxation Planning 259Accumulated Earnings Tax 260Cash Method of Accounting 261Inventory Valuation 262Mergers and Acquisitions 262Net Operating Loss Carryforwards 263Nexus 264Passive Activity Losses 265Project Costing 266Property Taxes 267S Corporation 267Sales and Use Taxes 268Transfer Pricing 269Unemployment Taxes 271Management of the Taxation Function 272Part III Planning and Controlling Operations 275Chapter 14 General Discussion of Standards 277Definition of Standards 277Advantages of Standards 278Relationship of Entity Goals to Performance Standards 280Types of Standards Needed 281Trend to More Comprehensive Performance Measures 285Benchmarking 287Setting the Standards 289Use of Standards for Control 291Procedure for Revising Standards 293Chapter 15 Planning and Control of Sales 295Sales Management Concerns 295Controller’s Assistive Role in Sales Management Problems 296Controller’s Independent Role in the Planning and Control of Sales 299Sales Analysis 300Sales Planning: Basis of All Business Plans 304Steps in Developing the Near-Term Sales Plan/Budget 305Methods of Determining the Sales Level 308Useful Sources of Forecasting Information 311Forecasting the Business Cycle 312Sales Standards 318Sales Reports 322Product Pricing: Policy and Procedure 328Chapter 16 Planning and Control of Marketing Expenses 339Definition 339Factors Increasing the Difficulty of Cost Control 341Marketing Expense Analysis 341Types of Analyses 342Planning Marketing Expenses 353Special Comments on Advertising and Sales Promotion Expense 354Marketing Expense Standards 360Chapter 17 Planning and Control of Manufacturing Costs: Direct Material and Direct Labor 367Direct Material Costs: Planning and Control 372Labor Costs: Planning and Control 379Chapter 18 Planning and Control of Manufacturing Costs: Manufacturing Expenses 389Proper Departmentalization of Expenses 389Variations in Cost Based on Fixed and Variable Costs 390Variations in Cost Based on Direct Labor 392Variations in Cost Based on Batch Size 394Variations in Cost Based on Overhead 396Variations in Cost Based on Time 398Cost Estimation Methods 399Normal Activity 404Allocation of Indirect Production Costs 405Budgetary Planning and Control of Manufacturing Expenses 407Securing Control of Overhead 409Control with Throughput Analysis 415Role of the Controller 416Chapter 19 Planning and Control of Research and Development Expenses 425R&D Activities in Relation to Corporate Objectives 425Organization for the R&D Financial Functions 425Elements of R&D Costs 426Role of the Financial Executive in R&D 429Determining the Total R&D Budget 429Establishing the R&D Operating Budgets 430Detailed Budgeting Procedure 438Other Control Methods 438Effectiveness of R&D Effort 442Chapter 20 Financial Planning and Control in a Service Company 447Data Classification 447Cost Accounting in a Service Organization 449Planning System 454Strategic Planning 459Chapter 21 Planning and Control of General and Administrative Expenses 461Components of G&A Expense 461Control over G&A Expenses 462Reducing G&A Expenses 468Spend Management Systems 473Budgeting G&A Expenses 474Chapter 22 Payroll 477Improving the Payroll Process 479Compensation 485Federal Income Taxes 489Social Security Taxes 491Medicare Tax 491State Income Taxes 491Payroll Taxes for Employees Working Abroad 492Remitting Federal Taxes 492Payroll Deductions for Child Support 494Payroll Deductions for Unpaid Taxes 495Unemployment Insurance 496Part IV Planning and Control of the Balance Sheet 499Chapter 23 Planning and Control of Cash and Short-Term Investments 501Objectives of Cash Planning and Control 501Duties of the Controller versus the Treasurer 501The Cash Forecast 502Cash Collections 514Cash Disbursements 520Internal Control 521Reports on Cash 524Cash Flow Ratio Analysis 526Variations in Cash Requirements by Industry 528Investment of Short-Term Funds 529Chapter 24 Planning and Control of Customer Credit and Receivables 533Credit Procedures and Systems 533Collection Procedures and Systems 542Measurement of Accounts Receivable 548The Bad Debt Forecast 549Budgeting for Accounts Receivable Balances 550Chapter 25 Planning and Control of Inventories 553Costs and Benefits of Carrying Inventory 553Role of the Controller 555Material Requirements Planning Systems 557JIT Manufacturing Systems 558Inventory Purchasing 561Production Issues Impacting Inventory 563Inventory Quantity Management 565Obsolete Inventory 567Inventory Cutoff 570Budgeting for Raw Materials 572Budgeting for Work-in-Process 577Budgeting for Finished Goods 578Significance of Proper Inventory Valuation 582Selection of the Cost Base 582Chapter 26 Accounting and Reporting for Selected Investments and Employee Benefit Plans 585Improving the Investment Decision Process 585Role of the Controller 586Accounting Records for Selected Investments 587Financial Reports on Selected Investments 587Accounting and Disclosure Requirements and Practices for Employee Benefit Plans 590Chapter 27 Planning and Control of Plant and Equipment or Capital Assets 601Controller’s Responsibility 601Capital Budgeting Process 603Information Supporting Capital Expenditure Proposals 604Methods of Evaluating Projects 605Payback Method 606Operators’ Method 607Accountants’ Method 608Discounted Cash Flow Methods 609Cash Flow Modeling Issues 614Hurdle Rates 615Cost of Capital—A Hurdle Rate 616Throughput Method 617Classifying and Ranking Proposed Capital Projects 620Problems with the Capital Budget Approval Process 621Using Expected Commercial Value for Project Ranking 622Board of Directors’ Approval 624Project Authorization 628Accounting Control of the Project 630Postproject Appraisals or Audits 630Other Aspects of Capital Expenditures 632Chapter 28 Management of Liabilities 637Objectives of Liability Management 637Direct Liabilities 638Planning the Current Liabilities 639Standards to Measure and Control Current Liabilities 642Corrective Action 644Some Benefits from Debt Incurrence 644Standards for Debt Capacity 645Leverage 648Managing Liabilities: Some Practical Steps 649Management of Accounts Payable 652Accounting Reports on Liabilities 656Internal Controls 656Chapter 29 Management of Shareholders’ Equity 659Role of the Controller 659Growth of Equity as a Source of Capital 660Return on Equity as Related to Growth in Earnings per Share 661Growth in Earnings per Share 661Cost of Capital 663Components of Cost of Capital 664Calculating the Cost of Debt 665Calculating the Cost of Equity 666Calculating the Weighted Cost of Capital 669Dividend Policy 670Other Transactions Affecting Shareholders’ Equity 672Long-Term Equity Planning 673Short-Term Plan for Shareholders’ Equity 678Other Considerations 680Part V Financial and Related Reports 683Chapter 30 Internal Management Reports 685Rules of Reporting 685Status Reports 688Margin Reports 690Cash Reports 694Capacity Reports 695Sales and Expense Reports 696Payroll Reports 698Graphical Report Layouts 703Chapter 31 External Reporting 705Purpose of the Annual Report to Shareholders 705Controller and the Annual Report 706General Contents of the Annual Report 706Importance of Form 709Other Reports to Shareholders 711Disclosure Issues 712SEC Forms 713Contents xvPart VI Some Administrative and Special Aspects of the Con- Troller’s Department 719Chapter 32 Mergers and Acquisitions 721Acquisition Strategy 721The Acquisition Process 723Locating Acquisition Targets 726Due Diligence 729Valuing the Target 739Legal Documents 743Acquisition Integration 753Types of Acquisitions 760Chapter 33 The Reporting Period and How to Close It 763Selecting the Fiscal Year 763Selecting the Number of Interim Reporting Periods 764Reasons for Accelerating the Closing Period 766How to Achieve a Fast Close 766Chapter 34 Inventory Tracking 781Differences between Perpetual and Periodic Inventory Systems 781Setting Up a Perpetual Inventory System 783Auditing and Measuring a Perpetual Inventory System 787Physical Inventory Procedure 788Physical Inventory Complications: The Cutoff 791Reconciling Inventory Variances 792How to Avoid the Inventory Tracking Problem 794Chapter 35 Tax Records and Procedures 797Tax Organization 798Centralized Tax Department 798Functions Of the Tax Manager 800Tax Communications 801Tax Records in General 801Tax Calendar 802Tax Information Records 802Tax Working Papers and Files 805Internal Revenue Code and Record Requirements 805Proper Classification of Accounts 805Other Taxes 806Income Taxes and Business Planning 806Special Tax Reports 806Index 807