THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT DECISION MAKING PROCESS CASE TUDY: SAMSUNG ELECTRONIC CORPORATION BY BUI THI CAM DUYEN Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons OCTOBER 2011 I DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University College or other institutions The word count is 10, 286 words BUI THI CAM DUYEN 17 October, 2011 II ACKNOWLEDGEMENT This project would not have been made possible without the assistance, support and encouragement of many people I wish to take this opportunity to thank all the people who have helped me during the time of completing the dissertation Firstly, I would like to express my deep gratitude to my supervisor Dr NGUYN VAN ANH, she has kindly helped me and supported me all the way through For that, I am very grateful I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey I want to thank them for all their support, interest and valuable hints III THE IMPACT OF ACCOUNTING INFORMATION ON MANAGEMENT DECISION MAKING PROCESS CASE TUDY: SAMSUNG ELECTRONIC CORPORATION By BUI THI CAM DUYEN October 2011 Supervisor: Dr NGUYEN VAN ANH ABSTRACT This paper aims to explore factors, which influence the process of accounting information implementation in the context of developing countries like Vietnam where the challenging are much more than opportunities, as well as analyze and explain the change area of methodology and organization of company, after accounting information implementation In this research, have finding for both theorical and practical are more importance Beside, according the accounting information will lead to different profits to a company, therefore choosing a suitable accounting information is very important for managers In additional, focuses on some of these tools, including the costing system, profitability, costing tools and budgeting, which will be presented in this thesis The costing system contributes to the available knowledge of costs, building the basis for several decisions, like determining prices Profitability is used especially for decisions concerning discontinuing operations, whereas budgeting deals with the evaluation of investments This financial information supports decisions making Various decision-making models have been identified in literature to examine this process of decision-making Out of this pool a sequential model was chosen to illustrate the decision-making steps in SAMSUNG ELECTRONIC CORPORATION This model divides the IV decision-making process into several stages that follow each other However, it will be illustrated that the decision-making process in SAMSUNG is a bit more complex and cannot be easily squeezed into these steps It will become apparent in this paper that this process is influenced by many people, making it difficult to determine one final decision-maker as well as a certain decision-making point Besides, experiences, feelings, preferences and other qualitative factors can have an impact on decisions in SAMSUNG COPORATION Nevertheless, financial information affects the decision-making process In the role of management accounting information is interwoven and integrated in the whole decision course, having the ability to influence the process at almost every stage V TABLE CONTENT DECLARATION OF ORIGINALITY AND WORD COUNT……………….…i TABLE OF CONTENT……………………………………………………… … ii ABSTRACT…………………………………………………………………… ….iii TABLE OF CONTENIS…………………………………………………………….v LIST OF FINGURES & CHATS………………………………………………… v Chapter Introduction 1.1 Introduction 1.2 Problem statement 1.3 The objective of research 1.4 Structure of research Chapter 2: Literature review 2.1 Managerial decision making process 2.1.1 Planning process 2.1.2 Control process 10 2.2 The importance and impact of accounting information on decision making process 11 2.2.1 Accounting information and its role in decision making process 11 2.2.2 Management accounting and decision making 12 2.3 Financial statements, the importance source of accounting information for manager in electronics industry 14 2.4 Tool for decision making 17 2.4.1 Cost accounting system 18 2.4.2 Pricing and competition 20 2.4.3 Profitability 23 VI Chapter3: Research and Methodology 25 3.1 Research objective 26 3.2 Research approach 26 3.3 Data collection 27 3.3.1Primary data 27 3.3.2 Secondary data 28 Chapter 4: Case study 29 4.1 Samsung background 30 4.2 Company vision and strategy 31 Case study analysis 31 4.3.1 Accounting applied in Samsung Company 31 Chapter5: Conclusion and recommendation 47 5.1 Conclusions: 48 5.2 Recommendations 49 5.3 Limitation of study 49 5.4 suggestions for future research 50 VII LIST OF TABLE AND FIGURE Table 1: Structure cost of the Samsung Company .33 Table 2: the different prices of electronics customer of three companies Samsung, Sony and LG 35 Table 3: the different price of two companies Samsung and Sony .37 Table 4: competitive positioning of Samsung in DRAM market 39 Figure 1: target costing 22 Figure 2: revenue structure of product 43 Graph 1: adapted from DRURY’s model (2000) Graph 2: adapted from DRURY’s model (2000) 19 VIII Chapter Introduction 1.1 Introduction 1.2 Problem statement 1.3 The objective of research 1.4 Structure of research Chapter one cover the whole picture about the idea of this paper, these help manager and user easy to link each other between the accounting information and management decision making process This also covers the structure and introduction about the topic as well as related issues 1.1 Introduction Nowadays, in the industry, accounting information is more and more importance And decisions making is part of our life In the competitive environment and develop manufacturing, reliability accounting information is important for all business, like manufacturing business, service business and merchandise business Considering organizational to organization, this is the main functions and actions of management Decision-making and management are usually regarded as belonging together as management in the company often makes the main decisions of the organization The diversity managers will make the different decision with the different information and report, so making decision will depend on manager’s policy To have successful, organization are need to make decisions, also to implement the right ones A decision is concerned with the selection of an action often out of a number of alternatives To make the right decision, manager needs any guidance to making decision, which is a part provided by information assemble by management accounting In fact, there are many factors that influent to the management decision making, but in this contention, put only to the intention on the importance and impact of accounting information in decision making process 1.2 Problem statement In this project, the main idea related to the impact of accounting information on decision making of manager The accounting information includes information applied to make ready financial statements that report the effects and financial position of an organization in order to help manager better making decision Owners and manager use this information to argue about the results and effects of business operations also make decision about their management External users such as suppliers, tax authorities, creditors also applied accounting information for their Hynix 1.52 0.8 22.20% Elpida 1.99 1.7 13.60% Win bond 0.06 0.54 1.20% Nanya 0.17 0.46 4.20% Power chip 0.08 0.35 2.60% promos 0.06 0.45 1.50% Table4: Competitive positioning of Samsung in DRAM market (Source: HIS issupli, March 2010) The first metric of pure cash is telling indicator because companies able to finance their own capital expenditure enjoys a competitive advantage over those that are unable Samsung are clearly more cash to maintain its current market share than a smaller company like Nanya As the above table, in market share, Samsung has highest with 42.10%, it indicator the company’s relative competitiveness Samsung has strong position and the highest of healthy balance sheet As comparisons, proMOS are $0.06 billion in cash and Power chip is $0.08 billion in cash, Samsung Company is higher of cash with $1.94million This implement, Samsung has right decision making in research and development to the market in order to receive the highest market share, strong positioning and keep up product development efforts, such as Samsung and Micron have the greatest opportunity for continued longevity in the year to come  Profitability Samsung company is commonly used tool profitability, it is very important They defined as the value of customer pays minus the production expense by manager who are in the financial field The company refers to the profits to get money for news investment Profit always was the purpose of the company Managing director 39 underlined profit data monthly and this account also rewarded to the Samsung group who is highly interested in the highlight use of profit in order to eliminate not profitable products Manager in Samsung making decision, Samsung continuously tries to raise the standard of product that not profitable products or if necessary to write off unprofitable ones Moreover, the financial manager also supported that gross profit; operating profit and working capital are the three most important tools within the company These are closely related to the profitability tool and thus match with the objective of Samsung group Therefore, the manager can consider information about the profit in order to make right decision As in the financial statement of Samsung Income statement Year 2008 Year 2009 ($billions) ($billions) Year 2010 ($billions) Sales 121,294 136,324 154,630 Operating profit 6,032 10,925 17,297 Net income 5,526 9,761 16,147 (Source: Samsung financial summary 2010) Samsung has become a market leader with the main revenues increasing of electronic in the production and consumption In 2010, Samsung achieved all targets of sales and profit The total sales increased by 154,630 as compared to 2009 with 136,324 and 2008 is 121,294, the operating profit also strong increase in 2010 with 17,297 compare with year 2009 is 10,925 These indicate, the company has strong profit and net income This also useful for internal purposes, such as assessing progress and making plans for the future as long-term investment and short term investment 40 In addition, competition is also cause of Samsung profit and market share Increase competition mean reduces in Samsung’s profit and market share by reason of it creates over supply and reduce in sales Over supply is due to increase in supply while sales are decreasing This happen because more than competitors is issuing the same product, so, there are more alternative for consumer in which creates demand in lower price Therefore, Samsung has made any solution to improve their sales and profitability They are redesigning it to make innovative electronics To continue attract customer, Samsung has upgrade and improve their product, introducing product to the both urban market and foreign market as Vietnam, china, India, etc and become one of the top seller in the electronic market By different product as TV, semiconductor, LCD, digital imaging Samsung has performed the strong position in the electronics industry Figure2: Revenue structure by product (source: Samsung electronics) The figure above indicates that a digital imaging segment product is the biggest sales contributor to the local sales of Samsung with the contribution of approximately 41% 41 All the products are consuming in any market The competition in the market segment of fresh milk is highly intensive since there are many other local involving players, not mention to some other product brands imported The second largest product is LCD; this contributed 25.7% percentage of category sales, industry leader, Samsung has achieved number market share for LCD panels for nine consecutive years owing to their exceptional technology and product quality This market segment of Samsung is under the severe competition with the imported products of international brands as well as from the other local competitors The potential for growth of this product range is great and in the coming years, this will be the ongoing emphasis of Samsung for LCD development strategy with the aim to develop the industries most efficient and highest quality products In addition, the last one is TV segmentation The sales from this group account for 22.1% of Samsung global product sales Samsung has remained its dominant position in this market segment and the perspective for the development of this product range in the future is still great Supported by their vital technologies and inimitable design, in the word with TV market share Samsung Electronics has achieved No for five years in a row since 2006 After establishing the new market for LED TVs in 2009, we have extended their competitive lead with sales of 45.11 million TVs That included 39.26 million flat panel TVs in 2010, as our Full HD 3D LED TV became readily available With sales of million 3D TVs, they also are leading the nextgeneration market Moreover, they intend to maintain their position as the global leader in the TV market (Source: Samsung display search 2010) Therefore, based on this information, Samsung tend to change the direction of revenue from any electronics product to become the most important products  Financial ratio: 42 In order to understand more about the business activity of Samsung group and provide more information to the management’s decision-making, the financial ratios analysis need to be discussed These based on some financial criteria such as liquidity, capital structure, operational capability, and profitability  operational capability Receivable turnover 2009 = credits sales/ receivable = 20,572,586,889/1,214,682,261 =16.9 Receivable turnover 2010 = credit sales/ receivable = 15,752,613,890/882,365,028 = 17.85 Compare within two year 2009 and 2010 This shows that the account receivable tend to turnover is faster more and more with 16.9% in 2009 and increase in 2010 is 17.5% This also implement the ability to use working capital are better Inventory turnover 2009 = cost of good sold/ inventory = 10,375,197,061/ 2,113,540,576 = 4.90 Inventory turnover 2010 =cost of goods sold/ inventory = 12,579,802,219/3513, 345,229 = 3.40 The ratios represent the ability to manage inventory well Inventory turnover is so fast 3.40 in 2010 and 4.90 in 2009 round per year This results in creating more profit and reducing cost and capital This shows that the management of inventory in 2010 is more effectively than 2009; the profit is also higher than previous year In fact, the profit of Samsung Company increase approximately 22% per year 43  capital structure Debt to equity = liabilities/ owner’s equity = 4,955,800,758/ 9,364,236,590 = 0.52 The ratio 0.52 or 52% the entity’s capital comes from debt and company is able to meet its debt obligations on the long-term basis In addition, Long-term debt accounts for only about 3% of total capital that means financial capacity of Samsung electronic corporation is strong The company does not have to borrow capital from outside to operation This leads to company be more active in implementing its investment projects, reducing significantly borrowing costs and increasing profit for the shareholders  liquidity Current ratio = current assets/ current liabilities = 7,208,199,786/ 4,645,210,152 = 1.55 The liquidity indicates that the company’s ability highly pays current obligations Moreover, short-term assets are more dominant when accounting for over 63% of the total assets of Samsung group while short-term debt accounts for 21% of capital structure, thus the solvency of Samsung always guaranteed a good level In the past, Samsung maintained large amounts of cash and short-term receivables, but the company recently takes the advantage of these cash stored to increase the inventory to avoid price fluctuations of raw materials on world markets and increased financial investment  profitability Profit margin 2009 = net income/ net sales 44 = 7,512,072,432/ 17,527,565,499 = 0.4285 Profit margin 2010 = 4,731,672,538/12,613,570,900 = 0.3751 The profit margin ratio measures the entity’s profitability These ratios indicate that the profitability next year better than last year because of controlling the cost of advertising, promotion and distribution support the reduction, enterprise management costs also reduced Furthermore, the company develops priority of the high value products such as TV and LCD So the cost material of powdered electronics tends to reducing Debt accounts for small proportion of Samsung’s capital, so taking advantage to increase return on equity is little Return on equity = Net income / shareholders’ equity = 6,521,432,207/8,469,364,590 = 0.7700 Return on equity is high due to profit after tax of Samsung is good Return on assets = Net income / total assets = 6,521,432,207/ 12,377,323,595 = 0.52 The proportion of asset takes part in production is large and highly effective Therefore, the profit and operation are better more and more In short, the profit of the company is growing due to the improved management cost of inputs well, business expenses used effectively In the coming years as new plants come into operation, if the company remain to manage good cost of inputs then the company's profits may also optimistic 45 Based on accounting information, financial statement with realizable information and truthfulness, manager in Samsung electronics can evaluate the economics performance of the business and plan for future growth Manager can use information financial ratio to entice new investor 46 Chapter5: Conclusion and recommendation 5.1 Conclusions 5.2 Recommendations 5.3 Limitation of study 5.4 Suggestions for future research In this last chapter are the conclusion and recommendation of this research Besides, it gives to any limitation of this study and further suggestion of the research 47 5.1 Conclusions: From the data analysis and select information in this paper, the manager and supervisor are more concern accounting information by reason of it is very grave and effectiveness It may difficult to figure out the framework of accounting information as well as the numbers of experiments which are applied; however, they are very extremely important role in managers' on decision-making process Accounting information reflects the financial terms and business environment of organization On management, business decisions are based on reliable information So, the unlucky could be limited and investments are more efficient For Samsung electronics, reliability and truthfully accounting information reflect the financial, business situation of company is considered key important and contain the substance about efficiency of electronic placement Lack and limitation of unrealizable information about listed company this shows the risk in the decision of managers would be excellent Accounting information has suitable with international accounting practices and standard So, board of finance need to update accounting and auditing standard a abiding to international practices, it is simultaneously fit with economy activity to attain international recognition about quality of accounting information In addition, information of accounting system also must meet the different needs of managers in short run management, long run management The role of qualitative data are providing by accounting books, internet source, etc of the accounting information, as well as the decision-makers has an important impact on decision making By this project the importance of financial information as advantage through management accounting tools was underlined Apparently, decisions are affected by 48 data; this is also the case in Samsung electronics This answer the purpose of what and how those accounting tools affects the decisions made by the company 5.2 Recommendations Throughout the paper the case study made suggestions how Samsung could profit more of the financial data for decision-making purposes It is left to say with the managing director who stated that the controlling function of the financial department should be more developed in the future Through the analysis the price, competition, profitability, the alternative of accounting information from financial data, this shows Samsung has advantage leader market because of various qualify and innovative such as TV, LCD, DRAM, etc with a lower price than competitor like Sony or LG Electronics company Moreover, the manager in Samsung Corporation should responsible for improving the quality of accounting information disclosed and for preventing distortion acts of accounting information Beside, analyzed the financial ratio also help Samsung Electronics Corporation make right decision on investment Financial department should strengthen financial supervisory activities to prevent cheating in making financial statement An indispensable factor to ensure the transparency of information is independently audited Beside, Samsung should be improving the quality of accounting information through the focus on senior management, the code of ethics and internal control They also should establish internal control systems as the basis to improve the quality of financial statement also quality of information 5.3 Limitation of study The accounting information cannot express all idea about accounting 49 This research is done on accounting information which only available in financial statement The result of this research may limit and not accurate when putting to other types of information The major limitations of this study are using secondary data and concentrate on the case study method Both of them has many advantages, however in order to make the company’s performance looks better, the data should be used a lot of times, therefore in fact the way in managing can be hidden Besides that, this project only focuses on a specific company so the recommendations might be useless and inapplicable for other companies Moreover, most of analyses are based on the others’ research so it can be arguable and difficult for users to apply in the reality 5.4 suggestions for future research Due to the various limitation of this research, there should be some suggestion for future researches which have similar topic The other 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Accounting, 5th edition, London: Thompson Business 52 53 ... Managerial decision making process 2.1.1 Planning process 2.1.2 Control process 2.2 The importance and impact of accounting information on decision making process 2.2.1 Accounting information and... importance and impact of accounting information on decision making process 2.2.1 Accounting information and its role in decision making process Accounting is commonly concern with recognition dealing... From the fluctuations of electronics market overtime, this study evaluates a usage of accounting information of manager on management decision- making process in electronics market; this is one of