One of the buzz-words in business schools in current times is data analytics or, in an accounting school, accounting analytics.
But what exactly is ‘accounting analytics’?
So, in layman’s language, Accounting analytics is the examination of big data using data science or data analytics tools to help answer accounting-related questions. We live in a world which is full of huge piles of online data. The Accountants, now a days, are required to have the skill of analyzing this huge data in the form of financial statements of a company. That is why, it is very important to be familiar with the concept of accounting analytics.
Here, we would learn about how data science is practically applied in the field of accounting analytics.There are various functions which the accountants are now a days using which originate from analytics. For example- budgeting, planning, data management, auditing; these are some fields where accountants are used to dealing with data. In fact, most professionals have already mastered two types of analytics-
Descriptive Analytics- By summarizing and interpreting raw data, accountants find answers to what has happened. For example, we see that usually, analysts use sums, averages, and percent changes to calculate sales results, inventory stock, cost per customer, average dollars spent, year-over-year change in sales, etc.
Diagnostic Analytics- Accountants often deploy data analytics and data mining to discover why something happened. They also create variance reports to show differences between budgeted amounts and actual income or expenses, employ tools and software to look for patterns and problems in large data sets.
These skills are great, but they’re not enough. As the automation takes over day-to-day tasks, accountants are increasingly being asked to act as data scientists. Accountants can use various tools of analytics such as- Excel, Tableau, Python, SQL, etc
Let us now examine how 3 different types of accounting studies which may use analytics to modify their current work through examples.
Managerial Accounting Financial Accounting Auditing In this blog, we’re going to talk about three major aspects of accounting Analytics with respect to each type of accounting study mentioned above-
1) Variance Analysis in Management Accounting
2) The concept of SVA in Financial Accounting
3) Trend Analysis in Auditing
1) Variance Analysis in Managerial Accounting
Managerial Accounting is a domain in which accountants prepare and use data for internal decision making process. We’d like to introduce you to a couple of ways in which advanced data analytics skills will help you make better internal decisions.
Case study of the usage of analytics in Dominos
Dominos India is a popular pizza restaurant chain in India. So, Dominos India implements standards to keep the costs of cheese in control with respect to every normal pizza size. They also measure how much cheese they start a day with, how much is prepared, and how much they end with so that they can see how much of it was used.
When a customer buys a pizza, say a medium size, the employees at Dominos are supposed to use a standard amount of cheese.
•If the employee doesn’t put enough cheese in the pizza, then customers may be dissatisfied.
•On the other hand, if employees put too much cheese on the pizza, then the profit margin decreases and Dominos’ shareholders are dissatisfied.
The company has to minimize the un-evenness.
Combining the point of sale data with inventory data and data about standard quantities of cheese can calculate variances to help identify if the employees are using the right amount of cheese.
Variance information can be criticized for being too old to make a difference. However, if one knows how to systematically fetch data at regular intervals and combine data, perhaps from, say, a point of sale system, spreadsheets, and QuickBooks, then one can help set up a process to calculate and communicate variances on a daily basis.
This is just the start. If you can gather the names of the employees who are responsible for serving the pizza, then you can also quantify the extent to which each employee is serving the right amount of cheese, helping managers to identify employees who may need additional training. All of this can be done with the help of Excel.
2) The Concept of SVA in Financial Accounting
Financial accounting is a domain of accounting that focuses on summarizing accounting transactions during a period of time for users external to an organization like investors, creditors, and regulators.
Shareholder Value Analytics
Shareholder value analysis (SVA) is one of several non-traditional metrics being used in business today. SVA determines the financial value of a company by looking at the returns it gives its stockholders and is based on the view that the objective of company directors is to maximize the wealth of company stockholders.
How is shareholder value calculated?
Shareholder value is calculated by dividing the estimated total net value of a company based on its present and future cash flows by the value of its shares of stock. The resulting figure indicates the company’s value to stockholders.
The Formula for Shareholder Value Added Is-
NOPAT=Net operating profit after tax
CC=Cost of capital
Why do the companies adopt SVA?
The principle of shareholder value is that a company adds value for its stockholders only when equity returns exceed equity costs. Once the amount of value is calculated, targets for improvement can be set and shareholder value can be used as a measure for managing performance.
Some of the value investors use SVA as a tool to judge the corporation’s profitability and management efficacy. This line of thinking often runs congruent with value-based management, which assumes that the foremost consideration of a corporation should be to maximize economic value for its shareholders.
Shareholder value is created when a company’s profits exceed its costs. But there is more than one way to calculate this.
3) Trend Analysis in Auditing
Auditing is the domain within accounting which focuses on whether the control procedures are being followed and whether the reported financial statements are accurate.
Case Study for the Application of Trend Analysis
Comfort Ltd. is a major player in the shoe industry in India and worldwide. We are here to have an audit examining how the number of orders shipped impacts its sales.
Let’s take a look at the following table showing the sales and number of orders shipped over five periods-Period 1 Period 2 Period 3 Period 4 Period 5
Sales 750,000 850,000 900,000 1,100,000 1,150,000 Change ($) 100,000 50,000 200,000 50,000 Change (%) 13% 6% 22% 5%
Orders Shipped 700 1,200 1,600 2,300 3,000 Change (Count) 500 400 700 700 Change (%) 71% 33% 44% 30% We can see that the information in the table shows solid performance over the five periods. Sales and orders shipped increase during each period.
So, can the auditors come to the conclusion that the company has faired well in the 5 periods?
It’s hard to answer without digging a little deeper. So, let’s take a look at the graph below which shows the sales and orders shipped information-
The graph clearly shows the same increasing sales and orders shipped. However, upon a closer examination, we see that the sales do not increase at the same rate as orders shipped. This shows us that the sales per order shipped are deteriorating.
Does this decrease in sales per order shipped represent an alarming development over the five periods? Not necessarily. It can be the company’s intent to increase the orders shipped over time. However, the company may want to investigate and take measures if the decreasing sales per order shipped numbers are not what the company wants or expects.
This is just an example of how analytics can be used in auditing. There are many more applications being used in the corporate world.
So, we hope that you must have understood the concept of accounting analytics and how analytics is widely used in the field of accounting. Hit the like button, if you liked our post; and subscribe our blog to be connected to us, as many more wonderful topics are underway-)
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