BESTLINK COLLEGE OF THE PHILIPPINES Page 1

CHAPTER 2
2.0 Introduction

Project study is more effective and satisfying, with all the necessary documents
presented together with it. Exploring studies as well as literatures creates a more solid
proof of the main agenda of the proposed study. In this chapter studies and literatures are
presented divided into two, mainly representing the local and international. Making
differences create a new possibility for a much effective solution.

2.1 Related Literature

2.1.1 Foreign Literature

Financial Analysis on China Eastern Airline Company

According to China Eastern Airline Company's financial analysis based on its

financial report which were include the Balance sheet and Profit and loss Account of the
Company in year 2000 and 2001

The Financial Analysis was analyzed by using the types of financial analysis
methods. It is includes:
The Common Size balance sheet of the China Eastern Airline in year ended 2001 with
the analysis and explanation.

The Horizontal analysis over the Profit and Loss Account between year 2000 and
2001 with the explanation. Calculated the China Eastern Airline Company's finance
Ratios for both year 2000 and 2001.The analysis of financial indicators of China Eastern
Airline Company by from the Ratio calculation and at the same time, some of the risks
that company may face in its future business develop was also listed on the Financial
Analysis..

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 2

At the ended of the Financial Analysis, after go through and analysis the Financial
statement of China Eastern Airline Company, the author was give some
recommendations and suggestions to the company which may help the company have
better develop and improve at the future time.

Southwest Airline Co. and Cost Accounting

Based on Southwest Airline Co. is a major passenger airline that provides

scheduled air transportation in the United States. Southwest provides point-to-point
service which allows the use of key assets, including aircrafts, gates, employees, and the
ability to provide frequent, conveniently- timed flights and low fares. Southwest Airlines
has built its culture from the inside out and believes that the satisfied employees will keep
customers coming back.

Southwest Airlines operates with a low-cost structure that is designed to allow it

to charge low airfares. With that said, cost accounting can have a pervasive influence in
this and other organizations. From the company’s 2006 annual report-Disclosure
Regarding Forward-Looking Information, Item 1A. Risk Factors; fuel price volatility
presents one of the company’s most significant challenges. Southwest for the past five
years of this annual report, has hedged its fuel risk as part of its lost cost strategy. While
this also demonstrates the use of cost accounting, the company entered into fuel
derivatives contracts to protect against rising fuel costs.
Southwest Airlines uses cost accountants in contributing to the external financial reports
such as inventory valuation as noted on page 55, under Notes Consolidated Financial
Statements – (Continued) – Inventories, which consists of flight equipment expendable
parts, materials, aircraft fuel, and supplies. The cost accountant determines the valuation
method that is in the best interest of the company and favorable to the stockholder. There
is an advantage to having cost accountants, they create reports used strictly for internal
use and are not restricted to generally accepted accounting principles (GAAP).

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 3

Financial performance measures

ACCOUNTING AND FINANCE RESEARCH UNIT
An international survey of performance
Measurement and benchmarking by airlines

Based on Airline literature measuring various aspects of financial performance is

important for airlines operating on tight margins. It is important to measure those aspects
of which are contributing to the overall performance and not just the traditional ‘bottom
line’ measure. As one of our respondents observed: ‘Airlines are by nature a strange mix
of retail and technical industries with large cost base and cash flow variations.
Performance measurement is essential in the tough low margin business environment.’ In
terms of the reported use of financial performance measures the more traditional profit
based measures were the most used and tended to be seen as useful. In particular there
was a focus on operating revenue and expenses. Profit was far more widely used than
investor ratios such as earnings per share (EPS) and price earnings ratios (P/E), whose
low uptake and usefulness can be explained by the fact that by no means the respondents
were in private ownership (46 per cent of respondents had a government stake in
ownership and 54 per cent did not).

This working paper has the following structure. In order to place our survey in
context, the next section outlines the importance of performance measurement to airlines.
This is followed by a section outlining the methods used to collect data and a section on
the demographics and non-response bias of the survey. The results of the survey are then
described and some conclusions drawn.

2.2.2 Local Literature

CONCEPTS AND PRINCIPLES OF INTERNAL AUDIT

To complement the implementation of the National Guidelines on Internal

Control Systems (NGICS), the Philippine Government Internal Audit Manual (PGIAM)

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 4

is being issued to explain and clarify the nature and scope of internal audit in the
Philippine public sector, including its institutional arrangements, as well as its protocols
and processes. In October 2008, the Department of Budget and Management issued the
NGICS pursuant to Administrative Order No. 119 dated 29 March 1989 and
Memorandum Order No. 277 dated 17 January 1990 which directs the DBM to
promulgate the necessary rules, regulations and circulars for the strengthening \ of the
internal control systems of government agencies. Following the provisions of the
Constitution, the Government Auditing Code of the Philippines (Presidential Decree No.
1445 dated 11 June 1978, as amended), the Administrative Code of 1987 and the United
Nations Convention Against Corruption (UNCAC), the NGICS serves as a guide to the
heads of departments and agencies in designing, installing, implementing and monitoring
a strong and responsive internal control system.

In fulfilling their mandates and missions, departments and agencies must consider and
observe the general objectives of internal control, namely to:
1. Safeguard assets;
2. Check the accuracy and reliability of accounting data;
3. Ensure efficient, effective, ethical and economical operations;
4. Comply with laws and regulations; and
5. Adhere to managerial policies.

To achieve these objectives, five interrelated internal control components as enumerated

below need to be set in place:

1. Control environment;
2. Risk assessment;
3. Control activities;
4. Information and communication; and
5. Monitoring.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 5

While it is the direct responsibility of the agency head to install, implement and
monitor a sound system of internal control, the Internal Audit Service/Unit (IAS/IAU)
assists him/her by conducting a separate evaluation of the internal control system (ICS)
to determine if controls are well designed and properly implemented. This function of
the IAS/IAU is separate or distinct from the function of the operating units, other support
units, and their equivalent in Government-Owned and/or -Controlled Corporations
(GOCCs) and Government Financial Institutions (GFIs), which monitor and institute
continual improvement of internal controls to support the achievement of performance
targets and organizational objectives.

From a baseline assessment of the ICS which identifies gaps or control

deficiencies, the IAS/IAU recommends an audit agenda for approval by the Department
Secretary/Head of Agency (DS/HoA) or the Governing Board/Audit Committee
(GB/AuditCom). Once approved, internal audit is conducted based on set procedures and
criteria. The results of internal audit are submitted to the DS/HoA or the GB/AuditCom
with appropriate recommendations. The PGIAM provides guidelines and protocols in the
performance of these internal audit functions.

Managerial and Financial Accounting Report

Based on this report the role of managerial accounting is increasing. These

managers have to be able to increase effectively the involvement and size of
organizations. These business managers also have to be aware of the rapid growth and
enactment of technology.

When examining the major differences between financial and managerial

accounting, we find that with financial accounting the information is reported in
statements. The financial statements objectively and periodically report the results of past
operations and the financial condition of the business according to the Generally
Accepted Accounting Principles (GAAP) (Vallabhaneni, 2003). Examples include
shareholders, creditors, government agencies, and the public. On the other hand,
Airline Finance and Accounting
 BESTLINK COLLEGE OF THE PHILIPPINES Page 6

managerial accounting information includes both historical and estimated data used by
management in conducting daily operations, planning future operations, and developing
overall business strategies (Vallabhaneni, 2003).

Managerial accounting also includes information for decision-making, planning,

directing, controlling an organization's operations, and appraising its competitive
position. Managerial accounting has internal users of information. These users comprise
of business managers at all levels in the organization. Financial accounting uses external
users of information. These users include stockholders, financial analysts, lenders,
unions, consumer groups, and government agencies. This is hard data, and must meet
audit criteria to be acceptable. Managerial Accounting rules are set within the company to
carry out management objectives related to adding value to the company. Managerial
accounting data must only be relevant for management decisions.

Financial Reporting

Based on government repot the Fiscal Manager should prepare a set of monthly
financial reports for distribution to the President, and the Budget and Finance Committee.
The reports should include: a balance sheet and a statement of income and expenses for
each department (operating, project); a consolidated balance sheet and consolidated
income and expense report which show all departments combined; a budget-to-actual
report for all accounts included in the annual operating budget; a list of deferred and
receivable funds, and a cash flow projection. In addition, the monthly reports for the
quarterly periods (December, March, June, September) will be submitted to the full
board for their review and acceptance at the following board meeting.

The monthly statements should be reviewed by the President or Vice President

prior to distribution to the Treasurer for initial comments. After the Treasurer=s approval,
the statements will be mailed to the Budget and Finance Committee every month and to
the full board as stated above. The monthly statements will be finalized by the conclusion
of the month following the statement period.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 7

Year-End Report/Audit:
At fiscal year-end, and in time for the winter retreat of the Board of Directors, a year end
Audit report should be prepared summarizing the total income and expense activity for
the year. A balance sheet should be prepared as of September 30 and should be attached
to the income and expense report. This report will be initially reviewed by the President
and Vice President, and then by the Treasurer, prior to distribution at the annual meeting.
Bids for an independent auditor to conduct this review will be accepted between
September 1 and October 15. In accordance with XXX policy, at least three proposals
will be considered. The auditing process will begin on or about November 1.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 8

2.2 Related Studies

2.2.1 Foreign Studies

Management Accounting Change: A Case Study of Balanced Scorecard

Implementation in a Portuguese Service Company
Luís Pimentel
ISCTE Business School, Lisbon
Maria João Major
ISCTE Business School, Lisbon
Av. das Forças Armadas, Cacifo 105-A, 1649-026 Lisboa;

This paper presents a longitudinal case study of management accounting (MA)

change in a Portuguese service company operating within the information technology
(IT) business which has implemented the Balanced Scorecard (BSC). BSC
implementation turned out to be problematic. It took too long and faced several
difficulties and obstacles. Drawing upon Kasurinen’s (2002) revised model of accounting
change, the factors that created a potential for change (motivators, facilitators and
catalysts) and the events that seek to explain how the process of change evolved
(momentum and leadership) are identified. Furthermore, Kasurinen’s barriers to change
(confusers, frustrators and delayers) have been recognised in the study. This investigation
demonstrates how Kasurinen’s (2002) framework can help researchers to understand the
reasons and explanations as to why change occurs in organizations and the process by
which MA changes.
The process of Balanced Scorecard (BSC) implementation may be considered one
of the most common examples of MA change these days (Epstein and Manzoni, 1997;
Sousa and Rodrigues, 2002). Broadly conceived, the BSC is a tool that, if framed
properly in the organizational culture and if linked accurately to the global management
system of companies, has a high potential that surpasses its technical characteristic as a
framework for performance evaluation. The aim of this research is to contribute to the
understanding of the reasons and explanations as to why and how MA change occurs, by
analysing the advancing forces of change and the wide range of potential problems

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 9

related to change implementation identified in a specific Portuguese IT company (called

Alpha1), in a BSC context.

STUDYING THE DIALECTICS BETWEEN AND WITHIN MANAGEMENT

PHILOSOPHY AND MANAGEMENT ACCOUNTING
Norio Sawabe
Graduate School of Economics,
Kyoto University
Sumitaka Ushio
Graduate School of Economics,
Kyoto University
Management accounting researchers have long been interested in the relationship
between organizational culture and management accounting practices (Bhimani, 1999,
2003, 2007, Ahrens, 1996, 1997, 1999). Existing literature on management accounting
and organizational culture suggest that success or failure of a management accounting
system is influenced by the cultural values held by the users of that management
accounting system. (Bhimani, 2003; Dent 1987).
One potential weakness of the existing literature is that it treats culture at a level or
domain where it is considered to be internally consistent throughout an organisation.
Even where the literature acknowledges that an organization is comprised of culturally
heterogeneous groups, groups that exhibit similar cultural orientations are analysed
collectively as a much larger group. Within the literature, it seems to be assumed that
culture is coherent within the chosen unit of analysis, and that consistency exists between
culture and management accounting practices.

The rest of the paper is structured as follows. The next section outlines our
research methods. In that section we outline how we have utilised an empirical study
based upon detailed field research at a manufacturing firm. The firm, examined in this
research, has been the subject of management accounting research since the 1990s, as a
part of the Japanese management accounting research bandwagon, due to its unique and
sophisticated management style. In the following section we review existing literature on

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 10

the relationship between management philosophy and management accounting, and on

the management accounting system of the firm. In the next section we discuss Giddens’
structuration theory and new institutional theory, and develop a simplified model of
evolutionary institutional processes that has a focus on the inconsistencies and conflicts
in an organization. We then proceed to discuss the findings from the case site and analyse
how management philosophy and management accounting constitute each other in a
dialectic manner at the case site.

Airline Financial Analysis

Financial reports submitted to DOT are generally unaudited, but they must tie to
the airlines’ GAAP reporting. The system is a holdover from the days of complete
government regulation of the airline industry under the Civil Aeronautics Board (CAB),
which mandated an industry-wide standard for accounts and reports. With airline
deregulation and modernization of enterprise-wide accounting systems, carriers now have
a diverse array of accounting system choices. They either must have their accounting
system approved by DOT, and let DOT do the translation of their reports into Form 41
format, or they must translate their own accounting system output into DOT format
before reports are submitted. The resulting comparability across carriers makes Form 41
data widely used in finance, economics, and industry analysis and for competitive
benchmarking.

sThe student of finance studying airlines for the first time is learning a foreign
language; the most widely-used aviation benchmarks are different from those used in
other industries and the source of the information used to calculate those ratios is seldom
identified. For example, O’Connor’s (2001) An Introduction to Airline Economics
defines airline ratios but does not specifically discuss Form 41 data or how to get it. This
is pretty typical of the literature; those who are in the field use Form 41 data for many
purposes but seldom identify its origins.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 11

2.2.2 Local Study

IT FIRM REVOLUTIONIZE PHILIPPINES ACCOUNTING PRACTICE

By Antonio L. Colina IV

Sunday, August 11, 2013

According to the article of Sun Star Davao newspaper a homegrown Davao

developers recently launched the first-of-a-kind accounting software in the Philippines
that is set to revolutionize the accounting practice in the country.

When just about every company advances to employing computerization, what's

left of accountants still are a truckload of works need to be accomplished from making
internal reports, to a tedious job of making Bureau of Internal Revenue (BIR) compliance
reports.

There's not only one accounting system software in the Philippines, many of them
came mostly from other international software firms.

The problem, however, is that some, if not all of them, do not directly meet what
the accountants, or the accounting department of a company at least, look for in an
accounting software based on the Philippine set-up.

Tito said Easy Journal is the brainchild of the collaboration between him, as the
certified public accountant (CPA) and of the two Information Technology (IT) experts --
Rey Anthony Tito, marketing head, and Edmund Ado, IT head. In that way, they came up
with a solution that can help accountants cut almost 90 percent of their workload.

Before, he said an accountant has to go through several phases of making BIR

statutory reports, but Easy Journal can cut the work into one phase as it can produce
computer-generated reports.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 12

Easy Journal is equipped with BIR forms, BIR certificates, BIR Reports
Summary, BIR Date Files, and Standard Financial Reports. These forms are exactly
patterned from the BIR compliance reports in its digitalized format.

What one only needs to do involves only few steps; first, input all the necessary
data; and second, produce a printout of all computer-generated BIR reports and they're
good to go!

Published in the Sun.Star Davao newspaper on August 12, 2013.

TRADITIONAL COST ACCOUNTING SYSTEM TODAY

Marivic V. Manalo, CPA MBA
De La Salle University – Manila, Philippines

According to the study of Mr. Marivic Manalo of De La Salle University

manufacturing and cost accounting in the country became so linked because of the
necessity to determine profit on goods produced, sold and shipped. Early decisions made
within this relationship fostered a certain bench mark or standard upon which most of the
manufacturers in the earlier times will use as method. In the past, using direct labor as
basis for the computation of overhead costs to be charged on the products manufactured
would make sense, since it has contributed to the largest percentage of the cost that was
expended in manufacturing products such as, automobiles, trains, garments, etc. This
procedure of allocating costs incurred in production, other than direct materials and direct
labor costs was known as the traditional costing method.

Despite the fact that it is over 75 years old, most companies still use standard cost
systems to value inventory for financial statement purposes and for many other
management
purposes as well. This standard cost system has some advantages for financial statement
purposes (e.g., for simplicity and consistency). However, in this modern times where the
way

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 13

we do business have changed, insisting on the use of the traditional costing system would
be
misleading as a tool to assist in making effective management decisions.

The traditional cost accounting is becoming ineffective if not obsolete in the

current global competitive world of business. The business scenario in the olden times for
which it was developed and used is no longer the current business trend. Using standard
cost, which is the one being advocated by traditional costing system was designed for a
company that had: 1) homogeneous products, 2) large direct costs compared to indirect
costs, 3) limited ability to collect data and 4) low “below the line” costs. On the other
hand, today’s companies typically have 1) a wide variety and complexity of products and
services, 2) high overhead costs compared to direct labor, 3) an overabundance of data
and 4) substantial non product (e.g., distribution channels) costs that can dramatically
affect true product cost.

Many manufacturing companies are still arbitrarily attaching overhead to products

using direct labor as the basis. These companies often allocate the largest cost (i.e.,
overhead) based on the smallest cost (i.e., direct labor). Because of product variety and
product line complexity, using one homogeneous overhead rate which is being utilized
under traditional costing system, is no longer an appropriate average. Lastly, the modern
business environment today, is now characterized by high technology, high-speed, state-
of-the-art data collection and reporting systems. With the proper tools and equipment,
gathering and manipulation of data in a multiple complex ways is no longer an issue. As
a result of these changes, the traditional system, with its "one-size-fits-all" approach, is
not an adequate tool for today's business conditions. Not only is the traditional costing
method unable to supply the necessary framework for measuring cost accurately, it
cannot also empower managers with sufficient information needed to manage the
company’s operations effectively and profitably.

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 14

Financial Accountancy (or Financial Accounting)

Financial accountancy (or financial accounting) is the field of accountancy

concerned with the preparation of financial statements for decision makers, such as
stockholders, suppliers, banks, employees, government agencies, owners, and other
stakeholders. The fundamental need for financial accounting is to reduce principal-agent
problem by measuring and monitoring agents' performance and reporting the results to
interested users.

Financial accountancy is used to prepare accounting information for people

outside the organization or not involved in the day to day running of the company.
Managerial accounting provides accounting information to help managers make decisions
to manage the business.
Objective of Financial Accounting (FA):

The objective of financial accounting is to collect accurate, systematic, and timely

financial data and other financial information, and to compile and consolidate it in an
organized and systematic way, according to the principles and rules of accounting, for
reporting purpose.
The financial managers use these reports to assess the financial position of the company
through various financial management tools and then the financial position can be
compared to, or benchmarked against, the industry norms. The four different financial
statements used for the purpose of reporting and analysis are

1. Balance Sheet
2. P/L or Income Statement
3. Cash Flow Statement
4. Statement of Retained Earnings (or Shareholders’ Equity Statement)
In financial accounting, assets are recorded on the basis of historical costs in the
balance sheet, i.e., the assets are recorded at their original purchase price. Of course, the

Airline Finance and Accounting

 BESTLINK COLLEGE OF THE PHILIPPINES Page 15

depreciation on the asset is duly subtracted from its original value as the asset remains in
use of the business.
However, in financial management, book value is seldom used and financial managers
consider the market value and the intrinsic value of assets.

2.3 Synthesis and Significance of the Study

Most of the studies or reports presented have common problems it is all about the
cash flow of every transaction. Debits are usually unavoidable and creating a much better
solution to it is very difficult to achieve at these instances. Also some of the problems are
greatly affected by the exchange of dollar rates or value of the present monetary
circulation in a specific market.

Airline Finance and Accounting