managerial vs financial accounting

managerial vs financial accounting

A Comparative Study of Managerial and Financial Accounting

1. Introduction to Managerial and Financial Accounting

The purpose of this case is to analyze how information from both managerial and financial accounting is used to evaluate the operational and financial performance of a company. The case consists of an Excel financial model that includes a complete pro forma income statement, balance sheet, and statement of cash flows for the 2001-2003 years. In the case, a group of students use real and pro forma financial statements to evaluate the 2001-2003 future cash flows and the common stock value of a public firm. The students are surprised in that they realize that the important information for generating pro forma financial statements comes from both financial data from the company’s service to the public; and managerial data, not because accounting should be perfect in theory but out of necessity, because a manager could not direct operational improvements without it.

There are two primary components of accounting. Managerial accounting is used to help managers make business decisions. Financial accounting is the compilation of information to ensure that the financial statements are in conformance with Generally Accepted Accounting Principles (GAAP) to make announcements to present and potential investors about the firm’s fiscal well-being. Although there are two separate titles for these two types of accounting, both functions are performed by the same individual. This is done so that the financial statements are in conformance with GAAP and to enforce a skilled authority that helps senior management in making decisions that enhance the operational efficiency of the firm.

2. Key Differences Between Managerial and Financial Accounting

1. Audience 2. Purpose 3. Emphasis 4. Rules and regulations 5. Precision 6. Timeliness 7. Aggregation 8. Reporting Frequency 9. Reporting Earnings

The differences between managerial and financial accounting include:

Managers use managerial accounting to make decisions, while investors and creditors use financial accounting to make decisions. Managerial accounting is aimed at a broad audience including stockholders and creditors as well as managerial decision-makers inside the company.

Managerial and financial accounting are two of the most prominent branches of the accounting discipline. The main difference between financial and managerial accounting is whether there’s a set of rules to be followed or not. In most cases, financial accounting is usually based on a set of predetermined rules rather than any logical conclusion. Students and professionals often have a hard time distinguishing between the two branches of the accounting term without the free help of the essay topics and ideas given here.

3. The Role and Importance of Managerial Accounting in Decision-Making

3.2 A Framework for Making Decisions Every manager is required to take a series of decisions. Decisions are taken at all levels in the organization by all individuals, every working day. From personal experience, decisions are probably taken every hour, and perhaps every five or ten minutes. Sometimes the decision alters the status quo, and regardless of the scope of responsibilities, reaching decisions is a recurring event. Every decision requires an identification and an assessment of the situation. The next, and probably more difficult step, in the decision-making process is to understand the problem, that is to consider it in its context, and identify the range of alternative courses of action, and their likely outcomes. These are the input parameters for the final key decision: What action should be taken? Frequently there is intense pressure to make the decision quickly. For a wide range of activities, the first-best decision is to recognize the urgency of the decision and act accordingly, but in many instances, that rapid determination conflicts with the requirement to take quality decisions. Quality is important!

Introduction The reports prepared for tax, regulatory, and pension purposes are not designed for planning, decision-making, and control purposes, and management accountants must provide these services. One major study concluded that decision-oriented accounting information depends largely upon format rather than on the underlying data, and a number of texts, including Federal Studies in Accounting, challenge the validity and reliability of accounting figures currently being used to assist decision-making. These are serious allegations, and therefore the purpose of this chapter is to consider the scope and role of management accounting in decision-making, with particular emphasis on planning and control.

4. The Role and Importance of Financial Accounting in External Reporting

Given this fundamentally different environment, it is inevitable that the information needs of external users will not be the same as those of internal users. Some of the differences are reflected in the objectives developed by the bodies responsible for setting accounting standards in different countries. Although these standards may use different wordings to describe what they seek to achieve, in essence, they are very similar. Thus, in the United States, the Financial Accounting Standards Board has formulated the objectives of financial reporting by business enterprises to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.

One important feature of financial accounting is that it has as its prime focus the needs of external users. These external users are in a very different position from internal users of accounting information, who have or can be given the opportunity to obtain much more comprehensive, detailed, and specific information about an entity’s activities.

The discussion in earlier sections of the various objectives of financial accounting, the users to whom financial accounting information is relevant, and the range of decisions which financial accounting information can assist in making indicates the diversity of needs which financial reporting must meet. It also provides some clues as to why financial accounting has developed as it has.

5. Case Studies and Examples in Managerial and Financial Accounting

However, this real-life drama provides an ideal setting with which to illustrate and to critically discuss the learning objectives of managerial accounting. Many of these companies have exploited technology at the cutting edge. This has provided the opportunity to expand market potential and initiate operations at a breathtaking pace. Providing the information on which management can plan, control, and evaluate these decisions is essential. In finance, as well as in operations, even the most elementary concepts are required for structured decision-making. There is nothing unique about these companies, the issues, or the decisions. Indeed, their central importance is reflected in the fact that these issues troubled many others at the time. We use some “mini” case studies and examples to illustrate the context in which these learning objectives can be achieved in managerial accounting.

The use of examples and case studies is a common means of illustrating rather abstract topics in the classroom. Often, the examples use a familiar concept in a new or different situation to create learning. In this chapter, we follow this approach to illustrate the use of managerial and financial accounting concepts in a business context. We have developed cases and examples around popular company stories of the last decade. Much newsprint has been spent on the glories, the losses, and the disappointments of a collection of companies during this period of corporate drama. For the most part, it is a drama full of errors of judgment and management, optimism beyond logic, information selected for maximum effect, and lessons of history ignored.