Chapter 1
Overview of Managerial Accounting
T
Thhee B
Baassiicc O
Obbjjeeccttiivvee ooff A
Accccoouunnttiinngg
The basic objective of A
ACCCCOOUUNNTTIINNGG is to provide (STAKEHOLDERS) with useful
information about a business enterprise in order to help them make rational economic
decisions.
The basic objective of FINANCIAL ACCOUNTING is to provide EXTERNAL USERS (e.g.,
investors, creditors, financial analysts,etc.) with useful financial information about the
financial performance health, and cash flows of a business enterprise in order to help them
make investment and credit decisions.
The basic objective of MANAGEMENT ACCOUNTING is to provide INTERNAL USERS (i.e.,
managers of a company at all levels) with financial and non-financial information about a
business enterprise that help them make business decisions so as to achieve the goals of
the organization.
Figure 1
Users of Accounting Information (Stakeholders)
External Users
Internal Users
)
(They cannot access the Accounting Records)
(They have access to the Accounting Records)
Financial Accounting
Auditing
Current owners (shareholders):
Want to know if they should hold, buy more, or sell
their shares in a particular company.
Potential Investors:
Want to know if a company is a good investment.
Creditors: (e.g., suppliers, banks, ...etc.)
Want to know if they should extend credit to the firm,
how much to extend, and for how long.
Income tax authorities:
Want to know if taxable income is measured properly.
Others. (e.g., Financial Analysts, Labor Unions,
Customers, Legislators, Government regulators).
Managerial Accounting
Managers of the firm at all levels
Need Information to make
decisions related to:
Planning
Implementing
the Plan &
Decision
Making
Controlling
&
Performance
Evaluation
Feedback
Financial Statements
1. Balance Sheet measures the Financial Health of the Company.
2. Income Statement measures the Financial Success of the Company.
3. Cash Flow Statement measures the Liquidity of the Company.
1. How does a company decide on the amount of information to disclose?
2. In what format should its financial information be presented?
3. How should each item be measured?
Companies must prepare the Financial Statements according to generally accepted set of
rules, standards, principles, and concepts referred to as:
Generally Accepted Accounting Principles (GAAP)
Figure 2
Managerial Accounting
Planning
Establishing goals and objectives,
predicting results, and drawing a
detailed plan of who will do what,
when and how to achieve the
desired goals.
Implementing the Plan &
Decion Making
Controlling &
Performance Evaluation
Directing, Motivating, and
Measuring Performance
Keeping the firm's activities on
track and ensuring that the plan
has been followed in the
implementation process.
Budgeting
(Ch. 6)
Variance Analysis
(Chs. 7, and 8)
Measuring Costs of
Operations
(Product Costing Systems)
Job Order Costing
System
(Ch. 4)
Activity-Based
Costing System
(ABC)
Process Costing
System
(Ch. 5)
(Chs. 17 & 18)
Decision Making
CVP Analysis (Ch. 3)
Decision Making (Ch.
11)
Fundamental Concepts & Foundation
Cost Concepts (Ch. 2)
Estimating Cost Behavior (Ch. 10)
Alternative Costing Methods (Ch. 9)
Comparing Managerial Accounting and
Financial Accounting
There are both similarities and differences between managerial and financial accounting.
o Both fields of accounting deal with the economic events of a business and require
that the results of that company's economic events be quantified and communicated
to interested parties.
o The two fields differ along several diminutions including: primary users of reports,
types and frequency of reports, purpose of reports, content of reports, and
verification process.
Perspective
Financial Accounting
Managerial Accounting
Primary Users
External users: Investors, Internal users: Managers of a
creditors, tax authorities.
firm at all levels.
Time Orientation (focus)
Past
Purpose of reports
General Purpose to help Special-purpose for a particular
external
users
make user for a specific decision.
investment & credit decisions.
Frequency of Reporting
Periodic (e.g., quarterly)
As frequent as needed
Level of Aggregation
Aggregate
Very detailed
Current & Future
Rules& Regulations of Regulated. Must follow GAAP No GAAP. Uses Cost Benefit
Reporting
concept.
Guideline for judging
Usefulness of Info.
Focus is on Reliability
Focus is on Relevance
Verification process
Independent Audit
Internal Audit
