Managerial vs. Financial Accounting

Things You Must Know

Practice Test

Managerial accounting is directed towards providing information to managers inside the organization.

Examples of activities performed by managerial accountants are:

1. Determining the cost of providing a service or making a product
2. Assist management in profit planning and formalizing the plans into budgets
3. Determine the behavior of costs and how profit will change as sales and production volumes change
4. Compare actual costs and financial results with budgeted costs and results
5. Providing cost and sales information necessary for management to use to make a decision.

Managerial accountants prepare reports and analyze data.

Reporting and analysis is often related to parts/departments/functions of the company rather than reporting on the entire organization as a whole.

There are no required specific formats for reporting –

the management accountant provides the report that gives the most useful information.

Management Functions:

Planning:

Identify objectives the company wants to accomplish which will add value to the company and increase profits.
Discuss ways to accomplish the objectives
Prepare budgets to accomplish the profit objective

Directing/Motivating:

Coordinating the activities to produce a smooth running operation.
Oversee day to day activities and keep the organization functioning smoothly
Assign jobs/tasks – answer questions – solve problems

Controlling:

Make sure the plans are being followed and objectives are accomplished
Performance reporting – compare actual results to the budget
Implement changes when objectives and goals are not being accomplished

Decision Making:

Use all information provided to make good business decisions.

Comparison of Financial Accounting and Managerial Accounting:

FINANCIAL ACCOUNTING:

Reports are provided outside the organization – external reports
Reports past activities – based on a historical perspective
Reliability of data is emphasized – reports take more time to provide
Focus on precise information since they are used outside the company
Summarized data for entire company as a whole
Must follow GAAP which has specific required external reports

MANAGERIAL ACCOUNTING:

Does not follow GAAP and there are no reporting regulations
Prepares reports only for management’s internal use
Provides information to make decisions regarding the future
Relevance of data is emphasized over reliability
Focuses on timeliness of information
Nothing is required to be reported, reports what management needs to see
Reporting is focused on parts of the organization such as departments or
divisions and not on the organization as a whole.

The Institute of Management Accountants:

Goal is to assist those working in managerial accounting positions to
develop professionally. Provide general guidelines and assistance
for managerial accountants
Sponsors the Certified Managerial Accountant certification
Developed the Standards for Ethical Conduct for Practitioners of
Management Accounting and Financial Management:
The 4 components of this ethical standard are:

Competence
– maintain competence by ongoing development of knowledge and skills
– perform duties in accordance with relevant laws, regulations and technical standards
– prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information

Confidentiality

– refrain from disclosing confidential information except where authorized to do so

Integrity

– avoid actual or apparent conflicts of interest and always advise of any conflicts of interest that arise
– refuse any gift or favor that would appear to influence your actions
– recognize and communicate any professional limitations that would preclude you from doing an adequate job

Objectivity
– communicate information fairly and objectively
– disclose all relevant information that could influence the decision maker
– communicate unfavorable as well as favorable information and do not be biased towards one outcome or another

Resolving an ethical delimna:

1st – follow the established procedures within your organization
2nd – if the issue is not resolved to your satisfaction,

present problems to the next higher management level
if you are not clear on the issues, discuss with an objective advisor to clarify your alternatives and solutions

3rd – if the issue can not be resolved, resign from your position

These other issues are often mentioned in the first chapter of a managerial
accounting text book. Please check your notes to make sure you are not overlooking
the following things that your professor may have discussed in class which are not
noted on this review sheet. These items are not often discussed:

1. Just in time inventory
2. Total quality management
3. Enterprise resource planning
4. Supply chain management
5. Benchmarking
6. The accounting organizational structure – Chief financial officer, controller,
managerial accountant, general ledger accountant
7. Cost Accounting Standards Board