financial and managerial accounting 7th edition

financial and managerial accounting 7th edition

The Comprehensive Guide to Financial and Managerial Accounting: 7th Edition

1. Introduction to Financial and Managerial Accounting

Accounting is a service that provides useful and accurate financial information for businesses and investors to help them make proper business and financial decisions. Financial accounting is the process by which financial information about a business, such as its reporting operations, using mathematical and statistical skills. It takes more experience to manage a service business than it takes to manage a merchandising business. The elements of merchandising control also apply to service control. Financial Reporting Standards have many complex rules, and they have been aggressively enforcing these standards.

In this chapter, we will take a closer look at both financial and managerial accounting. We will begin with an introduction to financial accounting and continue by explaining the four major financial statements. We will also look at how these statements are used. We will conclude by discussing what financial accounting does not tell us. We will then move on to an introduction to managerial accounting and the functions of managerial accounting. Finally, we will take a look at ethical guidelines in business and the three levels of professional ethics.

Busy Beaver: The Comprehensive Guide to Financial and Managerial Accounting, 7th Edition

2. Fundamental Principles of Accounting

Accounting is often called “the language of business”. This language provides users with vital information about the financial position and operating results of a company. It allows managers to translate a vast array of diverse facts about a company into understandable and meaningful terms. Of course, the process is not always as direct and clear-cut as it seems. Indeed, accounting is as much an art as it is a science.

Competent management decisions in companies require a solid understanding of accounting. The basic function of accounting is to identify, record, and communicate the economic events of a company to interested users. This sounds relatively simple but, in fact, accounting is a complex subject that encompasses a broad body of knowledge.

Our goal is to prepare you to use accounting to solve business problems.

This text is designed for both the two-year and the four-year college undergraduate who wants an in-depth understanding of financial and managerial accounting concepts and procedures.

Introduction

Use accounting concepts and procedures to solve business problems.

3. Financial Statements and Reporting

Financial and managerial accounting serve as key building blocks to better understanding accounting information and accounting systems. The accounting information is recorded, processed, stored, and made available for various stakeholders’ decisions. Stakeholders include shareholders, financial analysts, creditors, unions, and federal, state, and local governments. Financial and managerial accounting help to organize diverse and dispersed pieces of information into both meaningful and useful reports. These reports are both numerical and non-numerical. They are communicated to management, internal and external stakeholders, and other decision-makers. The information helps management generate cash, budget and control cash, and properly report cash performance. Small businesses adapt financial and managerial accounting systems to their business models and strategies. Small businesses and not-for-profit leaders ensure that their business transactions are accurately recorded, processed, and stored. Restaurants are required to provide separate steak, liquor, and food receipts to customers and federal, state, and local governments.

Chapter 4, Financial Statements and Reporting, is an easy to understand and easy set to follow outline that includes definitions of financial and managerial accounting; the interrelationships between cash generation, budgeting, control, and reporting; general-purpose financial statements and how they apply to different companies; the buying and selling decisions of financial statement users; the importance of accounting rules and ethics; and the performance evaluation and improvement of a company. The appendix to Chapter 4 includes accounting jargon and the way to solve and analyze business transactions and accounting questions. Overall, you will find this guide to be the perfect partner for studying financial and managerial accounting.

4. Cost Behavior and Analysis

Unit cost may assume forms of increasing cost, decreasing cost, or any performance gradient in between. The same types of performance gradients are also assumed for total costs. While the form may vary among different cost components, however, cost per unit as well as total costs may not closely resemble any known geometric terms. As costs change, the cost-behavior pattern is also subject to immediate change. Although some costs may change faster or slower than the expected speed, the cost-behavior relationships of all influences on costs, as well as the degree of consistency, provide a basis of magnitude. These different behavior patterns and their management synthesis provide an opportunity for interpretation and investigation. Accounting benefits from these new roles by measuring products and costs, and thus becoming more valuable to management.

Cost behavior includes the changes that take place in costs and their relationship because of changes in the level of production. Statements based on generally observed historical records specifically indicate behavior patterns of many different costs. Because these historical records show continual changes, they indicate that unit or total costs can be plotted as graphs with output on one axis, while either total cost or cost per unit is plotted on the other axis. Unfortunately, a lack of knowledge regarding cost references has often caused many accountants to be preoccupied with the assumption that unit or total costs behave well for all relevant and useful costs. However, this single assumption is often unrealistic, and it is generally inappropriate in cost-behavior relationships.

5. Budgeting and Performance Evaluation

Even if your particular job responsibility does not involve personal involvement in the budgeting process, it is important to have an understanding of some of the key elements of accounting and budgeting, which are inherently connected as an outcropping of a good accounting/managerial system and control significant aspects of your enterprise. This chapter is designed to accomplish three things: first, to demonstrate how accounting embraces an organic whole of building individual or master budgets; second, to provide a chapter that deals with accounting management aspects that students will find the most interesting and tied to everyday life; and third, to show that budgeting, especially related to variance performance analysis, encompasses a good bit of the material we have developed in previous chapters. As you read on, you should bear in mind that although budgeting is a standalone topic, accounting preparation plays a support role.

The process begins with various departments developing their detailed operating plans for the coming year. These “sub-budgets,” as they are called, are submitted to the central budget authority, which revises and consolidates the sub-budgets into the completed operating budget. Upon adoption, managers are held responsible for the actual results—revenue and expense performances are compared to the plan and interdepartmental conflicts arising because budgets have not been met are resolved.

The operating budget represents a primary component (or roadmap) of the master budget. Its function is critical. In a service business, the budget spells out how much service is to be provided and at what cost. In a merchandising or manufacturing operation, strategic product-mix and cost-of-sales decisions are made. Throughout an organization, revenue and expense transactions are planned with the operating budget.

In smaller companies, the budget is part of the business plan; in larger organizations, the plan evolves into many separate budgets, gathered together into what is called a master budget. The process usually involves several rounds of negotiating and bargaining. Functional managers submit their budget requests to a central budget committee; this level may or may not include top management. All proposed spending is examined in the harsh and uncompromising light of borderline essentials. Each line of the budget is scrutinized below the level of each subtotal, and the central budget committee works with the functional managers until a mutually agreeable plan best serving the total organization is assembled. Once top management approves, the final budget documents become the company’s financial plan for the next year, or whatever time period is used as the base.

Most well-run businesses prepare a comprehensive annual budget. Such a document expresses financial as well as operating goals and action plans for accomplishing those goals. The budget focuses not so much on the business confronted with a range of external influences, such as competition, technology, regulation, and currency fluctuations, as on the managers and supervisors who control each of the business’s many activities.

The Role of Budgets

– Explain the functions of a budget – Prepare the operating budget – Discuss other master budgets – Consider the need to adjust budgeted income data when performance is evaluated – Use variance analysis to explain changes in income – Describe responsibility accounting

Learning Objectives