financial and managerial accounting 9th edition

financial and managerial accounting 9th edition

The Role and Importance of Financial and Managerial Accounting in Business Operations

1. Introduction to Financial and Managerial Accounting

Now let us look at that machine from a stockholder’s perspective – the future cash flows and other financial returns of the company. Wouldn’t you, as an owner, want to know how the machine is doing today as an indicator of how the business should perform in the future? You can look at the actual annual financial returns to judge the past performance, but financial returns are lagged and only provide delayed feedback as to what is really happening. Is this a place for financial accounting? In fact, not only does financial accounting provide information to assist in judging stock performance, but it also establishes the rules that the company uses to judge itself. In other words, statements are created for stockholders, but they are created with the company’s best interests in mind. Moreover, the stockholders are not part of the company; they must, for the most part, rely on information that is created and published after the fact to aid them in their investment decisions. Thus, financial accounting is the other discipline within accounting that generates financial information, mostly for users external to the company.

Let’s consider a company as being a machine that has a large number of moving parts. The stockholders are the owners of the machine and hire a few managers to run the machine. The managers, in turn, go out and hire a management team as well as hundreds of workers to work on the machine. The managers are ultimately responsible to the owners (stockholders) of the machine and must, therefore, have good information in order to ensure that the machine’s operations are as efficient and effective as they can be. Similarly, taxpayers are the owners of government business. If you own a business and hire managers on your behalf, you want them to provide you with good operational information so that the business operates efficiently and effectively. Isn’t this why managers, and often the owners they serve, want good information? Immediately, the role of management information makes sense – to aid in efficiency and effectiveness. And management accounting is the process that generates such information.

There are two fundamental elements of the accounting profession: financial accounting and managerial accounting. Financial accounting, of course, is the act of creating external financial statements such as the income statement, balance sheet, and statement of cash flows. Managerial accounting is the act of creating internal financial statements and other financial information for the purposes of helping managers in their operations.

2. Fundamental Concepts and Principles in Accounting

In response to these and other fraudulent activities by management, the U.S. Congress, SEC, major stock exchanges, and many of the country’s CPA firms have worked very closely with business leaders, accounting educators, and practitioners to better identify the role of accounting, as well as the principles that should guide its development and implementation. This will ensure that the accounting informational needs of all business stakeholders are met.

The fundamental concepts and principles that guide the development of accounting maximize the transparency and convey the most relevant and reliable information about a business to its management and multiple stakeholders. These stakeholders include the business owners, investors, lenders, suppliers, employees, customers, government, and the general public. This is important, for the road to corporate disaster has been littered by the accounting sins of companies that meticulously documented their operations with the objective of deceptively portraying inflated profits and net worth.

As we embark on our course of study, it is important to take some time and reflect on the fundamental concepts and principles on which the discipline of accounting is built. An understanding of these concepts and principles will be essential to our understanding of the nature of accounting and the role it plays in the business environment.

3. Financial Statements and Analysis

Financial Accounting provides students with instructions on how to analyze business transactions, which are thereby classified and recorded using debits and credits for various internal business units. The process: Journalizing Transactions. All business transactions are evidenced by some form of document, such as a receipt for money paid or received, a contract that sets forth in legal terms money or goods and services that are to be exchanged, or an electronic data exchange related to financial activities. In turn, these documents are used as a source of evidence for financial statement activity. The account serves as the primary source of evidence for preparing the financial statements.

Key topics such as the General Ledger, Trial Balance, and adjusting, closing, and reversing entries are covered in Principles of Financial Accounting as part of studying the financial statements. Indeed, the completion of the trial balance constitutes a major ending point of this phase of financial accounting. This tool compares the total debit balance to the total credit balance in the general ledger and checks that they are equal. This safeguard is very important; if the totals did not match, there would be an error in the general ledger, which would have to be found and corrected.

4. Cost Behavior and Decision Making

Business managers can use past data to help predict future events when making day-to-day decisions. Cost behavior presents a strong base for such estimates. Prime costs (direct materials and direct labor) of an inventoriable product do display variability. As discussed earlier, direct materials typically represent a variable cost, in total for financial reporting purposes and on a unit cost basis for cost accounting purposes. When a specific job or unit is costed, the direct labor is also variable in total and per unit, even though the hourly pay rate could be fixed during the period.

As a business grows, a managerial accounting system can establish cost behaviors for use in control and decision-making functions. For example, a company’s cost of electricity may have both a variable and a fixed component. Each month, the company has a basic charge for the first 2,500 kilowatt-hours plus an additional charge for each kilowatt-hour in excess. The overage charge is purely variable and varies with usage. The basic charge is fixed when plotted as a fixed charge per month without regard to kilowatt-hour usage. Cost behavior enables the company accountant to estimate a monthly power bill for financial reporting purposes. Cost behavior derives a budget amount for the month in question. Cost behavior also provides the cost of electricity as a percentage of sales, a ratio that can be monitored when sales vary.

5. Budgeting and Performance Evaluation

Budgeting and Performance Evaluation In addition to planning and control activities, managers need tools that focus attention on the future. These tools include preparing budgets and evaluating the efficiency of the entity’s operations. Budgets are designed to force management to look ahead and to harness appropriate resources. A master budget is the operating financial budget for the entire organization. This budget derives from other budgets – sales, production, direct materials, direct labor, selling and administrative expenses, and a cash budget. Operating budgets then derive from the summary master budget. The operating budget for each department of a business includes production schedules, out-of-pocket costs, and selling expenses. These budgets may reflect operating conditions that vary significantly between departments. Information in both financial and managerial accounting supports entities in evaluating the entity and in making decisions.

Introduction The chapter discusses the role and importance of financial and managerial accounting in business operations. Financial accounting provides external financial reports to shareholders, creditors, and others. Managerial accounting provides information for use by managers in directing the operations of an organization. Managerial accounting provides specific details regarding profitable or unprofitable segments and services. In summary, financial accounting measures the financial performance of the organization and reports those results to decision-makers outside the organization.