financial and managerial accounting

financial and managerial accounting

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

1. Introduction to Financial and Managerial Accounting

Managerial accounting is also important in performing the planning function, which involves the decision of what short-term activities should be undertaken to implement the long-term plan. For instance, the budgeting process is a very important component in the planning function. Although the planning and controlling performance aspects are familiar to most in an organizational structure, the decision-making capability should be viewed as a broader focus. For example, the decision to automate a manufacturing process is primarily a decision-making function.

To make decisions, managers need accurate cost or profit information. Although financial accounting reports summarize revenues and expenses, they are not always flexible enough to help managers in making cost-related decisions or projections. Cost-related data can be separated into two broad categories: financial and non-financial (managerial) data. Managerial accounting can produce this flexible, high-quality, detailed data. In addition to assisting in decision-making activities, managerial accounting techniques assist in the controlling function by providing performance reports in various forms.

2. Key Differences and Similarities Between Financial and Managerial Accounting

The rules of accounting that apply for external financial reporting are also formulated for the purpose of ensuring consistency of financial reports. While consistency of financial reports may not be sacrificed, managerial accounting reports that are intended for internal decision making can be in whatever method is desired by managers. This means that the needs of the individual firm drive the development of managerial accounting practices. The primary responsibility of a firm’s financial accountants is to report to parties outside the firm. The reports of the financial accountants are likely to be shared with parties that reveal a direct financial interest in the business, stockholders, or trade creditors. When necessary, the reports may reach governmental agencies. However, a firm’s managerial accountants are responsible to the firm’s managers. The reports of the managerial accountants are used, for the most part, exclusively by the employees of the firm. The basis of the report varies depending on the needs of the manager. Since the outside parties have no influence, the financial reports about the company are designed to be of equal relevance to outsiders having diversified objectives.

Given the underlying differences in the conception of accounting in financial and managerial accounting, as well as the procedural aspect, there are several differences in technical aspects. Financial reports that are considered to be used by stockholders and regulatory agencies must also adhere to GAAP. This level of uniformity is not necessary for managerial accounting. Also, time frames have importance in some financial reports, such as quarterly and annual reports, and income tax returns, as all are prepared on a monthly or yearly basis. There are no such uniform reporting timeline strictures for managerial accounting, and reports can be prepared as needed. Information in managerial accounting is often regulated. Because the information is usually for internal use, reports can be tailored to meet the requirements of managers within a particular organization using the standard formats as required by the management.

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

We discuss the context of financial and managerial accounting and the role of these disciplines in business operations. Financial accounting addresses the current and prospective stakeholders of the company. It is an organic part of the reporting activities and contains a number of statements, including the balance sheet, the income statement, the statement of owner equity, and the statement of cash flows. The sources and methods of financial statement analysis were also listed. Managerial accounting disseminates the essential information that management needs concerning a particular business problem or situation. These problems and decisions occur in several different roles, and management accounting provides the tools for the company’s information needs. The market for managerial accounting in the U.S. includes staffing, research, theory development, and conferences. The process that leads to the establishment of financial and management accounting was examined. The context of financial and managerial accounting was discussed. The implications of generally accepted accounting principles for financial and managerial accounting were then reviewed.

This chapter discusses the role of financial and managerial accounting. We know that financial statements are the principal means through which management informs those in a position to assess management to serendipity provided by the contributions of human resources. The focus of managerial accounting is on decision-making. Given that any business activity can be viewed in terms of its costs and revenues, the decision-based theme is the unifying thread that spans all topics considered in this book. Similarly, all the tools developed for use in decision-making are predicated on the behavior of costs. Indeed, all of managerial accounting can be thought of as the costing problems that arise in a wide range of business management activities, as well as the decision-making situation that management faces. With these points in mind, we provide an overview of the financial and managerial accounting that has been developed in this book.

4. Integration of Financial and Managerial Accounting Systems in Business Operations

In our opinion, business operations and their decentralization down to the lowest possible level are a very important aspect of the strategy and management of companies, interwoven with the information systems used for decision making. Once our premises have been established, the main point is, naturally, the nature and content of the link between each of those information systems and the corresponding decentralized business operations. The development of such systems will depend on the management functions performed at each level of decision-making within the company: strategic planning, operational control, product pricing, profitability analysis, as well as investment and financing decisions. In particular, the distributed database processing systems within the company should be especially useful for further development of managerial accounting since such systems can support multiple users within an organization.

The existing literature on the integration of financial and managerial accounting information systems in business operations actually constitutes a powerful argument in favor of such an integration. However, a great number of real cases suggest that business organizations have set up separate systems that do not allow for such an integration. The purpose of this paper is to identify the main contradictions between the development of managerial accounting tools, on the one hand, and the decentralization of business operations, on the other, that explain, to a great extent, such segregation between both systems. The interplay between business operations and financial accounting information is not ignored, but a special emphasis is put on managerial accounting information, as it is the less explored area.