FINANCIAL ACCOUNTING VS MANAGERIAL ACCOUNTING

PART 1: FINANCIAL ACCOUNTING VS MANAGERIAL ACCOUNTING

TO: Susan Thompson

FROM: [Name]

DATE: 21 February 2017

SUBJECT: Financial Accounting vs. Managerial Accounting

Any commercial enterprise relies heavily on accounting. Organizational performance depends on the wise application of both financial and management accounting. Between financial accounting and management accounting, there are numerous distinctions and parallels.

Differences

Use and target audience

Financial accounting serves mostly external purposes, whereas management accounting serves a company’s internal purposes (Bragg, 2012). Stockholders, investors, tax and regulatory authorities, and creditors are the main stakeholders who utilize financial accounting. In contrast, management accounting is exclusively used internally. Business managers use it in decision-making regarding the operations of the enterprise, motivation, and performance evaluation.

Period

Financial accounting reports the past financial performance of the company while management accounting is mainly for decision making regarding the present and future. Therefore, financial accounting is historical in nature while management accounting is future-oriented as it mainly deals with budgets and forecasts (Bragg, 2012).

Timing

Reports in financial reporting are presented mainly at the end of specific periods mostly annually. In contrast, management accounting reports are done much more frequently and do not have to be at the end of a financial period. For example, management accounting reports can be done each time that the management would like to make major decisions and may be more frequent.

Precision

The information in financial accounting reports should be precise and accurate. For instance, when preparing profit and loss accounts or balance sheets, the figures used must be exact (Bragg, 2012). In management accounting, there is room for the use of estimates since they are future-oriented.

Legal requirements and regulations

There are legal requirements for the preparation of financial accounting reports. It is true especially for public companies, which are required to make their financial reports public. In addition, there are accounting standards that must be taken into account when preparing financial accounting reports since they are for the use of many stakeholders and to aid in comparison. There are no such requirements for management accounting. It is because they are for internal use within a business organization only, and in most cases, they is flexibility in their preparation. They do not have to follow a particular format (Bragg, 2012).

Significance

Financial accounting focuses on reporting the performance of a company during a specific period. Its primary concern in not to evaluate the reasons for an organization’s performance but simply to report on its performance and outcome. In contrast, management accounting focuses on using the information to make decisions that can have a future impact on the company (Bragg, 2012). The management can use the financial information to make budgets and forecasts and other decisions to optimize on the future performance of a company.

Reporting focus

Financial accounting is mainly concerned with financials that are distributed primarily to stakeholders outside the company (Bragg, 2012). Management accounting is concerned with operational reports that the managers can assist the managers in making the right decisions.

Similarities

Both constitute a firm’s total accounting system

Both financial and management accounting are parts of accounting systems of an enterprise that have the aim of providing accounting information to the various users (Sharma, 2016). The personnel who manage the system are all accountants, and in many cases, the financial accountants perform the role of management accountants. The training and execution of tasks are also similar since both require almost the same skill set.

Both deal with economic and business events within an organization

Financial and management accounting all deal with the economic and business aspects of an organization (Sharma, 2016). Although they may have different roles, they have the same purpose of informing various stakeholders of the economic performance of business.

Both quantify the business results using numbers

Financial accounting and management accounting both rely on numbers to analyze business performance and make projections. Financial accountants and management accountants must be good in numeracy skills to be able to deliver efficiently on the job because numbers form the biggest part of the analysis and presentation of reports.

Examples of Managerial Accounting Reports

Managers use various managerial accounting reports in decision-making. Financial accounting can provide tools that are used to prepare management accounting reports (Sabac &Tian, 2015). First, a budget is a very common managerial accounting report. The managers use a budget to plan for the future of the company by giving details of income and expenditure.

Another managerial accounting report is a cash flow forecast. It provides a summary of funds in the future, mostly annually or biannually. The forecast will guide the management on its use of cash that will come in and go out in its future operations (Sabac &Tian, 2015).

Accounts Receivable Aging report contains the amount owed by each client. The management uses it to monitor delinquent accounts so that they determine the appropriate collection methods to pursue in recovering the money.

The job-casting report is a managerial report that shows the profitability of a business by doing an analysis of each job. By analyzing the costs and revenue for every job, the management can determine the profitability of a given job. It, therefore, helps the management to make decisions on what they should do to attain specific profitability targets.

PART TWO: FINANCIAL STATEMENTS INFORMATION

TO: The Board of Directors

FROM: [Name]

DATE: 21 February 2017

SUBJECT: Financial Statements Information

Financial statements contain many types of information that a company can utilize in making good decisions (Auken & Carreher, 2013). Examples include the balance sheet, profit and loss account, statements of stockholder’s equity, and the cash flow statement.

The balance sheet gives a summary of the value of assets, liabilities, and owners equity of a company at a particular time. Examples of assets include property and building, investments, intangible assets such as goodwill and current assets such as cash. It also shows the long-term liabilities and current liabilities such as trade payables. The information in the balance sheet assists managers in planning. For instance, they can analyze asset performance and make appropriate decisions on the type of assets to acquire to grow the business.

The profit and loss account reports the profitability of an enterprise during the specified period. It shows revenues, expenses, losses, and gains. Examples of revenues are sales, interest income, rental income, and fees from professional services. Expenses include salaries, insurance, and utilities. A company with a net profit demonstrates that it is generating sufficient revenue to cover costs and remain with a surplus. A firm’s management analyzes the information in the income statement to design effective strategies that guarantee more profitability in the future (Auken & Carreher, 2013).

The cash flow statement shows the movement of cash to and from a company. Since liquidity is crucial for business performance, it is important for a company to maintain sufficient cash balances to ensure the smooth running of operations. They can be from operating, investing, and financing activities. The management can utilize the cash flow statement to plan for the optimal cash for the operation of the company (Auken & Carreher, 2013).

The statement of stockholder’s equity contains common stock, paid-up capital, preferred stock, and retained earnings. It shows any changes in the stockholder’s equity over a period. It is important for managers because they can use the information to attract other potential investors in the company if the statement shows a healthy financial position for the stockholders. They can also use it compare the performance of different segments of stockholder’s equity and hence design plans for the enterprise.

Conclusion

The analysis of financial statements is necessary for the planning and the alignment of the strategies of a business to its objectives. Expert use of the statements can generate ideas that management accountants can use for the growth of the company. The accurate representation of the financial statements is crucial for effective decision-making.

References

Auken, H.V., & Carreher, S. (2013). Influences on Frequency of Preparation of Financial

Statements. Journal of Innovation Management, 1(1), 143-157.

Bragg, S. (2012). What is the difference between financial accounting and cost accounting?

Retrieved from http://www.accountingtools.com/questions-and-answers/what-is-the-difference-between-cost-accounting-and-financial.html

Sabac, F., & Tian, J. (2015). On the Stewardship Value of Soft Managerial Reports. The Accounting Review, 90(4), 1683-1706.

Sharma, V. (2016). Management Accounting and Financial Accounting. Retrieved from

http://www.yourarticlelibrary.com/accounting/management-accounting/management-accounting-and-financial-accounting-6-similarities/52470/