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Chapter 1

Overview of Managerial Accounting


T
Thhee B
Baassiicc O
Obbjjeeccttiivvee ooff A
Accccoouunnttiinngg
The basic objective of A
ACCCCOOUUNNTTIINNGG is to provide (STAKEHOLDERS) with useful
information about a business enterprise in order to help them make rational economic
decisions.
The basic objective of FINANCIAL ACCOUNTING is to provide EXTERNAL USERS (e.g.,
investors, creditors, financial analysts,etc.) with useful financial information about the
financial performance health, and cash flows of a business enterprise in order to help them
make investment and credit decisions.

The basic objective of MANAGEMENT ACCOUNTING is to provide INTERNAL USERS (i.e.,


managers of a company at all levels) with financial and non-financial information about a
business enterprise that help them make business decisions so as to achieve the goals of
the organization.

Figure 1
Users of Accounting Information (Stakeholders)
External Users

Internal Users

)
(They cannot access the Accounting Records)

(They have access to the Accounting Records)

Financial Accounting

Auditing

Current owners (shareholders):


Want to know if they should hold, buy more, or sell
their shares in a particular company.
Potential Investors:
Want to know if a company is a good investment.
Creditors: (e.g., suppliers, banks, ...etc.)
Want to know if they should extend credit to the firm,
how much to extend, and for how long.
Income tax authorities:
Want to know if taxable income is measured properly.
Others. (e.g., Financial Analysts, Labor Unions,
Customers, Legislators, Government regulators).

Managerial Accounting

Managers of the firm at all levels


Need Information to make
decisions related to:

Planning

Implementing
the Plan &

Decision
Making

Controlling
&
Performance
Evaluation

Feedback

Financial Statements
1. Balance Sheet measures the Financial Health of the Company.
2. Income Statement measures the Financial Success of the Company.
3. Cash Flow Statement measures the Liquidity of the Company.
1. How does a company decide on the amount of information to disclose?
2. In what format should its financial information be presented?
3. How should each item be measured?
Companies must prepare the Financial Statements according to generally accepted set of
rules, standards, principles, and concepts referred to as:

Generally Accepted Accounting Principles (GAAP)

Figure 2
Managerial Accounting

Planning
Establishing goals and objectives,
predicting results, and drawing a
detailed plan of who will do what,
when and how to achieve the
desired goals.

Implementing the Plan &


Decion Making

Controlling &
Performance Evaluation

Directing, Motivating, and


Measuring Performance

Keeping the firm's activities on


track and ensuring that the plan
has been followed in the
implementation process.

Budgeting
(Ch. 6)

Variance Analysis
(Chs. 7, and 8)

Measuring Costs of
Operations
(Product Costing Systems)

Job Order Costing


System

(Ch. 4)

Activity-Based
Costing System
(ABC)

Process Costing
System

(Ch. 5)

(Chs. 17 & 18)

Decision Making
CVP Analysis (Ch. 3)
Decision Making (Ch.
11)

Fundamental Concepts & Foundation


Cost Concepts (Ch. 2)
Estimating Cost Behavior (Ch. 10)
Alternative Costing Methods (Ch. 9)

Comparing Managerial Accounting and


Financial Accounting
There are both similarities and differences between managerial and financial accounting.
o Both fields of accounting deal with the economic events of a business and require
that the results of that company's economic events be quantified and communicated
to interested parties.
o The two fields differ along several diminutions including: primary users of reports,
types and frequency of reports, purpose of reports, content of reports, and
verification process.

Perspective

Financial Accounting

Managerial Accounting

Primary Users

External users: Investors, Internal users: Managers of a


creditors, tax authorities.
firm at all levels.

Time Orientation (focus)

Past

Purpose of reports

General Purpose to help Special-purpose for a particular


external
users
make user for a specific decision.
investment & credit decisions.

Frequency of Reporting

Periodic (e.g., quarterly)

As frequent as needed

Level of Aggregation

Aggregate

Very detailed

Current & Future

Rules& Regulations of Regulated. Must follow GAAP No GAAP. Uses Cost Benefit
Reporting
concept.
Guideline for judging
Usefulness of Info.

Focus is on Reliability

Focus is on Relevance

Verification process

Independent Audit

Internal Audit