Managerial and Financial Accounting (Coursework Sample)

Managerial and Financial Accounting
Following the American Psychological Association Guidelines
Name
Institution
PART 1
Discuss and analyze the difference between managerial and financial accounting. Pay particular attention to;
* How is managerial accounting different from financial accounting?
* Comment on the different needs and use of financial information for internal purposes.
* The managerial accounting profession and its role in today's business environment. How has it changed over time?
* Comment on the Certified Management Accountant (CMA) designation.
Meaning of Managerial accounting:
Management Accounting is the branch of accounting used by the persons working within the organization for making decisions about the efficient functioning of the organization. In management accounting, reports are generated daily, weekly or monthly depending upon the requirements of the company. In management accounting, reports are prepared predicting the future of the company viz., sales forecasting reports which predict the future sales value of the company for the next financial year (s).
Uses of management accounting:
Management Accounting basically focusses on making decisions concerning different choices or alternatives.
1. Whether to do expansion or diversification programmers etc.
2. Whether to open new retail branches in far off locations.
3. Whether to recruit new manpower to improve the production.
Meaning of Financial accounting;
Financial accounting is the branch of accounting used by the persons outside the organization. In financial accounting, financial statements are prepared for the period for one year. Financial statements are used by the persons like shareholders to make decision whether to purchase the additional shares in the company or to sell off the existing shares. Likewise, banks and financial institutions use the financial statements prepared under financial accounting to assess the profitability of the organization and the liquidity and solvency of the organization to take the decision regarding 1.whether to give fresh loan to the Company 2.Whether to continue the existing loan arrangement and 3.Whether terminate the present loan
Further, prospective investors will decide about whether to purchase the shares of the company by analyzing the financial statements prepared under the financial accounting.
Difference between the managerial Accounting and financial accounting:
1. Financial accounting is based on historical data. Financial statements are nothing but the record of past financial transactions of the company for the particular period which is why financial accounting statements are prepared on the basis of historical cost concept. On the other hand, managerial accounting deals with past, present and future data which affects the transactions of the company in future.
2. The main objective of financial accounting is stewardship of business for the benefit of shareholders. Financial accounting is the preparation of financial statements periodically and presenting the same to the investing public and presenting the same to Government agencies and to banks and financial institutions which provided loans to the company. External users use the financial statements in conjunction with the general economic condition of the country and they will look at the overall performance of the Company. On the other hand, the objective of management accounting is majorly built on improving the economy and the efficiency and effectiveness of different involved operations. Internal users generally focus on the sub units of the company like departments and divisions of the company.
3. In case of managerial accounting, reports are prepared on monthly, quarterly or annual basis clearly describing the operations of the products of the company and functions of the company. Management accounting reports include preparation of ad-hoc reports based on basis of the requirements of the company. Examples of management report are: budget analysis, merger and consolidation reports, feasibility reports, production forecasting report, sales forecasting report, etc. On the other hand, in financial accounting, the Profit and loss account, the balance sheets and statement of cash flows must be prepared compulsorily according to the statue. In case of financial accounting, financial statements reveal the monetary performance of the company.
4. In case of financial accounting, financial statements are presented to external agencies like Government, shareholders, banks, creditors and financial institutions .On the other hand, in case of managerial accounting, the reports generated and are given to directors of the company. These are also given to the company executives, the managers and at particular instances to employees of the subject company.
5. In case of financial accounting, there should be adequate disclosure as per provisions of the Companies Act and other Regulations. On the other hand, management accounting informs how the future activities and decisions of the company affect the value of the company and the employees of the company.
6. In case of financial accounting, accounting concepts should be followed and the financial statements should be prepared according to Regulations issued by the Accounting standard Board and the statutory requirements of the Companies Act. Further, financial statements should be prepared by duly following Generally Accepted Accounting Principles (GAAP). However, in case of management accounting reports, there is no statutory compulsion that it should be prepared according to the Rules and Regulations of the Accounting Standard Board. In practice, management accounting reports are prepared according to the directions and terminology issued by Chartered Institute of Management Accountants (CIMA), London.
7. In management accounting, reports are prepared by management accountants working in the organization and there is no independent audit by outside persons. Firms appoint the management accountants who have the Certificate of management Accountants from The Institute of Management Accountants. On the other hand, in case of financial accounting, financial statements are audited by independent statutory audit firm like CPA (Certified Public Accountant) firm or CA (Chartered Accountant) firm.
Certified management accountant's profession was previously confined to maintenance of costing records and cost accounting. However, over the passage of time, CMA's role has been expanded to decision making areas of cost and management accounting like Whether to do expansion or diversification of existing product lines, dropping of existing segment, Whether to open new retail branches in far off locations, acceptance or rejection of special offer etc.,
Certified Management Accountant (CMA) designation.
This designation can be attained by the person who completes the professional course of CMA conducted by various recognized Institutes all over the world example, CMA OF USA, CIMA OF UK, ICWA OF INDIA etc., they are not statutory auditors of the company. CMAs are appointed by the management for specific purposes.
PART 2
Explain the main differences between the absorption and contribution (behavioral, variable) income statements. Will net income always be the same under the two approaches? If not, explain the difference.
The key observable differences existing in the absorption and variable income statements are as follows:
1. In absorption income statement, the cost per unit in the inventory includes direct material cost, direct labor cost, variable manufacturing overhead and fixed manufacturing overhead. Looking at the other hand in the case with variable costing income statement, unit cost in the inventory always includes direct material cost, direct labor cost and variable manufacturing overhead.
2. Absorption costing income statement involves the computation of the gross margin by the deduction of cost of goods sold from the sales made. However for variable costing income statement, the variable expenses are subtracted from the sales to obtain the contribution margin and then the fixed expenses are subtracted from the contribution margin to obtain sales.
3. Taking the case of absorption costing, the inventories are customarily valued at their full costs whereas under the variable costing, inventories stand to always be valued at variable costs.
The net income given the two methodologies is similar if the production is equal to the sales. Where the production surpasses the sales, absorption costing will show more profit than the variable costing income statement. This is due to the fact that the closing stock is valued at high cost per unit compared to variable costing because of inclusion of fixed manufacturing cost in the cost per unit.
Comment specifically on why companies feel the need to create yet another income statement in a different format. What information can the company gleam from this approach which is helpful as a tool in the decision making process.
The income statement under absorption costing is statutorily required to be prepared. On the other hand, variable costing income statement is prepared for decision making purposes. Examples: make or buy decision, accepting the special offer, dropping the product line etc.,
Example:
If the company has the capacity to produce 10000 units of Product A and presently manuf...