Memorandum
To: Susan Thompson
From: Department Manager
Date: May 19, 2017
Subject: Financial Accounting Viz a Viz Management Accounting
Hi Susan!
First, I would like to congratulate you on being joining us as assistant in the management accounting department. We know that you have experience in the field of financial accounting and you can prepare the financial reports, but here you as a management accounting assistant would be responsible for different reporting duties. Therefore, it is essential to give you an overview of the management accounting domain along with the knowledge on interface between the financial accounting and management accounting. Please refer below the discussion on similarities and differences between financial accounting and management accounting and examples of the managerial accounting reports that you will be expected to prepare:
Similarities and Differences between Financial Accounting and Managerial Accounting
The financial accounting refers to the process of recording the financial transactions and preparing the financial statements, which are to be submitted to the regulatory authorities. On the other hand, the management accounting refers to the process of collecting data, analyzing, and preparing reports which are to be used by the management of the company for internal decision making purposes. Thus, the financial accounting has external perspective while the management accounting has internal perspective (Warren, Reeve, & Duchac, 2016).
Further, the focus of management accounting is on the cost management and preparing budgets and plans as opposed to the preparation conventional financial statements such as profit and loss statement and balance sheet (Warren, Reeve, & Duchac, 2016). The cost computations, budgets, and plans may be prepared for a particular department or a particular product. However, the financial statements are prepared for the organization as a whole. The budgets and plans prepared under the management accounting domain are based on the estimations but the financial statements are prepared based on the actual information. Thus, the use of assumptions and forecasting tools is essential in management accounting while it is not required in financial accounting (Warren, Reeve, & Duchac, 2016).
Although the purpose of management and financial accounting is different but there is interrelationship among these two. The management accountant needs to use the information produced by the financial statements in preparing budgets and plans. In order to make estimations regarding revenues and costs for future periods, the information contained in the historical financial statements provides a basis (Garrison, 2012). Further, the management accounting is similar to financial accounting when it comes on basic principles of record maintenance. The records for management accounting as well as financial accounting are prepared applying double entry system and accrual basis. The records under financial accounting as well as management accounting have to follow the matching concept (Garrison, 2012).
The managerial accounting reports are prepared with the primary objective of assisting the top management in decision making. However, these reports are different from those prepared under the financial accounting system but the information produced by the financial accounting system is used in preparation of these reports (Crosson & Needles, 2013). Some of the prominent examples of managerial accounting reports are given below:
The budgets are prepared to estimate the amount of income and expenditure for future periods. The primarily sales budget, production budget, material budget, labor budget, and overhead budgets are prepared. Further, based on the outcome of these budgets, a master budget is prepared showing net income/loss position (Crosson & Needles, 2013).
This is perhaps the most important report prepared for managerial decision making purposes. The cost-volume-profit analysis report presents the position in regards to profitability of different products manufactured by the firm (Crosson & Needles, 2013). As example of CVP report is presented below:
|
Product |
A |
B |
Total |
|
Units sold |
1000 |
1500 |
|
|
Sales price per unit |
$15 |
$20 |
|
|
Less: Variable cost per unit |
$8 |
$12 |
|
|
Unit contribution margin |
$7 |
$8 |
|
|
PV Ratio |
46.67% |
40.00% |
|
|
Total contribution |
$ 7,000.00 |
$ 12,000.00 |
$ 19,000.00 |
|
Less: Fixed cost |
$ 5,000.00 |
||
|
Profit |
$ 14,000.00 |
The break-even analysis report is prepared to compute the number of units required to be sold to recover all the costs incurred in producing the products. This report forms an essential part of the management decision making process (Crosson & Needles, 2013). As example of how is it prepared given below:
|
Product |
A |
B |
|
A. Fixed cost |
$ 2,500.00 |
$ 2,500.00 |
|
B. Unit contribution margin |
$7 |
$8 |
|
C. PV Ratio |
46.67% |
40.00% |
|
D. Breakeven Units (A/B) |
357 |
313 |
|
E. Breakeven dollar (A/C) |
5,357 |
6,250 |
The balance score card has emerged as a new reporting requirement in the management accounting domain in recent few years. The balance core card is used by the top management in setting strategies and directions for the achievement of the objectives of organization (Blocher, 2006). A snap shot of balance score card is given below:
The ratio analysis report is prepared to analyze the financial performance of the business over the period. This report facilitates the management to analyze the trend in financial performance along with comparison with the industry (Blocher, 2006). An example of ratio analysis report is presented below:
|
Description |
XYZ Plc |
|||
|
2016 |
2015 |
2014 |
Industry |
|
|
Profitability |
||||
|
Net margin |
0.23% |
0.30% |
0.27% |
1.21% |
|
Gross margin |
0.77% |
0.73% |
0.71% |
3.31% |
|
Liquidity |
||||
|
Current ratio |
3.27% |
2.14% |
2.65% |
3.45% |
|
Quick Ratio |
3.27% |
2.14% |
2.65% |
3.10% |
|
Efficiency |
||||
|
Receivables collection period |
1.81 |
1.39 |
1.46 |
3.84 |
|
Payables collection period |
3.75 |
2.92 |
3.14 |
2.85 |
|
Asset turnover ratio |
3.54% |
11.91% |
10.10% |
2.55% |
|
Solvency |
||||
|
Debt to Equity Ratio |
17.53% |
-13.47% |
-20.53% |
20.50% |
|
Debt to assets |
3.89% |
7.95% |
6.61% |
7.00% |
|
Investment |
||||
|
Dividend yield |
0.07% |
0.07% |
0.05% |
0.00% |
|
EPS |
13.40% |
16.10% |
13.00% |
9.70% |
|
Interest cover |
29.23% |
40.42% |
50.39% |
45.50% |
To: Board of Directors
From: Department Manager
Date: May 19, 2017
Subject: Information in the Financial Statements
Hi!
The entity prepares balance sheet, income statement, cash flow statement, and changes in equity as the primary financial statements to report affairs of its financial performance and position. The aforementioned financial statements not only provide useful information to the shareholders but to the management also.
The balance sheet is prepared to show the financial position of the business. It contains the year end balances of various items of assets, liabilities, and shareholder’s equity. The assets section in balance sheet provides details of balances of cash, accounts receivables, property, plant and equipment, and furniture. The liabilities section provides details of balances of accounts payable and loans and lines credits. The equity section provides details of balances of capital and reserves (Griff, 2014).
The income statement is prepared to show the financial performance of the business for the period ended. The income statement presents the items of revenues, other income, expenses incurred by the firm and net profit/loss (Griff, 2014).
The cash flow statement is prepared to present the information in regards to cash inflows and outflows of the business during the prescribed time period. The cash flow statement presents information under three broad categories such as operating, investing, and financing. The cash flow statement is prepared using the information from income statement and balance sheet; therefore, it is considered a blend of these two (Griff, 2014).
The statement of changes in equity is prepared to show in detail the movements in the items comprising the shareholder’s equity. This statement shows increase or decrease in the share capital, retained earnings, and other reserves (Griff, 2014).
The management needs information to plan and control the activities of the business at various levels in an organization. The top management needs information to make strategies for expansion of business and take decisions on investment and divestment strategies. For this purpose, the top management needs to analyze the financial projections which are prepared in the form of income statement and balance sheet (Blocher, 2006). Further, the top management may also use the information contained in the historical financial statements in preparation of the projected income statement and balance sheet. The historical information contained in the financial statements provides a good basis for preparation of the projected income statement and balance sheet (Blocher, 2006).
Apart from the above, the management at tactical level usages the information contained in the financial statements for various controlling and supervision purposes. For example, the information contained in the income statement in regards to revenues and expenses could be used to prepare variance report. The variance report is prepared using the budgeted figures of the items of income and expenses with the actual figures. The actual figures for this purpose can be obtained from the income statement. The variance analysis report provides a good basis for controlling the costs. Further, the management has to keep track of the progress of business on a continuous basis and for this purpose ratio analysis is an essential tool. In order to prepare ratio analysis report, the management has to use the information provided by the financial statements (Bagchi, 2010).
References
Bagchi, N. 2010. Management Information Systems. VK Publishing House.
Blocher. 2006. Cost Management: A Strategic Emphasis. Tata McGraw-Hill Education.
Blocher. 2006. Cost Management: A Strategic Emphasis. Tata McGraw-Hill Education.
Crosson, S.V. & Needles, B.E. 2013. Managerial Accounting. Cengage Learning.
Garrison. 2012. Managerial Accounting 11E W/Dvd. Tata McGraw-Hill Education.
Griff, M. 2014. Professional Accounting Essays and Assignments. Lulu Press, Inc.
Warren, C.S., Reeve, J.M., & Duchac, J. 2016. Financial & Managerial Accounting. Cengage Learning.
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