ACCT431 Spring 2006 Chapter 1 Page 1 of 4 Financial versus Managerial Accounting Accounting: the process of identification, measurement and communication of financial information about economic entities to interested parties. Management: activities which include planning, controlling, measuring and evaluating performance and making business decisions relating to the operation of a business entity. Financial Accounting is the process of identifying, measuring and communicating financial information about an entity that culminates in the preparation of financial reports on the enterprise as a whole for use by both internal and external parties. Managerial Accounting is the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, evaluate and control an organization’s operations. ACCT431 Spring 2006 Chapter 1 Page 2 of 4 Objectives of financial reporting: (SOC #1) The primary objective of financial reporting is “to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions” Specifically, financial reporting requires disclosure about: 1. A company’s economic resources, obligations and owners’ equity, 2. A company’s comprehensive income and its components, 3. A company’s cash flows, 4. The stewardship responsibility of a company’s management 5. Other information necessary to understand the preceding information. These are accomplished by period specific Balance Sheets Income Statement & Statement of Comprehensive Income Statement of Cash Flows Statement of Owners’ Equity and Statements as a whole. Note to Financial Statements What is the objective of managerial/internal reporting? How does this affect the output of managerial reporting? ACCT431 Spring 2006 Chapter 1 Page 3 of 4 Qualitative Characteristics of Useful Information: (SOC #2) Pervasive Constraint – Cost/Benefit Understandable Useful Relevant Predictive value Feedback value Timeliness Comparable Reliable Verifiable Representational faithfulness Neutral Consistent Threshold Constraint – Materiality Which of the above qualitative characteristics apply or do not apply to managerial/internal financial information? To accomplish comparability and neutrality financial accounting/reporting must have rules, definitions and criteria: Separate entity Conservatism Continuity Period of Time Historical Cost Revenue Recognition Monetary Unit Matching Recognition criteria: 1. fit the definition of the item to be recorded 2. be measurable 3. be relevant and reliable Revenue must also be earned and realized or realizable. Expenses are recognized: 1) if direct then ……. 2) if long-term then ……. 3) if neither then…….. Timing is everything! Managerial Accounting is not bound by these rules, definitions or criteria. It’s all about COST/BENEFIT, and it’s all about the future. ACCT431 Spring 2006 Chapter 1 Page 4 of 4 The Role of the Managerial Accountant (Cost Analyst) Managerial Accounting is the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, evaluate and control an organization’s operations. Management activities: Planning Controlling Measuring and evaluating performance Decision Making Decision Making Process: Know your objective Identify the problem Identify alternative courses of action Analyze the alternatives Quantitative considerations Qualitative considerations Make a decision and implement action Review and measure the outcomes The objective of every for-profit business is to earn profit for the owners of the business now and in the future. Profits are earned when the benefits received by a company for goods or services provided exceed the costs incurred by the company. Profits can be enhanced by either creating more value or reducing costs. Decision-making is forward looking and accordingly is inherently subject to risk. Ethics in Managerial Accounting Why the focus on Cost?