Financial accounting

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Jones - Finance 540                                                                                                                    


The primary role of accounting information is to provide information for decision-making purposes. Both financial and managerial accounting rely on the same basic accounting database. However, there are important differences between the two disciplines. Neither financial nor managerial accounting is a subset of the other. They each have a distinct purpose and audience.

        Financial accounting is defined as measuring and recording business transactions and providing financial statements that are based on generally accepted accounting principles (Matteson, 2004). Financial accounting is concerned with external reports to owners, creditors, and shareholders. One objective of financial accounting is to provide information that is useful in making investment and credit decisions; in assessing the amount, timing, and uncertainty of future cash flows; and in learning about the enterprise's economic resources, claims to resources, and changes in claims to resources.

The object of financial accounting is to assist accountants in their stewardship function: the safeguarding of the organization’s assets. The central outputs of financial accounting are auditing financial statements such as balance sheets and income statements.

        By contrast, managerial accounting “measures and reports financial and

non-financial information that helps managers make decisions to fulfill the goals

of an organization (White, 2004). It focuses on internal reporting. The tools used by

managerial accountants to achieve their goal of decision support are such things

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as budgets, activity-based costing (ABC) and financial planning (Engel, Gordon, and Hayes, 2002). Since these are internal reports, there is no requirement that management accounting reports conform to GAAP. Management accounting information is useful to the enterprise in achieving its goals, objectives, and mission; assessing past performance and future directions; and evaluating and rewarding decision-making performance. Some of the important characteristics of management accounting information are its timeliness, its relationship to decision-making authority, its future orientation, its relationship to measuring efficiency and effectiveness, and the fact that it is a means to an end (Kellner, 2004).  

        Costing is another ...

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