A Comparision of Financial and Management Accounting.
by
afkamaaa (student)
Outline
Introduction:
Accounting is known to be the procedure that delivers informed decisions and judgements through identifying, analysing and presenting financial information (Weetman, 2003). Similarly, it provides competent information to users to aid decision making at a minimal possible cost (Dury, 2007). According to accounting information and decision making (2012) Michel dell the founder and CEO of Dell incorporated illustrated a success story by the application of accounting techniques. Accounting can be utilised by many entities including employees, who need information to assess the ability of a firm to provide remuneration, shareholders, Managers. Also, government agencies as the HM Revenue & Customs need information to establish taxation on profit incurred (Weetman, 2003). As a result, a wide variety of entities require the application of accounting to facilitate with their decision making. However, accounting information normally differs depending on the specification of users as it can be management or financial accounting (Dury, 2003). Management accounting is closely involved with providing information within an organisation, whereas financial accounting is concerned with providing information to external users of entity (Weetman, 2003). This essay will discuss the variation between these two branches of accounting and describe how they guide to good decision making.
Body:
To begin with, financial accounting issue annual and semi-annual reports which provide finite help to firms especially in evaluating its financial risk exposure (Woods, 2004). Furthermore, it must be prepared to confirm with legal requirements and generally accepted accounting principles as FASB and ASB (Dury,2007). According to Carty (1982), accounting standards are not aimed to be rigid but to narrow areas of difference in accounting practice. Also, Akgun (2012) stated that there is demand for qualified accountants with full awareness with international financial reporting standards. Furthermore, financial accounting focuses on the whole of a business and the report of ...
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Body:
To begin with, financial accounting issue annual and semi-annual reports which provide finite help to firms especially in evaluating its financial risk exposure (Woods, 2004). Furthermore, it must be prepared to confirm with legal requirements and generally accepted accounting principles as FASB and ASB (Dury,2007). According to Carty (1982), accounting standards are not aimed to be rigid but to narrow areas of difference in accounting practice. Also, Akgun (2012) stated that there is demand for qualified accountants with full awareness with international financial reporting standards. Furthermore, financial accounting focuses on the whole of a business and the report of past transactions. Iatridis (2008) discusses that the disclosure of financial statements of firms result in an expansion and increase in growth. He argues that the more sensitive information is the higher the profit, quality and increase in capital growth, as a result of the implementation of the IFRS. Also, financial accounting issues income statements, balance sheets, statement of cash flows and stockholders equity where some are necessary in making financial reports. The reports include a disclosure on each period of transaction based on the income statement and its description, and whether it is a debit or credit depending on the time period of the balance sheet and terms of settlements. A study investigated in Japan (Kubota etal, 2010) revealed that financial semi-annual reports help decrease level of doubt in data provided in annual reports, as well as change perceptions about earning estimation. Furthermore, the main functions of financial accounting are:
- Financing activities: to calculate business activity by transactions that involve external fundings as proprietors capital or creditors.
- Investing activities: to calculate business activity by purchase and sale of long term assets and other resources.
- Operating activities: to calculate business activity by transactions that relate to primary operations of a business as rent, wage etc.(accounting information and decision making,2012).
Financial accounting information guides the decision of investors and creditors to identifying successful companies to lend or invest money. For example, financial accounting net income on the income statement will determine stock price. Therefore, investors in a company will benefit from an increase in stock price. Also, the increase in debt level in the balance sheet will burden a business and may go to bankruptcy (ibid).
Secondly, management accountings main purpose is to attain a high level of profit at a minimal cost possible and to have optimum usage of business capital or resources (Management-Accounting And Decision Making,2012). Unlike financial accounting , management accounting produces reports only when the benefits exceeds costs and it can differ with their time period as they can be daily, weekly or monthly (Dury,2007). Also, management accounting relies on past transactions to predict future happenings such as expected future cost and revenue (ibid). Therefore, management accounting can affect a business by producing decisions. In addition, financial, marketing and production are the main categories in which management accounting produce decisions in. Also, management accounting use information from the accounting department to produce estimates, future data and standards. Financial statements along with the historical accounting record and other types of data are the area of interest for extracting information necessary for decision making. Also, decisions can be classified as strategic (quantive) or tactical (unquantive) and long term or short term, depending on the business. In order to make decision, first alternatives should be identified with enough data to assess each choice and the consequences of it (Management-Accounting And Decision Making,2012). According to a study in Thai-based firms, Shammuangpak (2011) stated that the efficiency of a management accounting application can improve the quality of decisions and activity. He also stated that the effectiveness of management accounting application is a result of its cooperation with other factors as cooperate strategy ,top management support and employee involvement. Management accounting aims to increase profit in different areas: Net income, sales, return on total assets, return on total equity and earnings per share. It also simplifies complex relationships by using key variables and models(Management-Accounting And Decision Making,2012). The main functions of management accounting are:
- Cost allocation : assigning cost of stock sold and stock for internal and external profit reporting.
- Present information: to guide managers to choose best decisions
- Present information: for control, planning, activity measurement and continuous development (Dury, 2007).
Furthermore, management accounting use financial statements as a model in which each item in the financial statement has a specific management accounting tool (as stated in table 1) to extract information in order to provide better decisions (Management-Accounting And Decision Making,2012). If the management accountant chooses the right tools with its required information and applies it ,it will positively influence decisions as price, product quantity, salaries, commission rate , interest rate , advertising budget etc..(ibid).
Table 1:
The management accounting tools for each financial statement item (Management-Accounting And Decision Making,2012).
Conclusion:
In conclusion, financial accounting and management accounting differ in areas including the legal requirements, main functions, reporting criteria, kind of data utilised, specification of users, and specification of transactions. Financial accounting delivers information to external users as investors and creditors and produce annual and semi-annual reports based on past transactions to assess a business success. Therefore, it focuses on the whole of a business. The financial reports follow generally accepted accounting principles as FASB and ASB. Financial accounting functions are to measure a business’s performance in finance, investing and operating activities. Income statements, balance sheets, statement of cash flows and stockholders’ equity are the output data presented. On the other hand, management accounting provides internal users as managers with sufficient information to facilitate better decisions. The reports don’t have legal requirements and are necessary when benefits exceed costs. Its goal is to achieve maximum profit at a minimal cost possible. Also, it uses past transactions to predict future costs. Furthermore, It uses financial statements as a model to implement the management accounting tools and its information, to guide manager’s decision. Its main functions are: allocating cost of goods sold and inventories for external and internal profit report, presenting information for planning, controlling etc., and guiding managers’ decisions with sufficient information. Both financial and management accounting provide information for their users to aid their decision making. Also, they are two vital branches for any businesses growth and continuous, as financial serves external expansion and management is for internal expansion. Financial accounting presents information for investors and creditors as income statements which reflect the stock price and therefore guiding decisions. Management accounting gives decisions based on financial statement items using specific tools and therefore provide managers with best decisions on product quantity, salaries etc.. It is believed that financial and management accounting can contribute to the success of a business and its expansion.
Bibliography
Books :
Dury, C.(2007). Cost and management accounting an introduction.7th ed. Canada; cenage learning.
Weetman,P.(2003).Financial and management accounting an introduction.3rded. London; Pearson education limited.
Journal:
Akgün, A. 2012, 'MANDATORY APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS: INFLUENCE PROCESS AIMED AT MEMBERS OF THE ACCOUNTING PROFESSION', Journal Of Accounting & Finance, 55, pp. 173-193, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Carty, JP. 1982. 'Accounting standard in the UK', Journal Of General Management, 8, 2, pp. 29-69, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Fearnley, S. & Hines, T. 2007, 'How IFRS has destabilised financial reporting for UK non-listed entities', Journal Of Financial Regulation & Compliance, 15, 4, pp. 394-408, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Iatridis, G. 2008, 'Accounting disclosure and firms' financial attributes: Evidence from the UK stock market', International Review Of Financial Analysis, 17, 2, pp. 219-241, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Kubota, K., Suda, K. & Takehara, H. 2010. 'Dissemination of Accruals Information, Role of Semi-Annual Reporting, and Analysts' Earnings Forecasts: Evidence from Japan', Journal Of
International Financial Management & Accounting, 21, 2, pp. 120-160, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Porter, JC. 2012. 'How Adjusting Entries Affect the Quality of Financial Reporting: The Case of Frosty Co', Issues In Accounting Education, 27, 2, pp. 493-524, Business Source Complete, EBSCOhost, viewed 24 October 2012.
'Statement of Financial Accounting Standards No. 57' 2002, Original Pronouncements: Accounting Standards, 1/2, p. 552, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Woods, M. & Marginson, D 2004, 'Accounting for derivatives: An evaluation of reporting practice by UK banks', European Accounting Review, 13, 2, pp. 373-390, Business Source Complete, EBSCOhost, viewed 24 October 2012.
Shoommuangpak, P. 2011, 'EFFECTIVENESS OF MANAGEMENT ACCOUNTING IMPLEMENTATION, DECISION MAKING QUALITY AND PERFORMANCE: AN EMPIRICAL STUDY OF THAI-LISTED FIRMS', International Journal Of Business Strategy, 11, 1, pp. 197-209, Business Source Complete, EBSCOhost, viewed 26 October 2012.
Steven, G. 2009. 'MANAGEMENT ACCOUNTING-DECISION MANAGEMENT', Financial Management (14719185), pp. 50-53, Business Source Complete, EBSCOhost, viewed 26 October 2012.
Website:
mcgraw-hill (2012) Accounting Information And Decision Making. [online] Available at: http://highered.mcgraw-hill.com/sites/dl/free/0078110823/859852/spiceland2e_sample_ch01.pdf [Accessed: 24 Oct 2012].
microbuspub (2012) Management-Accounting And Decision Making. [online] Available at: http://www.microbuspub.com/pdfs/chapter2.pdf [Accessed: 24 Oct 2012].
