C H A P T E R
1
Introduction: the scope
and development of
accountancy in the
management of financial
resources
THE AIMS OF THIS CHAPTER ARE TO:
Provide a working definition of accounting.
Consider the historical development of financial accounting and
management accounting.
& Compare and contrast financial and management accounting.
& Provide a framework for the study of the management of financial
resources and a summary of the contents of this book.
&
&
INTRODUCTION
Within many sectors of the economy the last two decades have seen a greater
emphasis placed on the management of financial resources. The financial
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management attributes of organizations are no longer the perogative and
sole responsibility of higher echelons of management, but are now the dayto-day currency of all managers. This has resulted from the flattening of
management structures empowering individuals to take responsibility for
the broader aspects of their jobs, including finance. The public sector in
particular has seen many changes resulting in the delegation of financial
management to operation managers and professionals. We now have delegated budgets for general practitioners, the local management of schools has
meant primary and secondary school governors are responsible for the
financial wellbeing of their schools. There has been a whole spate of privatizations of previously public sector organizations, where the finances of the
market now influence decision making to a greater extent. Stagecoach plc is
a classic example of a company growing by the acquisition of recently privatized local authority bus and coach services. The varying changes have led to
an increased emphasis on the financial aspects of all activities and this has
created a growing importance of accounting information.
The management of financial resources can be considered at different
levels of aggregation. For illustrative purposes we will confine these to three,
but other classifications may lead to many more levels of aggregation. The
levels to be considered are the individual, the organization and the economy
as a whole. This book concentrates on the organization level of aggregation.
At the individual level, each of us is attempting to manage our limited
financial resources for our best interests. A 14-year-old girl may be wishing to
purchase a hi-fi unit and considering how it may be financed by the balancing of ‘pocket-money’, savings and gifts. In a similar manner, the purchase
of a car may involve a finance deal resulting in monthly payments which will
have to be met from income. Aggregating slightly, the running of a household for a family has similar financial management problems, the balancing
of monthly income with outgoings, which include the normal consumables
and items of a fixed asset nature, like a house or car.
In many ways an organization is like a complex household. It has to meet
current expenditures with receipts while also providing for the replacement
of any depreciating assets and the acquisition of others. What is different
from a household is that first, an organization has a set of objectives which
are not personal to the managers but are those of the organization and
second, there are many more individuals concerned. These two factors
mean the process must be managed using an information system to monitor
the progress towards meeting objectives and a communication network
between different individuals within the organization. One of the major
parts of a management information system is accounting information, and
its sophistication and detail will vary with the size and complexity of the
organization.
Many organizations are separate legal entities from the persons involved
in them. The local bowling or tennis club will have a separate legal entity
from its members. A limited company will be able to trade under its own
title, being legally separate from its owners, known as shareholders.
Similarly, giant multinationals like Hanson Trust plc, or BP plc are an entity
separate from their shareholders. This legal complexity requires an organization to provide financial information for its members or shareholders.
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Hence, the bowling club, the small limited company and the huge multinational company will all have annual general meetings where published
financial statements are required to be presented by law. The legal requirements may differ but their principle is the same, an organization must
account to its shareholders.
Thus organizations require information for internal management consumption to meet objectives and the legal obligations regarding their legal
status. At the highest level of aggregation the Chancellor of the Exchequer is
‘balancing’ the budget by the management of monetary and fiscal policy,
while also attempting to meet the political aspirations of his or her party
members and the electorate in general.
Returning to the organization level and the financial reporting mechanisms, we have already established that any organization must maintain a set
of financial records. This is because the money involved, while legally
belonging to that organization, will have been loaned or invested by individuals. They are stakeholders in a general sense, and specifically loan creditors and shareholders, respectively. The annual accounts presented at an
annual general meeting represent a financial summary of the transactions
made by that organization during the year (known as an income statement),
the financial affairs at the year end (a balance sheet) and a summary statement of cash movement over the year (a cash flow statement). The annual
accounts are usually accompanied by an auditor’s report which states
whether the financial statements presented to the meeting represent a
true record.
Similarly, for a limited company, the management, usually through the
board of directors, owe a duty to individuals who have either lent money to
the company or bought shares in that company. In a similar manner to a
bowling club, the information is summarized annually in the form of published accounts, which contain various statements of a financial nature and
reports by the company auditors and directors. While legal requirements
may necessitate information to be recorded, management practice also
necessitates the maintenance of records.
The financial information of a small organization may be recorded primarily for legal reasons. As an organization grows in size the financial information becomes more complex, often including several tiers of
management, or different branches or divisions within a company. Once
professional managers are required because of an organization’s size then
information becomes a crucial ingredient of management practice. Records
must be maintained for decision making, planning and control purposes
over and above those required by legislation.
Information exists in different ways within organizations, either within
the formal administrative mechanisms or within the informal ones, and
may be held within a paper filing system, a computerized file or within the
minds of individual employees. This text is particularly concerned with the
storage, use and interpretation of financial data with regard to the management of an organization in meeting both the objectives of that organization
and its external interested parties.
Such a financial focus must be considered within the broader context of
other information which is critical to understanding organizations. The sto-
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rage and presentation of financial data either within organizations or about
organizations is known as accountancy, which attempts to use a financial
information system to help control and assist in the economic decisionmaking process relating to that organization.
OBJECTIVE OF ACCOUNTANCY
To develop an objective for accountancy by observing what accountants do
would be a lengthy and time-consuming process, as they are involved in a
broad range of tasks all relating to the way financial data is recorded and
applied. It would be better to approach the objective by considering the
output of accountants’ labour, the provision of financial reports. Early
ideas about the objectives of such reports concentrated on the issue of
ensuring that organizational assets were correctly accounted for to the owners of that organization. However, over time the objective of finance reporting has broadened; a 1975 UK report put forward this definition:
. . . to communicate economic measurement of and information about the
resources and performance of the reporting entity useful to those who have a
reasonable right to such information. (Corporate Report, 1975)
while another, American, definition gives more idea of the processes
included in such reporting:
The process of identifying, measuring and communicating economic information
to permit informed judgement and decisions by the users of the information.
(AAA, 1966)
Both the above definitions provide a basis for the study of the management
of financial resources either using accounting information produced for
users within an organization, say a budget holder, or for accounting information prepared for external users, say shareholders or creditors. These general ideas can be applied to the two main branches of accounting, which are
financial reporting and management accounting. At this stage it will be
sufficient to state that financial reporting provides information to users
who are external to that organization, while management accounting provides information to decision makers within that organization. Before an
analysis of the different roles of these two branches of accounting is presented it may be useful to consider their recent historical development, as
this will also provide a useful backdrop to other areas of study within the
text.
The following section provides a brief history of accounting, the initial
part explaining the development of financial accounting and its links with
company legislation, while the latter views the development of management
accounting through management’s requirements for information.
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A RECENT HISTORY OF ACCOUNTING
The Industrial Revolution in Britain and later elsewhere brought about the
replacement of domestic traditional crafts with methods of production
housed in large factories, which required substantial capital investment.
Because of the size of funds required for this capital investment it was
often the case that a large number of individuals would be required to
provide the money (capital), as no one such individual was sufficiently
wealthy. The process of bringing individuals together to invest in a single
entity was legally difficult until the passing of the Joint Stock Companies Act
in 1844. The shareholders (also called stockholders), or the individuals owning a share of the business, delegated the use of their money to directors and
managers who were employed to run the business on their behalf. As already
stated, the managers therefore owed a duty to protect the interests of their
shareholders, and to operate on their behalf.
A further Act in 1855 enabled groups of individuals to form companies
which had separate legal identities from their shareholders and which possessed limited liability. These two developments meant that by 1856 directors of companies owed duties of care to the shareholders who owned the
business and a responsibility to meet the claims of creditors as they fell due.
It was not until 1907 that companies had to file their audited balance sheet, a
statement of assets and liabilities at the year end, with the Registrar of
Companies. An 1857 Act did require proper books of account to be kept,
the appointment of auditors to report on the accounts and the preparation
of a balance sheet for the formal annual meeting of shareholders.
The 1928 Companies Act required the presentation of an income statement, known as a profit and loss account to shareholders, but it was not until
1948 that this statement had to be filed with the Registrar of Companies. The
1948 Act also required the audit to be carried out by professionally qualified
persons rather than from the body of shareholders.
The 1967, 1981 and 1985 Companies Acts have greatly expanded the
accounting disclosure requirements of registered companies and have specified how such accounts should be presented to comply with the EU Fourth
and Seventh Directives. Companies must now display how profits have been
calculated, including the accounting policies adopted, and information on
the valuation of the assets held within the company and presented in the
balance sheet at the year end.
The accounting profession itself has introduced a system of self-regulation
whereby accountants preparing financial reports for external users must
adopt the relevant statement of Standard Accounting Practice (SSAP) or
relevant Financial Reporting Standards (FRS). The movement towards selfregulation of accounting reporting practices commenced in 1942, but it was
not until the establishment of the Accounting Standards Steering
Committee in 1970, and its successor, the Accounting Standards Board, in
1990 that agreed frameworks for compliance were available.
The development of financial reporting has been involved with the information requirements of external users, with legislation being particularly
concerned with shareholder and creditor protection, and the content of
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the balance sheet, providing a statement of assets and liabilities, and the
profit and loss account, providing a statement of profitability. (These will
be developed fully in Chapter 2.) The emphasis is very much upon asset
valuation and profit calculation as both of these are important measures
of financial performance by external users.
With the developments of financial accounting came those of management accounting. There is some debate whether they developed in parallel
or whether management accounting was derived from the inadequacy of
financial accounting information for managers’ requirements. Johnson and
Kaplan (1987) argue that management accounting has a long history and was
not a product of financial reporting. Indeed Johnson (1972) has found evidence to suggest that sophisticated internal management accounting systems
existed in some large firms as early as the mid-nineteenth century.
The traditional view of the history of management accounting is that it
developed primarily for the costing and pricing of products and the valuation of assets at the year end, particularly stocks and work-in-progress. This
cost accounting emphasis is rather a narrow view. While no historian is
denying its existence, evidence is emerging of much broader information
bases for management decision making and their links with management
accounting.
Chandler (1962, 1977) suggests that management accounting was crucial
to the development of the large firms which grew from early beginnings in
the mid-nineteenth century to become very large companies by the early part
of the twentieth century. Management accounting information was used not
only to determine prices but also to assess how different parts of the business
were performing, focusing on efficiency through the use of company
resources.
Other advances in company efficiency had been promoted by the engineer managers, like F.W. Taylor, who from around 1880 aimed to improve
the production process by standardizing jobs and processes as much as
possible, with the objective of minimizing costs, which leads naturally into
standard costing.
By the early twentieth century companies like Du Pont, American
Tobacco and General Electric (US) were using management accounting
to assess divisional performance by adopting accounting measures like
return on capital employed (ROCE), developing budgeting techniques to
coordinate the flow of goods to their customers and adopting the standard
cost procedures, so easily linked to product standardization and mass
production.
Even in American health care Chapman (1921) recommended that:
. . . one of the first principles of properly recording hospital finances is to set up a
chart of accounts that will reflect the individual departmental performance of the
various units of the hospital, so that comparable periods may be analysed against
one another, to note the performance of these periods.
While early management accounting may have a history of rapid development, in 1987 Johnson and Kaplan argued that management accounting had
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lost its relevance to modern manufacturing and that the techniques and
ideas developed early in the twentieth century were still being used in an
unmodified form. Subsequent chapters of this book present both traditional
ideas and modern developments within management accounting, hopefully
repudiating the Johnson and Kaplan argument. Both Johnson (1992) and
Kaplan (1995) have since developed ideas individually or with others that will
be considered as the book unfolds. Examples include the Balanced Score
Card (Chapter 10) and Activity Based Management (Chapter 4).
The historical progression of management accounting is not a product of
legislation or accounting standards but a dynamic process to meet the needs
of managers in the tasks of decision making and the control of operations
within the firm. Techniques applied by managers have been changing to
include total quality management (TQM), business process re-engineering
(BPR), activity-based costing (ABC), just in time (JIT), value based management (VBM) and benchmarking; each have been included within the management accounting agendas and procedures.
FINANCIAL AND MANAGEMENT ACCOUNTING
COMPARED
Accounting, the process of providing information to relevant users for economic decision making, will vary in emphasis with regard to the user’s needs
and the regulatory framework within which it has to be presented. The
information base used to prepare these different statements may be common to both management and financial accounting; it is the classification,
aggregation and emphasis placed upon the information which separates the
two. Neither are neutral in their effect. Both management and financial
accounting procedures and process affect management behaviour.
The aim of financial accounting is to provide a recording system which
fulfils the requirements of the Companies Act ‘to keep proper books of
account’ in the terminology of the 1844 Act, and to use this information
to produce financial reports that are published in accordance with current
legislation and standards, for external users. The objective is to produce
financial reports that provide reliable measures of profit and asset recognition for the period of question using historic data. A working definition for
the objective of financial statements is
to provide information about the financial position, performance and financial
adaptability of an enterprise that is useful to a wide range of users for assessing
the stewardship of management and for making economic decisions
the emphasis being on the total organization rather than the disaggregation
of its component divisions, departments and branches, although business
segment analysis is now required in a limited manner.
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Management accounting aids management in decision making and control within the firm, the information provided may be using historic data but
the emphasis is on future (budgeted) data. The framework for presentation
may be specific to particular managers as no legislative or standard accounting requirements have to be fulfilled. Table 1.1 illustrates the differences
between the two.
Chadwick (2002) illustrates the difference between cost and management
accounting and financial accounting by the types of statements and techniques that are commonly used in each of the fields. The techniques of absorption costing, budgetary control, standard costing and marginal costing will
be illustrated later in the text.
The dominant requirements of both legislation and standards for financial reporting have meant that users’ needs for specific information may be
neglected. Emphasis is placed on producing data which is comparable
between companies rather than being specific to any particular user requirements. Management accounting, by its very nature, should meet the specific
requirements of the management team. It distinguishes between cost
Table 1.1 Financial and management accounting compared by aspect
Data
Users
Decision making
Cost base
Legislation/standards
Objective
Financial accounting
Management accounting
Historic
External
By external users
Historic
Yes
Profit and asset
measurement
Future and historic
Internal management
By internal management
Future
No
Aids management
decision making and
control
Figure 1.1
Financial and
management
accounting
compared: by
statement and by
process. Source:
Chadwick (2002)
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accounting and management accounting (Figure 1.2). The former considers
historic (or ex post) data to cost and price products and place values on stock
and work-in-progress. The latter uses historic and future (ex ante) information to provide management with a base to plan, control, coordinate, communicate and motivate others within the firm.
The two streams within the management accounting can be traced
back to the origins of the discipline. The cost accounting side was developed to support the requirements of financial reporting by providing
valuations for stock and work-in-progress at year and period ends. The
management accounting stream is part of the expertise of functional
management and has developed from various disciplines. The two
streams of management accounting are not obvious today, as information
technology has made the costing less visible and time-consuming, so freeing up management accountants to develop their advisory role to management regarding the management of financial resources within an
organization.
In a study by Joseph et al (1996) it was found there was little evidence ‘of a
belief amongst respondents . . . that internal systems are dominated by the
needs of external reporting’. In fact, there was agreement that accounting
systems were designed ‘to meet management information needs independently from the requirements of published financial statements’. They
further suggested that cash flow information was regarded as most important for internal decision makers, whereas earnings (profits) were perceived
to be of most importance for investors. In addition, they also reported that
non-financial and future oriented information not currently available in
financial statements is important for decision making.
It is the debate about the ‘usefulness’ of accounting information that
poses an important question for this text. Profit can be viewed as the residual
after deducting expenses from revenues, hence there is pressure to exercise
controls which drives expenses (costs) downwards and pushes revenues
(sales) upwards. Another approach is that profit is the residual, and follows
naturally, if your organization has a competitive advantage over its rivals.
This may include a low cost base, but other attributes including quality,
customer service, speed to the market, research and development all have
a part to play.
Figure 1.2
Management
accounting and cost
accounting
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Both financial reporting and management accounting are adapting to
meet new challenges. For example, a report by one of the UK-based accounting professional bodies recognized the need for the published annual report
of companies to be read in conjunction with other documents that provide
contextual and strategic backgrounds to the financial data itself. In so doing,
they have argued for broader measures of performance than merely profit,
which provide indications of value which include both financial and nonfinancial measures.
Management accounting is also being amended. Otley (2001) summarizes
this change as follows:
&
&
&
&
&
from
from
from
from
from
historic to forward looking
control to planning
internal to external (customers, competitors, etc.)
cost to value
production to marketing.
Both financial and management accounting have agendas to include nonfinancial information as this provides context for and of operational, managerial and strategic considerations.
PUBLIC SECTOR REPORTING PRACTICES
While a short summary of the historical development of accounting may be
presented for the private sector, no such attempt will be made for the
public sector, which includes organizations as diverse as central government, local government, the National Health Service and the British
Broadcasting Corporation. While each has to provide evidence of sound
financial management to the population at large, the backgrounds of such
organizations vary greatly. They are products of a variety of social, political
and legal characteristics, but they all have one factor in common – their
outputs are not easily measured and consequently their financial statements are mainly concerned with inputs (resources consumed) rather
than financially measurable outputs.
Public sector reporting practices were very much concerned with the
recording and verification of finances rather than the internal management
of financial resources. Public sector activities were managed by professionals
in their fields – doctors, policemen, educationalists, etc. – and the financial
accountability was overseen by a treasurer; the emphasis was on aggregate
cash control and financial reporting style records. In the UK since the early
1980s there has a been a dramatic change in this sector, the most visible
outcome being the privatization of some large public utilities, but the services that remain within the sector have gone through a programme of
change requiring value for money through measures of economy, efficiency
and effectiveness (the three Es). These changes have shifted the emphasis to
the management of financial resources from the treasurer and the recording
financial transactions to the individual managers or professionals who are
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1 INTRODUCTION
now ‘empowered’ and hence responsible for the management of their own
department’s financial resources within the organization.
In demonstrating the management of financial resources this book has
attempted to balance ideas and issues from both the public and private
sectors of our economy. In doing so, it provides insights into the way in
which private sector techniques are being developed and employed within
the public sector.
A FRAMEWORK FOR THE STUDY OF ACCOUNTING
The following framework has been developed by the authors, in negotiation with students, to provide a heuristic for the understanding of accounting. It offers a sufficiently simple construct for initial study, while also
supplying a model to understand complex relationships as your studies
develop. The framework is presented initially in Figure 1.3 but will be
used within the introduction to each subsequent chapter to place the
developing ideas in a broader context. The following sections will explain
each box in the diagram in turn, before considering the relationships
between them.
Figure 1.3
A framework for the
study of accounting
and the managing of
f|nancial resources
TRADING OPERATIONS
Mose organizations are involved in the supply of goods and services to a
client base. The method by which this is done may be highly complex
(missile guidance systems), it may include several processes to complete
the product (motor vehicle manufacture), involve on-site work (domestic
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plumbing repairs) and may require skilled operatives (open-heart surgery).
It will often require the coordination and support of several departments.
Regardless of these issues the trading operations box represents the total
activities of the firm.
DATA COLLECTION SYSTEM
The data collection system is the process whereby information about operations and anything related to them is recorded. As previously stated, this
information may be formally recorded within an accounting system or
management information system while some will almost invariably be
held informally by managers. The accounting system will record economic
transactions that have taken place to enable the operations either to be
initiated for a new firm or to continue for an existing one. The data
collection system will include records of stock levels, manpower, wages
and salaries, receipts from customers, payments to suppliers, etc. The
accounting system records such transactions through a process known as
double-entry book-keeping which can be traced back to the twelfth century.
The data may be classified in a variety of ways, but financial accounting
recognizes two types, a debit and a credit, and the logic of this process
means total debit entries must equal total credit entries, hence the phrase
‘balancing the books’ and the ‘balance sheet’. Other classification systems
will be introduced in Chapter 4.
The data collection system of an organization and particularly the accounting records are considered by many managers as a ‘black box’, the recording
of economic transactions by double-entry book-keeping as a ‘black art’. Let us
hope this text will change these perceptions. It may be easier to consider this
box as a huge information database as stored by a software package, where
the information held can be classified in many different ways.
FINANCIAL REPORTING
This box represents the published report and accounts of an organization
prepared by financial accountants for the external users (or stakeholders) of
that organization. The data presented in this box have to comply with relevant legislative requirements, accounting standards and reporting practices,
and the Stock Exchange listing requirements, if appropriate. The financial
reports are a major communication medium between the organization and
its public, as represented by the stakeholder box.
STAKEHOLDERS
This box represents the interests of all parties who use the information
presented in the annual report and accounts for decision making. They
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1 INTRODUCTION
include shareholders, creditors, the banks, potential shareholders, employees and pressure groups (like Friends of the Earth).
PLANNING AND CONTROL AND DECISION MAKING
These two remaining boxes represent the domain of the management
accountants, providing information to managers for the process of decision
making, planning and control. The techniques adopted and the information
selected from the data collection system will depend on the circumstances
and management requirements.
Having briefly outlined the nature of each box it would be useful to
consider the constituent parts relating to financial accounting and management accounting respectively. The financial accounting route is illustrated in
Figure 1.4.
The operations of the business are regarded as economic transactions,
recorded as such in the data collection system and summarized for presentation in the financial report for stakeholders. The data collection system is not
used to provide management with information on how to manage but is seen
as a legal requirement to maintain accounting records and provide information for external reporting. The stakeholders receive information in a prescribed format as specified by legislation and current accounting standards.
Financial accounting will be developed in Chapter 2, when the main statements within published financial reports will be considered with regard to the
users of such statements and their objectives. The main financial reports are
the balance sheet, profit and loss account and cash flow statement which are
provided annually by companies. Chapter 3 will analyse the information
contained within the published financial reports to develop ratios which
Figure 1.4
Financial accounting
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may be used to compare the performance of companies, in a similar manner
to the methods of financial analysis used within the City of London.
Extracts from the published accounts of a quoted limited company, W. H.
Smith Group plc, are presented in Appendix B, with a full ratio analysis, for
those interested in such detail.
The management accounting route is presented in Figure 1.5. This process is more complex as it includes the accountant’s contribution to the
management process within the firm, whose objective, in a profit-seeking
company, is to provide a level of profit or return measured by the financial
reporting route, that is considered adequate by the stakeholders investing in
the business. The process within the firm includes techniques and procedures which have been developed and modified over long periods of time. In
fact, as management techniques and styles have developed so too has the
contribution that management accountants could be asked to make to the
management process. These developments within management have come
from a variety of sources; for example, economics has contributed ideas
about investment in assets, sociology has made managers view their relationships with employees and among employees differently, operational
research has provided mathematical techniques to help the scheduling of
work, computer science has assisted in the way information is processed and
stored. The list could go on, but it is these highly diverse contributions to
management that make the task of managing so challenging.
To return to the management accounting route, the main boxes are planning and control and decision making. These two are very much part of the
same process as any decision must involve planning the consequences of
such a decision, and then controlling or monitoring the developments
from that decision against the plan devised. Within this text the decisionmaking and planning and control aspects will be separated for ease of understanding, as the techniques within each part can be quite complex.
Chapter 4 will consider the way the data collection system can contribute
to management decision making, planning and control. Within this chapter
the nature of cost within an organization will be analysed and developed to
provide a basis for subsequent chapters.
Chapter 5 will develop the ideas of planning and control through
traditional concepts of budgets and budgeting control, developed from
Figure 1.5
The management
accounting route
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1 INTRODUCTION
a general model of control. The text will then consider more technical
aspects of control in Chapter 6, with the introduction of standard costing
which can be traced back to the engineer managers of the late nineteenth
century.
Chapter 7 develops ideas of decision making in the short term. It develops
techniques about cost behaviour first introduced in Chapter 4, and applies
them to a variety of situations. Chapter 8 also looks at decision making, but
for the long term, and applies techniques from economics to the management of financial resources. Because such a process relies heavily upon
future estimates, it is useful to consider risk and uncertainty within the
decision-making process for these longer-term decisions.
Chapter 9 applies ideas presented within the decision-making process,
and aspects of Chapter 4, about cost classifications, to the pricing decision
within the firm. Quite clearly such a process will have to consider not only
the financial resource implications of such a decision but also the marketing
impacts, as price is only one variable within the marketing mix.
The final chapter will bring together all the issues raised in the text to
consider the broader questions of performance appraisal for the firm as a
whole. It employs ideas from Chapters 2 and 3, external reporting and
assessment of company performance, and the management accounting techniques introduced in subsequent chapters. This chapter will also consider
performance of different parts of a firm and in doing so develops concepts
that may be useful to monitor and control activities which may be highly
diverse, and which may have conflicting objectives and interests both in the
long and short term.
The balance of the chapters between financial accounting and management accounting is deliberate. The emphasis of this book is very much on
the management of financial resources. While an understanding of the
financial reporting practices to external stockholders, presented in
Chapters 2 and 3, is essential, it is the internal management process
which warrants the greater emphasis. As managers, or potential managers,
yourselves, it is useful to understand published financial reports, but not
the complex accounting process which aggregates data to produce them. It
is more important for you to understand the internal management process
and how management accounting may aid you in the provision of efficient
and effective management, hence the seven chapters devoted to this area
of study.
Throughout the text we must always remember that information is the
resource to be managed and nurtured – without it the management process
would collapse. The management of financial resources must use information to provide a mechanism for enabling this process to be carried out
effectively and efficiently, but good decision making and control must not
rely exclusively on financial information, but must be seen in the broad
context of management.
The decision-making and control process may be considered as a
rational process, which naturally flows from objective-setting, through
choices between alternatives, and the measurement of outcomes against
those envisaged in the objectives. A more detailed version of this is
given in Figure 1.6.
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MANAGING FINANCIAL RESOURCES
Figure 1.6
The decision-making
and control process
While individual stages of such a process may be hard to recognize
within organizations, nevertheless they will be present in some form or
another. Because financial resources are so critical to the wellbeing of an
organization, such decision processes may be more obvious within the
management of such resources, particularly within profit-seeking organizations whose objectives are much clearer than those of their not-for-profit
counterparts.
SUMMARY
Accounting has been defined as:
The process of identifying, measuring and communicating economic information
to permit informed judgements and decision by users of information. (AAA,
1966)
It is clearly to this subject area the management of financial resources must
turn, but in doing so, it not only provides opportunities, it also provides
problems. Accountancy, like any profession, has its own vocabulary; the
terminology and expressions used are particular to the subject. This immediately creates problems of interpretation and understanding. This text aims
to provide you not only with a basis for understanding the techniques and
terminologies but also with a vehicle that will aid the communication process
between managers and accountants. All are in the same game, the management of an enterprise, whether it is using manpower, machines or financial
resources.
This introductory chapter has provided a framework from which to proceed with your studies on the management of financial resources. It has
drawn heavily from ideas put forward by the accounting literature.
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1 INTRODUCTION
After reading this chapter you should be able to:
Define accounting
Understand the brief history of accounting
& Compare and contrast the differences between financial and management accounting.
&
&
REFERENCES
AAA (American Accounting Association) (1966) A Statement of Basic Accounting
Theory, AAA, Sarasota, Fla
AAA (American Accounting Association) (1975) Report of the Committee on
Concepts and Standards for External Financial Reports, Accounting Review
Supplement, XLX
Chadwick, L. (2002) Essential Finance and Accounting for Managers. Prentice Hall
Chandler, A.D. (1962) Strategy and Structure, MIT Press, Boston, Mass.
Chandler, A.D. (1977) The Visible Hand: The Managerial Revolution in American
Business, Harvard Business Press, Cambridge, Mass.
Chapman F.E. (1921) Hospital accounting as basis for hospital analysis. Modern
Hospital
Corporate Report (1975) Accounting Standards Steering Committee, London
Johnson H.T. (1972) Early cost accounting for internal management control:
Lyman Mills in the 1850s. Business History Review, Winter
Johnson H.T. and Kaplan R.S. (1987) Relevance Lost: The Rise and Fall of
Management Accounting, Harvard Business Press, Cambridge, Mass.
Johnson H.T. (1992) Relevance Regained, The Free Press, New York
Joseph N., Turley S., Burns J., Lewis L., Scapers R. and Southworth A. (1996)
External financial reporting and management information: a survey of UK
management accountants. Management Accounting Research, 7(1), 53–72
Kaplan R.S. (1995) New roles for management accountants. Cost Management (US),
Fall
FURTHER READING
Arnold, J. and Turley, S. (1990) Accounting for Management Decisions, 2nd edn,
Prentice Hall, Englewood Cliffs, NJ, Chapters 1, 2
Glautier M.W.E. and Underdown, B. (1994) Accounting Theory and Practice, 5th edn,
Pitman, London, Chapters 1, 2 and 3
Jones, R. and Pendlebury, M. (1996) Public Sector Accounting, 4th edn, Pitman,
London, Chapters 1 and 2
PROBLEMS AND DISCUSSION TOPICS
1 The following is an extract from the published Annual Accounts of the
International Food, Drink and Leisure Group.
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MANAGING FINANCIAL RESOURCES
We continue to develop our strength in the marketplace through the ownership
of leading international brands, creativity in new product development, skilful
retailing and innovative hospitality concepts.
CORPORATE OBJECTIVES
&
&
&
&
&
To provide our shareholders with above-average returns from our
core activities by building upon our long-term record of growth in
profits, earnings-per-share and dividends.
To satisfy the existing and emerging requirements of our worldwide customers and consumers by providing high quality goods,
services and hospitality.
To ensure a good work environment for our employees avoiding
unfair discrimination, recognizing their contributions and
encouraging their initiative.
To enrich the community, principally through our capacity to create wealth but also through selective direct support of enterprise,
education and charities.
To conduct our business with due consideration of its impact upon
the environment.
Do you consider these objectives compatible with one another and how
might that company communicate the success of achieving these objectives to its stakeholders?
2 Either for the organization where you work, or an organization that you
are familiar with, obtain the published Annual Report and answer the
following questions after familiarizing yourself with its contents.
(a) In what ways do you find the information contained to be useful to
you as an employee or interested party?
(b) What additional information would you find useful to be included?
3 Either for an organization where you work or an organization that you are
familiar with, consider the following.
How does accounting affect the way you do your job, and does this have
positive or negative benefits for you as an individual and for the organization as a whole?
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