ACCOUNTING FOR MANAGERS
CHAPTER ONE
A GENERAL OVERVIEW
 Introduction
 Accounting vs Finance: A distinction
 Financial vs Management Accounting: User
perspective
 Finance
INTRODUCTION
“Accounting is the art ofrecording ,classifying andsummarizing in a significant
manner and in terms ofmoney transactions and events which are, in part at
least, of a financial character and
interpreting the results thereof.” AICPA
“It is the process of identifying, measuring and communicating economic
information topermit informed judgments and decisions by users of the
information.” AAA
Its purpose is tocommunicate orreport the results of business operations and
its various aspects.
CONT’D
On analyzing the above definitions, the following characteristics of
accounting emerges:
Accounting is the art of recording and classifying different business
transactions.
Generally the business transactions are described in monetary terms.
In accounting process, the business transactions are summarized and
analyzed so as to arrive at a meaningful interpretation.
The analysis and interpretations thus obtained are communicated to
those who are responsible to take certain decisions to determine the
future course of business.
OBJECTIVES OF ACCOUNTING
To record the business transactions in a systematic manner.
To determine the gross profit and net profit earned by a firm during a specific
period.
To assess the taxable income and the sales tax liability.
To know the financial position of a firm at the close of the financial year by way
of preparing the balance sheet.
To facilitate management control.
To provide requisite information to different parties, i.e., owners, creditors,
employees, management, government, investors, financial institutions, banks
etc.
USERS OF ACCOUNTING INFORMATION
Internal Users
External Users
•Lenders
•Consumer Groups
•Managers
•Sales Staff
•Shareholders
•Employee Unions
•Officers
•Budget Officers
•Governments
•Potential Investors
•Internal Auditors
•Controllers
1-7
CONT’D
• Accounting Information(AI): A Means to an
End
Accounting information is not an end , but is a
means to an end i.e. its final product is
decision which is ultimately enhanced by the
use of accounting information, whether that
decision made by owners, management,
creditors, government bodies, labor unions ,etc.
• Why accounting is being called as “the
language of business”?
• Why Accounting information is a means
to an end, not the end in itself?
FINANCIAL ACCOUNTING & MANAGEMENT ACCOUNTING
Financial Accounting:
• Financial accounting information provides information about the
financial resources, obligations, & activities of an enterprise that is
intended for use primarily byexternal decision makers.
• Financial accounting information appears in financial statements that
are intended for external use.
• The primary questions about an organization’s success that decision
makers want to know are:
• What is the financial picture of the organization on a given day?
• How well did the organization do during a given period?
CONT’D
• Accountants answer these primary questions with
three major financial statements.
•Balance sheet - Shows financial picture on a given day.
•Income statement- shows performance over a given
period.
•Statement of cash flows- shows performance over a
given period.
CONT’D
Management Accounting:
Management accounting involves the development and
interpretation of accounting information intended specifically to
assist managing in operating the business.
Management accounting information is for internal use & provides
special information for managers.
Managers use this information in
setting companies goals,
evaluating the performance of departments and individuals,
deciding whether to introduce a new line of products, and
making virtually all types of managerial decisions.
CONT’D
• Management accounting generates
information that managers can use to make
sound decisions such as:
•Financial,
•Resource allocation,
•Production &
•Marketing decisions
FINANCIAL ACCOUNTING VS MANAGEMENT
ACCOUNTING
• Financial accounting is aimed to provide accounting
information to external users.
• Managerial Accounting is aimed to provide accounting
information to internal users.
• Although there is a difference in the type of information
presented in financial and managerial accounting, the
underlying objective is the same; to satisfy the
information needs of the user.
MANAGEMENT ACCOUNTING VS FINANCIAL ACCOUNTING
Criteria
Management Accounting
Financial Accounting
Purpose of information
Help managers make decisions to fulfill an
organization’s goals
Primary users
Managers of the organization
Communicate organization’s financial Position
and operating results to investors, banks,
regulators, and other outside parties
External users such as investors, banks,
regulators, and suppliers
Focus and emphasis`
Future-oriented (budget for 2014 prepared in
2013)
Past-oriented (reports on 2013 performance
prepared in 2014)
Rules of measurement
and reporting
Internal measures and reports do not have to
follow GAAP (IFRS) but are based on cost-benefit
analysis and usefulness to managers
Varies from hourly information to 15 to 20 years,
with financial and nonfinancial reports on
products, departments, territories, and strategies
Financial statements must be prepared in
accordance with GAAP (IFRS) and be certified by
external, independent auditors
Annual and quarterly financial reports, primarily
on the company as a whole
Designed to influence the behavior of managers
and other employees
Primarily reports economic events but also
influences behavior because manager’s
compensation is often based on reported
financial results
Time span and type of reports
Behavioral implications
1. What is the purpose of the 3 major financial statements?
2. How are the three major financial statements related?
3. Discuss the differences between managerial and
financial accounting.
FINANCE
 Virtually all individuals and organizations earn or raise money and spend or
invest money.
 Finance is concerned with the process, institutions, markets, and
instruments involved in the transfer of money among individuals,
businesses and governments.
 The general areas of finance are business, personal and public finance.
 Finance is important to individuals, business and government to achieve
their economic objectives.
CONT’D
 Finance plays a pivotal role to every general person to earn and invest
money; for business to raise and invest funds; and to the government to
plan expenses and incomes, to execute goals of government and to
achieve development of a country.
 FINANCE uses accounting information as inputs to decision-making.
 The study of how to raise money and invest it productively.
CONT’D
Financial management defined:
 It is an integral part of overall management. concerned with the
efficient use of an important economic resource namely, capital funds”
 “Financial Management deals with procurement of funds and their
effective utilization in the business”
 In simple words, Financial Management as practiced by business firms
can be called as corporation Finance or business Finance.
CONT’D
Financial decisions in a firm
There are four broad areas of financial decision making in a firm.
These are:
1. Investment decisions (Capital budgeting)
2. Financing decisions (capital structure)
3. Liquidity decisions (working capital management/short term asset
mix decision)
4. Dividend decisions
CONT’D
1. Investment decisions:
 A firm’s investment decisions involve capital expenditures.
 They are, therefore, referred as capital budgeting decision.
 Capital investment isthe allocation of capital to investment proposals
 Involves commitment of funds to long term assets that would yield long term
benefits

 Two important aspects of investment decision are:
1.
The evaluation of the prospective profitability of new investment, and
2.
The measurement of acut-off rate against that the prospective return of
new investments could be compared.
Investment proposal should be evaluated in terms of both expected return and
risk.
CONT’D
2. Financing decisions:
 Once a firm has decided the investment projects it wants to undertake, it
has to figure out ways and means of financing them.
 This is the function of raising funds.
 The central issue here is to determine the appropriate proportion of
equity and debt; the mix of debt and equity is called capital structure.
 The financial manager must strive to obtainthe best financing mix or the
optimum capital structure.
 The use ofdebt affects the return and risk of shareholders ; it may
increase the return on equity funds, but it always increases risk as well.
CONT’D
3. Working capital management (Liquidity) decision:
 Also referred as short term financial management that deals with current
assets and current liabilities.
 Investment in current assetsaffect the firm’s profitability and liquidity .
 Current assets should be managed efficiently for safeguarding the firm
against the risk of illiquidity.
 If the firm does not invest sufficient funds in current assets, it may become
illiquid and therefore, risky; but it would lose profitability, as idle current
assets would not earn anything.
 Conflict exists between profitability and liquidity while managing current
assets and hence it deals with proper trade-off between liquidity and
profitability .
CONT’D
4. Dividend Decision:

The financial manager must decide whether the firm should
distribute all profits, or retain them or distribute a portion and retain
the balance.

The proportion of profits distributed as dividends is called the
dividend payout ratio and the retained portion of profit is known as
the
retention ratio

.
The optimum dividend policy is that onemaximizes the market value
of the firm’s shares
1. Distinguish Accounting and Finance.
2. Explain the Four key decision areas of financial Management.
3. How can you explain the contribution accounting & finance in
administering business/managing projects?
End of Chapter One!