Ch 1

Ch 1 : managerial accounting
Users of accounting information:
Internal parties : as managers
External parties : such as investors and government authorities
The major differences between management and financial accounting :
Management accounting: the field of accounting that measures and reports financial and
nonfinancial information that help managers fulfill the organizational objectives.
Financial accounting: the branch of accounting that measures and records business
transactions and provides financial statement for the use of external parties.
Management accounting
Financial accounting
Help managers reach organization goals
Communicate organization financial position
to external parties
Internal managers
External parties
Future oriented
Past oriented
Don't follow GAAP, but internal reports Follow GAAP
based on cost benefit analysis
Time focus
Time span
Types of reports
Detailed financial and nonfinancial Summarized financial reports
Accounting information system:
Process of gathering, organizing, and Communicating financial information
A good accounting information system answer three types of questions:
1. Scorekeeping questions:
 This role describes: is the company is doing good or poorly?
 Accumulating data and reporting reliable results to users(
2. Attention directing questions:
This role describes: which problems should the company look into?
Involves helping managers in identifying the opportunities and problems
needed to be focused on(performance reports).
Closely related to the scorecard.
3. Problem solving questions :
This role asks: of the several alternatives what's the best alternative to
achieve organizational goals?
Involves assess possible courses of action and recommend the best course
to follow.
Managers use problem solving information when they make long range
plans or special nonrecurring decisions, such as make or buy, keep or
replace, or add or drop decisions.
Influences on accounting systems:
A. Generally accepted accounting principles (GAAP)
B. Governmental regulations…
1. foreign corrupt practices act : a U.S. law that forbidden corrupt practices by
requiring the accounting records be maintained in reasonable detail and accuracy,
and have an appropriate system of internal controls.
 Internal controls: policies to protect and make the most efficient use of an
organization's assets.
 Internal auditors: accountants who help review and evaluate accounting systems ,
including internal controls, to help minimize errors , fraud and waste. They also
conduct management audit.
 Management audit: a review to determine whether managers are implementing the
policies and procedures specified by top management.
2. Sarbanes –oxley act: a 2002 law that requires more oversight of a company's
accounting policies and procedures.
Cost benefit and behavioral considerations:
Managers keep the following ideas in mind when designing accounting systems:
1. Simplicity
2. The cost-benefit balance:
 Primary consideration in choosing among accounting systems and methods.
 Comparing estimated costs with probable benefits.
3. Behavioral implications: the accounting system's effect on the behavior (decisions)
of managers (The system must provide accurate, timely budgets and performance
reports in a form useful to managers.
Management functions:
Management activities and responsibilities can be classified into the following 2 board
1. Planning: setting objectives and outline how they will be attained.
 Budget: quantitative expression of a plan of action
2. Controlling:
o implementing plans …maintain accounting systems that communicate
actual results
o using feedback to evaluate the attainment of objective
 performance reports: reports that compare actual results with proposed budget.
Management by exception: concentrating on areas that need attentions and
ignoring areas that appear to be running smoothly.
Planning and control for product life cycles and the value chain:
Product life cycle: the various stages through which a product passes from, conception
and development in to the market, maturation, and finally withdrawal from the market.
The value chain: set of business functions that add value to products or services of an
organization. They are: research and development, design cost, production cost, distribution
cost, customer service.
Accounting positions in the organization:
Management accountant perform the 4 following activities with more focusing on the 3 and
4 activities:
Collecting information.
Preparing standardized reports.
Analyzing information.
Being involved in decision making.
Line managers: directly involved with making and selling products or services.
Staff managers: advisory to line the line managers.
Controller and treasurer functions:
Chief financial officer (CFO): is a top executive who deals with all finance and
accounting issues.
Controller (comptrollers): … the head of accounting department
are responsible for
 Planning for control
 Reporting and interpreting
 Evaluating and consulting
 Tax administration
 Government reporting
 Protection of assets
 Economic appraisal
Treasurer: …the head of financing department
are responsible for
 Provision of capital
 Investor relations
 Short-term financing
 Banking and custody
 Credits and collections
 Investments
 Risk management (insurance)
Changes in the business process:
The most important recent change leading to increased efficiency in American factories has
been the adoption of:
1. Just-in-time(JIT) philosophy:
The elimination of waste by
 Reducing the time that a product spends in production process.
 Eliminating the time that products spend on activities that do not add value.
2. Lean manufacturing:
This applies continuous process improvements to eliminate waste from the
entire enterprise.
3. Quality management(TQM):
Initiatives to minimize costs by maximizing quality.
4. Six sigma:
A continuous process improvement effort designed to reduce costs by
improving quality.