KENNETH C HOLMES
APPLIED MANAGERIAL ACCOUNTING
PROFESSOR: JASON CADE
JANUARY 5, 2015
DISCUSSION BOARD 1
To: Susan Thompson
From: Kenneth C Holmes
Date: January 6, 2015
RE: Similarities and differences between Financial and Managerial Accounting
Since your experience is based in financial accounting, you have an excellent foundation,
but will need to familiarize yourself with the reports used in managerial accounting. I would
greatly appreciate your cooperation on this matter so you will be comfortable with your
assignments upon starting your new position. I have provided detailed information regarding the
subject below. I hope the information provided is helpful. If you have any questions, feel free to
call my office (850) 966-2155 or email me at kcholmes44@EEC.org
Financial accounting reports are mandatory and are prepared for the use of external
parties including: shareholders, creditors, tax authorities (IRS), and regulators (SEC, OSHA,
etc.). Financial accounting summarizes past financial transactions, focuses on what has already
happened, and summarizes data on the company as a whole. The data must be objective, reliable,
accurate, verifiable, precise, current, and financial accounting statements must be prepared in
accordance with generally accepted accounting principles (GAAP) to provide assurances that the
reports are free of fraud and misrepresentation, and the reports are prepared quarterly.
Managerial accounting reports are prepared for managers inside the organization for
planning, directing, motivating, controlling, and performance evaluation. Managerial accounting
is future oriented with an emphasis on future decision making. The data must accurate, reliable,
relevant, timely, and appropriate for the problem at hand, and is based on non-precise estimates.
Managerial accounting focuses on segments of a company including: product lines, sales
territories, divisions, departments, or any other useful categories: and requires breakdowns of
revenue and cost by major segments. The reports are prepared daily, weekly, monthly and as
needed. Managerial accounting is not concerned with GAAP because it is not mandatory, and
there are no regulatory bodies or outside agencies to specify what is to be done, or needs to be
done at all. This benefit allows for the introduction of useful information instead of necessary
information.
The four basic types of Financial Statements include: Statement of Financial Position
(Balance Sheet), Income Statement (Profit and Loss Statement), Cash Flow Statement, and
Statement of Changes in Equity (Statement of Retained Earnings, and all provide the information
used in managerial accounting statements.
Examples of Managerial Reports include:
Income Statement (Profit and Loss Statement), is a listing of all revenues generated and
expenses incurred by a business or department. This report is important because it shows the
profit or loss generated by the firm’s operations, it can be generated for the whole company, and
can be broken down by department, providing revenues and costs are recorded.
Accounts Receivable Aging Report lists the amounts that are owed by each customer. This
report is important in monitoring delinquent accounts and improving the efficiency of collection
efforts against customers with past-due invoices. It is generated by using the due date to
determine the age of the invoice, usually 30, 60, and 90 days past due.
Job Costing Report shows the profitability of the company on a job-by-job basis. The costs
incurred by each job are compared to the revenue generated, allowing the user to quickly
determine the profitability of a specific job. Managers use these reports to determine which
segments of the business are profitable which segments must be addressed.
Operating Budget documents the expected revenues and expenses for a time period, and allows
for the examination of variances compared to actual results. The operating budget is a guide for
the day-to-day operation of the business, and an essential tool for planning the expenses of a
business over a period of time.
Inventory and Manufacturing Report is used by companies with physical inventory, and is
helpful in improving the efficiency of their manufacturing processes. These reports generally
include: inventory waste, hourly labor costs or per-unit overhead cost. This report allows a
manager to compare different assembly lines within the company to see where one needs
improvement, and which lines are operating efficiently.
Break Even Analysis (Break Even Point) determines the level of sales at which profit is zero,
the point where sales just equals the total of the variable expenses plus fixed expenses and profit
is zero. For example: Break even sales = fixed cost + variable cost, Profit = (Sales – Variable
expenses) – Fixed expenses, or Sales = Variable expenses + Fixed expenses + Profit.
Horizontal Analysis (Trend Analysis) focuses on trends and changes in financial statements
over time, it compares two or more year’s financial data, and shows changes between years in
both dollar and percentage. For example: Horizontal Analysis can be carried out by computing
trend percentages, which states several years’ financial data in terms of a base year. The base
equals 100%, with all other years stated in some percentage of the base.
Vertical Analysis (Common-Size Analysis) represents all of the amounts for a given year in
both dollar and percentage form, each item is stated as a percentage of some total of which that
item is a part. For example: on the income statement, total revenue is 100% and each item is
calculated as a percentage of total revenue. This allows one to monitor the composition and any
significant changes in the financial statements.
Ratio Analysis is used to describe relationships between two figures, and can be used to
calculate Gross Profit ratio, Net Profit ratio, Operating ratio, expense ratio, etc. For example: the
current assets and current liabilities are $500,000 and $250,000 respectfully, the ratio can be
expresses as 500,000/250,000, 200 percent, or 2:1.
Liquidity Ratio measures the short term solvency of the financial position of a firm. These
ratios are calculated to determine the short term paying capacity of a concern or the firm’s ability
to meet its current obligations. Examples include Current ratio and Liquid/Acid test/Quick ratio.
Activity Ratios (Turnover Ratio) are calculated to measure how efficiently the resources of a
firm have been, or are being used. They also indicate the speed with which assets are being
turned over into sales. Examples include: Inventory/Stock turnover ratio, Debtors/Receivables
turnover ratio, Average collection period, Working capital turnover ratio, etc.
Long Term Solvency or Leverage Ratios convey a firm’s ability to meet the interest costs and
payment schedules of its long term obligations. Examples include: Debt-to-equity ratio,
proprietary or equity ratio, Ratio of fixed assets to shareholders funds, Interest coverage ratio,
etc.
REFERENCES
Ahmad, S. (2014, March 20). Financial Accounting Vs. Managerial Accounting. Retrieved from
Accounting4Management.com:
www.accounting4management.com/financial_accounting_vs_managerial_accounting
Fahrid, S. (2014, March 20). Financial Statement Analysis-Managerial Accounting. Retrieved
from www.accounting4management.com>Financial Statement Analysis
Johnson, J. (2015). What are Examples of Managerial Reports? Retrieved from Chron.com:
smallbusiness.chron.com>...>profit and loss statements
Rafique, S. (2014, March 20). Break Even Point Formula Analysis and Calculation. Retrieved
from www.accounting4management.com>costing
Sullivan, D. (2015). Types of Managerial Accounting Reports. Retrieved from Chron.com:
smallbusiness.chron.com>Accounting and Bookkeeping>Accounting