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MGAB03H3 Study Guide - Management Accounting, Financial Accounting

Financial Accounting
Course Code
Michael Khan

of 4
Managerial Accounting Notes
Chapter 1: Managerial Accounting and Business Environment
The Role of the Management Accountant in Value Creation
Managerial Accounting is concerned with providing information to managers
that is, people inside an organization who direct and control its operations. In
contrast, Financial Accounting is concerned with providing information to
shareholders, creditors, and others who are outside an organization.
Managerial accounting provides data that help organizations run more efficiently.
Financial accounting provides the scorecard by which a company’s past
performance is judged.
The Work of Managers and need for Managerial Accounting Information
Managers carry our three major activities;
Planning; involves selecting a course of actions and specifying how the
action will be implemented.
Directing and Motivating; involve mobilizing people to carry out plans
and run routine operations.
Controlling; involves ensuring that the plan is actually carried out and is
appropriately modified as circumstances change.
A Strategy is a “game plan” that enables a company to attract and retain customers
by distinguishing itself from competitors.
An important part of planning is to identify alternatives and then to select from
among the alternatives the one that best meets the organization’s objectives.
All-important alternatives considered by management in the planning process have
some effect on revenues or costs, and management accounting data are essential in
estimating those effects.
The plans of management are often expressed formally in budgets, budgeting is a
part of the planning process. Budgets are usually prepared under the direction of
the controller, who is the manager in charge of the Accounting Department.
Directing and Motivating
In addition to planning for the future, managers must oversee day-to-day activities
and keep the organization functioning smoothly. This requires motivating and
directing people.
Managers assign tasks to employees, arbitrate disputes, answer questions solve on-
the-spot problems, and make many small decisions that affect customers and
In the control function, managers seek to ensure that the plan is being followed.
Feedback, which signals whether operations are on track, is the key to effective
control. In sophisticated organizations, this feedback is provided by detailed
One of these reports is called a performance report. Performance reports suggest
where operations are not proceeding as planned and where some parts of the
organization may require additional attention.
The Planning and Control Cycle
The planning and control cycle, illustrates the smooth flow of management
activities from planning through directing and motivating, controlling, and then
back to planning again.
Business Plan
New businesses typically formalize their strategic planning in the form of a business
plan. A business plan consists of information about the company’s basic product or
service and about the steps it will take to reach its potential market.
The plan includes information about production methods, the competition, the
management team, and details on how the business will be financed.
Comparison of Financial and Managerial Accounting
Financial accounting reports are prepared for the use of external parties such as
shareholders and creditors, whereas managerial accounting reports are prepared
for managers inside the organization.
Relevance of Data
Financial accounting data are expected to be objective and verifiable. For internal
uses the manager wants information that is relevant even if it is not completely
objective or verifiable. (relevant, means appropriate for the problem at hand).
Less Emphasis on Precision
Making sure that amounts accurate down to the last dollar ad penny takes time.
Accuracy is desirable for external reports; most managers would rather have an
immediate estimate than wait for a more precise answer. As such managerial
accountants often place less emphasis on precision than financial accountants do.
Segments of an Organization
Financial accounting is primarily concerned with reporting for the company as a
whole. By contrast, managerial accounting focuses much more on the parts, or
segments, of a company.