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Chapter 1

chapter 1 notes

Course Code
ACC 410
Maurizio Di Maio

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Chapter 1
Chapter Overview
Four main purposes of this chapter:
1. Describe the nature of managerial accounting to provide internal accounting information to
support the work of management—planning, directing and motivating, and controlling.
2. Explains the role of management accountants in an organization.
3. To details how globalization and increased competition in the business environment have
caused companies to undergo improvement programs such as
oJust-In-Time (JIT) to reduce inventory,
oTotal Quality Management (TQM) to increase customer satisfaction,
oProcess Reengineering to change systems, and the
oTheory of Constraints (TOC) to focus attention on constraints.
4. It discusses the importance of upholding ethical standards.
1. Managerial vs. Financial Accounting
Financial accounting is concerned with reports to owners, creditors, and others outside of
the firm. Managerial accounting is concerned with reports prepared for the internal use of
The types of organizations in which managers operate is varied and include: sole
proprietorships, partnerships, corporations, as well as churches, cities, military units, social
clubs, foundations, and families. Regardless of type focus on two points about any
1. An organization consists of people who are brought together for some common
2. People work together in an organization in order to attain some goal(s) or objective(s).
The work of managers can be usefully classified into three major categories: 1) planning,
2) directing and motivating, and 3) controlling, and all of these activities involve making
1. Planning consists of strategic planning and developing more detailed short-term plans.
2. Directing and motivating involves mobilizing people to implement the plan.
3. Control is concerned with ensuring that the plan is followed.
4. Decision-making is an important part of ALL of the other three management activities.
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2. Role of a Management Accountant
Managements constant need for accurate and timely accounting information helps them
plan effectively and to focus attention on deviations from plans. In the planning stage,
managers make decisions concerning which alternatives should be selected. Once the
alternatives have been selected, detailed planning is possible usually stated in the form of
budgets. The control function of management is aided by performance reports that compare
actual performance to the budget.
Both financial and managerial accounting rely on the same basic accounting data. However,
there are important differences between the two disciplines:
Financial Accounting.
Is concerned with reports made to those outside the organization.
Summarizes the financial consequences of past activities.
Emphasizes precision and verifiability.
Summarizes data for the entire organization.
Must follow GAAP since the reports are made to outsiders and are audited.
Is required for publicly held companies and by lenders.
Managerial Accounting.
Is concerned with information for the internal use of management.
Emphasizes the future.
Emphasizes relevance and flexibility of data.
Places more emphasis on non-monetary data and timeliness and less emphasis on
Emphasizes the segments of an organization rather than the organization as a
Is not governed by GAAP.
Is not required by external regulatory bodies or by lenders.
Terms to be familiar with when discussing an organization:
Organizational Structure: The way in which responsibilities and authority are distributed
within an organization.
Centralization vs. decentralization: Centralization tends to be favoured in situations where
information is centralized and control is important. Decentralization tends to be favoured in
situations where information is dispersed and centralized control is less important.
Organization charts
Line and staff relationships: A line manager is directly engaged in attaining the
organizations objectives. People in staff positions provide support to the line positions.
The Chief Financial Officer: The controller is the manager in charge of the accounting
department and he/she reports to the Chief Financial Officer (CFO). The CFO is a member
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