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Chapter 1

AFM123 Chapter Notes - Chapter 1: Standard Accounting Practice, Management Accounting, Financial Accounting

Accounting & Financial Management
Course Code
Seth Bouwers

of 3
Chapter 1 An Intro to Managerial Accounting
The Work of Management and the Need for Managerial Accounting Information
Financial accounting the discipline of account concerned with providing information to shareholders,
creditors, and other outsiders of the organization
Managerial accounting the discipline of accounting concerned with providing information to managers for use
in planning, directing and motivating and controlling within the organization
Strategy the general direction in which an organization plans to move to achieve its goals and objectives
Planning selecting a course of action and specifying how the action will be implemented; steps
o Identifying alternatives and then selecting the one that does the best job of furthering the
organization’s objectives
o Balancing the opportunities against the demands made on the company’s resources
o Management looks at the sales volumes, profit margins, and costs of the company’s established
stores in similar markets
o Budgets a detailed plan for the future, usually expressed in formal quantitative terms
Directing and motivating mobilizing people to carry out plans and run routine operations; involves:
o Assigning tasks to employees, arbitrating disputes, answering questions, solving on-the spot
o Daily sales reports are often used in this day-to-day decision making
Controlling ensuring that the plan is actually carried out
o Control the process of instituting procedures and then obtaining feedback to ensure that all
parts of the organization are functioning effectively and moving toward overall company goals
o Feedback accounting and other reports that help managers monitor performance and focus
on problems and/or opportunities that might otherwise go unnoticed; signals whether
operations are on track and key to effective control
Performance report a detailed report containing budgeted results with actual results;
suggests where operations are not proceeding as planned and where they require more
Planning and control cycle the flow of management activities through planning, directing and motivating and
controlling and then back again to planning
Comparison of Financial and Managerial Accounting
Emphasis on the future - Since planning is such an important part of the manager’s job, managerial
accounting has a strong future orientation due to the constant economic, customer and competitive
changes which occur; whereas financial accounting primarily provides summaries of the past
Relevance and flexibility of data financial accounting is expected to be objective and verifiable
whereas managers want data which is relevant (appropriate for the decision at hand) and flexible
enough to provide whatever data needed for a particular decision such as unquantifiable info about
customer satisfaction
Less emphasis on precision since precision is costly in terms of time and resources there is less
emphasis than in financial accounting
Segments of an organization in managerial accounting segment reporting is the primary emphasis
o Segments any part of an organization that can be evaluated independently of other parts and
about which the manager seeks financial data
Generally accepted accounting principles (GAAP) rules the indicate acceptable accounting practice
which enhance comparability and help reduce fraud and misrepresentation but they do not lead to the
most useful reports for internal decision making; managers can set their own rules concerning the
content and form of internal reports
Managerial accounting not mandatory various outside parties require financial accounting however
Three major changes in the business environment have made managerial accounting more important include
1. Globalization increasing competition which has lowered prices, raised quality and provided consumers
with more choices
2. Organizations have needed to find new ways of doing business I new strategies, new management
practices and more sophisticated management accounting systems
3. Ethical responsibility and corporate governance among businesses
The Lean Business Model
Lean business model a business model that focuses on continuous improvement by eliminating waste in an
organization; if properly implemented these processes can enhance quality, increase efficiencies, eliminate
delays and reduce costs which add to profits
Just-in-time approach a production and inventory control system in which materials are purchased
and units are produced only as needed to meet actual customer demand; raw materials are received
just in time to go into production, and products are completed just in time to be shipped to customers
o Zero defects having zero or as few as possible defects
o Benefits
Tied up funds in inventories can be used elsewhere
Areas used for inventory storage are available for more productive uses
Time required to fill orders is reduced resulting in quicker response to customers and
greater sales
Defect rates are reduced, resulting in less waste and greater customer satisfaction
Total quality management an approach to continuous improvement that focuses on customers and
using teams of front-line workers to systematically identify and solve problems
o Benchmarking a study of organization that are among the best in the world at performing a
particular task
o Plan-do-check-act cycle a systematic approach to continuous improvement that applies the
scientific method to problem solving
Plan phase analyze data to identify possible causes for problem and propose solution
Do phase experiment is conducted
Check phase results of experiment analyzed
Act phase favourable results the plan in implemented; unfavourable restart process
Process re-engineering an approach to improvement that involves completely redesigning business
processes in order to eliminate unnecessary steps, reduce errors and reduce costs; focuses on
simplification and elimination of wasted effort
o Business process a series of steps that are followed in order to carry out a task in a business
o Non-value-added activities an activity that consumer resources or takes time, but does not
add value for which customers are willing to pay
Theory of constraints a management approach that emphasizes the importance of managing
o Constraint a hurdle (obstacle) that prevents people for getting more of what they want
o Identify the weakest link
o Do not place a greater strain on the system than the weakest link can handle
o Concentrate on the improvement efforts on strengthening the weakest link
o Is successful eventually the weakest link will improve
o Restart process
Ethical Responsibility and Corporate Governance
Most people who act unethically justify their behaviour by:
1. The organization expects unethical behaviour
2. Everyone else is unethical
3. Behaving unethically is the only way to get ahead
Sarbanes-Oxley Act U.S. legislation of 2002 that was intended to protect the interests of those who invest in
publicly traded companies by improving reliability and accuracy of corporate financial reports and disclosures
Corporate governance the system by which an organization is directed and controlled; if properly
implemented it should provide incentives for top management to pursue objectives in the interests of the
company and provide for effective monitoring of performance