Analyzing Financial Statements for Planning and Cost DB

MEMO

From: 

To: 

Cc: Finance Department 

Re: Explanation of Financial and Managerial Accounting

Accounting is a broad field of study that has branched into different branches over the past few decades. One of the broad divisions of accounting is based on financial and managerial accounting. In general, financial account refers to the process of aggregating accounting information into financial statements. It records revenues, expenses, assets, and liabilities that are concerned with the running of a business. Management accounting refers to the internal processes that are used to account for transactions in business. It involves the application of accounting techniques to assist management function and coordinate future plans for an organization ("Financial & management accounting | Similarities & Differences", 2018). 

One of the similarities between financial and managerial accounting is that they are involved in the total accounting information systems and deal with economic events. When conducting their reports, both are concerned with revenues, expenses, liabilities, assets, cash flows, and financial statements. A similar accounting principle and concept is applied to both systems of accounting. However, management accounting is less regulated compared to financial accounting. Organizations should follow the Generally Accepted Accounting Principles (GAAP) when preparing their reports. These are a set of common accounting principles set by the accounting board. Public companies should also follow regulations set by the SEC. The regulations are not necessary when preparing reports in management accounting.

One of the main differences between financial and managerial accounting is in reporting. Financial accounting reports are used for external purposes. They are prepared for stakeholders where they are used to show the financial health of an institution. Other individuals that benefit from the financial reporting include creditors, stock exchanges, government authorities, financial analysists, and trade unions. Financial accounting would generally report on the profitability and efficiency of running a business while managerial accounting would report on problems in an organization and how they are fixed. 

Examples of financial reports used in financial accounting include balance sheets, income statement, and a statement of cash flows. The balance sheet shows the position of the company after a certain amount of time. The income statement shows the expenses and revenues after a certain amount of time. The statement of cash flows shows the changes in cash levels (Horngren et al., 2015). 

Managerial accounting is used primarily for internal purposes. A different set of information is prepared in the reports and supplied to different management executives. Management accounting can be prepared for the specific needs of the Chief Executive Officer or the department manager. The information provided in the statements for management accounting is more detailed compared to the statements that are provided in financial accounting. The statements provided could be in the form of forecasts and budgets. They assist in the general running of the organization and enable it to achieve its objectives and strategic aims and objectives.

MEMO

From: 

To: Board of Directors

Cc: Financial Department

Re: Financial Statements

Financial accounting is the process of recording, summarization, and reporting the transactions of a company. Financial statements are used to show the result of operations and the financial position of a company (Wohlner, 2018). Financial statements can be used by managers for planning and control. Four statements are usually prepared for companies that trade publicly. The statements include a balance sheet, income statement, cash flow statement, and statement of stockholders’ equity.

Balance Sheet

The balance sheet is used to show the financial position of a company at a given time. It consists of three basic elements; assets, liabilities, and equity. The data extracted from the balance sheet can be used in managerial planning and control. Several indicators such as the working capital, current ratio, debt-equity ratio, and quick ratio can be used to show the financial structure of a company. It can show how liquid the company is and the overall financial structure. The managerial department can use this information to know whether the company is in a position to acquire more assets or should change its business structure in order to become more liquid. 

Income Statement

The income statement is also known as a profit and loss statement because it shows the profit and loss of a company during a certain period. The financial statement is important to managerial accounting because it provides a clear view of the monthly expenses and revenues without any other information within (Richards, 2018). The information presented can be used to control a company’s expenses or try to improve its revenues in order to have a more stable financial structure. The information is also presented periodically such as a month, a quarter, or a year. The periodic nature of the information allows it for comparison over similar periods of time.

Statement of Cash Flows

The cash flow statement is used to summarize the amount of money generated and expended in a given period. It can be used to measure the amount of money that a company has in its hand which is used to plan the payment of suppliers, employees, and to meet other obligations. It can also be used to project the amount of revenue expected in the near future and plan for the use of that revenue. 

Statement of Stockholders’ Equity

The statement of stockholder’s equity is used to record the current stakes of investors. The records would consist of the amount investors started in the company and the changes over a certain period of time. The information presented includes a paid-in capital that can be used by the management to plan for the use of stockholder’s investment to advance the company’s progress. It can also be used to forecast future investors in the company and their investment can be planned for accordingly.

All the statements presented are used by the managers in planning and control in different ways. They can be used to make critical financial decisions depending on the forecasts in the reports. A company can undertake several measures such as reducing expenses based on the information presented in the financial statements.

References

Horngren, C. B., Harrison, W. T., & Oliver, M. S. (2015). Financial & Management Accounting.

Financial & management accounting | Similarities & Differences. (2018). Retrieved from https://accountlearning.com/financial-and-management-accounting-similarities-differences/  

Richards, D. (2018). Using Financial Statements as a Management Tool. Retrieved from https://www.thebalancesmb.com/using-financial-statements-as-a-management-tool-1200762  

Wohlner, R. (2018). Accounting Basics: Financial Statements. Retrieved from https://www.investopedia.com/university/accounting/accounting5.asp