Question

Assignment Questions: 1. One of the differences between Managerial Accounting and Financial Accounting is reporting flexibility. Financial reporting is restricted by Generally Accepted Accounting Principles whereas reporting in Managerial Accounting has fewer rules. a) Why is it permissible to violate Generally Accepted Accounting Principles when preparing reports used strictly by company management? b) Should external users always have the same information as internal users? Explain. 2. The United States uses accounting standards developed by the Financial Accounting Standards Board (FASB) known as the generally accepted accounting principles (GAAP). This system relies on rules and regulations and thus is said to be a rules- based system. The rest of the world follows accounting standards developed by the International Accounting Standards Board (IASB) known as the international accounting financial reporting standards (IFRS). This system relies more on principles than rules. There is a movement to have one global standard, which would combine GAAP and IFRS. a) What are the differences between GAAP and IFRS? b) How does each standard handle research and development costs? c) What issues might arise with combining a rules-based with a principles-based system?

Answer 1

a) When the financial statements are prepared under managerial accounting it is not mandatory for the company to follow the GAAP guidelines. Managerial accounting is for the internal use of the managers and the intended users to make the better business decisions. This accounting is done for the decision making purpose. Therefore, no strict rules or the accounting principles are applicable to the managerial accounting. This information is not issued to the public.

b) No. External users does not have the same information as of the internal users. The internal users have the information about the future decisions of the company. However, external users are provided with the limited information. External users gain the information from the publicly issued reports. Internal users involves in the day to day business decisions. And they are aware about the future projects or activities of the company.