Question

You have recently hired a new assistant, Susan Thompson, who previously worked in a financial accounting office preparing journal entries, which provide you with a recording of the day-to-day activities of the company and financial statements (income statement, statement of owners' equity balance sheet, and cash flow statement). Although your new assistant has experience with and fully understands financial accounting, she has no experience with managerial accounting.

Part 1

In a memo to your new assistant, Susan Thompson, complete the following:

• Explain to her the similarities and differences between financial and managerial accounting.
• Provide examples of managerial accounting reports that she could expect to see within EEC, and explain how management might use the information to make decisions.
  • Keep in mind that although the income statement, the statement of owners’ equity balance sheet, and the cash flow statement are generated in financial accounting, they are used to develop all of your managerial accounting reports.
  • Examples of a few of those reports are the horizontal analyzes, vertical analyzes, and ratios.

Part 2

In a memo to the board of directors, discuss the information found in each of the following financial statements, and describe how accounting information is used by managers for planning and control:

• Balance sheet
• Income statement
• Statement of cash flows
• Statement of stockholders’ equity

Answer 1

Similarity between Financial and Managerial Accounting – Most important fact is both accounting provide financial information to users . Financial accounts and Managerial accounts both put accounting information in a report format for managers and executives to review. Financial accountant in publicity traded companies must generate following documents – Balance Sheet , Income statement , Statement of cash flow , statement of change in Stockholders Equity

Management accountant are less regulated . A typical managerial accounting report may compare Budgeted cost to actual cost , analysis of sources of revenue in relation with cost , volume and Profit

Basic difference between Financial Accounting Vs Managerial Accounting are as below :

Financial accounting reports on the results of an entire business , where as Managerial Accounting always provide reports in details

Financial accounting reports on the Profitability of a business where as managerial accounting reports specifically what is causing problem ( root cause )

Financial accounting requires that records be kept with considerable precision , which is needed to prove that the financial Statement is correct . Where as Managerial Accounting frequently deal with estimates

Reporting distribution – Financial reporting distributed inside and outside of any organization where as Managerial accounting is more concerned about Operation matter and distributed with a Company

Standards – Financial Accounting followed various accounting standards , where as Managerial Accounting does not have comply with nay standards

Time period – Financial Accounting mainly concerned with the financial results that business has already achieved , so it is historical method where as Managerial Accounting may address Budgets and forecast

Horizontal Analysis – This analysis is used to review of a Company’s financial Statement over multiple periods

It basically represents as a % growth over the same line item in the base year – Say revenue growth , cost vs revenue comparison , Gross Profit , Net Profit % trend analysis , EBITDA margin analysis etc.

This analysis always help users to easily spot trends and Growth pattern

The analysis of critical measures of business performance , such as Profit Margins , Inventory turnover, return on equity, can detect emerging problems and strength .

Coverage Ratio like the cash flow to Debt ratio and the Interest coverage ratio can reveal whether a company can service its debt through sufficient Liquidity

Vertical Analysis looks at each line item as a % of a base figure within the current periods . Under Income Statement , line items can be stated as a % of total assets or Liabilities . Vertical analysis of cash flow statement shows each cash inflow and outflow as a % of total cash flow

Part 2

Balance Sheet is used by Managers for planning and Control purpose .mainly due to The Balance Sheet is the most important of the three major financial statements . Balance sheet provides complete financial condition . Any person ( Investor , users , stakeholders etc) can assess whether the business will have a hard time paying its bills . Assets such as cash , stock , bonds or any assets which will convert into liquid asset easily

Asset breakdown – Balance Sheet provides details breakdown of assets . Balance Sheet cover all part / process of Inventory like – Raw Material , Work in process , Finished goods .

Scenario Analysis- Balance Sheet provide multiple scenario in terms of asset , Liability , equity of any Company .

A Balance Sheet along with the Income and cash flow statement m is an important tool for Investor to gain insight into a company and its operation

Income Statement also important tool for future planning purpose . Income Statement help manager to understand companies :

1. Revenue position+ Trend of revenue + revenue growth ( past ) and expected growth in future on % basis
2. Cost of goods sold details – trend analysis
3. Determine Operating margin – understand margin trend . With help of this trend , manager can identify any cost overrun or revenue leakage and they can cover up this deficit while doing future planning
4. Overhead cost analysis – This will also help manager to understand present Overhead cost structure of any company and with help of trend analysis , they can make future planning ( Overhead cost – mainly include Salary/ Wags of support team ..)

Multiple Key ratio based on Income Statement ( like Operating margin , Net profit , Interest coverage ratio ) – this will definitely help to do future analysis

Statement of   Cash flow – This cash flow is one of the major tool to understand actual movement of cash , Working capital flow . Any outsiders , users , Stakeholders are interested to see Cash flow position of any organization .

At present , cash flow having three parts – Cash flow from Operation , cash flow from Investment and Cash flow from Financial Activity .

Cash flow from Operation will help manger to understand present challenge in Working capital mainly debtors , creditors , inventory movement .

Cash flow from Investment activity represents position of major capex and future utilization of this capex to generate revenue of the company

Cash flow from Financial activity represents mainly movement of Loan , repayment of borrowings , any addition of borrowings , dividend payout etc.

All above information is very important for manager to make future planning

Statement of change in Equity Importance – 1) Selling additional shares – This statement of change in Equity enables the management of the company to make prior arrangements for securing the approval of the owners of the business when seeking to adjust the authorized share capital

This statement will help to do planning of future programme for repurchasing the company’s shares with a view to maximize shareholders value

Employee stock ownership plan . This reports enable the management to monitor and review the progress of and adjustment to the company’s ESOP

With the help of above report , the company determine per share earnings for each accounting period

Statement of change in Equity mainly consist of following details :

1. Net profit / loss – distributed to shareholders
2. Increase / decrease in share capital reserves
3. Dividend payments
4. Change in accounting policy
5. Any prior perio connections
6. Opening balance – retained earnings adjustment
7. Revaluation reserve ( if any)