Question

The following statement was made by the Vice President of finance of Legend Guitars Inc.:

"The managers of a company should use the same information as the shareholders of the firm. When managers use the same information in guiding their internal operations as shareholders use in evaluating their investments, the managers will be aligned with the shareholders' profit objectives."

Discuss whether you agree or disagree with the vice president's statement and why. Please include in your discussion some of the differences between Financial Accounting and Managerial Accounting.

***(Minimum of 4 - 5 legitimate sentences required)***

Also, why you agree or disagree with the vice presidents statement and incorporate the difference between financial and managerial accounting in the discussion.  

Answer 1

I disagree with the vice president’s statement. The management and shareholders uses different information’s for financial performance analysis and decision making purpose.

Basically, the shareholders uses financial accounting reports like Profit and Loss account, Balance sheet, Statement of Equity, and other financial statement supporting documentations to analyze the profitability and financial position of a company. On the other hand, the management uses managerial accounting techniques to evaluate a company performance over a period of time using ratio analysis, common size balance sheet, common size income statement, trend analysis, cash flow statement, fund flow statement, etc.

Financial accounting is a system of collecting, classifying, summarizing, analyzing and reporting financial transactions/information’s which are occurred during a specified period time. The shareholders and other stakeholder’s uses accounting information’s to understand the company’s profit potential.

Management Accounting is one of the three dimensions of accounting which can be depicted as follows;

Financial Accounting

Cost Accounting              Management Accounting

Management accounting refers to providing accounting information’s to the management for the purpose of decision making. According to the words of ‘Robert N. Anthony’, “Management Accounting is concerned with providing accounting information’s that is useful to the management.”

The difference between Financial Accounting and Managerial Accounting are summarized as follows;

Basis	Financial Accounting	Managerial Accounting
Users of Information’s	Shareholders and other stakeholders who make financial decisions	Managers who are engaged in planning and controlling the business organization
Data Prepared By	Financial Accountant of the organization	Specially assigned management staff accountant
Time focus	It has historical perspective as the past transaction are recorded	Future perspective for planning and forecasting business requirements.
Rules	Compulsory to follow GAAP/IFRS and prescribed formats in reports	Not bound by outside rules
Requirement	Mandatory to report for all stakeholders	Not mandatory