Question

How financial accounting and management accounting can be used to get comprehensive overview about corporations? What if you are an external stakeholders and what if you are an internal stakeholders. Explain

Answer 1

Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

Companies issue financial statements on a routine schedule. If a corporation's stock is publicly traded, however, its financial statements (and other financial reportings) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It's important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves. Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.

In management accounting or managerial accounting, managers use the provisions of accounting information in order to better inform themselves before they decide matters within their organizations, which aids their managementand performance of control functions. Consistent with other roles in modern corporations, management accountants have a dual reporting relationship.

As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization and finance of an organization.

The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team.

Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation.

In corporations that derive much of their profits from the information economy, such as banks, publishing houses, telecommunications companies and defence contractors, IT costs are a significant source of uncontrollable spending, which in size is often the greatest corporate cost after total compensation costs and property related costs. A function of management accounting in such organizations is to work closely with the IT department to provide IT cost transparency.^[13]

One view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavour.

External stakeholders are groups, individuals or organizations outside of a company such as its customers (those individuals who purchase its goods and services), creditors (individuals or groups to whom the company owes money), the government, suppliers (companies from whom the business purchases its products), or society in general.  The government wants the business to pay taxes, employ more people, follow laws, and truthfully report its financial conditions. Customers want the business to provide high-quality goods or services at low cost. Suppliers want the business to continue to purchase from them. Creditors want to be repaid on time and in full. The community wants the business to contribute positively to its local environment and population.

• The purpose of financial accounting is to provide information that helps with the assessment of a firm’s financial history and current performance.
• Financial accounting includes income statements, balance sheets, and statements of cash flows. The financial statements of a company record important financial data on every aspect of a business’s activities. As such they can be evaluated on the basis of past, current, and projected performance.

As mentioned, there are three main financial statements that every company creates and monitors: the balance sheet, income statement, and cash flow statement.

Balance Sheet

The balance sheet is a report of a company's financial worth in terms of book value.

This value is an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue a company earns against the expenses involved in its business to provide a bottom line, net income profit or loss. Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin which each divide profit by revenue.

Cash Flow Statement

The cash flow statement provides an overview of the company's cash flows from operating activities, investing activities, and financing activities.The bottom line shows how much cash a company has available.

Management accounting involves preparing and providing timely financial and statistical information to business managers so that they can make day-to-day and short-term managerial decisions.

Management accounting (also known as managerial or cost accounting) differs from financial accounting in that it produces reports for a company’s internal stakeholders as opposed to external stakeholders.

The result of management accounting is periodic reports for the company’s department managers and CEO, for example.

Management accounting reports often include details of the company’s available cash, recent generation of sales revenues, the current state of the organisation’s accounts payable and receivable, and more.

The information found in management accounting is vastly different than financial accounting in a number of ways. While financial accounting reports tend to be based on historical data, management reports are primarily forward-looking.

Management accounting reports are also usually confidential and for internal use only, as opposed to financial accounting statements, which are publically reported.

Also, instead of being calculated based on generally accepted accounting practices, they are calculated based on management’s informational needs. Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy".

As an external stakeholder, financial accounting can be used to get comprehensive overview about corporations. As an internal stakeholder, management accounting can be used to get comprehensive overview about corporations.