Financial and Managerial Accounting

Managerial and Financial Accounting Report

FIN540 Accounting for Managerial Decision Making

Abstract

Financial accounting develops account information that is used by external parties such as stockholders, suppliers, banks, and government regulatory agencies in their decision-making. Management accounting develops confidential accounting information that is used by managers within an organization. Management accounting is a complex process of identifying, accumulating and analyzing information and then communicating this information to managers to aid in fulfilling organizational objectives. Interpretation of those analyses is also a large component of this discipline. This paper shall serve to illustrate the key differences and how professional organizations, such as the Institute of Management Accountants (IMA) influence organizations and standards.

Financial and Managerial Accounting: A Comparison

Financial accounting primary produces financial statements, such as profit and loss statements, statements of cash flow and balance sheets; these types of statements are primarily used for analysis by investors and government agencies but also internal managers. An important constraint to remember is that financial statements are limited by generally accepted accounting principles (GAAP). Management accounting reports fall under no such constraints as they are often used to aid managers in an improved management decision-making process (Pitts, Shargi, Gonzales, p.4)

While there are behavioral implications in financial accounting such as concerns about how to measure and communicate economic phenomena such behavior considerations are secondary, although executive compensation based on reported results may have behavioral impacts. Management accounting is primarily concerned with measurements and how reports will influence manager’s daily behavior.

Financial accounting is chiefly focused on the past and performs a historical evaluation of a firm’s performance, while managerial accounting focuses on forward moving analysis and forecasts such as implementation of budgets based on financial reports. Financial statements are very inflexible in that they will only report a given period at a time, in most cases one year or one quarter; managerial accounting varies and can jump from one year to 15 years depending on the need of the user.

Financial reports are generally presented in summary format and communicate a company’s financial position as a whole while management reports tend to be very detailed. These types of reports focus entirely on specific details of parts of the entity, such as sales of product X in territory Y. Controllers and internal accountants are bound by sharp definition, the numbers are what they are. Managerial accountants are somewhat less constrained and make use of a number of loosely related disciplines to present and analyze data.

Larry Smith, chairman of the IMA, states,” management accounting is about building quality decision-support, planning, and control processes over the value-creating operations inside organizations. Without strong internal processes and management, there is nothing for the capital markets to value or auditors to check.” (Strategic Finance, June 2005). IMA also publishes standards of ethical conduct for its members (IMA, 2004, Online), which state the four most critical components of the profession: competence, confidentiality, integrity and objectivity.

A competent management accountant should commit to ongoing education and skill enhancement to be able to perform his or her duties in relation to applicable laws, regulations as well as technical standards. While experience gained through employment is often valuable the landscape of accounting and related regulation has changed drastically over the past 10 years and as such it would any