TO: Susan Thompson, Assistant
FROM: Lela Keel, EEC Financial Analyst
DATE: January 07, 2011
SUBJECT: Financial Accounting and Managerial Accounting
Both financial accounting and managerial accounting will play a role in putting together financial information for Eddison Electronics Company (EEC). They will both have the same usage which is to prepare and analyze financial data related to the company. The purpose of both of these accounting methods is to provide the users with enough information to make sound economic decisions regarding the company. Therefore, both of these accounting methods will be very important in determining the financial status of the company.
The related reports found in financial accounting will serve to communicate economic data specifically to individuals who are external to the company that have concerns regarding the operations of the business. Conversely, the related reports found in managerial accounting will focus on providing financial information to those within the company who are responsible for making decisions related to the operations of the business (Atkinson, Kaplan, Matsumura, & Young, 2007). Also, apart from the intentional viewers, both of these accounting methods will differ as it related to their purpose, reporting frequency, report generation, aggregation level, regulations set forth, and attribute knowledge of each (Garrison, Noreen, & Brewer, 2010).
Financial accounting will utilize historic economic data to communicate the well-being of the company’s performance as a whole. This will provide the external viewers, such as creditors or lenders, with specific data related to the performance of the company so that they can make appropriate conclusions on whether to make investments in the business or lend money to the company for business operations. Potential investors or lenders, such as banks, will use the financial accounting reports of the company, like the statement of income, balance sheet statement, and cash flow statement to understand how well we are doing as it relates to performance. The necessary performance data of the company being looked at will be the liquidity, profitability, asset activity, market value, and debt ratios. This data will provide the viewers with an accurate look into the financial standing of the company, as well as the company capabilities to perform (Atkinson, Kaplan, Matsumura, & Young, 2007).
As previously stated, the external views with concerns related to the operations of the business will rely on financial data about the company to make decisions. In making these decisions they will examine the data in combination with economic information general to the company, such as information about the industry in which the company functions. The external viewers will have a broad focus on data related to the performance of the entire company. In addition, the financial accounting process will only report the financial dealings of the company that have taken place in the past (Accounting for Management, 2009).
Managerial accounting will present the financial data necessary to internal members, such as managers, executives, or employees, of the company who want to continually improve the operations of the business. This financial data will allow them to make informed decisions regarding the operations of the business, such as with the processes or products we present. Even though this financial historic data will be utilized to aid in the process of decision making and for understanding the operations of the business, the information found in managerial accounting will also be accumulated, collected and applied to the process of decisions making in regards to the current operations of the company, as well as planning for the future and creating and controlling the budget of the company. Continuous inflow of cost data related to the production of the company will aid internal viewers when they need to develop and/or change the lines of products the company produces, such as when new technologies become available in which the operations or production costs of the company could be continually impacted or influenced by external markets. Also, having detailed cost of products the company manufactures can offer a basis for making effective pricing decisions (Atkinson, Kaplan, Matsumura, & Young, 2007).
As previously stated, the financial statement report information related to the company will be reviewed by internal views to make informed decisions about the business operations. These internal viewers will also use company information that is non-financial, such as satisfaction related to our customers, and data related to our competitors. Additionally, the process of managerial accounting will concentrate on present and past information regarding the financial status of the company, as well as the future forecasting of the financial dealings that the company anticipates (Accounting for Management, 2009).
The different types of reports found in the managerial accounting process that might be expected to be presented within the company are departmental budgets and main budgets for the upcoming period of operation, the company’s process reports as it relates to our budget on processing specific products in relation to data cost and analysis, and non-financial data reports that are used to communicate the successfulness of areas such as satisfaction among customers and data related to our competitors. Also, the managerial accounting process will use qualitative data, in addition to quantitative data. The significance of including and giving out this data is obvious when thinking about the many factors that would be essential to keeping up the production of the products manufactured by us, particularly if we fail in delivering quality, on-time service to our customers (Managerial Accounting, n.d.).
Another difference in the practices of managerial and financial accounting is the data reporting frequency essential to each. The period of financial accounting is consistently reported, usually on an annual or quarterly basis. The reports of managerial accounting are typically produced on an as needed basis in order to appropriately plan and control the operations of the company. Also, managerial accounting reports will cover a set time period so that relevance can be given to those individuals who need to apply and use this information to appropriately plan and control the continuing operations of the company. For instance, as the company attempts to advance the timely production of the products we manufacture, a report, such as weekly or monthly, may be produced to compare production times of the past with possible changes in the company’s future performance. Similarly, in the company’s attempt to operate while utilizing a defect policy of zero, managers may call for a daily report of progress on the defective units we produce so that problems area can be readily identified and immediately addressed. With that being said, the process of financial accounting will center on the past data and financial dealings of the company being consistent and reliable while the process of managerial accounting will center on the significance and appropriateness of the different processes of our products so that managers can make decisions while using anticipated data so that any issues can be spotted and directly addressed (Garrison, Noreen, & Brewer, 2010).
The financial accounting reports of the company must be created to comply with the Generally Accepted Accounting Principles (GAAP) and they are regulated by the Securities and Exchange Commission (SEC). This is done to ensure that all interests related to the investments of the company’s activities are protected. In contrast, management accounting is not enforced to comply with any regulations and is standardized only by theories of ethics. This is because the information presented by management accounting is proposed for internal viewers and is not available to the public like the information presented in financial accounting (Accounting for Management, 2009). Regulations relative to reporting managerial accounting will be set by management of the company so that the content can be used to make informed decisions regarding the operations of the business. Managerial accounting is like a tool for planning the operations of the business strategically by collecting data to be used by management or other viewers to plan, organize, staff, direct, and control the organizational activities of the business In addition, managerial accounting will be more collective in gathering reports associated with operating the business. These reports will include the different departments of the company, as well as the different products we manufacture in order to be able to make proper decisions regarding the operations of the business (Garrison, Noreen, & Brewer, 2010).
To conclude, financial accounting is about reporting statistical financial numbers while managerial accounting involves generating reports for making appropriate decisions to achieve optimal results regarding the company’s performance. Moreover, the data included in financial accounting is reported sporadically, but at a minimum the company must report it annually. Conversely, the reporting period of managerial accounting must be continual to examine the past, present, and future of the company’s performance so that the decision making process can be enhanced to ensure financial success of the business (Accounting for Management, 2009). Even though there are many differences between financial accounting and managerial accounting they are still both critical to the continuing success of the operations of the company. Therefore, in my opinion, financial accounting and managerial accounting will be two main branches of accounting that the company must utilize in order to determine the financial health of the company.
Accounting for Management. (2009). Financial accounting vs. managerial accounting – differences between financial and managerial accounting. Retrieved from http://www.accountingformanagement.com/financial_accounting_vs_managerial_accounting.htm
Atkinson, A., Kaplan, R., Matsumura, E., & Young, S. (2007). Management accounting. (5th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.
Garrison, R., Noreen, E., & Brewer, P. (2010). Managerial accounting, (13th ed.). New York, NY: McGraw-Hill Irwin.
Managerial Accounting, (n.d). Retrieved from http://www.cpafinder.com/accounting/managerial-accounting.html