Accounting Principles

Week 1 Reading

Managerial Accounting

Produce financial statements for parties within the company to assist in company decision making

Financial Accounting

Produce financial statements for parties outside the company

3 Key differences between Financial and Managerial Accounting

Structure: Financial accounting must comply with the rules of the GAAP or IFRS, while managerial accounting can be set up in any way that fits the manager/company needs

Time Period: Financial accounting summarizes historical data, while managerial accounting can use projections to influence future decision making

Metrics: Managerial accounting does not have to exclusively use financial terms, as data can be expressed as numbers or percentages as well

Product Differentiation

A company is able to differentiate its product from its competitors (ex: BMW differentiating itself from other cars through speed and handling)

Price-based competition

A company tries to sell its product at a lower price than its competitors in order to gain a share in the market (ex: Walmart providing more affordable goods than other retailers)

3 Inventory cost for manufacturing firms

Direct materials: raw materials that go directly to the product being produced

Direct labor: Labor cost for all employees working DIRECTLY on producing the product

Manufacturing overhead: All factory related expenses not included in direct materials or labor (ex: forklift driver salary, rags used by workers, factory utilities, rent, etc.) Does NOT include non-factory related expenses (ex: administrative expenses/ salesmen salary)

Inventoriable expenses/ Product costs

All factory-related expenses (direct materials, direct labor, and manufacturing overhead)

Non-inventoriable/ Period costs

other expenses not related directly to the factory (ex: marketing, research, customer service, shipping)

(THEY ARE EXPENSED IN THE PERIOD THEY INCURRED and are NEVER part of company inventory)

3 Inventory accounts

Raw material Inventory: direct materials go into this account at the moment purchased

Work-in-process Inventory:

Finished Goods Inventory:

these 3 make up TOTAL inventory