Financial Management Chapter 1

Comparing Managerial and Financial Accounting: Similarities

= Each field deals with economic events of a business

= Both require that economic events be quantified and

communicated to interested parties

Financial vs. Managerial Accounting differences: Primary Users of Reports, Who uses the accounting information?

Financial Accounting – External users: People outside the company.

• Stockholders: People who own shares in the company.

• Creditors: Banks or people who lend money to the company.

• Regulators: Government authorities that supervise businesses.

Managerial Accounting – Internal users: People working inside the company.

• Officers and managers who need financial information to run the business.

Types and Frequency of Reports: What reports are created, and how often?

Financial Accounting: Produces financial statements, usually quarterly (every 3 months) and annually (every year).

Managerial Accounting: Produces internal reports whenever managers need them. This could be daily, weekly or monthly.

Purpose of reports

Why are the reports created?

Financial Accounting – General purpose: Reports provide general financial information that can be useful to different external users.

Managerial Accounting – Special purpose: Reports are created to answer specific questions and help with particular business decisions.

Content of Reports: What information do the reports contain?

Financial Accounting:

• Looks at the business as a whole.

• Information is highly aggregated (summarised and condensed).

• Mainly uses financial information recorded according to accounting rules and standards.

Managerial Accounting:

• Looks at specific parts of the business (departments, products, stores, etc.).

• Provides much more detailed information.

• Can use both financial and non-financial information.

• Information is selected based on whether it is relevant to a decision.

Verification Process: Who checks whether the information is reliable?

Financial Accounting: Reports are audited by independent accountants. This means external professionals check the financial statements to see whether they are fairly presented and follow the relevant rules.

Managerial Accounting: There are no mandatory independent external audits of these internal reports because they are mainly used internally for decision-making.

Management Functions

Planning, Directing, Controlling

What is the purpose of planning?

Set objectives and decide how to achieve them

What are the finnancial goals of planning

Maximize short term profit and market share

What social and enviromental goals are included in planning?

Protect the enviroment and support social programs

What does adding value to a business mean in the Planning phase

Increasing the overall worth of the business

How can the companies value be measures

By its stock price and potential selling price

What is the purpose of directing?

Coordinate people and activities to implement plans

How do managers motivate employees in the Directing phase

By providing incentives such as ; bonuses and rewards

What other activities are part of directing?

Hiring, training and coordinating employees for smooth operations

What is the purpose of controlling?

Monitor activities, check goals and make necessary collections

In the controlling phase how do managers know wether goals are being achieved

By comparing actual results with the planned objectives

In the controlling phase what happens when a company is not on track?

Managers decide what changes are needed.

In the controlling phase what types of evaluation systems can managers use?

Formal or informal evaluation system.

What is an example of strategic planning

Apple planning its expansion into emerging markets like India

What did apple research before entering India

Local consumer behavior and purchasing power

How did apple adapt its pricing strategy in India

It adjusted prices for older Iphone Models

Why did apple partner with local suppliers and manufacturers

To meet India’s “Make in India” requirements.

Why is apples expansion into India an example of Planning?

It set goals and developed strategies to achieve market entry and sales growth.

what is an Example of Directing

Toyota Directing teams using its Toyota production system

What does Kaizen Mean

Continuous improvement

How do Toyota Managers encourage problem solving?

Through workshops on production lines and employee development

What does Employee ownership of quality control mean at toyota?

Workers take responsibility for mantaining product qualities

Why is Toyota’s TPS an example of Directing?

Managers motivate and guide employees towards quality and efficiency goals

Whats an Example of Controlling

Mcdonalds strict global quality control system

How does Mcdonalds use quantity control?

It uses strict global standards to ensure consistency accros franchise

How does Mcdonalds inspect Data

monitoring of sales, customer satisfaction, and speed of service

What corrective actions can they take?

Retrain staff or adjust menu to local tastes

Why is Mcdonalds an example of controlling ?

It measures performance, compares results with standards and takes corrective action

What is an Organizational structure

The way activities, authority and responsibilities are organized within a company

What does an Organization chart show

The relationships between positions and the delegation of authority and responsibility.

Top of the Orga Chart

Shareholders followed by the board of directors

Whata comes after the board of directors

The chief Executive officer, The CEO and President

Which positions report to the CEO

General counsel secretary and the different Vice Presidents

Which departments are led by vice presidents

Marketing, Finance, Operations, Human Resources and Information Technology

Who works under the vice president off Finance CFO

The controller, internal auditor and treasurer

Who works under the vice president of operations

Line employess

Who works under the vice president of human resources

Staff employees

Shareholder/Stockholders

Own the corporation and end board of elections

Board of directors

Formulates operating policies for company, selects officers to execute and perform daily management functions

CEO

Main responsibility for maanaging the business, delegates responsibilities to officers

CFO

responsible for all the accounting and finnancing

COO

Responsible for overseeing a company’s daily operations and ensuring efficiency

Line employees

Directly involved in the company’s primary revenue generating operating activities

Staff Employees

Involved in activities that support efforts of the line employees.

What are Manufacturing Costs

Cost of Activities and processes that convert raw materials into

finished goods.

Three main Manufacturing Costs

Direct Labour, Direct Materials, and Manufacturing Overheid

Raw materials

basic

materials and parts used in the

manufacturing process

What are direct materials?

Raw materials that can be

physically and directly associated

with finished product

Example of Direct material in a Table

Wood, screws, nails, bolts.

Why are these direct materials.

They are tangible items that become part of the finished table

Indirect Materials are part of what Manufacturing Cost

Manufacturing Overhead

What are Indirect Materials

Materials not directly traceable to the finished product

Why might materials be classified as Indirect

They are not part of the product or are to small in cost to trace

Examples of indirect materials in table production

Glue, Sand paper and protective machine coating

Why is wood glue considered indirect

It is to small to trace

Why is sand paper considered indirect

Its impractical to trace because its not in the finishing product.

Direct Labor

Work of factory employees that can be

physically and directly associated with

converting raw materials into finished goods.

Example of Direct Labor with the table

Carpenters cutting and assembling the wood pieces

• Workers sanding and finishing the table

• Employees applying paint or varnish

Their work can be directly traced to a specific table being produced.

Indirect Labor

Work of manufacturing-related employees that has no physical association with the making of the finished

product or Costs for which it is impractical to trace to the goods produced.

Indirect labor example with the table

Factory supervisor (oversees carpenters but doesn’t build tables)

Maintenance staff (repairs machines and tools)

Manufacturing Overheid

All Indirect costs. So all manufacturing costs expect Direct Materials and Direct Labor

Other names for Manufacturing Overheid

factory overhead,

indirect manufacturing costs,

or burden

Product Costs:

All manufacturing cost components

Costs that are an integral part of producing product

Product costs components

o Direct materials

o Direct labor

o Manufacturing overhead

Where are product costs recorded

In an inventory account

When do product costs become an expense

When the goods are sold as Cost of Goods Sold (COGS)

Period Costs

Nonmanufacturing costs, Includes all selling and administrative expenses