Similarities and Differences between Financial and Managerial Accounting.
I am writing you this MEMO to provide the similarities and differences between financial and managerial accountings. Identification of the similarities and differences between the two concepts is very important to enhance your greater understanding on the importance of managerial accounting, managerial reports, and their usefulness in making importance decisions within the Sparklin Automotive Company (SAC).
The objective of this MEMO is to identify the major similarities and differences between financial and managerial accounting. In a contemporary business environment, both financial and managerial accountings are important tools for business. Although, both concepts employ the same financial data, nevertheless, they serve different purposes. Differences between financial and management accountings could be identified from the different roles they perform.
II. Differences Between Managerial and Financial Accounting
Financial accounting report is prepared to reveal the financial health of an organization. Financial accounting is prepared for the use of the external stakeholders such as investors, creditors and other entities outside the business. Since external users do not have access to the internal information, they always rely on the standardized financial data presented by the organization. Contrarily, managerial accounting report is prepared for the use of managers, executive and employees within the organization. For example, to forecast the market trends, management heavily relies on managerial accounting. (Walther, 2010). Internal users such as management and employee need information to control and plan the business operations since the high-level management rely on financial data to make decision. While managerial accounting report assists the executive to make decision, the financial accounting helps the investors or other external entities to decide on whether to purchase stock or bonds security of an organization. (See Table 1). (McGraw-Hill Higher Education, 2008).
Although, both financial and managerial accounting rely on the same underlying financial data to make decision, however financial accounting report presents the past financial data of the organization to enable external entities to evaluate the organizational performances. On the other hand, managerial accounting lays emphasis on the past, current and future trends for the business decision. While managerial accounting report helps manager to make decision on the day-to-day business operations, the managers may not rely on the exact numbers because managers need to make swift decision in a strong competitive and fluctuating environment. Typically, financial accounting does not provide enough detail to assist managers to make internal decision, contrarily, the managerial accounting report assists managers to forecast for future planning, controlling, and accomplish decision-making. (University of North Carolina, 2010).
Table 1: Comparative Features of Managerial and Financial Accounting Information
Source: McGraw-Hill Higher Education, (2008).
Since decision-making is essential for the survival of an organization, management report is very critical in the decision making process.
III. Managerial Reports and usefulness in Decision Making
In the present competitive environment, decision-making is very essential for the survival and performances of an organization. Decision-making is defined as choosing the best from the alternatives. The task of management is to identify and make the best decision for an organizational growth. For management to make effective decision that will have direct impact for an organization, management requires relevant information. Managerial report is concerned with providing information for the support of the internal management process. The management report is concerned with the issue relating to the importance of the organization, and it could be presented in written or verbal form. However, matters of importance relating to an organization are always presented in written form. The management report is always presented in the following format:
Issue: stating the subject of the report.
Background: states the reason investing in the issue.
Alternatives: identify the available alternatives and the resources, allocation, strength, and weakness for each alternative.
Financial Analysis: states the effect of the revenue, expenses, and cost coordination on the organization.
Performance measures: reveal the extent the issue in question will be able to improve the organization performances.
Communications: states the communication plan for the issue.
Recommendations: provides the recommendations for improvement.
To prepare management report, an organization relies on the internal accounting unit and other units to provide information that will assists management in making effective decision relating to marketing, finance, and production. When the problem arises in making the best financial decision on different alternatives, managerial reports are the major tools that management use to identify and resolute the problems. To prepare management report, accounting department assists in providing relevant information to all level of the organization to assist in the decision making process. To make financial decision on an issue, management always relies on the management report that reveals the financial statement of an organization. Typically, the financial statement is prepared by the accountant, which shows the income statement and balance. Management is deemed successful when an organization has been able to reach its financial target through successful management of assets, capital, liabilities, revenue and expenses.
A prerequisite to decision is that it must ally with management goals. The objective of managerial report is essentially to make the best decision due to complex interacting relationship. Thus, it is very critical for management to make critical and strategic decision for the organization advancement. Strategic decision is concerned with the goals and objectives that management needs to implement. Tactical decision is executable decision that results from the strategic decision, and management tool is very critical to implement tactical decision. Managerial report provides elaborate method and technique to execute tactical and strategic decisions.
To implement decision, manager requires information from management accountant. For example, if the management requires implementing flexible budget for the organizational goals, management will require information on variable costs rate. It is the duty of the company accountant to provide report on variable cost rates that will help the management to make decision on the flexible budget. As being revealed in Table 2, management requires different information to implement selected tools.
Table 2: Tool and Required Information for Management Decision
As being revealed in Table 2, there is connecting link among the following:
Financial statement items
Strategic and tactical decisions
Management accounting techniques
For example, if Sparklin Automotive Company (SAC) decides to improve the quality of service for customers, and there is a need to equip the staff with portable computers. To make decision on the best portable computer to order, management will require a report on the cost of the alternative portable computers and their specifications for the improvement of the client site.
Following is a sample of managerial report for the management:
Sample Managerial Report
Purpose of this report is to analyze two portable computers and recommends a suitable computer for the use of staff at client's locations
The report investigates the corporate use of these computer, standard features and optional benefits.
The information was collected by contacting the individual company on the technical specifications of the machines.
2.1 Micro-pro 8500 Series
Cost: $7,890 RRP
Weight: 4.5 Kg
Size: (W x D. x H) 357 x 275 x 50mm
Screen size: 15.1"
Clarity of screen image: Resolution could be higher, set at 1,024 x 768.
RAM: 64 Mb, RAM can be raised to a maximum 128Mb for $1,130