As, a management tool financial reporting and analysis serves instrumental in

organizations formal communication.Comment

Define accounting and discuss briefly its managerial significance in organizations
.Elaborate with examples the various concepts of accounting.Also, provide with
illustrative discusiions on various branches of accounting.

Accounting especially managerial accounting provides relevant accounting

information to managers to do proper planning and control.how the organization
will achieve its objectives ?This is supported by the management
accounting. Process of implementing plans and evaluating if objectives
are achieved or not is informed by the accounts.
Accounting information helps managers plan and control the organizations
operations. Setting objectives and outlining how the objectives will be
obtained.
Control: Implementing plans and using feedback to evaluate the
attainment of objectives.
For e.g increase profitability through product growth and improved marketing.

Formulating overall strategies and long-range plans. Purpose 2: Resource allocation

decisions such as product and customer emphasis and pricing. Purpose 3: Cost
planning and cost control of operations and activities. Purpose 4: Performance
measurement and evaluation of people. Purpose 5: Meeting external regulatory and
legal reporting requirements where they exist.

Managerial accounting information is used by company management to determine what should be sold
and how to sell it. For example, a small business owner may be unsure where he should focus his
marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ
between advertising alternatives for each product, ignoring common costs. This process is known as
relevant cost analysis and is a technique that is taught in basic managerial accounting courses. The same
process can be used to determine whether to add product lines or discontinue operations.

Activity-based Costing Techniques

Once the company has determined what products to sell, the business needs to determine to whom they
should sell the products. By using activity-based costing techniques, small business management can
determine the activities required to produce and service a product line. Embedded in this information is

the cost of customers. Deciding which customers are more or less profitable allows the business owner to
focus advertising toward the consumers who are the most profitable.

A primary use of managerial accounting information is to provide information used in manufacturing. For
example, a small business owner may be considering whether to make or buy a component needed to
manufacture the company's primary product. By completing a make or buy analysis, she can determine
which choice is more profitable. While this technique is certainly useful, small business owners should
only use these analyses as a factor in the decision. There could be other non-financial metrics that are
important to consider that would not be part of the analysis.

Managerial accounting information provides a data-driven look at how to grow a small business.
Budgeting, financial statement projections and balanced scorecards are just a few examples of how
managerial accounting information is used to provide information to help management guide the future of
a company. By focusing on this data, managers can make decisions that aim for continuous improvement
and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings.

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1 Management Accounting
1.1 The managerial processes of planning, decision making and control

1.1.1 Planning

1.1.2 Decision making

1.1.3 Control
1.2 Cost accounting

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Managerial Accounting,

v. 1.0

by Kurt Heisinger and Joe Hoyle

1.2 Planning and Control Functions Performed by

Managers
LEARNING OBJECTIVE
1.

Describe the planning and control functions performed by managers.

Question: Managers of most organizations continually plan for the future, and after the plan is
implemented, managers assess whether they achieved their goals.What are the two functions
that enable management to go through the process of continually planning and
evaluating?

Answer: The two important functions that enable management to continually plan for the future and assess
implementation are called planning and control.Planning is the process of establishing goals and
communicating these goals to employees of the organization. The control function is the process of evaluating
whether the organizations plans were implemented effectively.

Planning
Question: Continually planning for the future is an important quality of many successful
organizations, such as Southwest Airlines (discussed in "Business in Action 1.1"). How do
organizations formalize their strategic plans?

Answer: Organizations formalize their plans by creating abudget, which is a series of reports used to quantify
an organizations plans for the future. For example, Ernst & Young, an international accounting firm, plans
for the future by establishing a budget indicating the labor hours required to perform specific services for each
client. The process of creating a budget for each client enables the firm to plan for future staffing needs and
communicate these needs to employees of the company. Rather than simply hoping it all works out in the
end, Ernst & Youngprojects the labor hours required in the future, hires accounting staff based on these
projections, and schedules the staff required for each client.

A budget can take a variety of forms. A budgeted income statement indicates a profit plan for the future. A
capital budget shows the long-term investments planned for the future. A cash flow budget outlines cash
inflows and outflows for the future. We provide more information about how budgets can be used for planning
purposes in later chapters.

Business in Action 1.1

Plans for the Future

Review the annual report or 10K for just about any company, and you are likely to find information regarding
plans for the future. Here are some examples:

Southwest Airlines. A low-fare, short-haul carrier that targets business commuters as

well as leisure travelers states in its annual report, We are focused on four big initiatives: the
AirTran integration, the All-New Rapid Rewards program, the addition of the Boeing 737800
in 2012, and the replacement of our reservations system.

Sears Holdings Corporation. A multiline retailer that offers a wide array of

merchandise and related services states in its 10K report, We will continue to invest in our
online properties. By integrating our vast store network with our online properties, we believe
that Sears Holdings will succeed in the rapidly evolving retail environment.

Nordstrom, Inc. A fashion specialty retailer indicates in its 10K report that its strategic
growth plan includes opening new Nordstrom full-line and Nordstrom Rack stores, with 6
announced Nordstrom full-line and 18 announced Nordstrom Rack store openings, the
majority of which will occur by 2012.

As these companies go through the process of making decisions about the future, developing plans based on
their decisions, and controlling the implementation of their plans, managerial accounting information will play
a key role in all phases of the process.

Sources: Southwest Airlines, Annual Report, 2010, http://www.southwest.com; Sears Holdings

Corporation, 10K Report, 2010,http://www.searsholdings.com; Nordstrom, Inc., 10K Report,
2010, http://www.nordstrom.com.

Control
Question: Although planning for the future is important, plans are only effective if implemented
properly. How do organizations assess the implementation of their plans?

Answer: The control function evaluates whether an organizations plans were implemented effectively and often
leads to recommendations for the future. Many organizations compare actual results with the initial plan (or
budget) to evaluate performance of employees, departments, or the entire organization.

For example, assume Ernst & Young creates a budget indicating the labor hours needed to perform tax
services for a particular client (this is the planning function). After the work is performed, actual labor hours
used to complete the work are compared to budgeted labor hours. This analysis is then used to evaluate
whether employees were able to complete the work within the budgeted time and often results in
recommendations for the future. Recommendations might include the need for adding more labor hours to the
budget or obtaining better support documents from the client.

Planning and controlling operations are critical functions within most organizations. In todays business
environment, effective planning and control by managers can be the key to survival.

K E Y TA K E AWAY

Managers continually plan and control operations within organizations. Planning

involves establishing goals and communicating these goals to employees of the

organization. The control function assesses whether goals were achieved and is often used
to evaluate the performance of employees, departments, and the organization as a whole.

REV IEW PROBLEM 1.2

Assume you are preparing a personal budget of all income and expenses for next month.
1.

Describe the planning and control functions of this process.

2.

What benefits might be derived from performing the planning and control functions
for a personal budget?

Solution to Review Problem 1.2

1.

The planning function would involve establishing income and expense goals for next month.
Possible sources of income include wages, scholarships, or student loans. Expenses might include
rent, textbooks, tuition, food, entertainment, and transportation.

The control function occurs after the end of the month and involves comparing actual income and
expenses with budgeted income and expenses. This allows for the evaluation of whether income and
expense goals were achieved.

2.

There are several benefits to using a planning and control process. The planning function
establishes income and expense goals and helps to identify any deviations from these goals. For
example, planned expenditures are clearly outlined in the budget and provide guidelines for making
expenditure decisions throughout the month. Without clear guidelines, money might be spent on
items that are not needed.

The control function allows for an evaluation of how well you met the goals established in the
planning process. Perhaps some goals were achieved (e.g., food expenditures were close to what was
budgeted) while other goals were not (e.g., transportation expenditures were higher than what was
budgeted). The control function identifies these areas and leads to refined goals in the future. For
example, the decision might be made to carpool next month to save on transportation costs or to
earn more income to pay for transportation by working additional hours.

PreviousNext
2015 Flat World Education, Inc. Terms of Use

Accounting serves differently for different types of entities as the nature of business
activities differ significantly.Comment

Yes, accounting serves differently for different types of entities as the nature of
business activities fdiffer significantly.As, a business owner our prime duty is to
know how the business is structured /.in , the case of sole propietorship The owners
equity has only one item which is the owners equity account.Whereas if we look at limited company
Shareholders fund = Share Capital + Retained Earnings + Other Revenue & Capital Reserves.In sole
proprietorship Tax is levied on the income of the owner/sole proprietor. A limited company is imposed tax as
it is a separate legal entity

Sole proprietor own all the assets of the business and the profits generated by it. They also assume
complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are
one in the same with the business. Profits from the business flow-through directly to the owners
personal tax return.
The business is easy to dissolve, if desired.

Some employee benefits such as owners medical insurance premiums are not directly deductible
from business income (only partially as an adjustment to income).

e proprietors have unlimited liability and are legally responsible for all debts against the business.
Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.

Partnerships and sole proprietorships have far less paperwork and fewer ongoing formalities to adhere to
in comparison to a corporation. Corporations are required to hold at least one annual meeting, while sole
proprietorships and partnerships do not have to hold company meetings. A corporation must keep strict
financial records and keep a ledger detailing how the company reached certain decisions. Unlike a
corporation, sole proprietorships and partnerships are not required to file annual reports with the state or
create financial statements.

4.Discuss briefly the various issues and challenges facing the financial reporting and
analyses in organizations today.
5.How do you portray managerial impications of financial reporting and analyses in
business and public service instituions?Discuss with illustrative examples.
6.Discuss briefly the various elements of financial reporting and analyses
7.Compare and contrast between IFRS and NAS in line with their technical
coverage.

public limited company can be set up by a minimum of seven promoter

shareholders. However, an existing public limited company can promote another
public company even without seven promoters.
In most joint stock companies, there is a separation of ownership and management
for better governance. The owners exercise their powers through General Meetings
and Board. Board of Directors is the supreme policy-making body, which comprises
directors elected from among shareholders. The election process is defined in the
Articles of Association.

Limited partnerships limit the personal liability of individual partners for the debts of the
business according to the amount they have invested. Partners must file a certificate of
limited partnership with state authorities.
Sole proprietorship unlimited liability

Partnership
More than one capital
account. The number of
capital account depends
on the number of
partners in the
Partnership concern.

Profit & loss is

distributed to the
partners capital
account according to
the agreed ratio.

Limited company
Shareholders fund which
comprises many categories
like share capital, retained
earnings, other revenue and
capital reserves.

Unlike a partnership which

has taxation on the
individual partners, a
limited company is imposed
tax as it is a separate legal
entity

The income statement

Also, show a Statement of

of the Partnership

Changes in Equity where

shows a schedule on

changes in share capital,

how the net profit/loss

profit, revenue and other

is distributed to the

capital reserves during the

partners.

year.

The balance sheet

shows the balance of
the capital amount of

As shareholder funds

each partner classified

{ Click here to go

under owners equity.

to Content Page on The

Different Types of
Organizations,

Besides the income

statement and the
balance sheet, a
Statement of Partners
Equity is also prepared
to show the CHANGES
in equity of each
partner since the
beginning of the year.

Statement of Changes in
Equity

public limited
company can be set

up by a minimum of seven promoter shareholders. However, an existing public

limited company can promote another public company even without seven
promoters.
In most joint stock companies, there is a separation of ownership and management
for better governance. The owners exercise their powers through General Meetings
and Board. Board of Directors is the supreme policy-making body, which comprises
directors elected from among shareholders. The election process is defined in the
Articles of Association.

Sole Proprietorship

Limited Company

The owners equity has only

one item which is the
owners equity account

Shareholders fund = Share

Capital + Retained Earnings +
Other Revenue & Capital
Reserves

Tax on the income of the

owner/sole proprietor

A limited company is imposed

tax as it is a separate legal
entity

As it is not subjected to any

accounting standards or
generally acceptable
accounting practices
(GAAP), the owner can
decides whether financial
statements need to be
prepared or not and if they

Needs to follow proper

accounting concept, principles,
rules and other regulatory
framework.

decide to prepare it, the form

of the financial statement is
also the decision of the
owner.

Not subjected to audit

Needs to be audited and

therefore needs to follow the
strict accounting concepts,
principles, rules and other
regulatory framework.

Sole Proprietorship

Partnership

Only one Capital Account

More than one capital account. The

number of capital account depends
on the number of partners in the
Partnership concern.

All the profit belongs to

the owner

Profit & loss is distributed to the

partners capital account
according to the agreed ratio.

None

The income statement of the

Partnership shows a schedule on
how the net profit/loss is
distributed to the partners.

Balance Sheet show only

one capital account

The balance sheet shows the

balance of the capital amount of

which belongs to the

single owner.

each partner classified under

owners equity.

None.

Besides the income statement and

the balance sheet, a Statement of
Partners Equity is also prepared
to show the CHANGES in equity
of each partner since the
beginning of the year.

ompared to a partnership there is no necessity to prepare a profit and loss appropriation account as the
profit and loss appropriation account is basically to set up the SHARE OUT of the profits/(loss) of the
business amongst the partners
As the partnership itself is not taxed on its profit and the partners are taxed individually based on their
share of profits (re: share of profits, interest on capital and salaries), the preparation of such profit and loss
appropriations will facilitate the taxing of the individual partners.

orporations are subject to double taxation. This occurs when the corporation pays taxes on the company's
profits at the business level, and shareholders pay taxes on income received from the corporation on their
personal tax return.