Financial and Management Accounting: A Comprehensive Guide
What is management accounting?
Managerial accounting, also called management accounting, is a method of accounting that creates statements, reports, and documents that help management in making better decisions related to their business’ performance. Managerial accounting is primarily used for internal purposes.
Importance of managerial accounting
The main objective of managerial accounting is to assist the management of a company in efficiently performing its functions: planning, organizing, directing, and controlling. Management accounting helps with these functions in the following ways:
1. Provides data: It serves as a vital source of data for planning. The historical data captured by managerial accounting shows the growth of the business, which is useful in forecasting.
2. Analyzes data: The accounting data is presented in a meaningful way by calculating ratios and projecting trends. This information is then analysed for planning and decision-making. For example, you can categorise purchase of different items period-wise, supplier-wise and territory wise.
3. Aids meaningful discussions: Management accounting can be used as a means of communicating a course of action throughout the organization. In the initial stages, it depicts the organisational feasibility and consistency of various segments of a plan. Later, it tells about the progress of the plans and the roles of different parties to implement it.
4. Helps in achieving goals: It helps convert organizational strategies and objectives into feasible business goals. These goals can be achieved by imposing budget control and standard costing, which are integral parts of management accounting.
5. Uses qualitative information: Management accounting does not restrict itself to quantitative information for decision-making. It takes into account qualitative information which cannot be measured in terms of money. Industry cycles, strength of research and development are some of the examples qualitative information that a business can collect using special surveys.
A KEY FACTOR
A key factor is defined as the factor in the activities of an undertaking which, at a particular point of time or over a period, will limit the volume of output. Other variant terms are limiting factor, Principal Budget Factor & scarce factor. Limiting factors are governed by both internal & external factors.
Tools of Financial Analysis
Financial analysis tools are different ways to evaluate and interpret a company’s financial statements for various purposes like planning, investment, and performance. Some of the most used financial tools based on their usage and requirements are common size statements (vertical analysis), comparative financial statements (comparison of financial statements), ratio analysis (quantitative analysis), cash flow analysis, and trend analysis.
Financial analysis tools are the finance tools that help to maintain the company/organization’s financial position through planning, controlling, and analyzing financial business transactions.
When an analyst, business executive, or a student is dealing with a financial issue or wishes to understand the financial implications and economic trade-offs involved in decisions about business investment, operations, or financing; a wide variety of analytical techniques and infrequent rules of thumb is available to generate quantitative answers. Therefore, choosing the appropriate tools from the available alternatives is an important aspect of the analytical task.
The top four most common financial analysis tools are: –
- Common size statements
- Comparative financial statement
- Ratio analysis
- Benchmarking analysis
A fund flow refers to the inflow and outflow of funds or assets for a company and is often measured on a monthly or quarterly basis. A fund flow statement reveals the reasons for these changes or anomalies in the financial position of a company between two balance sheets. These statements portray the flow of funds – or the sources and applications of funds over a particular period.
Why prepare a fund flow statement?
A company’s financial statements already include a profit and loss statement and a balance sheet. So why is a fund flow statement needed at all?
- A profit and loss and balance sheet will show a company’s financial position, but will not explain the reasons for fluctuations or variations in within the company’s financial or cash position
- A profit and loss and balance sheet will depict two sets of figures – the current and previous year – but will not explain why movement has happened.
The importance of fund flow statements
A funds flow statement is an essential factor in revealing how funds are used. A fund flow statement shows financial analysts how to assess the fund flow of an organization in the near future.
Usually, the preparation of these statements is followed by a funds flow statement analysis. It serves as a financial parameter that helps a company to control its finance and develop a better strategy for long term financial planning, and to utilize short term and long term funds
Marginal costing is a cost accounting technique that focuses on the variable costs associated with producing one additional unit of a product or service. It helps in determining the contribution margin and assists in making decisions related to pricing, production, and profitability.
Marginal costing, or variable costing, is a valuable tool for managers to make informed decisions about pricing, product mix, and profitability. By separating variable costs from fixed costs, marginal costing provides a clear picture of how changes in production volume affect a company’s bottom line.
What is Marginal Costing?
Marginal costing is a cost accounting technique that helps businesses determine the cost of producing one additional unit of a product or service. Marginal costing is also known as “variable costing“. Because it only considers the variable costs associated with producing an additional unit of a product or service, such as direct labour and materials.
Under marginal costing, fixed costs, such as rent and salaries, are considered period costs that are not directly related to the production of a specific unit. Instead, fixed costs are expensed in the period they are incurred. This differs from absorption costing, another cost accounting technique that allocates fixed costs to each unit produced.
MARGINAL COST (MC)=CHANGE IN TOTAL COST ^TC / CHANGE IN QUANTITY ^Q
FINANCIAL STATEMENT HEALTH
It reflects the revenue received by the company from its customers, money received from the sale of investments, and the cash incoming in the business from loans. It also shows the cash outflow of the company like the payment of loans, purchase of assets, and the charges incurred during the selling of goods.
What is financial accounting?
Financial accounting refers to the branch of accounting which produces records, summaries and reports of the financial activities and transactions related to a company. The main tasks involved in financial accounting are the preparation of financial statements and reports which convey financial information about an organisation to external parties such as investors, creditors and the authorities.
What is management accounting?
Management accounting is used to keep a business or organisation’s leadership informed
about the financial situation and performance. This helps to support decision making and assess company performance over time, as well as providing some insight into what is likely to happen in the future. The reports produced by management accountants are used to support strategy and planning, goal-setting and decisions about the allocation of the business or organisation’s resources.
WHAT ARE THE KEY DIFFERENCES
Systems
Reporting focus
Aggregation
Efficiency
Timing
Proven information
Standards
Time period
Valuation
What are Comparative Statements?
Comparative statements or comparative financial statements are statements of financial position of a business at different periods. These statements help in determining the profitability of the business by comparing financial data from two or more accounting periods.
The data from two or more periods are updated side by side, which is why it is also known as Horizontal Analysis. The advantage of such an analysis is that it helps investors to identify the trends of business, check a company’s progress and also compare it with that of its competitors.
Objectives of Fund Flow Statement
- Helps in knowing the changes in the company’s financial position
The main aim of preparing a fund flow statement is to cite the reasons for changes in the liabilities, assets, or equity capital. It is done by comparing the two balance sheets for different accounting periods.
- Analysing the operational position of the company
The balance sheet gives a static view of the company’s financial position. It is only an overview of the current position of the company at any particular date so a thorough review of the movement of funds is essential for better financial planning.
- Helps in proper allocating of the resources
Fund flow statement helps in providing information regarding the allocating of the resources more efficiently and effectively. It also gives information regarding external and internal sources of financing.
Break Even Chart
A break-even chart presents the relationship between cost and revenue to indicate profit and loss on different quantities with break-even point. It is also known as Cost Volume Profit graph.
Break-even point i.e., intersection point of the chart, shows the level of sales wherein total revenue is equal to the total costs and net income is equal to zero. Any number below the break-even point constitutes a loss while any number above it shows a profit. The chart plots revenue, fixed costs, and variable costs on the vertical axis, and volume on the horizontal axis.
The Break-Even chart can be highly useful in profit forecasting and planning to examine the effect of alternative business management decisions for your company. It allows end-user to see the unit volume sales level needed to achieve break even, based on which the user can be decided whether it is possible to reach this sales level.
PV RATIO SELLING PRICE INCREASES
If the selling price is increased, it increases the P/V ratio, and the rate of fixed costs recovery is increased. The break-even point (break-even volume) declines, profits beyond the break-even point increases; losses below the break-even point decreases.
TOTAL FIXED COST INCREASES
Changes in Fixed Cost: Increase and decrease in the fixed cost do not have any impact on the P/V ratio, but they change the break-even point.