Financial Accounting vs Managerial Accounting

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Financial Accounting vs Managerial Accounting 

Accounting is a professional field dedicated to the keeping of account records and budgetary planning, analysis, management, and reporting of an organization’s finances. Accounting professionals can become accredited as CPA (certified public accountant), practice leaders qualified to oversee the external accounting audit and/or internal accounting activities of a firm, organization, or public administration. Demonstration of higher mathematics competency is required of students studying toward a degree in accounting. Accounting degree programs typically demand that students perform calculus of financial statements (i.e. ratios) and market activity. Students may study the regulation of financial accounting practices both domestically, and for the purposes of international compliance. 24HourAnswers is responsive to the needs of students training for a degree in accounting. Our team of highly qualified tutors are subject matter experts with the knowledge and skill to assist students in meeting their accounting coursework and credential objectives.

Here are some insights from the field of Accounting on the topic of Financial Accounting vs. Managerial Accounting:

Financial accounting and managerial accounting are two sub-disciplines of accounting. The key difference between financial accounting and managerial accounting relates to the purpose and intended users of the report. Financial accounting involves disclosure of financial records to official parties external to the organization (e.g. for taxation purposes). Managerial accounting involves the compilation of internal records for distribution amongst managers of a firm or organization for the purpose of making informed business decisions.  

  • Financial accounting is the activity of compiling an organization’s main financial statements. Financial accounting involves the analysis and reporting of profit and loss from operations, as well as the recording of an audited financial statement, including the balance sheet, consolidated income statement, and statement of cash flows.
  • Managerial accounting or “cost accounting” as it is often called, is the internal accounting of budgetary activities and cost-related planning of a firm, company, or organization. The purpose of cost accounting is to assist managers in making well-informed business decisions. Managerial accounting practice identifies, measures, analyzes, interprets, and provides the internal recording of budgetary allocations costs associated with internal processes or production goals.

Financial Accounting

Though financial accounting is relevant for internal planning, the focus of those activities is more concerned with external reporting. A CPA or CFO (chief financial officer) responsible for the compliance and disclosure of an organization’s financial records reports a firm's financial performance on a quarterly and annual basis. Disclosure of financial accounting records is an obligation to investors, creditors, tax bodies, and regulators. Part of the company’s annual report, financial statements are useful for purposes of fundraising, as those records reflect the financial activity during a given period, and are the basis for forecast estimation of future performance.

Part of the scope of financial accounting practice is the analysis of an organization’s financial statements: Income Statement, Cash Flow Statement and Balance Sheet. The balance sheet is an overview of a firm’s assets and liabilities and generally contains a summary of shareholder activity. A comprehensive income statement is a record of revenue and expense recognition for the period, as well as an overview of non-recurring items. The cash flow statement shows cash flow from operations, investment, and financing. Financial ratio analysis techniques enable an accountant to report the outcome of business activities, operations, liquidity, profitability, return on equity, solvency, and credit analysis. Creditors and investors can utilize a company’s financial statements to evaluate capital structure and project solvency and return on investment.

The uniformity of financial accounting records is mandated by law. The compliance of an organization’s financial accounting record is the substance of the audit. Audited financial statements in compliance with regulatory rules assure external users that the reporting of a firm is legitimate and without fraud or misrepresentation. Conformity with the standards of the U.S. Generally Accepted Accounting Principles (GAAP), as well as the Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) is a requirement. Entities operating in foreign jurisdictions are responsible for compliance with the International Financial Reporting Standards (IFRS) Foundation. 

Managerial Accounting

Managerial accounting is a practice that enables business managers to define realistic budgetary goals coherent with an organization’s finances and business objectives. Key to strategic planning of business processes and product costing, managerial accounting is the exercise of budgetary efficiency and resource management. An internal accounting activity, managerial accounting also provides inventory and cost adjustment recording in the external reporting process.

The calculation of the cost of production time, as well as the cost of depreciation and fixed assets is the basic calculus of cost accounting. More details of internal accounting practices involve cost accounting of inventory, processes, product costing, job costing, materials costing, overheads and labor time. Recognition of those costs translates to internal planning and control, as well as for external reporting. U.S. GAAP guidelines require managerial accounting LIFO (last-in first-out) inventory record sharing with financial accounting records for the purpose of annual reporting. Though companies have the option of retaining inventory records according to the applicable FIFO (first-in first-out) method, reporting of inventory must be in accordance with LIFO for official records. The LIFO method assumes the most recently inventoried unit is the first sold. 

Cost accounting practices include both monetary and non-monetary terms (e.g. lbs. of materials) in assignment of value. For this reason, managerial accounting has the utility for application in managerial economics. Another example of how managerial accounting informs managerial economics decision modeling can be viewed in the calculation of unit price or market equilibrium on the y axis, where “Price” is equal to the accounting formula: Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC). 

In conjunction with the strategic planning of business segments, cost accounting applications may be applied to production line activities, departments, divisions, product pricing, and business development and sales plans. In other words, managerial accounting practice is an essential feature of management decision modeling.

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