9/11/02Prof. Bentz1 Session 2 AGENDA  Answer questions  Compare and contrast financial and managerial accounting

9/11/02Prof. Bentz2 Financial Vs. Managerial  Who uses the information?  What entities are involved?  What time periods are used?  What basic information is used?  What are the guiding standards?  What are the more important methods?

9/11/02Prof. Bentz3 Financial Vs. Managerial  What makes information useful? ◈ Relevance ◈ Reliability ◈ Comparability ◈ Consistency

9/11/02Prof. Bentz4 Users of the Information Financial – Current and potential owners Directors Regulators Lenders Managerial – Directors Managers & Associates Customers (e.g., Federal Gov’t) “Partners”

9/11/02Prof. Bentz5 Users of the Information (2) Financial – Suppliers Customers Managers & Associates Managerial – Regulators Litigants Economists Investigators

9/11/02Prof. Bentz6 Accounting Entities Financial – Entities that are recognized in law for both business and non-business purposes Managerial – Any identifiable unit for which costs, revenues, cash flows, or assets can be associated meaningfully

9/11/02Prof. Bentz7 Examples of Entities (1) Financial – Corporations Partnerships Trusts Sole proprietors Individuals Managerial – Cost centers Revenue centers Profit centers Activities Divisions Departments

9/11/02Prof. Bentz8 Examples of Entities (2) Financial – Wendy’s OSU City of Columbus State of Ohio Managerial – Tim Horton’s Dept. of A&MIS Water Dept. Dept. of Education

9/11/02Prof. Bentz9 Accounting Periods Financial – Past months, quarters, or years Indefinite (e.g., bankruptcy trust) Managerial – Any period consistent with the information need at hand.

9/11/02Prof. Bentz10 Examples of Periods Financial - Quarterly financial statements Periodic reports to a bankruptcy judge Managerial - Monthly division statements 20-year capital expenditure analysis Hourly spoilage reports

9/11/02Prof. Bentz11 Basic Information Utilized Financial – Transactions, accruals, deferrals, estimates, allocations, and market values Managerial – Transactions, accruals, deferrals, estimates, allocations, market values, forecasts, plans, and hypothetical scenarios

9/11/02Prof. Bentz12 Guiding Standards Financial – SEC FASB AICPA EITF Other GAAP Managerial – Cost Accounting Standards Bd. Company Stds. Contracts GAAP

9/11/02Prof. Bentz13 Role of the Standards Financial – Standards protect the investing public and the functioning of markets. Managerial – Standards enhance the quality of the information available to managers and representatives of stakeholders.

9/11/02Prof. Bentz14 Accounting Methods Financial – accounting equation double-entry system chart of accounts data dictionaries Documentation standards are nearly universal. Managerial – Fin. acct. methods ERP and other software systems Statistical methods Mathematical programming

9/11/02Prof. Bentz15 Usefulness: Relevance Financial – Timeliness of reporting & analysis is constrained by audits, SEC review, etc. Managerial – Timeliness is un- constrained by out-side forces, so management decides the trade- off among timeliness, cost, and quality.

9/11/02Prof. Bentz16 Usefulness: Relevance (2) Financial – Feedback value is relatively high and improving due to GAAP & standardization Managerial – Feedback value should be higher because the decision-makers can request needed information

9/11/02Prof. Bentz17 Usefulness: Relevance (3) Financial – Predictive value is limited without other economic forecasts Managerial – Predictive value high because the perspective, volume, and variety of info. is geared for these purposes

9/11/02Prof. Bentz18 Usefulness: Reliability Financial – Neutrality is supposed to be high but abuses abound Managerial – Neutrality in the sense of an absence of “spin” and efforts to please bosses is important

9/11/02Prof. Bentz19 Usefulness: Reliability (2) Financial – Verifiability— objective bases that can be confirmed by other professionals Managerial – Verifiability— objective bases that can be confirmed by other professionals

9/11/02Prof. Bentz20 Usefulness: Reliability (3) Financial – Representational validity - communicates a “valid” perspective of what is happening in the underlying system Managerial – Representational validity – communicates a “valid” perspective of what is happening in the underlying system

9/11/02Prof. Bentz21 Usefulness: Reliability (4) Is neutrality redundant? The idea is that an accountant should be neutral in developing and presenting information rather than taking sides on an issue and attempting to put a more favorable light on one side or another.

9/11/02Prof. Bentz22 Usefulness: Comparability Financial – Comparability across entities for investment and lending decision purposes Managerial – Comparability – report results in a manner comparable with profit plans or analyses

9/11/02Prof. Bentz23 Usefulness: Comparability (2) Enhancing comparability in mgt. acct.  Flexible budgets  Plans modified to reflect the actual operating environment (adaptive plans)  Seasonal adjustment of data

9/11/02Prof. Bentz24 Usefulness: Comparability (3) Enhancing comparability in mgt. acct.  The most important comparability issue in MA is the reporting results in a manner consistent with the development of plans.  Comparability across business units is an important challenge in MA

9/11/02Prof. Bentz25 Usefulness: Consistency Financial – Reporting standards are observed over time by reporting entities within a firm Managerial – Consistency of reporting and analysis methodologies over time.

9/11/02Prof. Bentz26 Some Implications 1.Generally accepted accounting principles inform and support--but not constrain--what we do in managerial accounting. 2.If we are to better support internal users of information, we need to know how information is to be used. Increasingly, this implies interacting with other members of a team.

9/11/02Prof. Bentz27 Some Implications 3.Being knowledgeable about financial reporting standards and transactions processing systems does not make one a good managerial accountant. Some would go so far as to argue that different skills and abilities are needed for managerial accounting, particularly when it comes to planning activities.

9/11/02Prof. Bentz28 Where are YOU?  Comments?  Observations?  Questions?

9/11/02Prof. Bentz29 Homework  blems/H11C1E18.ppt blems/H11C1E18.ppt  blems/H11C1E21.ppt blems/H11C1E21.ppt