Introduction to Managerial Accounting

Introduction to Managerial Accounting
Chapter 1 Chapter 1 is an introduction to Managerial Accounting. Copyright ©2008 Prentice Hall. All rights reserved

Identify managers’ four primary responsibilities
Objective 1 Identify managers’ four primary responsibilities There are four primary Managerial Accounting responsibilities. These four responsibilities are the topic of Learning Objective 1. Copyright ©2008 Prentice Hall. All rights reserved

Managers’ Responsibilities
Setting goals and objectives Planning Decision Making Overseeing day-today operations Directing Managerial accounting helps managers fulfill their four primary responsibilities: Planning, Directing, Controlling, and Decision Making Evaluating results of operations Controlling Copyright ©2008 Prentice Hall. All rights reserved

Distinguish financial accounting from managerial accounting
Objective 2 Distinguish financial accounting from managerial accounting Learning Objective 2 is the ability to distinguish financial accounting from managerial accounting. The method used to master the objective is to identify the issue, and to then describe the different approaches used by the two disciplines. Copyright ©2008 Prentice Hall. All rights reserved

Managerial vs Financial Accounting
Issue Managerial Financial Primary Users Internal External Purpose of Information Plan, Direct, Control, Decide Users make investing and lending decisions Managerial accounting provides information to internal users; this will help managers direct, plan, control and make decisions that impact the company. Financial accounting addresses external users and is geared towards making investment and lending decisions. Copyright ©2008 Prentice Hall. All rights reserved

Issue Managerial Financial Primary Accounting Product Internal Reports useful to Management General Purpose Financial Statements What is included? Defined by Management Determined by GAAP In order to address these needs, managerial accounting provides internal reports useful to management, while financial accounting provides general purpose financial statement, as determined by GAAP. Copyright ©2008 Prentice Hall. All rights reserved

Issue Managerial Financial Underlying Basis of Information Internal and External Transactions, focus on future Based on historical transactions with external parties Emphasis Data must be relevant Data must be reliable and objective Managerial report data must be relevant to the decisions that company management is required to make; financial report data, initially based on historical transactions, must be reliable and objective. Copyright ©2008 Prentice Hall. All rights reserved

Issue Managerial Financial Business Unit Segments of the business Company as a whole Preparation Depends on management needs Annually and Quarterly Verification Internal audit External audit Managerial reports, prepared as needed, are verified by an internal audit. Financial reports, however, are provided quarterly and annually, and are verified by external auditors. Copyright ©2008 Prentice Hall. All rights reserved

Issue Managerial Financial Information Requirements No requirement SEC requires publicly traded companies to issue audited financial statements Impact on employee behavior Careful consideration Adequacy of disclosure Finally, managerial reports–which do not have any formal legal information requirements–may have direct impact on employee behavior. However, the SEC requires publicly traded companies to issue audited financial statements that disclose information critical to investors. Copyright ©2008 Prentice Hall. All rights reserved

Copyright ©2008 Prentice Hall. All rights reserved
What type of users outside of the company might utilize financial information? Companies must follow GAAP in their ____________________ systems. Financial accounting develops reports for external parties, such as __________ and _______________. When managers evaluate the company’s performance compared to the plan, they are performing the __________ role of Management. financial accounting Exercise E1-10 provides review and reinforcement of Learning Objectives 1 and 2. Companies must follow GAAP in their financial accounting systems. Financial accounting develops reports for external parties, such as __________ and __________. When managers evaluate the company’s performance compared to the plan, they are performing the controlling role of management. controlling Copyright ©2008 Prentice Hall. All rights reserved

E1-10 Managers __________ are decision makers inside a company.
___________________ provides information on a company’s past performance to external parties. ______________________ systems are not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system. Managers Financial accounting Managerial accounting Exercise E1-10 continues to provides review and reinforcement of Learning Objectives 1 and 2. Managers are decision makers inside a company. Financial accounting provides information on a company’s past performance to external parties. Managerial accounting systems are not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system. Copyright ©2008 Prentice Hall. All rights reserved

E1-10 Choosing goals and the means to achieve them is the __________ function of management. _____________________ systems report on various segments or business units of the company. ____________________ statements of public companies are audited annually by CPAs. planning Managerial accounting Exercise E1-10 continues to provide review and reinforcement of Learning Objectives 1 and 2. g. Choosing goals and the means to achieve them is the planning function of management. Managerial accounting systems report on various segments or business units of the company. Financial accounting statements of public companies are audited annually by CPAs. Financial accounting Copyright ©2008 Prentice Hall. All rights reserved

Objective 3 Describe organizational structure and the roles and skills required of management accountants within the organization Learning Objective 3 describes organizational structure and the roles and skills required of management accountants within the organization. Copyright ©2008 Prentice Hall. All rights reserved

Organizational Structure
A typical organizational structure for publicly held companies starts with the board of directors, elected by the stockholders (owners) of the company to oversee the company. Because the board meets only periodically, they hire a chief executive officer (CEO) to manage the day to day operations. The CEO hires other executives to run various aspects of the organization, including the chief operating officer (COO) and the chief financial officer (CFO). The COO is responsible for the company’s operations, and the CFO is responsible for all of the company’s financial concerns. To help ensure that the company’s internal controls and risk management policies are functioning properly, the New York Stock Exchange requires that listed companies have an internal audit function. The internal audit department reports to the CFO or CEO for day-to-day administrative matters. This internal audit department also reports to a subcommittee of the board of directors called the audit committee. The audit committee oversees the internal audit function as well as the annual financial statement audit by independent CPAs. Both the internal audit department and the independent CPAS report to the audit committee for one reason: to ensure management will not intimidate them or bias their work. Copyright ©2008 Prentice Hall. All rights reserved

Changing Roles of Management Accountants
Ensuring accurate financial records Helping to design information systems Recording non-routine transactions Making adjustments to financial records Planning, analyzing, and interpreting accounting data Providing decision support Technology has changed the roles of management accountants. They are still involved with the traditional tasks of ensuring accurate financial records, however, computers have taken over the task of performing routine mechanical accounting tasks. Freed from the routine mechanical work, management accountants spend more time planning, analyzing and interpreting accounting data to provide decision support. Copyright ©2008 Prentice Hall. All rights reserved

Required Skills Knowledge of financial and managerial accounting Analytical skills Knowledge of how a business functions Ability to work on a team Oral and written communications skills Today’s management accountant requires solid knowledge of both financial and managerial accounting, analytical skills, knowledge of how a business functions, the ability to work on a team, and oral and written communications skills. Copyright ©2008 Prentice Hall. All rights reserved

The _____ and the _____ report to the CEO. The internal audit function reports to the CFO or _______ and the _____________. The __________ is directly responsible for financial accounting, managerial accounting, and tax reporting. The CEO is hired by the______________. CFO COO CEO audit committee controller Exercise E1-11 reinforces Learning Objective 3: Organizational Structure and the roles of the management accountant. The CFO and the COO report to the CEO. The internal audit function reports to the CFO or COO and the audit committee. The controller is directly responsible for financial accounting, managerial accounting and tax reporting. The CEO is hired by the Board of Directors. Board of Directors Copyright ©2008 Prentice Hall. All rights reserved

The __________ is directly responsible for raising capital and investing funds. The __________ is directly responsible for the company’s operations. Managerial accountants often work with __________________________. The subgroup of the board of directors is called the _________________. treasurer Management accountants have many skills and need to be able to work with all areas in the company. COO Exercise E1-11 reinforces Learning Objective 3: Organizational Structure and the roles of the management accountant. The treasurer is directly responsible for raising capital and investing funds. The COO is directly responsible for the company’s operations. Managerial accountants often work with __________________________. The subgroup of the board of directors is called the audit committee. audit committee Copyright ©2008 Prentice Hall. All rights reserved

Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use its ethical standards to make reasonable ethical judgments Learning Objective 4 describes the role of the Institute of Managerial Accountants (IMA) and use its ethical standards to make reasonable ethical judgments. Copyright ©2008 Prentice Hall. All rights reserved

IMA Professional association for management accountants Goal Advance Managerial accounting profession through Certification Practice Development Education Networking Certifications Certified Management Accountant (CMA) Certified Financial Managers (CFM) The Institute of Management Accountants (IMA) is the professional association for management accountants. The goal of the IMA is to advance the management accounting profession primarily through certification, practice development, education and networking. The IMA issues two different professional certifications: the Certified Management Accountant (CMA) and the Certified Financial Manager (CFM). You can find out more about the IMA and the certifications it offers at its Web site Copyright ©2008 Prentice Hall. All rights reserved

Summary of Ethical Standards Management Accountants must comply with Four Ethical Standards
Maintain Professional COMPETENCE Preserve CONFIDENTIALILTY of Information Uphold INTEGRITY Perform Duties with CREDIBILITY The IMA Statement of Ethical Professional Practice requires compliance with 4 ethical standards: Competence, Confidentiality, Integrity and Credibility. Failure to comply with the standards may result in disciplinary action. Copyright ©2008 Prentice Hall. All rights reserved

Steps to Resolve Ethical Dilemmas
Follow company’s policies for reporting unethical behavior If not resolved Discuss with immediate supervisor Discuss with objective advisor/IMA Ethics counselor Consult an attorney To resolve ethical dilemmas, the IMA suggests that management accountants first follow their company’s established policies for reporting unethical behavior. If not resolved in this way, discuss the situation with the immediate supervisor unless the supervisor is involved in the unethical situation. If the immediate supervisor is involved and is the CEO, notify the audit committee or board of directors. Discuss the unethical situation with an objective advisor such as an IMA ethics counselor for clarification. Consulting an attorney regarding legal obligations and rights is also advisable. Copyright ©2008 Prentice Hall. All rights reserved

The ______ is the professional association for management accountants. The institute offers two types of certification – the _____ and _____. The __________ exam focuses on managerial accounting topics, economics, and business finance. IMA CMA CFM CMA Exercise 1-13 reviews the role of the IMA, its certifications and other demographics of the management accounting profession. The IMA is the professional association for management accountants. The institute offers two types of certification--the CMA and CFM. The CMA exam focuses on managerial accounting topics, economics, and business finance Copyright ©2008 Prentice Hall. All rights reserved

CFM CFM The ______ exam focuses on financial statement analysis, business valuation, risk management, working capital policy, and capital structure. The institute’s monthly publication, called ________________, addresses current topics of interest to management accountants. Strategic Finance Exercise 1-13 reviews the role of the IMA, its certifications and other demographics of the management accounting profession. The CFM exam focuses on financial statement analysis, business valuation, risk management, working capital policy, and capital structure. The institute’s monthly publication, called Strategic Finance, addresses current topics of interest to management accountants. Copyright ©2008 Prentice Hall. All rights reserved

f. The institute says that approximately _____ percent of accountants work inside of organizations, rather than at CPA firms. 85 Exercise 1-13 reviews the role of the IMA, its certifications and other demographics of the management accounting profession. f. The institute says that approximately 85% percent of accountants work inside of organizations, rather than at CPA firms. Copyright ©2008 Prentice Hall. All rights reserved

Discuss trends in the business environment
Objective 5 Discuss trends in the business environment Learning Objective 5 discusses trends in the business environment. Copyright ©2008 Prentice Hall. All rights reserved

Audit committee – independent and should include a financial expert
CEO and CFO - responsible for financial statements, internal control system, procedures for financial reporting Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 was enacted to restore trust in publicly traded corporations, their management, their financial statements and their auditors. The CEO and CFO of the publicly traded company are now responsible for financial statements, internal control systems, and procedures for financial reporting. The audit committee must be independent and should include a financial expert. There are new requirements for CPA firms including limited non-audit services for audit clients and periodic quality review for the CPA firm. Stiffer imprisonment and monetary fines are being imposed for white-collar crimes. Stiffer penalties for white-collar crimes CPA firms – limited non-audit services for audit clients and periodic quality review Copyright ©2008 Prentice Hall. All rights reserved

Current Trends Shifting economy Competing in global marketplace Time-based competition Advanced Information Systems E-Commerce Just-in-Time Management Total Quality Management ISO Certification Cost Benefit Analysis In the last century, North American economies have shifted away from manufacturing toward service companies, with the latter comprising the largest sector of the US economy and employing 55% of the workforce. The costs of international trade have plummeted over the past decade, allowing foreign companies to compete with domestic firms. To compete in this global market, manufacturers have moved operations to other countries to be closer to new markets and less expensive labor. Large companies are turning to more advanced information systems: enterprise resource planning (ERP) systems integrate all of a company’s worldwide functions, departments and data. Companies use the Internet in everyday operations, such as budgeting, planning, selling and customer service. This new “sales clerk” can sell to thousands of customers at once, 24 hours a day, 365 days a year without a break or vacation. Just-in-Time Management reduces the cost of holding inventory by only beginning production when there is an order from a customer. This means that raw materials are not stored before production, and finished units are shipped directly to the customer when they are completed. In Total Quality Management (TQM) each business function examines its own activities and works to improve performance by continually setting higher goals. The International Organization for Standardization (ISO) has developed international quality management standards and guidelines. Earning this certification provides competitive advantage in the global marketplace. Cost Benefit Analysis weighs costs against benefits of undertaking improvement initiatives. Copyright ©2008 Prentice Hall. All rights reserved

Use cost-benefit analysis to make business decisions
Objective 6 Use cost-benefit analysis to make business decisions Learning Objective 6 uses cost-benefit analysis to make business decisions. This objective is best illustrated by using a concrete example as shown in E1-18. Copyright ©2008 Prentice Hall. All rights reserved

1. What are the total costs of adopting JIT? Employee training $13,500 Streamline production process 37,000 Supplier identification 8,000 Total costs $58,500 Learning Objective 6 is illustrated using the example in E1-18. The present value of savings and reduction of spoilage by adopting JIT are given. The initial one-time costs are also given. The costs and benefits are compared, and the decision about whether to adopt Just-In-Time delivery is made based on the difference between cost and benefit. 1. What are the total costs of adopting JIT? Employee training $13,500 Streamline production process 37,000 Supplier identification 8,000 Total costs $58,500 Copyright ©2008 Prentice Hall. All rights reserved

2. What are the total benefits of adopting JIT? Savings in warehouse expenses $97,000 Lower spoilage costs 46,000 Total benefits $143,000 Learning Objective 6 is illustrated using the example in E1-18. The present value of savings and reduction of spoilage by adopting JIT are given. The initial one-time costs are also given. The costs and benefits are compared, and the decision about whether to adopt Just-In-Time delivery is made based on the difference between cost and benefit. 2. What are the total benefits of adopting JIT? Savings in warehouse expenses $97,000 Lower spoilage costs 46,000 Total benefits $143,000 Copyright ©2008 Prentice Hall. All rights reserved

3. Should Wild Rides adopt JIT? Why or why not? Expected total benefits $143,000 Expected total costs (58,500) Excess of benefits over costs $ 84,500 Wild Rides should adopt JIT because the expected benefits exceed the costs. Learning Objective 6 is illustrated using the example in E1-18. The present value of savings and reduction of spoilage by adopting JIT are given. The initial one-time costs are also given. The costs and benefits are compared, and the decision about whether to adopt Just-In-Time delivery is made based on the difference between cost and benefit. 3. Should Wild Rides adopt JIT? Why or why not? Expected total benefits $143,000 Expected total costs (58,500) Excess of benefits over costs $ 84,500 Wild Rides should adopt JIT because the expected benefits exceed the costs. Copyright ©2008 Prentice Hall. All rights reserved

Introduction to Managerial Accounting

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