Introduction to management accounting, financial statements

1. DR. J. MEXON P. RAYAN
MANAGEMENT ACCOUNTING
551/552 AC 62 – Unit 1

2. MANAGEMENT ACCOUNTING
The term management accounting refers to
accounting for the management, i.e., accounting
which provides necessary information to the
management for discharging its functions. The
function of the management are planning,
organising, directing and controlling. Thus,
management accounting provides information to
management so that planning, organising,
directing and controlling of business operations
can be done in an orderly manner.

3. Definitions
 The Institute of Cost and Management Accountants,
London, defines Management Accounting as follows :
“ The application of professional knowledge and skill
in the preparation of accounting information in such a
way as to assist management in the formation of
policies and in the planning and control of the
operation of the undertaking.”
 Robert N. Anthony : ” Management Accounting is
concerned with accounting information that is useful
to management.”
 T.G. Rose : “Management Accounting is the
adaptation and analysis of accounting information and
its diagnosis and explanation is such a way as to
assist management.”

4. OBJECTIVES OF MANAGEMENT
ACCOUNTING
i. Planning and Policy Formulation
ii. Helpful in Controlling Performance
iii. Helpful in Organizing
iv. Helpful in Interpreting Financial Information
v. Motivating Employees

5. NATURE OF MANAGEMENT
ACCOUNTING
i. Providing Accounting Information
ii. Cause and Effects Analysis
iii. Use Of Special Techniques and Concepts
iv. Taking Important Decisions
v. Achieving of Objectives
vi. No Fixed Norms Followed
vii. Increase In Efficiency
viii. Supplies Information and Not Decision
ix. Concerned With Forecasting

6. SCOPE OF MANAGEMENT
ACCOUNTING
i. Financial accounting
ii. Cost accounting
iii. Budgeting and Forecasting
iv. Inventory Control
v. Reporting to Management
vi. Interpretation of Data
vii. Internal audit
viii. Tax Accounting
ix. Office services

7. MANAGEMENT ACCOUNTANT
Any person responsible for the supply of
accounting information to management is known
as management accountant. He feeds
informational needs of different managerial levels.
If management accountant provides the facts as
accurately as are needed and are presented in a
manner which allows proper analysis and
interpretation then he cannot be held responsible
for any wrong judgment by the management. On
the other hand, if the information is biased,
inaccurate or it is not presented properly then
responsibility will lie on the management
accountant.

8. ROLE OF MANAGEMNT ACCOUNTANT
Roles of Management Accountant :
 i. Planning for control
 ii. Reporting
 iii. Evaluating
 iv. Administration of tax
 v. Protection of assets
Duties of Management Accountant :
 i. Collection of information
 ii. Evaluation of information
 iii. Interpretation of information
 iv. Reporting of information

9. FINANCIAL ACCOUNTING
 Financial accounting may be defined as the
science and art of recording and classifying
business transactions and preparing
summaries of the same for determining year
end profit or loss and the financial position of
the concern.

10. FINANCIAL ACCOUNTING AND
MANAGEMENT ACCOUNTING
 i. Object: The object of financial accounting is to record
various transactions. On the other hand, management
accounting is essential to help management in
formulating policies and plans.
 ii. Nature: In financial accounting actual figures are used
whereas in management accounting projected or
estimated figures are used.
 iii. Subject- matter: Financial accounting is concerned
with assessing the results of the whole business while
management accounting deals separately with different
units, departments and cost centers.
 iv. Compulsion: The preparation of financial accounts is
compulsory in certain undertakings while these are a
necessity in others. Management accounting is not
compulsory.

11. FINANCIAL ACCOUNTING AND
MANAGEMENT ACCOUNTING
 v. Reporting: Financial accounts reports are useful for
outsiders like bankers, investors, shareholders. Government
agencies, etc. Management accounting reports are meant for
the benefit of different levels of management.
 vi. Accounting principles: Financial accounts are governed by
the generally accepted principles and conventions. No set
principles are followed in management accounting.
 vii. Period: Financial accounts are prepared for a particular
period. Profit and loss account is generally prepared for one
year. Balance sheet is prepared on a particular date. There
are no specific periods for which management accounts are
prepared.
 viii. Publication: Financial accounts like profit and loss
account and balance sheet are published for the benefit of
the public. Management accounting statements are
prepared for the benefit of the management only and these
are not published.

12. COST ACCOUNTING
 A branch of accounting that deals with the
classifying, recording and appropriate
allocation of expenditure for the determination
of the costs of products or services, and for the
presentation of suitably arranged data for
purposes of control and guidance of
management.

13. COST ACCOUNTING AND MANAGEMENT
ACCOUNTING
 i. Object: The object of cost accounting is to record the cost of
producing a product or providing a service. The purpose of
management accounting is to provide information to the
management for planning and co-ordinating the activities of
the business.
 ii. Scope: The scope of management accounting is very wide.
It includes financial accounting, cost accounting, budgeting,
tax planning, reporting to management and interpretation of
financial data. On the other hand, cost accounting deals
primarily with cost ascertainment.
 iii. Nature: Management accounting is generally concerned
with the projection of figures for future. The policies and
plans are prepared for providing future guidelines. Cost
accounting uses both past and present figures.

14. COST ACCOUNTING AND MANAGEMENT
ACCOUNTING
 iv. Data used: In cost accounting only those
transactions are taken which can be expressed in
figures. Only quantitative aspect is recorded in cost
accounting. Management accounting uses both
quantitative and qualitative information.
 v. Development: The development of cost accounting
is related to industrial revolution. Cost accounting was
thus evolved as a supplementary accounting method.
Management accounting has developed only in the
last thirty years.
 vi. Principle followed: Certain principles and
procedures are followed for recording costs of
different products. No specific rules and procedures
are followed in reporting management accounting.

15. FINANCIAL STATEMENTS
A financial statement is a collection of data
organized according to logical and consistent
accounting procedures. It purpose is to convey an
understanding of some financial aspects of a
business firm. The term ‘financial statements’
generally refers to the two statements :
 (i) the position statement or the balance sheet;
and
 (ii) the income statement or the profit and loss
account
These statements are used to convey to
management and other interested outsiders the

16. Definitions
 In the other words of John N. Myer, “the financial
statements provide a summary of the accounts of
a business enterprise, the balance sheet reflecting
the assets, liabilities and capital as on a certain
date and the income statement showing the
results of operations during a certain period.”
 In the other words of Anthony, “financial
statements, essentially, are interim reports,
presented annually and reflect a division of the life
of an enterprise into more or less arbitrary
accounting period-more frequently a year.”

17. NATURE OF FINANCIAL
STATEMENTS
 Recorded facts:
 Accounting conventions:
 Postulates:
 Personal judgments :

18. OBJECTIVES OF FINANCIAL STATMENTS
 To provide reliable financial information about
economic resources and obligations of a business
firm.
 To provide other needed information about
changes in such economic resources and
obligations.
 To provide reliable information about changes in
net resources (resources less obligations ) arising
out of business activities.
 To provide financial information that assists
estimating the earning potentials of business.
 To disclose, to the extent possible, other
information related to the financial statements that
is relevant to the needs of the users of these

19. FINANCIAL ANALYSIS
 Meaning : The term ‘financial analysis’, also known as
analysis and interpretation of financial statements’,
refers to the process of determining financial strengths
and weaknesses of the firm by establishing strategic
relationship between the items of the balance sheet,
profit and loss account and other operative data.
 Definition :According to Myers, “Financial statement
Analysis is largely a study of relationship among
the various financial factors in a business as
disclosed by a single set-of statements, and a
study of the trend of these factors as shown in a
series of statements.”

20. METHODS OF FINANCIAL ANALYSIS
1. Comparative Financial Statements :
Comparative financial statements are those
statements which have been designed in a way so
as to provide time perspective to the consideration
of various elements of financial position embodied in
such statements. In these statements figures for two
or more periods are placed side by side to facilitate
comparison. Both the income statement and
balance sheet can be prepared in the form of
comparative financial statements.
 Comparative income statement:
 Comparative balance sheet:

21. 2. Common-size financial statements :
Common-size financial statements are those in
which figures reported are converted into
percentages to some common base. In the
income statement the sale figure is assumed to
be 100 and all figures are expressed as a
percentage of sales. Similarly in the balance
sheet the total of assets or liabilities is taken as
100 and all the figures are expressed as a
percentage of this total.

22. 3. Trend Percentages :
Trend percentage are immensely helpful in making a
comparative study of the financial statements for
several years. The method of calculating trend
percentages involves the calculation of percentage
relationship that each item bears to the same item in the
base year.
Any year may be taken as the base year. It is usually the
earliest year. Any intervening year may also be taken as
the base year. Each item of base year is taken as 100
and on that basic the percentage for each of the items of
each of the years are calculated. These percentages
can also be taken as Index Numbers showing relative
changes in the financial data resulting with the passage
of time.

23. 4. Funds Flow Analysis :
 Funds flow analysis has become an important tool
in the analytical kit of financial analysts, credit
granting institutions and financial managers.
 Funds flow analysis reveals the changes in
working capital position. It tells about the sources
from which the working capital was obtained and
the purposes for which is was used. It brings out
in open the changes which have taken place
behind the balance sheet. Working capital being
the life-blood of the business, such an analysis is
extremely useful.

24. 5. Ratio Analysis :
 This is the most important tool available to
financial analysts for their work. An accounting
ratio shows the relationship in mathematical terms
between two interrelated accounting figures. The
figures have to be interrelated, (e.g., Gross Profit
and Sales, Current Assets and Current Liabilities )
because no useful purpose will be served if ratios
are calculated between two figures which are not
at all related to each other, e.g., sales and
discount on issue of debentures.