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Summary ch. 1 + 2 Management Accounting
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Summary of chapter 1 and 2 for Management Accounting
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1. Why more accounting?An accounting system is a formal mechanism for gathering, organizing, and
communicating information about an organization’s activities.
1.1 Users, purposes and characteristics of financial accounting
Financial accounting = a branch of accounting that produces for external decision-
makers a mandatory, periodic, standardized and synthetic financial representation of an
organization’s transactions with, as well as rights and duties towards, other
constituencies.
➢ Produced for external users that need information on how to deal with the focal
organization (shareholders, creditors, suppliers,customers).
Qualities financial accounting:
1. Information provided should allow external users to make comparisons
between firms. All companies should use consistently similar concepts
and measurement. → Financial accounting is both regulated and audited;
it is guided by standards and rules. External auditors are mandated to check if
companies comply with these rules.
2. Standardization ensures that financial accounting is general enough to describe
a very wide variety of organizations that belong to different industries and are
characterized by different business models.
3. Financial accounting records in great details every transaction between an
organization and external constituencies. However, it aggregates these
transactions to only communicate a highly comprehensive and synthetic
representation of the organization.
4. Financial accounting accounts for the results of past transactions with third
parties. This retrospective approach allows it to limit the reliance on estimates
and therefore makes it relatively more accurate.
1.2 Limitations financial accounting
To achieve qualities which are highly desirable from the perspective of external decision
makers, financial accounting has to sacrifice other qualities which are highly desirable
from the perspective of internal decision makers.
● FA does not inform about transactions within the organization
● It lacks in flexibility and local adaptation
● Lacks in timeliness and future orientation
, 1.3 Users, purposes and characteristics of management accounting
Management accounting is a branch of accounting that produces for internal decision-
makers the financial and non-financial information they need, when they need it to make
the best possible use of available resources and achieve organizational or societal
objectives. Management accounting identifies, measures, accumulates, analyzes,
prepares, interprets, and communicates information that helps managers within the
organization make strategic and operational decisions. Such decisions are mostly about
value chain management, production management or sales management.
For each kind of decision, management accounting helps managers on:
1. Attention directing (i.e. the identification of challenges or opportunities to focus
on)
2. Problem solving (i.e. design of alternative courses of actions to address these
challenges and seize these opportunities)
3. Alternative evaluation (i.e. assessment of the economic consequences of
implementing each course of action)
4. Decision making (i.e. choice of the best course of action to achieve
organizational goals)
5. Organizational learning
6. Serves the purpose of motivating, evaluating and rewarding or sanctioning
performance
Qualities MA:
➢ Opposite stance on almost every characteristic of FA → MA emphasizes
the absolute primacy of relevance; any information which does not help make
a decision is seen as a distraction and thus ignored/eliminated. Any information
which helps make a decision will be taken into account, even if its subjective or
unreliable.
➢ Relies heavily on estimations → key qualities; being timely and
prospective. MA provides information when it is needed, which often has to be
estimated if not readily available.
➢ Diversity and flexibility: MA will use any piece of information which is deemed
relevant to the decision, managers set their own rules concerning the
contents/form of internal reports (adapted to local situation).
➢ Fundamentally private: MA provides strategic and sensitive information which
should not get out of the organization.
➢ Not mandated → it is voluntary and implies additional costs for design
and maintenance.
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