The Role of Financial and Accounting Management - Essay Example

Performance Measurement: The Role of Financial and Accounting Management” "Management accounting produces information for managers within an organization. It is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating information that helps managers fulfill organization objectives" (Horngren, Sundem, & Stratton, 2005, p. 5). Budgets are being prepared in order to attain the financial goals by proper identification, measurement, accumulation, analysis, interpretation and communication of relevant information (Horngren, Sundem, & Stratton, 2005, p.5). Management accounting handle the companies’ decision regarding capital budgeting and line of business analysis. Some of the basic aims involve cost measurement of new contracts and projects and determining the steps in controlling expenses efficiently. Management accounting is basically concerned with the transfer of information to the managers working within the organizations. Management accounting helps the internal managers who are liable to direct and control the company’s internal operations. In contrast with management accounting, financial accounting is concerned with the transfer of information to the stockholders, analysts, and creditors etc. which are not directly involved in the management of internal operations of the organization. Managerial accounting deals with the fundamental data required to run the business (Horngren, Sundem, & Stratton, 2005, p. 5). On the other hand, financial accounting prepares and provides financial statements to assess and analyze the past performance of the business. The financial statements of a company are used by the business to make important decisions about the short and long term financial planning (Bacidore et. al., 1997). Financial accounting prepares four basic financial statements including income statement, balance sheet, and statement of changes in owner’s equity and statement of cash flows (Reimers, 2007 pp. 72-89). The income statements are prepared to measure the net income of the organization during a specific period. It compares the revenues and expenses related to the specified period for the purpose of measuring the performance of the firm in terms of profitability, costs incurred and revenues generated. Using this statement, the managers are enabled to compare the previous periods’ results with that of the current period and measure the performance of the firm on the basis of the differences that occurred. For instance, an increase in expenses may help the managers analyze the situations that resulted in excess expenditure. The possible reasons may include increased losses due to poor working conditions, poor employee performance, change of material, increase in production and sales or so on. Hence, the statement of comprehensive income helps in measuring the performance of the business with its own past performance and provides help to the managers with the identification of risk elements that are affecting the performance of the firm. Ratio analysis is another important measure that helps in the measurement of the performance within the organization by comparing the current period’s results with the past results (Reimers, 2007 pp. 72-89). The statement of changes in equity also helps in the measurement of the changes that occurred in the owner’s equity and the trends that are seen in the contributed capital and retained earnings of the firm. An increase or decrease in the equity shows the performance of the firm over a period of time and calls for an assessment to understand the reasons for those changes and tackle the problems or issues that are identified. The balance sheet presents the real financial position of the firm. The information about the existing assets, liabilities and equity that a business holds are shown in this statement. The comparison of a company’s own balance sheets in two periods and with the competitors’ balance sheets helps in understanding the shortcomings of the business. The statement of cash flows helps in determining the difference of cash balances between 2 consecutive accounting periods. This statement helps the managers in determining the cash inflows and outflows of the firm and controls these cash flows if necessary (Duchac, Reeve and Warren, 2007). Management accounting deals with the planning i.e. budgeting using a thoughtful consideration to the resources and constraints that a business holds. Management accounting, hence, uses financial statements to base its decisions about the company’s prospective strategy and budget. Management accounting plays a vital role in keeping the business activities run smoothly. The positioning decisions of the products/services are taken by keeping management accounting tools in view. For instance, product pricing decisions are dependent on the costs incurred and the market analysis of that product. Management accountants may take necessary steps to measure the performance of the business in terms of cost controls and productivity like setting standards which are later compared with the actual results of the business. These standards are used to determine what the business’s expected results were and what it actually achieved, hence, giving a reasonably fair picture of the business’s operational strengths or weaknesses. This comparison calculates the variations in the business’s expectations and actual results and is called variance analysis. Knowing the changing customer behaviors and competition in the business industry, managerial accounting has focused its attention on the non-financial indicators of the performance of the business along with the financial ones. The balanced scorecard approach helps in viewing the performance of the business with four different perspectives including customer’s perspective, financial perspective, learning and growth and processes (Atkinson, 2007 pp. 400-454; Kaplan & Norton, 1997). Management accounting basically deals with the matters of costing. The costs related to a product may be determined by different methods including job costing, process costing; activity based costing or any other costing method. The management accountants choose the suitable costing method that matches with the requirements of the firm. If the business incurs a huge amount of overheads, there is a need to properly account for those overheads as they relate to different products hence an activity based costing approach may help the firm in maintaining those overheads. The proper costing process is important in the performance measurement of the firms since; the prices of the products are dependent on the costs incurred and the required return. A company’s overall performance can be misstated due to incorrect measurement of its costs. The performance of the firm, in this regards, deals with the efficient management of costs and the managerial decisions like moving to JIT, outsourcing etc. depend on the measurement of costs. In conclusion, we can say that, both management and financial indicators of performance help in keeping the business profitable. These performance measurement tools help in eliminating the risk factors and issues causing harm to the firm’s profitability and operations. These accounting concepts not only help in measuring the performance of the business but also help in the decisions which may bring great benefits for the business. Bibliography: ATKINSON, A. A. (2007). Management accounting. Upper Saddle River, N.J., Pearson/Prentice Hall. BACIDORE, J. M., BOQUIST, J. A., MILBOURN, T. T., & THAKOR, A. V. (1997). The Search for the Best Financial Performance Measure. Financial Analysts Journal. 53, 11-20. DUCHAC, J. E., REEVE, J. M., & WARREN, C. S. (2007).Financial accounting: an integrated statements approach. Mason, OH, Thomson/South-Western. HORNGREN, C. T., SUNDEM, G. L., & STRATTON, W. O. (2005). Introduction to management accounting. Upper Saddle River, N.J, Pearson. KAPLAN, R. S., & NORTON, D. P. (1997). WHY DOES BUSINESS NEED A BALANCED SCORECARD? Journal of Cost Management. 11, 5. REIMERS, J. L. (2007). Financial accounting. Upper Saddle River, NJ, Prentice Hall Read More