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MANAGERIAL ACCOUNTING

MANAGERIAL ACCOUNTING
FINANCIAL VS. MANAGERIAL ACCOUNTING
Accounting information is usually divided into two types: 1) financial and 2) managerial. Financial information (i.e. balance sheet and income statement) is prepared periodically, and is primarily intended for outsiders of the firm. Financial information is also useful to management in directing the current operations of a business and planning. Managerial accounting provides additional both historical and estimated data, which is intend specifically for management to run current operations and to plan for the future. The information generated is far more extensive than in financial accounting, and the reports are based on management’s needs.

THE MANAGEMENT PROCESS
Managerial accounting gives management the information to perform the functions of control and planning. The control function is concerned with the process of directing the operations of an enterprise to achieve its goals. Planning is concerned with developing and setting goals for the use of company resources and formulating methods to achieve these goals. Control and planning decisions are the responsibility of management. The controller of a company gives advice but assumes no responsibility for managerial decisions. Results of management decisions are continuously compared to the goals, and the goals themselves are periodically revised.

INTRODUCTION TO RESPONSIBILITY ACCOUNTING
When all major planning and operating decisions are made by one or a few individuals of a business, it is considered to be a centralized organization. The larger a business becomes, the more difficult it is to remain centralized. When an organization becomes decentralized, it is divided into separate units. Each of these units is delegated responsibilities for planning and control. Managers are not required to seek approval from upper management for normal operating decision. The level of decentralization varies greatly among companies because each one has specific and unique circumstances. Managerial accountants assist managers of decentralized organizations.

DECENTRALIZED OPERATIONS
Decentralized operations are usually classified according to the scope of responsibility assigned and the decision making authority delegated to managers. The three types of decentralized operations are: 1) cost center, 2) profit center, and 3) investment center.

COST CENTERS
A budget is the tool used for planning and controlling costs. It represents a written statement of management’s plans for the future in financial terms. Budget performance reports are prepared to compare actual results with budgeted figures. It is the management’s responsibility to investigate variances, determine their cause, and suggest improvements. Often there are good explanations for these variances, and variances do not necessarily reflect poor management.

PROFIT CENTERS
Managers of profit centers are responsible for expenses and revenues. The income statement is usually the report used to evaluate performance. Income statements for profit centers can emphasize either gross profit or operating income, in addition to showing revenues and expenses of that department. Difficulties arise when expenses are apportioned among departments. Some expenses (period costs and indirect costs) reported on departmental income statements are assigned based on subjective criteria, and the method of allocation is often questionable. Direct costs are under the direct control of the department. Indirect costs are company wide and are referred to as overhead.

INVESTMENT CENTERS
Investment center managers are responsible for revenues, expenses, and invested assets. Results can be measured by evaluating operating income, rate of return on investment, and residual income. Because operating income only represents revenues and expenses with no consideration for the amount of invested assets, it does not portray a clear picture of profitability. The rate of return on investment and residual income offer more informative approaches.

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Statement of Cash Flows

Statement of Cash Flows
THE CASH BASIS FUNDS STATEMENT
SOURCES OF CASH
1) Operating income – is usually the largest and most frequent source of cash provided a business is profitable. When revenues exceed expenses, cash flow increases. When expenses exceed revenues, cash flow decreases.
2) Issuance of capital stock or long-term debt.
3) The sale of noncurrent assets such as equipment, land, buildings, patents, etc.

CASH PROVIDED BY OPERATIONS
CONVERSION OF NET INCOME FROM A ACCRUAL BASIS TO A CASH BASIS
1) The following items should be added to net income: depreciation expenses, increases in current liabilities, decreases in current assets, and the amortization of bond discount or intangible assets.
2) The following items should be subtracted from net income: amortization of bond premium, increases in current assets, and decreases in current liabilities.

WORKING CAPITAL FUNDS STATEMENT
SOURCES OF WORKING CAPITAL
1) Operating income – when revenues exceed expenses.
2) The issuance of long-term debt.
Example: Issued a $50,000 bond due to mature in ten years.
3) The issuance of capital stock.
Example: 10,000 shares of $100 par preferred stock are sold to
shareholders for $105 a share.
4) The sale of noncurrent assets. Example: building, land, bonds,
equipment, etc.

WORKING CAPITAL FUNDS STATEMENT
USES OF WORKING CAPITAL
1) The declaration of cash dividends.
Example: The board of directors issues a declaration that all
common shareholders will receive $0.50 for each share held.
2) The retirement of long-term debt.
Example: Full payment is made to bondholders at maturity.
3) The purchase of noncurrent assets. Example: equipment, land,
buildings, etc.

WORKING CAPITAL FUNDS STATEMENT
WORKING CAPITAL IS NOT AFFECTED BY THE FOLLOWING TRANSACTIONS
1) Those that are only between current asset accounts.
Example: Cash is used to purchase inventory.
2) Those that are only between current liability accounts.
Example: A 90 day note is drawn up for a trade receivable.
3) Those that are only between current asset and current
liability accounts.
Example: A cash payment is made to reduce accounts payable.

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