ACTG CH 1 Notes

Financial vs Managerial accounting

- Managerial accounting primarily concerns providing information to people inside an
organization who direct and control its operations.
- In contrast, financial accounting primarily concerns providing information to
shareholders, creditors, and others who are outside an organization. Managerial
accounting provides data that help organizations run more efficiently. Financial
accounting provides the scorecard by which a company’s past performance is
judged.
- Managerial accounting concerns developing information and analysis to help
managers make business decisions that satisfy customers and other stakeholders
while continuously monitoring costs and improving efficiencies. This requires
management accountants to prepare a variety of reports. Some reports compare
actual results to plans and to benchmarks focusing on how well managers or
business units have performed. Other reports provide timely updates on key non-
financial and financial indicators, such as orders received, customer acquisition
costs, customer satisfaction, and sales. Reports may also be prepared as needed to
help investigate specific problems, such as a decline in profitability of a product line,
or to help decide whether to outsource some of the business operations. In contrast,
financial accounting focuses on a limited set of specific quarterly and annual financial
statements prepared in accordance with generally accepted accounting principles
(GAAP) and government regulations.
- Because managerial accounting is manager-oriented, its study must be preceded by
some understanding of what managers do, the information managers need, and the
general business environment

Managers and Managerial ACTG

- Planning involves establishing goals and specifying how to achieve them.
- Directing and motivating involve mobilizing people to carry out plans and run
routine operations.
- In addition to planning for the future, managers must oversee day-to-day
activities and keep the organization functioning smoothly. This requires
motivating and directing people. Managers assign tasks to employees,
arbitrate disputes, answer questions, solve on-the-spot problems, and make
many small decisions that affect customers and employees.
- In effect, directing is the part of managers’ activities that deals with the routine
and the here and now. Managerial accounting data are often used in this type
of day-to-day decision making
- Controlling involves gathering feedback to ensure that the plan is being properly
executed or modified as circumstances change.
- Part of the control process includes preparing performance reports. A
performance report compares budgeted data to actual data on a periodic
basis, usually monthly, to identify and learn from excellent performance and
to identify and eliminate sources of unsatisfactory performance. Performance
reports can also be used as one of many inputs to help evaluate and reward
employees.
- Decision making involves selecting a course of action from competing alternatives.
- Plans are often accompanied by a budget. A budget is a detailed plan for the
future that is usually expressed in formal quantitative terms.
 - Also includes evaluating the feedback

- Perhaps the most basic managerial skill is the ability to make intelligent, data-driven
decisions. Broadly speaking, many of those decisions revolve around the following
three questions. What should we be selling? Whom should we be serving? How
should we execute?

- Left - suggests that every company must make decisions related to the products and
services that it sells.
- Middle - indicates that all companies must make decisions related to the customers
that they serve.
- Right - shows that companies also make decisions related to how they execute.

- Big data refers to large collections of data that are gathered from inside or outside a
company to provide opportunities for ongoing reporting and analysis. Big data can be
both “structured,” such as memos and reports, and “unstructured,” such as videos,
pictures, audio, and other digital forms.
- Big data is often discussed in terms of five Vs.
- The first three of those Vs—variety, volume, and velocity—refine the definition
of big data.
- Variety refers to the data formats in which information is stored. This includes
traditional forms and digital formats, including social media as well as click-
streams on a webpage, sensor-enabled feedback, and Internet-based
audio/video files.
- Volume refers to the continuously expanding quantity of data that companies
must gather, cleanse, organize, and analyze.
- Velocity speaks to the rate at which data are received and acted on by
organizations. This is particularly important where the data have a limited
shelf life.
- The remaining Vs—value and veracity—define users’ expectations with respect to
big data. The concept of value implies that the expenditure of time and money by
organizations to analyze big data needs to result in insights that are valued by
stakeholders.
- Veracity refers to the fact that users expect their data to be accurate and
trustworthy. For management accounting professionals, veracity may be the
most important of the five Vs because their analysis and opinions, which are
relied on by numerous stakeholders (such as managers, investors, and
regulators), must be supported by verifiable data.
 - From a managerial accounting standpoint, the goal for managers is to use data
analytics to derive value from big data. Data analytics refers to the process of
analyzing data with the aid of specialized systems and software to draw conclusions
about the information they contain. Managers often communicate the findings from
their data analysis to others through the use of data visualization techniques, such as
graphs, charts, maps, and diagrams.
- Data analytics can be used for descriptive, diagnostic, predictive, and prescriptive
purposes. Descriptive analytics are used to answer the question: What happened?
For example, managers may use them to better understand historical trends in
revenues and expenses. Diagnostic analytics are used to answer the question: Why
did it happen? For example, managers may analyze economic indicators, such as
changes in the unemployment rate, to help explain why sales increased or
decreased. Predictive analytics are used to answer the question: What will happen?
For example, managers can use predictive techniques, such as regression analysis,
to estimate sales or expenses for the next month, quarter, or year. Finally,
prescriptive analytics can be used to answer the question: What should I do? For
example, managers may use prescriptive analytics to decide which products should
be promoted, de-emphasized, or discontinued.
The Planning and Controlling Cycle
- The model, which depicts the planning and control cycle, illustrates the smooth flow
of management activities from planning through directing and motivating, controlling,
and then back to planning again. All of these activities involve decision making, so it
is depicted as the hub around which the other activities revolve.

Strategic Management
- A strategy is a game plan that enables a company to attract and retain customers by
distinguishing itself from competitors. The focal point of a company’s strategy should
be its target customers. A company can succeed only if it creates a reason for
customers to repeatedly choose it over the competition. These reasons, or what are
more formally called customer value propositions, are the essence of strategy. Value
propositions typically focus on providing customers with one of the following:
products or services with exceptional quality and innovation, operational excellence
(i.e., low-cost products or services with reliable service), or outstanding customer
service.

Emphasis on the
Future
-
- Since planning is such an important part of the manager’s job,
managerial accounting has a strong future orientation. In
contrast, financial accounting primarily summarizes past
financial transactions. These summaries may be useful in
 planning, but only to a point. Changes are constantly taking
place in economic conditions, customer needs and desires,
competitive conditions, and so on. All of these changes require
that managers’ planning be based in large part on estimates of
what will happen rather than on summaries of what has already
happened.

- Relevance of Data
- Financial accounting data are expected to be objective and verifiable.
However, for internal use, managers need information that is relevant
even if it is not completely objective or verifiable. By relevant, we mean
appropriate for the decision being made.

- Less Emphasis on
Precision
- Making sure that amounts are highly accurate can take time and effort.
While a high degree of accuracy is required for external reports, most
managers would rather have timely information than have to wait for
more accurate information. Moreover, some decisions such as product
pricing or major investments are highly time sensitive and need to be
made quickly. For this reason, management accounting often places less
emphasis on precision than financial accounting

- Segments of an
Organization
- Financial accounting is primarily concerned with reporting for
the company as a whole. By contrast, managerial accounting
focuses much more on the parts, or segments, of a company.
These segments can be evaluated independently from other
parts of the organization and may be product lines, individual
customers, sales territories, divisions, departments, or any other
categorization of the company’s activities for which management
finds it useful to have financial data. Financial accounting does
require some breakdowns of revenues and costs by major
segments in external reports, but this is a secondary emphasis.
 In managerial accounting, segment analysis and reporting is the
primary emphasis.

- Generally Accepted
Accounting Principles
- Because managerial accounting is not bound by GAAP,
managers have flexibility to determine the content and form of
internal reports to best suit the needs of the organization. The
only constraint is that the expected benefits from using the
information should outweigh the costs of collecting, analyzing,
and summarizing the data.