One of the definitions of Management accounting says that it is the

application of professional skills and knowledge in the preparation of

financial and accounting information in a manner in which it will assist
the internal management in the formulation of policies, planning, and
control of the operations of the firm.

The basic function of management accounting is to help the

management make decisions. There is no fixed structure or format for
it.

Financial accounting, costing, business analysis, economics, etc are

some tools and techniques of management accounting.

The only need for management accounting is that the data should serve
its purpose, which is helping the management take important business
decisions.

Advantages and Objectives of Management

Accounting
There are many objectives of but the prime objective is to assist the
management team of an organization in improving the quality of their
decisions. Purpose of management accounting is to help the managerial
team with financial information so that they can execute business
operations and activities more efficiently. Following is the list of all
benefits of management accounting –

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
 5. Understanding financial data
6. Identifying business problem areas
7. Strategic Management

management reporting 

The definition of management reporting can be expressed broadly as reports that

management uses to run the organization, make business decisions, and monitor
progress. 
Management reports help managers monitor the smaller details of their
department. Employees submit managerial reports to their managers. 
Management reports range in content and breadth. Management reports contain
financial and operational reports on a small segment of the business. Management
reports can also contain complex and involved reports like the P&L document, accounts
receivable aging, or the operating budget. 
Management reports are a form of business intelligence. Management reports
contain performance data and analysis. This is so management can make decisions and
advise other senior executives. Often these reports include proprietary information and
are for internal use only. They do not follow GAAP or IFRS.

The goal of management reporting is to:

 Measure and monitor specific performance metrics and KPIs.

 Understand your status, health and what you should do next.
 Determine benchmarks.
 Ensure better communication between stakeholders, colleagues, and executives.
 Guide your next steps.
 Force you to have an action plan.
 Monitor performance frequently.

How to prepare a management report?

There is no one way to prepare a management report. Every management report has a
different purpose. Here are a few general best practices that you can apply:
 Set specific goals and understand the results you desire before doing anything else.
 Determine the most relevant KPIs for your manager. Managerial views will be broader
and more long-term while you might have more specific KPIs in mind.
 Use a combination of hard data and storytelling to present your results.
 Compare and contrast progress-over-time and year-to-year results using a combination
of historical and real-time data.
 Use graphs, charts, dashboards, heat maps and other visualizations to help visualize
the data’s story.
 Make sure your data is correct. (A single, automated source of data helps!)
 Your storytelling should be clear, concise and seek to answer all potential questions
from your superior before they ask.

How to Use a Comparative Statement for Income Your Small

Business

What is an income
statement?
The income statement, or profit and loss statement, shows sales minus expenses. The top line is
the total amount you earned in sales before subtracting any expenses. Then, business expenses
are listed and deducted until you reach the bottom line, or net profit.

Think of the income statement like this: You start with a whole pie (your total sales dollars).
Then, each business expense you have gets a piece of the pie. The last line shows what’s left
after recognizing all expenses. The bottom line is your piece of the pie.
 The income statement shows the effects your decisions have on the net income. By looking at
individual statements, you see results for one accounting period. But, sometimes, you want to
know long-term effects and compare more than one period. To do this, use a comparative income
statement.

What is a comparative
income statement?
A comparative income statement combines information from several income statements as
columns in a single statement. It helps you identify financial trends and measure performance
over time. You can compare different accounting periods from your records. Or, you can
compare your income statement to other companies.

Usually, you organize a comparative income statement into two or three columns. Each column
represents an accounting period. Amounts are listed in rows that correspond to a specific
account. Put the most current year closest to the accounts on the left.

For example, you might have columns for 2017, 2016, and 2015 (reading from left to right). Or,
you could compare months, such as July, June, and May. The column furthest to the left lists the
names of your accounts.

A comparative income statement helps you with many accounting tasks. Here are just a few
ways the statement benefits your business:

 Compare current amounts to past years

 See if performance has improved over time
 Figure out patterns in high and low sales months
 Calculate percentages of changes
 Show how your company compares to others when securing outside capital

Information on a comparative income statement helps you make smart business decisions. For
example, you notice sales dip every May. The pattern tells you to step up your marketing efforts
next May.

Looking at several references to compare financial figures takes time. Trying to locate
information on different statements can be confusing and frustrating. A comparative income
statement makes it easy to point out trends in performance. You don’t have to flip back and forth
between individual documents.
Comparative income
statement example
There is no standard comparative income statement format. The easiest way to create a
comparative income statement is to list the accounts in the left column. Then, create columns for
each accounting period with the most current closest to the left. Take a look at each example of a
comparative income statement.

Comparing one business’s accounting periods:

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

Comparing accounting periods for two businesses:

Business A

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

 Business B

Account 2017 2016 2015

Revenue 65,000 61,000 60,000

Gross Profit 50,000 42,000 40,000

EBITDA 40,000 36,000 35,000

Net Profit 30,000 27,000 25,000

As you can see, figures are easy to compare with this type of income statement. But, it can be
hard to judge performance based on the numbers alone. To get a clear picture, you might need to
do some simple calculations.

Comparative income
statement analysis
To understand your financial data, do a comparative income statement analysis. There are two
ways you can look at information: horizontal and vertical.

Each kind of analysis gives different insights into business performance. The analyses help you
make sense of your comparative profit and loss statement and see patterns.

Horizontal analysis
A horizontal, or time series, analysis looks at trends over time. You can see growth patterns and
seasonality. When calculating growth, look at the percentage of change between accounting
periods.

To find the percentage change, first calculate the dollar change between each period. Consider
the following example of comparative income statement analysis. If you made $45,000 in 2015
and $50,000 in 2016, the dollar change is $5,000.
Then, divide the dollar change by the base year profit. In this case, the base year profit is $45,000
for 2015. The result is 0.11 ($5,000 / $45,000 = 0.11).

Multiply the result (0.11) by 100 to get the percentage of change. In this example, there is an
11% change.

Dollar Change = Amount of the Item in the Current Year – Amount of the Item in the Base Year
Percentage Change = (Dollar Change / Amount of the Item in the Base Year) X 100

The percentage of change shows how much net profit increased or decreased from one period to
another. Enter the change in the base year column.

Here is the comparative income statement from the example above:

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

The following is a horizontal analysis on the comparative income statement:

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

Revenue — 9.09% 10%

 Account 2017 2016 2015

Gross Profit — 11.11% 8%

EBITDA — 12.50% 6.67%

Net Profit — 10% 11.11%

Vertical analysis
A vertical, or common-size, analysis looks at the relative size of line items. It allows you to
compare income statements from different-sized companies. To compare competing businesses,
find the percentage of revenue for each line item.

To find the percentage of revenue, divide each line item by the revenue. Multiply the figure by
100 to get a percentage. The percentage of revenue tells how much profit you keep from every
sales dollar you earn.

Here is the comparative income statement from the example above:

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

The following is a vertical analysis on the comparative income statement:

Account 2017 2016 2015

Revenue 180,000 165,000 150,000

 Account 2017 2016 2015

Gross Profit 150,000 135,000 125,000

EBITDA 90,000 80,000 75,000

Net Profit 55,000 50,000 45,000

Revenue 100% 100% 100%

Gross Profit 83.33% 81.81% 83.33%

EBITDA 50% 48.48% 50%

Net Profit 30.55% 30.30% 30%

Why use comparative

income statements?
As a small business owner, you need to measure performance. If you don’t, how do you know if
the decisions you make for your business are working? Looking at a comparative income
statement helps you analyze profitability over time.

You can use a comparative income statement to look at important financial figures. Patterns in
past figures can guide you in the future. For example, you compare last year’s return on
investment (ROI) to the current year. This tells you if the money you put into your business
brings in a greater amount of income.

Comparative income statements can also reveal if your costs and revenues are consistent. Let’s
say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By
recognizing the increase, you can find solutions to reduce COGS.

Business investors use comparative income statements to look at different companies. The

comparison helps them decide which business is a better investment.
I know—accounting is not the most exciting part of owning a business. But when you take the
time to review your financial numbers, the end result can be eye-opening. You see the outcomes
of all the work you put into your business and gain insight into which decisions will help you
succeed

Internal Reports: These are meant

for different levels of management
like the top, middle and lower
levels of management.
Example of internal reports
are periodical reports about
profit/ loss and
financial position, statement of
cash flow and changes in
working capital, report about
cost of
production, production trends,
reports of sales, credit collection
periods, stock po
Internal Reports: These are meant
for different levels of management
like the top, middle and lower
levels of management.
Example of internal reports
are periodical reports about
profit/ loss and
financial position, statement of
cash flow and changes in
working capital, report about
cost of
production, production trends,
reports of sales, credit collection
periods, stock po