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What is management accounting how it helps in company?

Management accounting is the process of preparing reports about business operations that help business owners
and/or managers to make short-term and long-term decisions. It aids the business to pursue its goals by identifying,
measuring, analysing, interpreting, and communicating both financial and non-financial data and the relationships
between both. The main functions of management accounting which assists in company management include:

1. HELPING FORECAST THE FUTURE

Forecasting helps decisions to be made and answers questions like: Should a company invest more in equipment?
Should it diversify into different markets and regions? Should it buy another company? By finding the answers to
these types of questions it helps to formulate future trends in the business contributing to its development.

2. HELPING IN MAKE-OR-BUY DECISIONS

Management accounting provides insights on cost and production availability which are integral deciding factors
in purchasing choices. Data from managerial accounting empowers decision-making at both operational and
strategic levels.

3. FORECASTING CASH FLOWS

Estimating cash flows and the impact of cash flows on the business is essential. Considering where the company’s
costs will incur in the future and where its revenue will come from can be vital to a business in making its next
move. Management accounting involves creating budgets, forecast, scenarios and trends that managers can then
use to be better informed when it comes to deciding how to allocate money and resources to generate the desired
revenue growth.

4. HELPING UNDERSTAND PERFORMANCE VARIANCES

Performance discrepancies in business are variances between what was predicted and what was achieved. Using
analytical techniques, management accounting helps management build on positive variances, manage or navigate
the negative ones.

5. ANALYSING THE RATE OF RETURN

Knowing the rate of return (ROR) is essential knowledge before embarking on a project that requires a lot of
investment. Vital questions that can be answered through management accounting include: If presented with two
investment opportunities, how does a business choose the most profitable one? In how many years will a company
break even on a project? What are the cash flows estimated to be?

What is ratio analysis and its types (debt equity ,liquid ,turnover, ROI
and its limitations?
A ratio is only a comparison of the numerator with the denominator. The term ratio refers to the numerical or
quantitative relationship between two figures. A ratio is the relationship between two figures. A ratio is the
relationship between two figures and obtained by dividing the former by the latter. Ratios are designed to show
how one number is related to another. It is worked out by dividing one number by another.

Ratio analysis is an important and age old technique of financial analysis. Ratio analysis involves comparison of
relevant figures or useful interpretation of the financial statements. Ratios are relative form of financial data and
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very useful technique to check upon the efficiency of a firm. Some ratios indicate the trend or progress or
downfall of the firm..

WHAT ARE THE MODES OF EXPRESSING ‘RATIOS’?

Ratios may be expressed in any one or more of the following ways:

RATE, which is the ratio between the two numerical facts over a period of time, for example, stock turnover is
three times a year.

PURE RATIO OR PROPORTION which is arrived at by the simple division of one number by another, for
example, current asset to current liability ratio is 3:1.

PERCENTAGE which is a special type of rate expressing the relationship in hundreds. It is arrived at by
multiplying the quotient by 100, for example, gross profit is 30% of sales.

Types:

Debt to Equity Ratio

Debt to equity ratio, also known as the debt-equity ratio, is a type of leverage ratio that is used to determine the
financial leverage that a company uses. Debt to equity ratio takes into account the company’s liabilities and the
shareholders equity.It is regarded as an important ratio in accounting as it establishes a relationship between the
total liabilities and shareholders equity of a company.

In other words, debt to equity ratio calculates to what extent the company is utilising debt as compared to equity
for running the business.

A very significant part of the debt to equity ratio is that it depicts the ability of the shareholder’s equity to clear all
the outstanding debts in case of the business going bankrupt.

Debt to equity ratio is an ideal ratio to judge a company’s financial performance. It can also help in checking the
ability of the company in repaying its obligations.

Increase in the levels of debt to equity ratio indicates that the company is running on a debt fund, which can be
risky in the long term.

Companies that have a higher debt to equity ratio find it difficult to obtain additional funding from other sources.

High debt to equity ratio presents a financial risk for companies. It means the company is using more debt as
compared to equity for financing.

A low debt to equity ratio shows that a company has sufficient funds in the form of equity and there is no need for
the company to obtain debt for financing the business.

Calculating Debt to Equity Ratio

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Debt to equity ratio can be calculated by dividing the total liabilities by the total equity of the business.

It can be represented in the form of a formula in the following way

Debt to Equity Ratio = Total Liabilities / Shareholders Equity

2. Liquidity Ratios: Liquidity ratios are helpful in determining the ability of the company to meet its debt
obligations by using the current assets. At times of financial crisis, the company can utilise the assets and sell them
for obtaining cash, which can be used for paying off the debts.

Some of the most commonly used liquidity ratios are quick ratio, current ratio, cash ratio, etc. The liquidity ratios
are used mostly by creditors, suppliers and any kind of financial institutions such as banks, money lending firms,
etc for determining the capacity of the company to pay off its obligations as and when they become due in the
current accounting period.

Liquidity Ratios
To help identify the short term liquidity of a firm, this ratio is used. It has mainly two types of
ratio under this. Current ratio which let us know the short term solvency of a firm.

Quick ratio helps us find the solvency for six months and the reason why inventory is subtracted
is that inventory usually take more than six month to convert into liquid asset.

Turnover Ratios
This ratio is also known as Activity ratio, this ratio measures the efficiency of a firm and
converting its products into cash. The ratio is measured in days.

The ratios under this category are:

• This ratio helps in letting the business know how many times the product is turning into cash during a
specified period of time.
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Return on Investment:
Return on Investment estimates the loss and gain generated on the amount of money invested.
ROI (Return on Investment) is generally expressed in the percentage to analyse an
organisation’s profit or the earnings of different investments. In simple words, Return on
Investments estimates what you receive back as compared to what you invest.

Return on Investment can be used in different ways to calculate the profitability of the business.
It can be used by a company to estimate inventory investments, pricing policy, capital
equipment investments, etc.

Return on Investment Formula:

ROI = Net Profit / Cost of Investment

Comparing ratios across industries may not be meaningful since different industries have
different norms and standards.

LIMITATIONS OF RATIO ANALYSIS:

- Ratios may not be comparable if companies use different accounting methods or have
different fiscal year-ends.

- Historical trends may not be a good indicator of future performance since the company's
circumstances may have changed.

- Ratios are backward-looking and may not reflect the current state of the company or the
industry.

- Companies may manipulate their financial statements to make their ratios look better.
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- Ratios don't take into account qualitative factors such as management quality, employee
morale, brand reputation, and customer satisfaction.

- Ratios don't provide a complete picture of the company's financial health and should be used
in conjunction with other financial analysis tools.

HOW TO MEASURE LONG TERM AND SHORT TERM FINANCIAL

POSITION?
Long term and short term financial position can be measured by using given below
ratios.

1. Liquidity Ratios
Liquidity ratios measure a company's ability to pay off its short-term debts as they
become due, using the company's current or quick assets. Liquidity ratios include the
current ratio, quick ratio, and working capital ratio. Then describe its types: current and
quick

2. Solvency Ratios
Also called financial leverage ratios, solvency ratios compare a company's debt levels
with its assets, equity, and earnings, to evaluate the likelihood of a company staying
afloat over the long haul, by paying off its long-term debt as well as the interest on its
debt. Examples of solvency ratios include: debt-equity ratios, debt-assets ratios, and
interest coverage ratios. Then describe its types: debt to equity,Total assets to debt
,proprietory ,return on investment.

Drafting a report for management reporting, it's important to keep the following
tips in mind:

1. Identify the purpose of the report and the target audience.

2. Gather relevant data and information from reliable sources.

3. Organize the report into sections, including an executive summary, introduction,

methodology, results, discussion, conclusions, recommendations, appendices, and references.

4. Use clear and concise language, and avoid jargon or technical terms that may be unfamiliar
to the reader.

5. Provide visual aids, such as charts and graphs, to help illustrate key points.

6. Use headings and subheadings to help organize the report and make it easier to read.

7. Include a summary of the findings and recommendations in the executive summary.

8. Interpret the results and provide analysis and insight into the findings in the discussion
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section.

9. Use specific examples and case studies to support your conclusions and recommendations.

10. Proofread the report carefully for spelling, grammar, and formatting errors.

11. Use appropriate citation styles to give credit to sources used in the report.

12. Pay attention to the tone of the report and ensure that it is professional and objective.

13. Use a consistent format and style throughout the report.

MANAGEMENT REPORTING different kinds and matters to deal while reporting

to directors?

Management Reporting

The word ‘Report’ consists of two parts. ‘Re’ meaning again and ‘Port’ means to carry. Thus
the word means ‘to carry information again’. Reports are always written for an event, which has
already occurred.

Objects or Purpose of Reports:

1. Means of communication: It is a means of communicating information from one who has it to

someone that needs the information for carrying out the functions of management. Reports
provide information to shareholders creditors, customers, government and general public.

2. Serve as a record: They provide valuable records for future reference.

3. Legal requirements: Some reports have to be submitted to fulfill legal requirements. For
example: - Annual reports of the company’s accounts must be furnished to shareholders as
per company’s act of 1956.

4. To Develop Public Relations: Reports of the general progress of the business helps in
increasing the goodwill and developing public relations.

5. Basis to measure performance: Work performance reports of employees help the

management to measure performance and become the basis for promotion and incentives.

6. Control purposes: It is on the basis or reports that actions are initiated and instructions are
given to improve the performance.
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KINDS OF REPORTS

According to object & purpose:

External Reports: Outsiders interested in the company’s reports may be shareholders, creditors or
bankers. The company publishes the ‘Income Statement’ & ‘Balance sheet’ at the end of every
financial year and these statements are filed with the1 Registrar of companies and stock exchange.
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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 position.

According to Nature:

Enterprise Reports: These are prepared for the concern as a whole and served as a
channel of communication with outsiders. These reports may include balance sheet,
income statement, income tax return, chairman’s report etc.,

Control Reports: These are two types. The first type is used to judge the performance of
the managers and reasons for deviations in performance is also identified. The second
type of control reports is used to judge how well a responsibly center has fared as an
economic utility.

Investigative Reports: In case a serious problem arises then the causes are studied and
analyzed. These reports help the management to analyze the cause of the problem.

According to period:

Routine Reports: These are prepared about the day to day working of the concern. They
are periodically sent to various levels of management, on a daily, weekly, monthly or
quarterly basis. Routing reports may relate to sales information, production figures, capital
expenditure, purchases of raw materials, market rents, labour situations etc.,

Special Reports: These are prepared according to the needs of the situation. Available
accounting information may not be sufficient, so data may have to be especially collected.
Special reports may deal with Technological changes in the industry.
Market analysis and method of distribution of competitors; Problems of purchase of raw
materials; Political development at home and abroad having an impact on business.

According to functions:

Operating Reports: They provide information about the operation of the concern.
Operating reports may consist of Control reports, which are intended to spot deviations
from the budgeted performance without loss of time so that corrective action can be taken.
Information reports which are prepared to provide useful information, which will enable
planning and policy formation for the future. Information reports can take the form of trend
reports or analytical reports.

Financial Reports: These reports can be either static or dynamic. Balance sheet is an
example of a static report, where as cash flow, fund flow statements and other reports
showing the financial position as compared to the budgeted one are examples of dynamic
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reports.

Matters while reporting to Directors:

When reporting to directors, you should focus on the key points of the
report and provide recommendations for action. Be prepared to
answer any questions or concerns the directors may have, and
provide additional information as needed. It's important to be clear,
concise, and professional in your presentation. If you are using visual
aids, such as graphs or charts, make sure they are easy to read and
understand. Additionally, be prepared to discuss any potential risks or
challenges associated with the recommendations you are making.

DIFFERENCE BETWEEN SPECIAL REPORTS AND ROUTINE

REPORTS:
Routine reports. These reports are required to be prepared and submitted
periodically on matters required by the organization so as to help the management of
the organization to take decisions in the matters relating to day to day affairs. The
main objectives of routine reports are to let the management know as to what is
happening in the organization, what is its progress where the deviation is, what
measures have been taken in solving the problems and what to do so that the
organization may run smoothly and efficiently. Routine reports are generally brief.
They only give the facts. No comments or explanations are usually offered in such
reports. Generally forms are prescribed for preparation and submission of such
reports.

Special reports. Such a type of report is specially required to be prepared and

submitted on matters of special nature. Due to an accident a death of the foreman

has occurred in a factory. The factory manager may ask for a detail report from the
head foreman. Such a report is classified as special reports. These reports contain
not only facts and details but they may contain suggestion, comments and
explanations as well.
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WHAT ARE STEPS TO PREPARE A BALANCE SHEET?

How to prepare a Balance Sheet?

Below are the steps mentioned to prepare a balance sheet.

1. Compose a trial balance- It is a regular report included in any accounting programme. If

it is a manual mode, then create a trial balance by transferring every general ledger
account’s ending balance to a spreadsheet.
2. Arrange the trial balance- It is important to arrange the initial trial balance to assure that
the balance sheet similar to the relevant accounting structure. While using adjusting
entries to adjust the trial balance all the entry should be completely recorded so the
auditors can understand why it was made.
3. Discard all expense and revenue accounts- The trial balance includes
expenses, revenue, losses, gains, liabilities, equity, and assets. Delete all from the trial
balance except equity, liabilities, and assets. However, the deleted accounts are used to
create an income statement.
4. Calculate the remaining accounts- In this stage, sum up all the trial balance account
used to create a balance sheet. The typical line items used in the balance sheet are:
o Cash
o Accounts receivable
o Inventory
o Fixed assets
o Other assets
o Accounts payable
o Accrued liabilities
o Debt
o Other liabilities
o Common stock
o Retained earnings
5. Validate the balance sheet- The total for all assets recorded in the balance sheet
should be similar to the liabilities and stockholders’ equity accounts.
6. Present in the required balance sheet format.

Balance Sheet Format:

The balance sheet of a company will look like the image given below.
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