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The process of preparing management reports and accounts that provide accurate and timely financial and statistical

information required by managers to make day-to-day and short-term decisions. Unlike financial accounting, which produces annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports for an organization's internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and may also include trend charts, variance analysis, and other statistics. Also called managerial accounting. SCOPE OF MANAGEMENT ACCOUNTING: Management accounting is a wide and diverse subject. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science, mathematics, statistics, finanacial accounting, cost accounting etc. It is thus very difficult to define its scope, as it is a dynamic and ever growing discipline of knowledge. The important techniques and systems used by management accounting are briefly stated below. 1. Historical cost accounting: Maintenance of books of cost accounting enables to know the actual costs incurred by the firm. 2. Standard costing: The standard costs laid down by experts are compared with the natural costs in order to know the deviations 3. Marginal costing: The costs are divided into fixed and variable costs which help is making vital decisions. 4. Decision accounting: Decisions are made after studying the impact of decisions in terms of costs, resource, profits, growth etc.

5. Budgetary control: It is a system of controlling the cost with the help of budgets. 6. Control accounting: It includes the techniques such as standard costing, budgetary control, control reports, internal check, internal audit and reports. 7. Revaluation accounting: It is based on current costs to ensure that the investment is intact and profits from investment are kept in mind. 8. Financial planning & policies: It consists of raising the long term and short term finance and invest it on optimum basis and enhance the profitability of the firm. 9. Capital expenditure: The large amounts of future capital expenditure and future profits are analysed to take important decisions. Break even analysis: This is an important technique which is 10. used to analyse the behavior of costs viz., fixed and marginal costs, indicating the level of activity at which the total costs would equal the total revenue and also the margin of safety. 11. Inter-period comparison: It is a technique of comparing the present performance with the past performance. 12. Techniques of forecasting: Some techniques like decision tree, probability and sensitivity analysis are used by management accountants for forecasting which forms a base for planning. Operations research: It consists of statistical and 13. mathematical techniques that are increasingly used in decision making process. Statistics: The statistical techniques used by management 14. accountant are correlation, regression, probability, time series, standard deviation, linear programming, control charts etc. 15. Other techniques: Other techniques employed are: Financial reporting, data processing, project management and appraisal, management audit, efficiency audit, cost audit, performance budgeting, tax planning, social accounting & audit, human

resource accounting, responsibility accounting and divisional performance.

ADVANTAGES OF MANAGEMENT ACCOUNTING: One of the most significant steps to improve managerial performance is the development of the new discipline. Management accounting it is still very much in a state of evolution. However, the following advantages are claimed for it 1. The main contribution of management accounting i s t h e e l i m i n a t i o n o f i n i t i a t i v e man agement. With the help managemen t a ccoun ting, the bus in ess activities are regulated systematically by means of efficient planning and organization thereby avoiding over working in busy periods and slackness in slump periods. 2. It enab les the bus iness to get the maximum retu rn on capita l b y h elping it in p lann in g, distribution and controlling activities. 3. It helps the management to improve its service to its customers by resorting to a continuous method of comparing the results with the standards. 4. It helps in improving the relations between the m a n a g e m e n t a n d l a b o r b y a v o i d i n g unreasonable standard of work which is the main cause of labor unrest.


We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required.

Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements : (i) Profit and loss Account or Income Statement (ii) Balance Sheet or Position Statement These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weaknesses of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of Financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes : _ measuring the profitability The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether

adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. _ indicating the trend of Achievements Financial statements of the previous years can be compared and the Trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged. _ Assessing the growth potential of the business The trend and other analysis of the business provides sufficient information indicating the growth potential of the business. _ Comparative position in relation to other firms The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilising capital, etc. _ Assess overall financial strength The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not if yes, how much? And also to assess how much funds have been received from external sources. _ Assess solvency of the firm The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not.

The major objectives of financial statement analysis are as follows 1.Assessment Of Past Performance

Past performance is a good indicator of future performance. Investors or creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance. 2.Assessment of current position Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise. 3.Prediction of profitability and growth prospects Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise. 4.Prediction of bankruptcy and failure Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure. 5. Assessment of the operational efficiency Financial statement analysis helps to assess the operational efficiency

of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management.

The financial statement analysis is important for different reasons: 1. Holding Of Share Shareholders are the owners of the company. Time and again, they may have to take decisions whether they have to continue with the holdings of the company's share or sell them out. The financial statement analysis is important as it provides meaningful information to the shareholders in taking such decisions. 2. Decisions And Plans The management of the company is responsible for taking decisions and formulating plans and policies for the future. They, therefore, always need to evaluate its performance and effectiveness of their action to realise the company's goal in the past. For that purpose, financial statement analysis is important to the company's management. 3. Extension Of Credit The creditors are the providers of loan capital to the company.Therefore they may have to take decisions as to whether they have to extend their loans to the company and demand for higher interest rates. The financial statement analysis provides important information to them for their purpose. 4.Investment Decision The prospective investors are those who have surplus capital to invest in some profitable opportunities. Therefore, they often have to decide whether to invest their capital in the company's share. The financial

statement analysis is important to them because they can obtain useful information for their investment decision making purpose.