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Module 1

Fundamentals of
Managerial Accounting
Managerial Accounting - Dr. Varadraj Bapat

Dr. Varadraj Bapat


Chartered Accountant
Cost Accountant
Ph.D., IIT B, Powai, Mumbai

Contact Information:
varadraj@som.iitb.ac.in

Managerial Accounting - Dr. Varadraj Bapat

LEARNING OBJECTIVES
Need to Know About Accounting
Managerial Accounting
Financial Statements - Balance Sheet,
Income Statement

Managerial Accounting - Dr. Varadraj Bapat

Need to Know About Accounting

Need to Know About Accounting and


Finance

Managerial Accounting - Dr. Varadraj Bapat

Why do I need to learn about finance


I am very good in my
own area of specialization
How would you react to the
above statement?
Managerial Accounting - Dr. Varadraj Bapat

The job content

As
you
mo
ve
up .
.

Management
& Finance
Expertise

Functional
Expertise

Managerial Accounting - Dr. Varadraj Bapat

About Managerial
Accounting
What is Accounting?
Financial Accounting, Cost Accounting and
Management Accounting
Financial Accounting and Financial
Management
Finance and complexity of organisation

Managerial Accounting - Dr. Varadraj Bapat

Accountin
g
Language

of Business
Performance is reported and
evaluated in financial terms
Knowledge
is
useful
for
personal investment and tax
planning as well
Managerial Accounting - Dr. Varadraj Bapat

Accounting
It

is not necessary to become


accountant
But its very useful if every one
understands the accounting
and financial concepts and
terminology properly

Managerial Accounting - Dr. Varadraj Bapat

Need to Learn Accounting


It

assists in management
Will
help
in
planning,
organisation and control of
business
Leads to increase in efficiency of
business
Profit maximization
Managerial Accounting - Dr. Varadraj Bapat

Streams of
Accounting
Financial

Accounting,
Cost
Accounting and Management
Accounting
Let
us
understand
the
similarities and difference in
these
three
streams
of
accounting
Managerial Accounting - Dr. Varadraj Bapat

Financial Accounting

Recording of Financial
Transactions
Reporting of Financial Results
Preparation of Financial
Statements
Targeted to External Users

Managerial Accounting - Dr. Varadraj Bapat

Cost
Accounting

Recording of Costs
Analysis of Costs
Preparation of Cost
Statements
Targeted to Internal Users

Managerial Accounting - Dr. Varadraj Bapat

Management
Accounting

Recording of Financial & other


data
Analysis of Financial and other
information
Preparation of Statements for
Managerial Decisions

Managerial Accounting - Dr. Varadraj Bapat

Management
Accounting

Targeted to Internal Users All levels of Management


This is a broader concept
encompasses Financial and
Cost Accounting

Managerial Accounting - Dr. Varadraj Bapat

Meaning of Management
Accounting
Any

form of accounting which


enables a business to be
conducted more efficiently can
be regarded as Management
Accounting.
(Institute
of
Chartered Accountants of IndiaICAI)
Management Accounting is the
Managerial Accounting - Dr. Varadraj Bapat

application
of
professional
knowledge
and
skill
in
the
preparation
of
accounting
information in such a way as to
assist management in the formation
of policies and in the planning and
control of operations of undertaking.
(International
Capital
Market
Association, London- ICMA)
Managerial Accounting - Dr. Varadraj Bapat

Financial Management
Financial

Accounting, Managerial
Accounting
and
Financial
Management: Relationship
Financial Management deals with
raising and utilization of funds
Raising of funds
may include
Cost of Capital, Capital Structure
Managerial Accounting - Dr. Varadraj Bapat

Financial Management
decisions, Capital Markets, IPOs
and so on
Financial Management deals with
raising and utilization of funds
Utilization of funds may include
Capital
Budgeting,
Portfolio
Management, Working Capital
Management and so on
Managerial Accounting - Dr. Varadraj Bapat

Managerial V/s Financial


Accounting
Accounting
Accounting System
System
(accumulates
(accumulates all
all
accounting
accounting data)
data)
Managerial
Managerial Accounting
Accounting Financial
Financial Accounting
Accounting
Information
Information for
for decision
decision Published
Published financial
financial
making,
statements
making, and
and control
control
statements and
and other
other
of
financial
of an
an organizations
organizations
financial reports.
reports.
operations.
operations.
Internal
Users
Managerial Accounting - Dr. Varadraj Bapat

External
Users

Complexity of Organisation
Finance

and complexity of
organisation
As the organizations grow, they
become complex
Ownership and Management are
separated
Managerial Accounting - Dr. Varadraj Bapat

Complexity
Organisation
Ownership

of

is widespread
This increases the importance of
Finance function

Managerial Accounting - Dr. Varadraj Bapat

About this
course
Managerial

Accounting Course
The course will cover Financial
Accounting, Cost Accounting
and Management Accounting
Financial Management is dealt
in a different course
Managerial Accounting - Dr. Varadraj Bapat

Financial Statements
What

are they?
Which are important Financial
Statements?
What purposes do they serve?

Managerial Accounting - Dr. Varadraj Bapat

Company or Organisation

PROVIDERS
OF
MONEY

RESOURCES
FOR
BUSINESS

These two
are always
equal
Managerial Accounting - Dr. Varadraj Bapat

The Basic Business Model


The
Money
Cycle
Value
Addition
Cycle

Infrastructure
Collection

Money
Procurement

Billing
Delivery

Managerial Accounting - Dr. Varadraj Bapat

People

Consumption

Infrastructure
e
u
n
e
v
e
R

Collection
Billing
Delivery

Money

Costs
Procurement
Consumption

To be profitable, our revenue should be more than


our cost ! This would make the organisation
stronger, healthy and long-lasting.
Managerial Accounting - Dr. Varadraj Bapat

Profit & Loss Account

Balance Sheet
Liabilities

Assets

Infrastructure

Revenue

Capital
Fixed Assets

Money

Borrowings from
Collection
Banks / FIs
Current Assets
or Working
Outstanding
Current
Capital
Liabilities
Human Assets

Delivery &
Billing

Costs

Procurement
& Inventory
Consumption
& WIP

Profit/ Loss

People
Balance Sheet shows the financial position of
organisation, while Profit & loss Account shows
the profitability of organisation.
Managerial Accounting - Dr. Varadraj Bapat

Balance
Sheet
shows
the
cumulative position of resources
(assets) and sources of funds
(liabilities) at the end of the year.
Profit & Loss Account shows
Revenue
&
Cost
performance
during a quarter/ year.
Managerial Accounting - Dr. Varadraj Bapat

Balance Sheet
Liabilities

Assets

Profit & Loss Account


Infrastructure

Capital
Fixed Assets
Reserves
Borrowings
Collection
(eg.from Banks) Current Assets
or
Working
Outstanding
Current
Capital
Liabilities
Human Assets

Revenue

Money

Delivery &
Billing

Procurement
& Inventory
Consumption
& WIP

Profit

People
Profits build up reserves & enable an
enterprise to acquire new assets without
borrowing money. Exactly the way we can
acquire assets for our use without borrowing.
Managerial Accounting - Dr. Varadraj Bapat

Costs

Balance Sheet
Liabilities

Assets

Profit & Loss Account


Infrastructure

Capital
Fixed Assets
Reserves
Borrowings
Collection
Current Assets
(eg.from Banks)
or
Working
Outstanding
Capital
Current

Revenue

Money
Procurement
& Inventory

Liabilities
Human Assets

Delivery &
Billing

Consumption
& WIP

People
Profits build up reserves & enable an enterprise to
acquire new assets without borrowing money.
Exactly the way we can acquire assets for our use
without borrowing.
Managerial Accounting - Dr. Varadraj Bapat

Costs

Profit

Balance

sheet may be prepared


at any time showing the position
as on that date.
Profit and loss account may be
prepared for any particular
period.

Managerial Accounting - Dr. Varadraj Bapat

Balance
Sheet
Owners

Funds
Non Current
liabilities
Current
liabilities

Managerial Accounting - Dr. Varadraj Bapat

Fixed

Assets
Non Current
Investments
Other non
current assets
Current
Assets

The Annual Report


Usually Contains ...
financial statements which consist
of
Balance sheet, Profit & Loss A/c
Cash Flow Statements
notes to the financial statements
disclosure of accounting policies


Managerial Accounting - Dr. Varadraj Bapat

The Annual Report


Usually Contains ...
Chairmans

Statement
Board of Directors & Committees
Directors Report
Directors Responsibility Statement
Auditors Report
Report on Corporate Governance
Managerial Accounting - Dr. Varadraj Bapat

The Annual Report


Usually Contains ...
Disclosure

regarding Employee
Stock options Schemes
List
of
employees
receiving
remuneration exceeding Rs. 60
Lakhs
Conservation of Energy Reports
Managerial Accounting - Dr. Varadraj Bapat

The Annual Report


Usually Contains ...
Consolidated

Financial Statements
Subsidiaries Financial Statements
Management Discussion and
Analysis
Annual General Meeting Notice

Managerial Accounting - Dr. Varadraj Bapat