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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

Management
As & Finance
you Expertise
mo
ve
up .
. 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

Itassists 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 India-
ICAI)
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,
making, and
and control
control statements
statements andand other
other
of
of an
an organizations
organizations financial
financial reports.
reports.
operations.
operations.
Internal External
Users Users
Managerial Accounting - Dr. Varadraj Bapat
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 of
Organisation

Ownership 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 RESOURCES
OF FOR
MONEY BUSINESS

These two
are always
equal
Managerial Accounting - Dr. Varadraj Bapat
The Basic Business Model
Infrastructure
The
Money
Money Collection
Cycle Procurement
Billing
Value
Consumption
Addition Delivery
Cycle
People

Managerial Accounting - Dr. Varadraj Bapat


Infrastructure
e v e n ue Money
R
Collection Costs
Procurement
Billing
Consumption
Delivery

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
Balance Sheet Profit & Loss Account

Liabilities Assets Infrastructure Revenue


Capital Costs
Fixed Assets Money
Borrowings from Collection
Banks / FIs Current Assets
Procurement
or Working Outstanding
Current & Inventory
Capital
Liabilities
Consumption Profit/ Loss
Delivery &
& WIP
Human Assets Billing

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 Profit & Loss Account

Liabilities Assets
Infrastructure Revenue
Capital Costs
Reserves Fixed Assets Money
Borrowings Collection
(eg.from Banks) Current Assets
or Working Procurement
Outstanding
Current Capital & Inventory
Liabilities
Consumption Profit
Delivery &
& WIP
Human Assets Billing

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
Balance Sheet Profit & Loss Account

Liabilities Assets
Infrastructure Revenue
Capital Costs
Fixed Assets
Reserves Money
Borrowings Collection
Current Assets
(eg.from Banks)
or Working Procurement
Capital Outstanding
Current & Inventory
Liabilities
Consumption Profit
Delivery &
Human Assets & WIP
Billing

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
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 Fixed Assets
Non Current Non Current
liabilities Investments
Current Other non
liabilities current assets
Current
Assets
Managerial Accounting - Dr. Varadraj Bapat
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