Financial & Managerial Accounting Mbas: Oanhnguyenth231

FINANCIAL & MANAGERIAL
ACCOUNTING for MBAs 5e

Peter D. Robert F. Mary Lea Al L. Wayne J.
EASTON HALSEY McANALLY HARTGRAVES MORSE
HTTPS://POLLEV.COM/
OANHNGUYENTH231
Financial Accounting versus
Managerial Accounting
© Cambridge Business Publishers, 2018

Learning Objective
Contrast the different uses of financial and

managerial accounting information.
© Cambridge Business Publishers, 2018 2

How Do Financial and Managerial Accounting Differ?
Financial Accounting Managerial Accounting
An information framework to support

An information processing system
the company’s goals
Generates Generates
general-purpose special-purpose
financial reports financial reports

How Do Financial and Managerial Accounting Differ?
Information for internal and

Information for internal users
external users
Not timely enough Reports are prepared

for managing as needed for
daily activities making timely decisions

Differences in External Standards
Must adhere to external reporting

No external standards imposed
standards
Measurement expressed
Emphasis on
in financial and
objective data—measured
nonfinancial terms,
in financial terms
such as time and quality

Differences in Financial Reports
Highly aggregated, Detail is based on

little detail management needs
Reports on historical costs Reports oriented to

and past decisions future costs and decisions
Long Reporting periods

reporting periods based on need

The Focus of Financial Accounting
Income Statement
Concerned with keeping records of assets, obligations, and
Statement of
Cash Flows
collection andFinancial
payment of cash.
Statements
Generated
Statement
Balance of
Sheet Stockholders’
Equity

What is managerial accounting and its roles?
The organisation:
•has a set of goals or objectives
•needs information to pursue its goals
Managerial accounting is the process of
 identifying
 measuring
 analysing
 interpreting’
 and communicating information
in pursuit of an organization’s goals.
The Focus of Managerial Accounting
 Primary focus is to assist management in decision making

 Provides management
 A framework to organize and evaluate data
 The information for decision making.
Emphasis on achieving a
company’s organizational goals

FINANCIAL & MANAGERIAL
ACCOUNTING for MBAs 5e
Peter D. Robert F. Mary Lea Al L. Wayne J.
EASTON HALSEY McANALLY HARTGRAVES MORSE
MODULE 1
Financial Accounting for MBAs
© Cambridge Business Publishers, 2018

Learning Objective 1
Explain and assess the four main business activities.

Four Types of Activities
 Companies
 Plan business activities,
 Finance those activities,
 Invest in those activities,
 Then engage in operating activities

Business Activities and
Financial Statements

Identify and discuss the users and suppliers of

financial statement information.

Demand for
Financial Accounting Information
 Managers and employees: current and future financial health.
 Investment analysts and information intermediaries: predicting companies’ future
performance.
 Creditors and suppliers: to help determine loan terms, loan amounts, interest rates, and
required collateral.
 Stockholders and directors: to assess the profitability and risks of companies and other
information useful in their investment decisions
 Customers and strategic partners: to assess a company’s ability to provide products or
services and to assess the company’s staying power and reliability.
 Regulators and tax agencies: for antitrust assessments, public protection, setting prices,
import-export analyses, and setting tax policies.
 Voters and their representatives: economic, social, taxation, and other initiatives, and to
monitor government spending.
Supply of Financial Accounting Information
 The quantity and quality of accounting information that companies

supply are determined by managers’ assessment of the benefits
and costs of disclosure.
 Form 10-K: the audited annual report that includes the four financial
statements with explanatory notes and the management’s discussion and
analysis (MD&A) of financial results.
 Form 10-Q: the unaudited quarterly report that includes summary versions
of the four financial statements and limited additional disclosures.
 https://www.sec.gov/
 https://www.sec.gov/oiea/Article/edgarguide.html
 https://www.hsx.vn/Modules/Listed/Web/Symbols?fid=9ac914fbe9434adc
a2801e30593d0ae2
Benefits of Disclosure
 The benefits of supplying accounting information extend to a company’s

capital, labor, input, and output markets.
 Cost of capital (as reflected in lower interest rates or higher stock prices),
 Recruiting efforts in labor markets, and
 the ability to establish superior Supplier-customer relations in the input and output
markets

Costs of Disclosure
 Preparation and dissemination of financial information,

 Competitive disadvantages,
 Litigation potential, and
 Political costs.

SEC’s Regulation Fair Disclosure (FD)
 Goal is to curb the practice of selective

disclosure by public companies.
 Reg FD reads as follows:
“Whenever an issuer discloses any material
nonpublic information regarding that issuer,
the issuer shall make public disclosure of that
information . . . simultaneously, in the case of
an intentional disclosure; and . . . promptly, in
the case of a non-intentional disclosure.”

International Accounting Standards
 Companies in more than 120 countries, including the European

Union, the United Kingdom, Canada, and Japan use International
Financial Reporting Standards (IFRS) for their financial reports.
 International Accounting Standards Board (IASB) oversees the
development of IFRS.
 The IASB and the Financial Accounting Standards Board (FASB)
work together cooperatively, often undertaking joint projects.
 Consequently, IFRS and U.S. GAAP (generally accepted accounting
principles) are generally more alike than different for most
transactions.

In the US
Year IFRS application

2007 IFRS financial statements for foreign companies
listed in the US
2015 US listed companies provided IFRS-based
information as a supplement to U.S. GAAP
financial statements

In Vietnam (Decision 345/QĐ-BTC, 20/03/2020)
Year Phase
2020-2021 Preparation
2022-2025 Phase 1: Voluntary application
After 2025 Phase 2: mandatory application

Describe and examine the four financial

statements, and define the accounting equation.

Financial Statement Links Across Time

Balance Sheet
 Reports a company’s financial position at a point in time.

 Resources (assets), namely what the company owns
Accounting equation
 Sources of asset financing
 From stockholders—owner financing, or
 From banks or other creditors and suppliers—non-owner financing
The accounting equation works for all companies at all points in time.

Under Armour Balance Sheet

Investing Activities
 The relative proportion of short- and

long-term assets is largely determined
by a company’s industry and business
model.
 Technology companies like Cisco
Systems and Alphabet
 Manufacturers and retailers such as
Johnson & Johnson, Caterpillar, Home
Depot, and Macy’s
 Transportation companies like
Southwest Airlines and communications
companies like Comcast
Financing Activities
 Companies use a combination of owner (or
equity) and nonowner financing (liabilities or
debt).
 Owner financing has two components:
 Resources contributed to the company by its
owners, and
 Profits retained by the company.
 Companies with relatively stable cash flows:
higher level of debt
 Technology companies, have higher levels of
business risk: lower level of debt
 Public companies: use slightly more debt
than equity in their capital structures
Questions
 Alphabet reports $73.1 billion of cash on its 2015 balance sheet,

nearly half of its total assets. Many high-tech companies carry
high levels of cash. Why is that? Is there a cost to holding too
much cash? Is it costly to carry too little cash?
 What are the trade-offs in financing a company by owner versus
nonowner financing? If nonowner financing is less costly, why
don’t we see companies financed entirely with borrowed money?

 How do stockholders influence the strategic direction of a
company? How can long-term creditors influence strategic
direction?
 Most assets and liabilities are reported on the balance sheet at
their acquisition price, called historical cost. Would reporting
assets and liabilities at fair values be more informative? What
problems might fair-value reporting cause?

Income Statement
 Reports on a company’s performance over a period of time and

lists amounts for
 Its top line revenues (also called sales) and
 Its expenses.
 Revenues less expenses equals the bottom-line net income
amount (also called profit or earnings).

Income Statement

Expenses
 Cost of goods sold (COGS, also called cost of sales)—
the amount Under Armour paid to purchase or
manufacture the goods (inventories) that it sold.
Gross profit = Revenues – Cost of goods sold
 Selling, general, and administrative expenses (SG&A)
—the overhead of the company, including
 Salaries
 Marketing costs
 Occupancy costs
 HR and IT costs
 All the other operating expenses the company incurs.
Net Income
 The ability of companies to

create barriers to competitive
pressure, either by patent
protection, effective
marketing, etc. is a key factor
in determining their level of
profitability.

Statement of Stockholders’ Equity
 Reports on year-over-year changes in the equity accounts that are

reported on the balance sheet:
 Contributed capital, the stockholders’ net contributions to the company,
 Retained earnings, net income over the life of the company minus all
dividends ever paid.
 Other equity, consists of amounts we explain later in the book.

Statement of Stockholders’ Equity

Statement of Cash Flows
 Reports cash inflows and outflows from operating, investing, and financing
activities over a period of time.

Information Beyond
Financial Statements
 Management Discussion and Analysis (MD&A)

 Independent auditor report
 Financial statement footnotes
 Regulatory filings, including proxy statements
and other SEC filings

Managerial Choices
in Financial Accounting
 GAAP allows companies choices in preparing

financial statements.
 The choice of methods can yield financial
statements that are markedly different from one
another in terms of reported income, assets,
liabilities, and equity amounts.
 Financial statements also comprise numerous
estimates.

Sarbanes-Oxley Act (SOX)
 The statements signed by both the CEO and CFO

contain the following declarations:
 Both the CEO and CFO have personally reviewed the annual
report.
 There are no untrue statements of a material fact that would
make the statements misleading.
 Financial statements fairly present in all material respects the
financial condition of the company.
 All material facts are disclosed to the company’s auditors and
board of directors.
 No changes to its system of internal controls are made unless
properly communicated.
Explain and apply basic profitability analysis.

Return on Assets

Profitability and Productivity
Across Companies

Relation Between
Earnings and Stock Prices
Ball, R., and P. Brown. 1968. “An empirical evaluation of accounting income numbers.” Journal of Accounting Research (Autumn): 159–178.

Free Cash Flow / Debt
 Free cash flow (FCF) represents the cash available for the

company to repay creditors or pay dividends and interest
to investors.
 This ratio shows the fraction of all debt that would be
repaid in one year if all of the free cash flow went to
repaying debt. It allows investors to see the company’s
financial stability.
 If the ratio is high, then the company can repay its debt
more easily and can incur more debt than companies that
have lower ratios
DEBT/EBITDA—earnings before interest, taxes, depreciation, and amortization
 A ratio measuring the amount of income generated

and available to pay down debt before covering
interest, taxes, depreciation, and amortization
expenses.
 Debt/EBITDA measures a company's ability to pay off
its incurred debt. A high ratio result could indicate a
company has a too-heavy debt load.

EBITDA-CapEx Interest Coverage
 This ratio is a financial ratio that is used to assess a

company's financial durability by examining whether it
is at least profitable enough to pay off its interest
expenses using its pre-tax income. Specifically it looks
to see what proportion of earnings before interest,
taxes, depreciation, and amortization (i.e., EBITDA), can
be used for this purpose.
 https://www.investopedia.com/terms/f/freecashflow.asp

Relation between
Financial Ratios and Credit Ratings

Assess business operations within the context of

a competitive environment.

Analyzing the Competitive Environment

Competitive Forces within
the Broader Business Environment
 Industry competition. Competition and rivalry raise the cost of doing business.
 Bargaining power of buyers. Buyers with strong bargaining power can extract price
concessions.
 Bargaining power of suppliers. Suppliers with strong bargaining power can demand
higher prices.
 Threat of substitution. As the number of product substitutes increases, sellers have less
power to raise prices and/or pass on costs to buyers.
 Threat of entry. New market entrants increase competition and companies must
expend monies on activities such as new technologies, promotion, and human
development to erect barriers to entry and to create economies of scale.

SWOT Analysis of
the Business Environment
 SWOT - strengths, weaknesses,

opportunities and threats.
 Internal - strengths and
weaknesses
 External - opportunities of and
threats

Analyzing Competitive Advantage
 Does the company have a competitive

advantage, and, if so, what factors explain it?
 Is the competitive advantage sustainable?
 If the company has no competitive advantage,
does its management have a plan to develop a
sustainable competitive advantage that can be
implemented in an acceptable period of time
and with a reasonable amount of investment?
Achieving Competitive Advantage
 Product differentiation
 Technological innovation
 Product design
 Marketing, distribution, and after-sale customer support
 Cost leader
 Access to low-cost raw materials or labor
 Manufacturing or service efficiency, and
 Manufacturing scale efficiencies, greater bargaining power with
suppliers, sophisticated IT systems, etc.
Appendix 1A
Access reports filed with the SEC.

SEC’s EDGAR - 1

SEC’s EDGAR - 2

SEC’s EDGAR - 3

Appendix 1B
Describe the accounting principles
and regulations that frame
financial statements.

Financial Accounting Environment
 Securities and Exchange Commission (SEC)

 Broad powers to regulate the issuance and trading of securities.
 Companies with more than $10 million in assets and whose securities are held by
more than 500 owners
 Must file annual and other periodic reports, including financial statements that are available for
download from the SEC’s database
 Financial Accounting Standards Board (FASB)
 Sets U.S. financial accounting standards called Generally Accepted Accounting
Principles (GAAP)

Audits and Corporate Governance

Audit Report
 Financial statements for each publicly traded company must be
audited by an independent audit firm.
 A company’s board of directors hires the auditors to review and
express an opinion on its financial statements.
 The basic “clean” audit report is consistent across companies and
includes these assertions:
 Financial statements are management’s responsibility. Auditor
responsibility is to express an opinion on those statements.
 Auditing involves a sampling of transactions, not investigation of each
transaction.
 Audit opinion provides reasonable assurance the statements are free of
material misstatements, not a guarantee.
 Auditors review accounting policies used by management and the
estimates used in preparing the statements.
 Financial statements present fairly, in all material respects a company’s
financial condition, in conformity with GAAP.
Audit Committee
Corporate Governance Structure

The End
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FINANCIAL & MANAGERIAL

ACCOUNTING for MBAs 5e

© Cambridge Business Publishers, 2018

Contrast the different uses of financial and

© Cambridge Business Publishers, 2018 2

Financial Accounting Managerial Accounting

An information framework to support

© Cambridge Business Publishers, 2018 3

Financial Accounting Managerial Accounting

Information for internal and

Not timely enough Reports are prepared

© Cambridge Business Publishers, 2018 4

Financial Accounting Managerial Accounting

Must adhere to external reporting

© Cambridge Business Publishers, 2018 5

Financial Accounting Managerial Accounting

Highly aggregated, Detail is based on

Reports on historical costs Reports oriented to

Long Reporting periods

© Cambridge Business Publishers, 2018 6

© Cambridge Business Publishers, 2018 7

 Primary focus is to assist management in decision making

© Cambridge Business Publishers, 2018 9

© Cambridge Business Publishers, 2018

Explain and assess the four main business activities.

© Cambridge Business Publishers, 2018 11

© Cambridge Business Publishers, 2018 12

© Cambridge Business Publishers, 2018 13

Identify and discuss the users and suppliers of

© Cambridge Business Publishers, 2018 14

 The quantity and quality of accounting information that companies

 The benefits of supplying accounting information extend to a company’s

© Cambridge Business Publishers, 2018 17

 Preparation and dissemination of financial information,

© Cambridge Business Publishers, 2018 18

 Goal is to curb the practice of selective

© Cambridge Business Publishers, 2018 19

 Companies in more than 120 countries, including the European

© Cambridge Business Publishers, 2018 20

Year IFRS application

© Cambridge Business Publishers, 2018 21

© Cambridge Business Publishers, 2018 22

Describe and examine the four financial

© Cambridge Business Publishers, 2018 23

© Cambridge Business Publishers, 2018 24

 Reports a company’s financial position at a point in time.

© Cambridge Business Publishers, 2018 25

© Cambridge Business Publishers, 2018 26

 The relative proportion of short- and

 Alphabet reports $73.1 billion of cash on its 2015 balance sheet,

© Cambridge Business Publishers, 2018 29

© Cambridge Business Publishers, 2018 30

 Reports on a company’s performance over a period of time and

© Cambridge Business Publishers, 2018 31

© Cambridge Business Publishers, 2018 32

 The ability of companies to

© Cambridge Business Publishers, 2018 34

 Reports on year-over-year changes in the equity accounts that are

© Cambridge Business Publishers, 2018 35

© Cambridge Business Publishers, 2018 36

© Cambridge Business Publishers, 2018 37

 Management Discussion and Analysis (MD&A)

© Cambridge Business Publishers, 2018 38