Hey- back to the 12 mark question
if any of you guys are free for a bit, do you reckon u could maybe skim/read over it and see if you think it fits the question?
Question: Explain what id meant by management accounting, state the reports used in management accounting, the user of the reports and any legislation regarding preparation
My answer:
Management accounting involves preparing and providing timely financial and statistical information to business managers so that they can make day-to-day and short-term managerial decisions.’1 This sector of accounting is concerned with the information needed to plan, coordinate and control the business on a day to day basis. The managers utilize accounting information in order to inform themselves before deciding matters with the business, to improve financial position; maximize cost-effectiveness, and ensure security and integrity of it’s assets. Key topics in managerial accounting include; understanding cost behavior and CVP analysis, operational budgeting and capital budgeting, standard costing and variance analysis, activity based costing, pricing of individual products and services, and, analyzing the profitability of product lines etc. The Institute of Management Accountants describes management accounting: "Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy"2. Management accounting differs from it’s counterpart, Financial accounting in the sense that it is not subject to external audit, hence, being customized to suit manager(s). Managerial accounting provides instructions on computing costs of products. Costs, that will then be used in the external financial statements. Where financial accounting has its focus on financial statements distributed outside the company, management accounting focuses on the internal users and management of the business.
Depending on the type of business and project, managerial reports can be produced annually, quarterly, monthly, weekly, or even daily; allowing managers to strategically monitor company policies and methods to maximize profitability.
Financial reports which top management of a company uses for managerial decision-making but those are not required for financial disclosure. For financial disclosure companies are bound under law to publish those related statements.
Common Managerial accounting related reports include:
Master Budget
The master budget is the name given to the full set of budgets prepared by a business for a period of time. These budgets are divided in two categories; operating budgets and Financial budgets.
Operating Budgets:
- Sales budget - Other expenses budget
- Production budget - Budgeted Income Statement
- Raw materials budget
- Cost of sales budget
Financial Budgets
- Cash Budget
- Budgeted balance sheet
- Capital expenditure budget
A budget is a blueprint for future financial transactions. Master budgets aid in this area, serveing as a planning tool. All budgets and statements in the master budget are interconnected; in the sense that the numbers from one component budget flow into other statements. For this reason the master budget needs to be prepared in a specific order. When all are prepared they will give management a comprehensive analysis on company financial position, allowing managers to adjust the business’ direction accordingly. Explanatory texts can be compiled along-side the master budget, explaining the entity’s strategic direction, how the master budget will aid the process and the management actions needed to achieve the budget.
The Budget Income statement Performance Report
A budget report is an internal report used to compare actual sales with those projected at the start of that period, whether it is a day, week…etc. This allows businesses to determine if their position is better or worse than anticipated, indicated by the variance. Budgets, being financial goals, are often in-accurate and can differ greatly from a business’ actual budget. If a business was substantially over the projected budget, it allows managerial accountants and managers to assess and decide the best course of action to prevent the discrepancy. The budget report is used to compare the two sets of data. Following the set-up of an income statement, there are two columns listed side by side; one for the budget and one for actual sales. A third column lists any variances; categorizing them favorable (F) and unfavorable (U). Budget Reports are considered managerial accounting reports, as they are perhaps one of the most vital reports in business growth analysis.
Budgeted Income Statement
A budgeted income statement is very similar to the classified income statement, the difference being the absence in classification of expenses in the budgeted statement, which is present in classified income statement. This managerial statement sets out expected income, expenses and profit/loss over an accounting period.
The Cash Budget
Cash budgets allow managers to analyze cash-related dealings. This statement displays current cash balance, the future cash inflows and outflows of a business and the expected cash balance at the end of a budget period. Cash budgets classify cash based dealings in two categories; receipts and payments.
Cost of good sold statement
This statement gathers cost of goods sold in a greater detail found in an income statement. It is used in the periodic inventory system and follows the formula:
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
Cost accounting is a name given to managerial accounting. Managers on different levels of the business use the reports constructed in cost accounting. These managers are given the name internal users. The reports given to these internal users are prepared in accordance with company policies as there is no set concept, merely guidelines to follow. Cost accounting reports are prepared in the form chosen by the entity.
Financial reports prepared in accordance with the Corporations Act generally must comply with accounting standards.
Reports for government authority are prepared in the prescribed format. According to the ASIC (Australian Securities and Investment Comission), unless business is listed with ASX or if a foreign company, a Form 388 Copy of financial statements and reports should be lodged. If entity holds an Australian Financial Services license the business must also present a profit and loss statement and a balance sheet, with an auditor’s report with a Form FS70 Australian financial services licensee profit and loss statement and balance sheet and Form FS71 Australian financial services licensee audit report. Details about when these managerial accounting statements need to be lodged are found in Section 319 of the Corporations Act, stating that these must be presented within 3 months of the ending of the financial year.
Khong Pty Ltd, being a large proprietary company and a reporting entity, must prepare annual financial reports, with accordance to chapter 2M, audited, lodged with AISC within a specific date and sent to members within 4 months of the financial year end.
Business financial security encompasses the protection of people from those more knowledgeable in that sector than them. Business Finance achieves this in the following ways;
- Development of accounting conceptual framework, with associated standards, setting out principles and rules with which all producers of financial reports are encouraged to comply
- The Corporations Act 2001 (governs operations of entity)
- Requirement that certain entities must have an audit (external)
The AASB 101 Presentation of Financial Statements prescribes basis for presentation of general purpose financial reports. The set of financial reports include
- Statement of financial position
- Statement of comprehensive income
- Statement in changes of equity
- Statement of cash flows for the period.
- Notes comprising of significant accounting policies and information
All financial statements, in managerial accounting, except for the cash flows must be prepared using the accrual accounting method
Each financial statement and notes must be clearly identified and contain the name of the entity, if the report covers the whole group, reporting period and date, currency used and level of rounding. The format and legislation regarding the income statement and the statement of changes in equity is explained in the AASB 101 part 80-111.
According to the AASB, in regards to income statement (P+L): Part (80)4
‘The statement of profit or loss and other comprehensive income (statement of comprehensive income) shall present, in addition to the profit or loss and other comprehensive income sections: - profit or loss;
- total other comprehensive income;
- comprehensive income for the period, being the total of profit or loss and other comprehensive income.
If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the statement presenting comprehensive income.’
This futher informs regarding income statement (82)4
‘In addition to items required by other Australian Accounting Standards, the profit or loss section or the statement of profit or loss shall include line items that present the following amounts for the period:
(a) revenue, presenting separately interest revenue calculated using the effective interest method;
(b) finance costs;
(ba) impairment losses (including reversals of impairment losses or impairment gains) determined in accordance with Section 5.5 of AASB 9;
(c) share of the profit or loss of associates and joint ventures accounted for using the equity method;
(ca) if a financial asset is reclassified out of the amortised cost measurement category so that it is measured at fair value through profit or loss, any gain or loss arising from a difference between the previous amortised cost of the financial asset and its fair value at the reclassification date (as defined in AASB 9);
(cb) if a financial asset is reclassified out of the fair value through other comprehensive income measurement category so that it is measured at fair value through profit or loss, any cumulative gain or loss previously recognised in other comprehensive income that is reclassified to profit or loss;
(d) tax expense;
Thankyou sooo much in advance
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