Managerial Accounting
Class Notes and Lecture Outline
Accounting Review 
Introduction and Semester Overview
Accounting Systems have 2 powerful uses
  • create records and internal controls to safeguard the company's assets
  • prepare financial statements  --  these are an objective measurement
Differences Between Financial and Management Accounting Information
  • Financial accounting provides summary information in a standard format, it is a regulated or rule-based reporting system.  It is an agreed upon set of measurement rules (a contract) between preparers and users, enforced by external audits.  
  • Management accounting information is flexible, providing relevant information for different situations, while maintaining an overall objective of increasing firm value.  It must be decision based, which requires hard and soft detailed information in many different formats using different media.   We determine the cost we are willing to incur for information by measuring the benefit (increase in value) from improved decisions. Relevant information improves a decision.  Relevant information may come from soft or hard data.

Accounting Principles and Concepts
  1. GAAP
    • rules, procedures, and techniques used to guide the preparation of the financial statements
  2. Business Entity Concept
    • transactions of the business are separate from personal transactions
  3. Money Concept
    • transactions are recorded in dollars
  4. Going Concern Concept
    • the business will operate indefinitely
  5. Cost Principle
    • a transaction is recorded at its actual value
  6. Periodicity Concept
    • the life of the business can be broken down into well-defined time periods
  7. Full Disclosure Principle
    • the business will disclose any present and future events which could have a financial impact on the company
  8. Consistency Concept
    • a business should use the same accounting procedures during an operating period
  9. Conservatism Concept
    • a business should not overstate revenues/assets or understate liabilities/expenses
  10. Materiality Concept
    • certain dollar value transactions may be regarded as immaterial regarding their effect on financial statements
  11. Objectivity Concept
    • a valid transaction has a basis in fact and can be documented
  12. Matching Principle
    • at the end of an accounting period all non-recorded revenues and expenses must be recognized before the period can be closed
Cash versus Accrual Methods of Accounting
  • Cash Basis - recognizes revenue/expense when cash changes hand  (may be preferred by small businesses that do not extend credit and report to external users)
  • Accrual Basis - recognizes revenue/expense when the transaction occurs  (preferred method)
The Rules of Debits and Credits

Debit Balanced Account
Credit Balanced Account
Debit Entry
increase the balance
decrease the balance
Credit Entry
decrease the balance
increase the balance
The Balance Sheet
  • Assets  =  Liabilities  +  Owner's Equity
  • shows the financial condition and solvency of the business at a point in time
The Income Statement
  • Revenues  -  Expenses  =  Net Profit/Loss
  • reports earnings or profitability during a specific period of time
3 Manufacturing Inventories

How do inventories differ for the three major economic sectors?

  1. Services.  These firms do not have inventories.  Value is created when customers are willing to pay more for the service than the cost incurred to provide it.  In the governmental and nonprofit sectors, value is created when customers (taxpayers or members) are willing to pay (with taxes or dues) for these types of services.  Here, the profit goal is zero because the customers are also the owners.
  2. Merchandisers.  Wholesalers and retailers purchase products and then resell them.  They report the cost of the unsold merchandise inventory as a current asset.
  3. Manufacturers.  Manufacturers purchase materials that may be stored in raw materials inventory (a current asset) until needed to make products.  While products are being made, their costs are accumulated in work-in-process inventory.  (WIP is also a current asset.)  As with merchandisers, the costs of finished products waiting to be sold are reported as finished goods inventory (a current asset).

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this page is maintained by Reed Fisher
last updated January 15, 2011