Financial accounting and management accounting are two broad but different scope of accounting. Differences are classified in different scopes such as users of the report, data used, the time and scope. As to users, financial accounting is used by external users such as creditors, investors, business enterprises outside the entity and buyers while management accounting is used by management in to their operation towards the achievement of the company’s objectives.
As to the data being used, financial accounting uses reliable data on which users can verify and validate the conciseness and accuracy of the data while management accounting uses relevant data that users can use to properly justified the report. Financial accounting focuses on past events and transactions that have occurred on the calendar or fiscal while management accounting emphasizes on future events or circumstances like budget and forecast.
Financial accounting reports on the financial position of the company as a whole while management accounting only focuses on a certain segment or division of a company. Financial accounting follows a certain principle like the International Accounting Standards that should be satisfied in order for the report to be considered fairly presented in all material aspects while management accounting does not have any regulations needed to be followed.
- Assets are tangible or intangible resources that have future economic benefit and can be measured reliably. Examples of which are cash, accounts receivables and prepaid insurance.
- Liabilities are obligations in the form of debts and payables that arise from past transactions or events and the settlement of it will result in an outflow of resources that comprises future economic benefit. Example of which is Accounts payable and Loans Payable.
- Equity is the net amount that the owners or capitalist can claim in the business. It is composed of contributed capital of the owners, retained earnings, minority interest and reserves.
- “Only adverse variances are worth investigating because favorable variances, by definition must be good.” I beg to disagree with this principle. Investigation on certain variance should not be based on whether it is favorable or not but instead, it should be based on the materiality of the aspect involved. The management should focus on the impact it can do to the whole organization or entity in order for it to be investigated. Time and power are utilized so the management should allocate that resources to important and material enough aspects.
- “A budget which attempts to be realistic will not motivate best performance.” One reason why an entity uses budgeting is to motivate managers and employees to achieve the goal they have set for a particular period. A budget is somehow based on past transactions that they have encountered which they revised or somehow make some changes for it to be futuristic in their sense. So, any budget is a way of motivating the organization to attain a certain goal; may it be realistic or not. Budget will tend to be motivating if all the relevant data needed are provided, reviewed and evaluated to be more beneficial and more useful to the organization.
I somehow agree to the managing director. As I go over the data of product A, I have found out that given the sales of 32,000, there is a variable cost of 24,000 which represents 75% of the total sales. As a result, 25% was left as Gross margin equivalent to 8,000. Though 25% gross margin is somehow enough, still, it is not as good as the two products B & C, that has 49.33% (Product B) and 49.63% (Product C) gross margin respectively. Product A to break even needs a sale of 48,000. Therefore, if the XYZ Limited can achieve a sale of more than 48,000 then, that is the only time that they will experience a gain or profit from the said product.
But for example, the three products will not have a single sale or production for a period, Product B will have the greatest cost given the Fixed Cost of 12,667; next is Product A with 12,000; and Product C with 11,333. Of all the three products, the best product to maintain and establish is Product C due to the fact that it has the highest gross margin percentage of 49.63%. It only means that, given the Sales as 100%, the variable cost only shows 50.37%. Aside from that, Product C has the lowest Fixed Cost above the three, making it economical for the company to produce and giving the company more profit on sales.
The EOQ is 44.72.
Order costs might include the cost to enter the purchase order and/or requisition, the cost to process the receipt, incoming inspection, invoice processing and vendor payment, and in other circumstances, a portion of the inbound freight may also be included in order cost. Ordinarily, order cost is primarily the labor associated with processing the order; however, you can include the other costs such as the costs of phone calls, faxes, postage, envelopes, etc.
On the other hand, holding cost or carrying cost is the cost associated with having inventory on hand like interest if you acquire additional investment or funds to maintain an inventory; insurance if it is included as part of the cost of inventory; taxes if it is a requirement or is included in the value of the inventory; storage cost; and cost related to risks factors when it comes to spoilage, theft, obsolescence and damage.
The three main type of business entities are sole proprietorship, partnership and corporation. This three are different in many aspects such as to number of owner, existence of separate legal entity, life of the entity, level of liability to outside creditors, existence of mutual agency, ownership of assets, profit distribution, regulation and access to finance. In sole proprietorship, there is only one owner; therefore there is no separate legal entity because of the fact that he/she is the sole owner of the business. Having said that, there is limited life due to the fact that the level of liability to creditors is unlimited making him/her susceptible to liquidation or possible dissolution.
Being the sole owner, he/she is the only one who will gain or lose when it comes to profit accumulation. On the other hand, partnership is another type of entity wherein two or more partners can be part of but not exceeding to twenty person. Like the sole trader, there is no separate legal entity which makes the partners liable to creditors unlimitedly. There is mutual agency due to the fact that it involves more than one member, making the ownership and profit distribution distributed among them depending on the agreement they have entered into. Lastly, the limited company or corporation is the broadest of all. There is no restriction as to the number of owners that can form part in the entity.
Therefore, there is separate legal entity that arises from the limited company. There is no limit as to the life of the corporation. The good thing about it is that liabilities of the corporation to creditors is limited which means that the owners are not liable to creditors to some extent. Only the corporation as a whole is liable, being a business entity. Generally, profits are distributed depending on the number of shares a shareholder invests in the company. Policies and regulations are established well in a corporation making their establishment costs relatively high.
- The purpose of income statement is to show the details regarding the change in wealth or economic inflows as a result of enhancement or acquisition of asset or decrease in liabilities that in turn, increases the equity. It measures the performance of a particular entity over a certain period, usually a calendar month, calendar year or fiscal year, depending on the reporting period of the company.
- Expenses are outflows that arise from economic activities such as depletion of assets or incurrence of liabilities that resulted in a decrease in the company’s equity while assets are tangible or intangible resources that have future economic benefit and can be measured reliably. Examples of assets are prepaid insurance, cash, accounts receivables and inventory while examples of expenses are insurance expense, depreciation expense, rental expense, marketing expense, and miscellaneous expense.
- The statement is true. Even though we are making small profits, we can still pay our debts as they fall due, because the items appearing on the expense section of the income statement is not the equivalent to the cash paid during that period. Accrual and prepayment basis of accounting is used in income statement but not in the balance sheet. Aside from that, non-cash items like depreciation and bad debts appear in the income statement as expense even though there is no actual outflow of cash, which is an asset. The point of recognition of an income or expense also affects the income statement and the balance sheet in different way. For example, sales on the income statement appears as income even though the company has not yet received the full amount of cash equivalent to the sales, making the cash, which is an asset, less than the sales presented in the income statement.
- In my opinion, the importance of a certain part of the financial report depends on who the user will be. If it is an investor or an incoming capital contributor, I think he will probably look at the income statement because he wants to know if the company will give him a good return on his investment if ever he will enter into the company. While a creditor will look on the balance sheet of the company in order for him to know if the company is capable enough to meet obligations as they fall due. On the other hand, management of the company will give importance to both, the income statement and balance sheet because they will need that information in establishing a good budget for the coming period. Use of the balance sheet and income statement lies solely on the user depending on how he will use the data that composes the report.
The cash flow of Priestly Limited shows a negative result in 2007 due to the fact that even though they have acquired loan to have additional acquisition of equipment, it is still not enough to fully cover the amount. They maybe use it or decided to make an expansion as to operation. And because of the loan/borrowing they have acquired, it entails interest that they need to pay when they fall due, making the cash outflow on interest paid increase by 100%, from 75 to 150.
Aside from that, the payment to suppliers and employees increases by 100,000 from year 2006 to 2007. A cash inflow from sale of non-current asset also increases in 2007 which means that they have sold depreciated equipments or property that they think they need to dispose. The receipts from customers remain constant which may mean that the management is not strong enough to tap customers and acquire more collections.
I can suggest to the management that they should revise and review their budget in order to motivate them to achieve company’s objectives without compromising the cash flow of the company. Major cash outflows should be planned in a manner most favorable to the company. Make a systematic schedule of outflows in order to allocate the inflows accordingly. With regards to company’s borrowings, set a limit as to how much the company will acquire and anticipate the consequences that it follows as a result of the transaction.
Net profit does not normally equals to cash due to the fact that there are items in the income statement that does not constitute cash inflow or outflow. For example, the sale for a certain period is recognized in the income statement even if there is no actual receipt of cash, thus making the cash less than the amount of sale for the period. Another is when the company acquired and paid insurance; therefore, cash outflow arises. Primarily, it is considered as an asset, prepaid insurance, which is reflected in the balance sheet. In the next period, the prepaid asset will now be considered as an expense, making it part of the income statement but not as part of cash on that period.
- In the sale of non-current asset, loss on sale of $ 2,000 has an effect in the income statement by decreasing P & L; thus, in effect, the Balance sheet is also understated by $ 2,000 because net income or loss is reflected in the Owners’ Equity. In the company cash flow, it has increases the cash by $ 3,000.
- Revaluation of non-current asset, land, gives no effect on the cash flow. However, in the balance sheet and income statement, it has an effect of increase in the amount of $70,000.
- Revaluation of non-current asset, building, gives no effect on the cash flow. However, in the balance sheet and income statement, it has an effect of increase in the amount of $40,000.
- The issuance of preference share has no effect on the Income statement but has an effect on the Balance sheet in the form of Additional Paid-in Capital in the amount of $ 20,000. The cash flow also increases in the amount of $20,000. But in the income statement, it has no effect.
- The repayment of debtor of a previously written off bad debt has no effect on the balance sheet due to the fact that there is an increase in an asset cash and a decrease in another asset accounts receivable. There is an increase in the cash flow in the amount of $ 1,000 because of the recovery that occurred. In the income statement, an increase of $1,000 occurs because of the recovery.