Lesson-managerial-accounting6709123.pptx

Basic Managerial Accounting

1. Management Accounting – Introduction Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial information, which is used by management to plan, evaluate and control activities within an organization It involves the application of appropriate techniques and concepts to economic data so as to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view toward achieving these objectives Users of accounting information Internal users – the people comprising the different levels of management External users – the stockholders, prospective investors, creditors, financing institutions, trade associations, labor government agencies and the general public Management Uses of Accounting in its Functions Functions of Management Planning – the process of determining objectives and alternatives to attain these objectives, evaluating the different alternatives and choosing the best among them Accounting assists in the planning function by providing the management with quantitive information derived from historical data which serve as a basis in making projection for the future. 2. Organizing – the process of defining and grouping functions and establishing relationships among them. accounting assists the management by making recommendations on the assignment of functions for a more effective internal control.

2. 3. Directing – the process of guiding the activities within an enterprise towards the attainment of the common objectives. Accounting helps in this function by providing the management with progress reports on the activities being undertaken thereby enabling the management to conduct operations as planned. 4. Controlling – the process of keeping track of the company’s operations, comparing actual performance with planned performance, and the adoption of corrective measures should there be deviations from plans. Accounting assists management in the controlling function by providing with analytical reports on variances between budgets or standards and actual results of operations. 5. Decision making – the process of making a choice from among two or more alternatives. TYPES OF MANAGEMENT POLICY/PRINCIPLE Management by exception – management devotes more of its time and effort to preventing the occurrence of problems and to problem solving rather than wasting its time on smooth operations. Reports to management must point out significant deviations from plans, standards or other accepted bases. Management by objectives – a management approach in which managers and employees work together to set, communicate and achieve specific, measurable goals for the organization. Management encourages lower management groups and the rank and file employees to contribute ideas or voice their opinions on matters concerning company operations.

3. MANAGEMENT ACCOUNTING DISTINGUISHED FROM FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING 1. Objective The objective of management accounting is to provide financial accounting Is concerned with the Information to management to serve as basis in making determination of the results of operations of decisions . c ompany as a whole. 2. User and nature of reports Reports prepared are for internal users and are special Reports are for external users and are in the form purpose in nature intended to meet the needs of the of one set of all purpose financial statements that parties for which they are prepared will reasonably serve the needs of any of the external users. 3. Compliance with Financial Reporting Standards reports need not be presented in conformity with IFRS financial data should be recorded and presented to be able to be useful to management in accordance with IFRS 4. Time orientation is concerned with the future, emphasizes projected is concerned with historical data, operations in the data and uses historical data only if they can be of past are summarized for the different partied use in making decisions for the future interested in the business

4. MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING 5. As to existence is optional, existence and functions depend upon the is mandatory, financial statements are management of the company required not only by the stockholders, creditors but also by the different regulatory bodies 6. Precision and timeliness of report timeliness is often more important to managers than reports are still useful even if submitted late. precision. Prompt submission is necessary to preserve precision is required its usefulness for decision making ORGANIZATION STRUCTURE AND THE MANAGEMENT ACCOUNTANT Management accounting is intended to include persons involved in such functions as controllership, treasury, financial analysis, planning and budgeting, cost accounting, internal audit and general accounting. Thus, management accountant may have titles as controller, treasurer, budget analyst, cost analyst, cost accountant among others. LINE AND STAFF RELATIONSHIP Line authority – authority to command action or give order to subordinates. Line managers are directly responsible for attaining the objectives of the company as efficiently as possible. Staff authority – is the authority to advise but not command others. Staff managers give support, advice and service to line departments

5. UNDERSTANDING FINANCIAL STATEMENTS T he Four Basic Financial Statements Statement of Financial Position – shows the financial position (assets, liabilities and owners’ equity) of the firm on a particular date such as the end of the month, of a quarter, or a year. It is a summary of what the company owns (assets) and what the firm owes to outsiders (liabilities) and to internal owners (stockholders’ equity) 2. Statement of operation or earnings statement – represents the result of operations (revenues, expenses, net profit or loss) for the accounting period 3. Statement of changes in equity – summarizes the changes in a company’s equity for a period of time, generally one year. 4. Statement of cash flow – provides information about the cash inflows and outflows from operating, financing and investing activities during an accounting period. Statement of Financial Position Current Assets include cash or those assets expected to be converted into cash, used or consumed within one year or one operating cycle whichever is longer. The operating cycle is the time required to purchase or manufacture inventory, sell the product, and collect the cash. Assets that are continually used up and replenished in the ongoing operations of the business Amount by which current assets exceed current liabilities (current assets less current liabilities) is called working capital

6. Cash and Cash Equivalents Cash awaiting deposit, cash on hand or cash in bank Cash equivalents are short-term and highly liquid investment that are readily convertible to cash Highly liquid investments that are acquired three months before maturity can qualify as cash equivalents Marketable Securities Are cash substitutes or cash that is not needed immediately in the business and is temporarily invested to earn a return Investments with short term maturities (less than 1 year) to minimize the risk of interest rate fluctuation. Accounts Receivable Customer balances outstanding on credit sales and is reported on the balance sheet at their net realizable value (actual amount of the account less allowance for doubtful account) Inventories Items held for sale or used in the manufacture of products that will be sold Prepaid Expenses Expenses that are paid in advance that are expected to expire within one year or one operating cycle, whichever is longer. Example: insurance, rent, property taxes and utilities

7. Property Plant and Equipment Company’s fixed assets (also called tangible, long-lived and capital assets) that are not consumed in annual business operations Produce economic benefits for more than one year Are considered tangible because they have physical substance Are depreciated over the period of time they benefit the company (except land) Depreciation is the method of allocating the cost of long-lived assets Other Non-Current Assets Assets that are not classified either as current assets or property plant and equipment Example: property held for sale, cash surrender value of insurance policy and long-term advance payment Current Liabilities Claims against assets that must be satisfied in one year or one operating cycle, whichever is longer Example: accounts payable, notes payable, current portion of long-term debt, accrued liabilities and deferred taxes A ccounts Payable Short-term obligations that arise from credit extended by suppliers for the purchase of goods and services

8. Notes Payable Short-term obligations in the form of promissory notes to suppliers or financial institutions Current Maturities of Long-term Debts Current portion of a long-term debt or portion of a principal that will be repaid during the upcoming year Accrued Liabilities Obligations already incurred but not yet paid Expense is already recognized in the accounting period but no actual payment is made Non-Current Liabilities Obligations with maturities beyond one year Equity Ownership interest in the company organized as corporation Residual interest in assets that remain after deducting liabilities Share Capital The amount invested by a company’s shareholders for use in the business

9. Additional Paid in Capital The amount paid by an investor above and beyond the par value price of a stock Par value is the value of a single common share as set by a corporation’s charter Retained Earnings Sum of a company’s net income or loss since its inception, less any payments made to shareholders in the form of cash or stock dividends A portion of a company’s profit that is held or retained from net income at the end of a reporting period and saved for future use Sum of all undistributed earnings THE INCOME STATEMENT Net Sales Total sales revenue for a year less returns and allowances Cost of Goods Sold / Cost of Sales The cost involved in directly producing the goods or services that a company sell

10. Gross Profit The difference between net sales and cost of sales Also called gross margin Indicates how much profit the firm is generating after deducting the cost of products sold Operating Expenses Costs incurred by a business for its normal operations Also called selling, general and administrative expenses typically include salaries, wages, advertising, rent, utilities, supplies and materials, depreciation, amortization and repairs and maintenance Operating Profit – also called earnings before interest and taxes (EBIT) Second profit determination and measures the overall performance of the company’s operations Other Income (Expense) – revenues and cost gained or incurred from sources and activities not part of the main or core business of a company Examples are interest, rent, gains (losses) from investment, gains (losses) from sale of fixed assets Net Earnings – represents the firm’s profit after consideration of all revenues and expenses reported during the period

11. FINANCIAL STATEMENTS ANALYSIS Evaluates a company’s performance or value through a company’s balance sheet, income statement or cash flow statement The process of analyzing a company’s financial statements for decision making purposes Involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company Its objective is to identify an organization’s financial strengths and weaknesses Steps in Financial Statement Analysis Establish objectives of the analysis Study the industry in which the firm operates and relate industry climate to current and projected economic development Develop knowledge of the firm and the quality of management Evaluate financial statements using any of the 5 methods Summarize findings based on analysis and reach conclusions about firm relevant to the established objectives Limitations of Financial Statement Analysis Information derived are not absolute measures of performance in any and all of the areas of business operations Inherent limitations in the accounting data the analyst work with. These are brought about by among others variation and lack of consistency in the application of accounting principles, policies and procedures

12. Limitations of Financial Statement Analysis – cont. too condensed presentation of data and failure to reflect change in purchasing power 3. Limitations of the performance measures or tools and techniques used in the analysis 4. Possible manipulation of data by the management to make the company appear as strong and profitable to appeal to creditors, investors and others 5 methods of financial statement analysis Horizontal analysis or trend analysis Vertical analysis Trend percentage Ratio analysis Cost-volume profit analysis Horizontal analysis it is used to evaluate a company's performance over multiple periods. By comparing prior period financial results with more current financial results, direction of change in account balances can be spotted and determine the magnitude in which that change has occurred

13. it usually depicted as percentage growth over the same line item in the base year Shows a company’s growth and financial position versus competitiors Example Golden Gate Corporation Comparative Statement of Financial Position December 31, 2022 and 2021 Increase (Decrease) 2022 2021 amount Percent           Assets Current Assets Cash 70,392.00 68,250.00 2,142.00 3.14% Accounts Receivable, net 218,549.00 194,978.00 23,571.00 12.09% Inventory 223,242.00 197,097.00 26,145.00 13.27% Prepaid Expenses 67,710.00 76,542.00 - 8,832.00 -11.54% Total Current Assets 579,893.00 536,867.00 43,026.00 8.01% Plant and Equipment Plant and Equipment, net 90503 110987 - 20,484.00 -18.46% TotAL Assets 670,396.00 647,854.00 22,542.00 3.48%

14. Golden Gate Corporation Comparative Income Statement For the Years Ended December 31, 2022 and 2021 Increase (Decrease) 2022 2021 amount Percent           Sales 2,000,000.00 1,801,802.00 198,198.00 11.00% Expenses Cost of Sales 1,472,000.00 1,309,910.00 162,090.00 12.37% Selling 248,000.00 230,000.00 18,000.00 7.83% Administrative 138,000.00 142,000.00 - 4,000.00 -2.82% Total Expenses 1,858,000.00 1,681,910.00 176,090.00 10.47% Operating Income 142,000.00 119,892.00 22,108.00 18.44% Interest Expense 27,907.00 29,270.00 - 1,363.00 -4.66% Income before taxes 114,093.00 90,622.00 23,471.00 25.90% income taxes 39,932.55 31,717.70 8,214.85 25.90% Net Income 74,160.45 58,904.30 15,256.15 25.90%

15. Vertical Analysis Comparison of financial statement by representing each line item on the statement as a percentage of another line item Used to show the relative sizes of the different accounts on a financial statement Breaks down financial statements line-by-line to give a clear picture of the day-to-day activity of a company Uses a base figure for comparison and works out each transaction recorded in the books as a percentage of the base figure Also known as common size financial statement Example Golden Gate Corporation Income Statement For the Year Ended December 31, 2022 2022 Percentage       Sales 2,000,000.00 100.00% Expenses Cost of Sales 1,472,000.00 73.60% Selling 248,000.00 12.40% Administrative 138,000.00 6.90% Total Expenses 1,858,000.00 92.90% Operating Income 142,000.00 7.10% Interest Expense 27,907.00 1.40% Income before taxes 114,093.00 5.70% income taxes 39,932.55 2.00% Net Income 74,160.45 3.71%

16. Trend Percentage Also referred as index numbers Helps compare financial information overtime to a base year or period The assigned base year is assigned a weight of 100% for every item appearing on the financial statement Process of analyzing data to look for trends or identify patterns Used to identify trends, predict future events and make decisions Example (2021 as base year) Golden Gate Corporation Comparative Income Statement For the Years Ended December 31, 2021 to 2023 2021 2022 2023 2021 2022 2023         Sales 910,550.00 1,002,980.00 1,049,880.00 100.00% 110.15% 115.30% Cost of Sales 469,600.00 522,370.00 534,130.00 100.00% 111.24% 113.74% Gross Profit 440,950.00 480,610.00 515,750.00 100.00% 108.99% 116.96% Selling 248,000.00 230,000.00 254,000.00 100.00% 92.74% 102.42% Administrative 138,000.00 142,000.00 145,000.00 100.00% 102.90% 105.07% Total Expenses 386,000.00 372,000.00 399,000.00 100.00% 96.37% 103.37% Operating Income 54,950.00 108,610.00 116,750.00 100.00% 197.65% 212.47% Interest Expense 27,907.00 29,270.00 25,480.00 100.00% 104.88% 91.30% Income before taxes 27,043.00 79,340.00 91,270.00 100.00% 293.38% 337.50% income taxes 9,465.05 27,769.00 31,944.50 100.00% 293.38% 337.50% Net Income 17,577.95 51,571.00 59,325.50 100.00% 293.38% 337.50%

17. Ratio analysis A comparison in fraction, proportion, decimal or percentage form of two significant figures taken from financial statements It expresses the direct relationship between two or more quantities in the financial statement An accounting method that uses financial statements to gain insights into a company’s financial health It helps determine various aspects of an organization including profitability, liquidity, solvency and market value Uses of ratio analysis Ratio analysis compares a company’s financial state to other companies or to its own financial history. The results of ratio analysis are just static data, so it is compared to other data for it to be useful. There are two ways ratio analysis can be used to calculate business trends and to compare one company against others in the same industry: 1. business trends – trends help determine the direction of a financial aspect of a business ( going up or down). Trends are determined by calculating ratios over many reporting period 2. competitive comparison – comparing a business to others in the same industry. Businesses in the same industry will have similar capital structures and similar fixed assets. By comparing the results of analysis, a business can be determined whether it is an industry leader or just keeping up with competitors

18. Ratio analysis Categories Profitability ratios – assesses the ability of a business to generate earnings compared to its revenue, operating costs, assets or shareholders equity. Gross profit margin’ Operating profit margin EBITDA margin Net profit margin Cash flow margin Return on equity Return on assets Return on invested capital 2. Liquidity ratios – also known as coverage ratios, determine whether or not a company can pay-off its short- term debt. It also refers to a company’s ability to use its assets to payoff its debts Current ratio Quick ratio Cash ratio Times interest earned

19. 3. Leverage ratios– also called debt ratios or solvency ratios. It assesses a businesses’ capability to fulfill its long term debt obligations\ Debt to equity ratio Debt to assets ratio Interest coverage ratio 4. Market value ratio – determine the current share price of a company’s stock. Investors use these values to determine if a business’ stocks is overvalued or undervalued Book value per share Dividend yield Earnings per share market value per share Price/earnings ratio 5. Efficiency ratios – assess how well an enterprises uses its resources internally Receivable turnover Repayment of liabilities Quality of equity Inventory turnover Equipment turnover