1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management
- The purpose of managerial accounting is to supply financial and nonfinancial information to the organization’s management and other internal decision makers.
- Most of the job responsibilities of a manager fit into one of three categories: planning, controlling, and evaluating.
- Planning involves setting goals and forming the plans to achieve those goals.
- Controlling involves the day-to-day activities. Its purpose is to help in planning functions and to facilitate coordination within the organization.
- Evaluation determines whether plans are being followed and whether progress is being made as planned toward the fulfillment of organizational goals and objectives. It also involves taking corrective measures in case of deviations identified in the course of action.
1.2 Distinguish between Financial and Managerial Accounting
- Managerial accounting provides information to managers and other users within the company. It has a specific focus, and the information is detailed and timely.
- Financial accounting follows the guidelines of the GAAP, set in place by the FASB and, in many cases, by the SEC. Managerial accounting is much more flexible and does not have to follow specific rules or guidelines.
- There are seven key differences between managerial accounting and financial accounting: users, types of reports produced, frequency of producing the reports, purpose of the information produced, focus of the reporting information, nature of the original information used to produce the reports, and verification of the data used to create the reports.
1.3 Explain the Primary Roles and Skills Required of Managerial Accountants
- Essential skills for managerial accountants include commercial awareness, collaboration, effective communication skills, strong technology talents, extensive analytical abilities, and elevated ethical values.
- Management accountants work with individuals at all levels of an organization from the CEO to the shop floor workers.
- There are many different career paths management accountants can take to work in corporations, government entities, service firms, or nonprofit organizations.
- There are numerous certifications that accountants can earn to improve their careers and set themselves apart from their peers.
1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards
- Many professional organizations share resources, such as education, research, and practice development, with their members. They also enforce a code of ethics for their members.
- All employees within a company are expected to act ethically within their business actions. This can sometimes be difficult when the company almost promotes the idea of unethical actions.
- In response to several corporate scandals, the United States Congress passed the Sarbanes-Oxley Act of 2002 (SOX).
- Ethical codes can be helpful guidelines, but the rationale to act ethically must originate from within oneself, from personal morals and values. There are steps that provide an outline for examining ethical issues.
- One of the issues with ethics is that what one person, community, or even country considers unethical or wrong, another person, community, or country may have no problem with and see it as just a way of doing business.
- The Foreign Corrupt Practices Act of 1977 specifically prohibits payments to foreign government officials to aid in attaining or retaining business. This provision applies to all US persons and foreign firms acting within the United States.
1.5 Describe Trends in Today’s Business Environment and Analyze Their Impact on Accounting
- Business regulations are always being altered, global competition continues to increase, and technology provides continual disruption. Management accounting must keep up with the changes in the business environment.
- The fundamental difference between manufacturing organizations and service-based firms is whether the organizations produce a tangible product.
- Business entities have been in the lead for using technology, but they must continue to adjust quickly with the ever-advancing business technology.
- ERP systems help companies streamline their operations and help management respond quickly to change.
- Lean manufacturing, which was started in Japan by automakers, is now a widely used practice that attempts to increase productivity and eliminate waste.
- The philosophy of continuous improvement has led organizations to adopt practices such as TQM, JIT manufacturing, and LSS.
- The balanced scorecard approach uses both financial and nonfinancial measures in evaluating all attributes of the organization’s procedures.
- Globalization has expanded competitive borders, giving customers and companies more alternatives.
- Many companies have started to assess their corporation not only on financial profits, but also on their corporate social responsibility.
- method of using systems such as computers or robots to operate different processes, and machinery to improve efficiencies and lower direct labor costs
- balanced scorecard
- tool used to evaluate performance using qualitative and nonqualitative measures
- board of directors
- group of individuals elected by the shareholders of a company with the role of placing management, supervising management, and making key decisions on major issues of the company
- when an organization or representative of an organization gives money or other financial benefits to another individual, business, or official in order to gain favor or to manipulate a business decision
- budget analyst
- someone who arranges and manages the master budget and compares master budget projections to actual results
- cash-management accountant
- someone with responsibilities that include transferring monies between accounts, monitoring deposits and payments, reconciling cash balances, creating and tracking cash forecasts, and performing all other cash-related financial processes
- Certified Financial Analyst (CFA)
- certification for a career in the finance and investment domains; requirements include a bachelor’s degree or four years’ experience and passing all three sections of the exam
- Certified Fraud Examiner (CFE)
- signifies proven proficiency in fraud prevention, detection, and deterrence; requirements include bachelor’s degree, two years of work-related experience, moral character references, and passing of four separate exams
- Certified Government Auditing Professional (CGAP)
- designation exclusively for auditors employed throughout the public sector (federal, state, local); requirements are the same as for the CIA, but with a different exam
- Certified Internal Auditor (CIA)
- credential offered by the Institute of Internal Auditors (IIA) and one of the only certifications accepted worldwide; requirements include a bachelor’s degree, two years of work experience in a related field, and passing the three sections of the examination
- Certified Management Accountant (CMA)
- certification for a specialist in corporate accounting management, including financial analytics, budgeting, and strategic assessment; requires a bachelor’s degree, two years of work experience, and successfully passing both parts of the exam
- Certified Public Accountant (CPA)
- top tier in accounting certifications; in the United States, each state has different educational and experience requirements, and certification requires passing the four-part CPA administered by the American Institute of Certified Public Accountants (AICPA)
- chief executive officer (CEO)
- executive within a company with the highest ranking title who has the overall responsibility for the management of a company; reports to the board of directors
- chief financial officer (CFO)
- corporation officer who reports to the CEO and oversees all of the accounting and finance concerns of a company
- working in cross-functional teams and earning the trust and respect of colleagues in order to complete a task
- commercial awareness
- knowing how a business is run and how it is influenced by the external environment, and knowing and understanding the overall industry within which the business is operating
- continuous improvement
- ongoing effort to improve processes, products, services, and practices
- financial officer of a corporation reporting to the CFO who is responsible for an organization’s accounting records, financial statements, tax returns, and internal reporting
- monitoring of the planning objectives that were put into place
- corporate social responsibility (CSR)
- actions that firms take to assume responsibility for their impact on the environment and social well-being
- cost accountant
- employee who amasses large sums of data, checking for accuracy and then formulating the cost of raw materials, work in process, finished goods, labor, overhead, and other associated manufacturing costs
- effective communication
- conveying information in both written and oral forms in a way that the intended audience can understand
- Enrolled Agent (EA)
- credential focusing on a career in taxation; created by the IRS to signify significant knowledge of the US tax code and the ability to apply the concepts of that code
- enterprise resource planning (ERP)
- system that helps a company streamline its operations and helps management respond quickly to change
- comparing actual results against the planned results
- external user
- someone who relies on the financial statements and annual reports to access information about a company in order to make more informed decisions (e.g., creditor, tax authority and regulator, investor, customer, competitor, and others)
- Financial Accounting Standards Board (FASB)
- independent, nonprofit organization that sets financial accounting and reporting standards for both public and private sector businesses in the United States that use Generally Accepted Accounting Principles (GAAP)
- financial analyst
- someone who assists in preparing budgets and tracking actual costs, and performs other tasks that support other management personnel in organizing forecasts and projections
- Foreign Corrupt Practices Act (FCPA)
- law that specifically prohibits payments to foreign government officials to aid in attaining or retaining business and requires a company to have good internal controls so a slush fund to pay bribes cannot be created and maintained
- generally accepted accounting principles (GAAP)
- common set of rules, standards, and procedures that publicly traded companies must follow when composing their financial statements
- development of business through international influence, or extending social and cultural aspects around the world
- what a company expects to accomplish over time
- government agency
- found at all levels of government: federal, state, county, city, and so on; includes military, law enforcement, airports, and school systems
- Institute of Management Accountants (IMA)
- professional organization for management accountants that provides research, education, a means of knowledge sharing, and practice development to its members
- intangible good
- good with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks
- internal auditor
- employee of an organization whose job is to provide an independent and objective evaluation of the company's accounting and operational activities
- internal user
- someone inside the company or organization who is responsible for managing the company’s business interests and executing decisions (e.g., all levels of management, owner, and other employees)
- just-in-time (JIT) manufacturing
- inventory system that companies use to increase efficiency and decrease waste by receiving goods only as they are needed within the production process, thereby reducing warehousing costs
- another process that is often linked to Six Sigma and is designed for continuous improvement by eliminating waste and increasing efficiencies; a Japanese word meaning change for the better
- lean business model
- one in which a company strives to eliminate waste in its products, services, and processes, while still fulfilling the company’s mission
- Lean Six Sigma (LSS)
- quality control program that depends on a combined effort of many team members to enhance performance by analytically removing waste and diminishing variations between products
- managerial accounting
- process that allows decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information
- mission statement
- short statement of a company’s purpose and focus
- monetary accounting information
- relating to money or currency
- nonmonetary accounting information
- not relating to money or currency, such as the quantity of materials, number of employees, number of hours worked, and so forth
- nonprofit (not-for-profit) organization
- tax-exempt organization that serves its community in a variety of areas
- target that needs to be met in order to meet company goals
- act of using another company to provide goods or services that your company requires
- process of setting goals and objectives
- radio-frequency identification (RFID)
- technology that uses electromagnetic fields to routinely identify and trace inventory tags that have been attached to objects
- Sarbanes-Oxley Act (SOX)
- federal law that regulates business practices; intended to protect investors by enhancing the accuracy and reliability of corporate financial statements and disclosures through governance guidelines including sanctions for criminal conduct
- strategic planning
- setting priorities and determining how to allocate corporate resources to help an organization accomplish short-term and long-term goals
- meeting the needs of the present generation without compromising the ability of future generations to meet their own needs by being aware of current economic, social, and environmental impacts
- tangible good
- physical good that customers can handle and see
- theory of constraints (TOC)
- process of recognizing and removing bottlenecks within the value chain that may be limiting an organization’s profitability
- total quality management (TQM)
- process in which management and employees look to reveal waste and errors, streamline the supply chain, improve customer relations, and confirm that employees are informed and properly trained
- financial officer of a corporation reporting to the CFO who is in control of the finance side of the business (cash position, corporation funds)
- someone who provides evidence of fraud
LO 1.1The managers of an organization are responsible for performing several broad functions. They are ________.
- planning, controlling, and selling
- directing, controlling, and evaluating
- planning, evaluating, and manufacturing
- planning, controlling, and evaluating
LO 1.1Management accountants help the management of an organization in their planning function through ________.
- monitoring anti-theft systems
- strategic planning
- evaluating costs
- analyzing profits
LO 1.1Which of the following is a primary aspect of the evaluating function within an organization?
- comparing actual results against expected results for products, departments, divisions, or the company as a whole
- reviewing only the quantitative or financial results of the company
- setting goals
- putting controls in place for the upcoming year
LO 1.1During the control function, the measurements taken of the performance must be accurate enough to see ________.
- only positive results
- deviations and variances
- the primary focus
- only the negative results
LO 1.1Which of the following is false regarding strategic planning?
- It is the sole responsibility of supervisors.
- It will span many years.
- It should include both short-term and long-term goals.
- Strategic objectives will be diverse and vary from company to company.
LO 1.2Managerial accounting produces information:
- to meet the needs of external users
- that is often focused on the future
- to meet the needs of investors
- that follows the rules of GAAP
LO 1.2Management accounting:
- emphasizes special-purpose information
- relates to the company as a whole
- is limited to strictly cost figures
- is controlled by GAAP
LO 1.2Internal users of accounting information would not include ________.
LO 1.2External users of accounting information would include ________.
LO 1.2Which of the following statements is incorrect?
- The practice of management accounting is fairly flexible.
- The information gathered from management accounting is not required by law.
- Management accounting focuses mainly on the internal user.
- Reports produced using management accounting must follow GAAP.
LO 1.3The stockholders of a company are:
- the owners
- policy setters
- responsible and liable for the financial well-being of the company
- operating within the company as independent shareholders
LO 1.3The controller of a corporation:
- reports to the CFO and is in charge of the finance side of the business
- reports to the CFO and is in charge of the accounting side of the business
- reports to the CEO and implements all cash policies
- reports to the board of directors
LO 1.3The Certified Financial Analyst (CFA) certification:
- only requires a high school diploma
- is administered by the AICPA
- consists of three separate exams that must be taken in succession
- is the most popular certification among accountants in the United States
LO 1.3The Certified Management Accountant (CMA) certification:
- signifies someone specializing in tax accounting
- requires an associate’s degree and four years of work experience
- includes a two-part exam, education requirements, and a work experience requirement
- is offered to managers who take special courses in accounting
LO 1.3Which of the following terms means the ability to work in cross-functional teams in order to complete a task?
- supervisory skills
- resource planning
LO 1.3Which of the following terms means knowing how a business is run and how it is influenced by external forces, and knowing and understanding the overall industry?
- commercial awareness
LO 1.4What is the law that protects investors from fraudulent financial accounting activity?
LO 1.4What year was the Sarbanes-Oxley Act enacted?
LO 1.4When a representative of an organization gives money to another business official in order to gain favor and/or manipulate a business decision, this is known as ________.
- buyer debits
- face value
LO 1.4The law that specifically prohibits payments to foreign officials in order to attain business is known as ________.
LO 1.4Which of the following is not a step in the outline for examining ethical issues?
- Establish the facts of the situation.
- Evaluate each course of action.
- Make a decision.
- Confirm decision with FASB.
LO 1.5Which of the following is not an objective used in the balanced scorecard approach?
- Learning and growth
LO 1.5Which of the following is not true regarding continuous improvement?
- It applies to both service and manufacturing companies.
- It is used to reduce performance costs.
- It rejects the idea of “good enough.”
- It can be applied only to improve processes and products but not services and practices.
LO 1.5A company’s attempts to utilize sustainable business practices with regard to its employees, the environment, and society are known as ________.
- a balanced scorecard
- corporate social responsibility
- total quality management
- value chain
LO 1.5A process that is often linked to Six Sigma and is designed toward continuous improvement by eliminating waste is ________.
- value chain
- total quality management
LO 1.5An inventory system that organizations use to increase efficiency and decrease waste is ________.
- corporate social responsibility
- just-in-time manufacturing
- total quality management
- Lean Six Sigma
LO 1.5A quality control program that depends on multiple team members for removing waste and diminishing defects within products is ________.
- total quality management
- Lean Six Sigma
- a balanced scorecard
LO 1.1Carlita believes an important part of the planning process for managers is being sure to position the company to achieve its goals. She thinks that positioning is an extensive concept and can depend on the right information and that managerial accountants assist in positioning the company. Is she correct? Explain.
LO 1.1What are some activities and tasks a manager might perform when engaging in the controlling function of management responsibilities?
LO 1.1If there are deviations from the stated goals and objectives, what steps can managers take to get back on track? Provide at least two specific examples.
LO 1.1Explain how managerial accountants help managers plan, control, and evaluate.
LO 1.1How do the subject matter of reports and the verification of reports differ between financial accounting and managerial accounting?
LO 1.2What is the purpose of management accounting?
LO 1.2Who are the primary users of the information gathered by managerial accountants?
LO 1.2What are the key differences between financial accounting and managerial accounting?
LO 1.3Other than accounting skills, what six qualities must be prevalent in a managerial accountant?
LO 1.3Explain how having more than one of the accounting credentials would be beneficial to an accounting career.
LO 1.3Briefly discuss the chain of command for someone being hired into an organization as a staff managerial accountant.
LO 1.4What other professional business organizations have a code of ethics?
LO 1.4How can having a bonus system based purely on sales goals create an environment that encourages unethical behavior?
LO 1.4What led to the United States Congress passing the public accounting reform act called Sarbanes-Oxley?
LO 1.5What is an enterprise resource planning (ERP) system? What are the principal benefits of such a system?
LO 1.5Describe what is meant by the term “balanced” in the term balanced scorecard method.
LO 1.5What is corporate social responsibility, and who are the stakeholders?
Exercise Set A
LO 1.2Indicate whether each statement describes financial accounting or managerial accounting.
- The information is directed at external users who are making decisions pertaining to investing, extending credit, and other decisions.
- The principal users are the organization’s managers.
- The key focus is on the entity as a whole.
- The rules and principles are very flexible.
- The information gathered is usually available after an independent audit has been completed.
LO 1.2Identify the following as True or False:
- Managerial accounting reports must comply with the rules set in place by the FASB.
- Financial accounting reports are typically general-purpose reports.
- Financial accounting reports pertain to the entity as a whole, whereas managerial accounting focuses more on subunits of the organization.
- The main users of the financial accounting information are the internal users.
- Managerial reports are prepared on an as-needed basis.
- Financial accounting reports often must be audited at least annually by an independent auditor.
LO 1.2Define each of these users of accounting information as an internal user of external user:
- Tax authorities
LO 1.2Discuss what information would be most useful for these users of accounting information:
- Tax authorities
LO 1.3Taylor Speedy has prepared the following list of statements about managerial accounting, financial accounting, and the functions of management. Identify each statement as true or false.
- Financial accounting centers on providing information to internal users.
- Staff positions are directly involved in the company’s primary revenue-generating activities.
- Preparation of budgets is part of financial accounting.
- Managerial accounting applies only to merchandising and manufacturing companies.
- Both managerial accounting and financial accounting deal with many of the same economic events.
LO 1.3Match the term with the description:
|A. Certified Public Accountant||i. Specialist in corporate accounting management; favors financial analytics, budgeting, and strategic domains|
|B. Certified Financial Analyst||ii. Considered the top tier in accounting certifications; must pass a four-part exam, with education and work experience requirements|
|C. Certified Management Accountant||iii. Designation that is exclusively for auditors of the public sector|
|D. Certified Internal Auditor||iv. Credential for auditors who work within organizations and is one of a few that is accepted worldwide|
|E. Certified Fraud Examiner||v. Certification for those with a career in finance and investment areas|
|F. Certified Government Auditing Professional||vi. Designation that proves proficiency in fraud prevention, detection, and deterrence|
LO 1.4After the passage of the Sarbanes-Oxley Act in 2002, many new responsibilities were put into place for organizations and their management. What are the four significant issues that were addressed by the act and its provisions as presented in this chapter? How does the act and its various requirements help deter fraudulent activity?
LO 1.4Indicate whether each of the following statements is true or false.
- Bribery in the world of business typically happens when an organization or representative of an organization gives financial benefits to an official to gain favor or manipulate a business decision.
- The Foreign Corrupt Practices Act was implemented in the aftermath of disclosures that businesses were violating the IMA Code of Ethics.
- Managers are required to follow specific rules issued by the IMA for internal financial reporting.
- Ethics is more than obeying laws.
- The Sarbanes-Oxley Act addressed public company accounting reform.
LO 1.5Match each lean business method to the best description:
|A. Just-in-time manufacturing||i. The focus is on quality throughout the entire process.|
|B. Continuous improvements||ii. Inventory is attained or produced only as needed.|
|C. Total quality management||iii. A combined effort of team members is used to eliminate waste and defects.|
|D. Lean Six Sigma||iv. All managers and employees are always looking for ways to improve operations.|
LO 1.5For each of the activities listed, choose the manufacturing concept that applies: (i) just-in-time inventory, (ii) continuous improvement, or (iii) total quality management.
- A company receives inventory daily based on customer orders.
- Manufacturing factories have been arranged in such a fashion to reduce inefficiencies.
- Companies organize customer focus groups in order to look at customer needs and expectations.
- The entire production process is standardized and written down with procedures.
- Each customer receives a survey of satisfaction with their product.
- All orders are complete and shipped within three business days.
LO 1.5Look up the definitions for the following terms:
- Budget (Budgeting)
- Capital budget (Capital Budgeting Decisions)
- Balanced scorecard (Balanced Scorecard and Other Performance Measures)
- Break-Even point (Cost Volume Profit Analysis)
Provide examples of how each of these terms is used in your own life and how using these practices is useful.