Topic 2: Financial and Managerial Accounting

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Classification of financial accounting transactions reflects the concern with two major interests in financial accounting. The first is addressed to the analysis of the profitability of the business. This is done normally on a yearly basis by comparing the sale and the purchase transactions and establishing the difference, with either a loss or a profit for the year. A profit will be shown when sale transactions are greater then the purchase transactions during the year; a loss will be shown in the reverse case. In financial accounting, the operating cycle is conventionally treated as a period of one year. This suggests that the profit or loss is a short-term analysis of business activities.

The second major interest in financial accounting is directed to the analysis of those transactions having a long-term impact on the firm. These transactions include, on the one hand, investment transactions by which the firm acquires assets of potential use for more than one accounting period, and, on the other hand, financial transactions by which the firm obtain funds for use for more than one year.

Financial accounting brings together investment and financial transactions in a statement of the financial status, or structure, of the enterprise which is commonly known as the balance sheet.

Managerial accounting (MA) involves using economic and financial information to plan and control many of the activities of the entity, and to support the management decision-making process. Cost-accounting is a subset of managerial accounting that relates primarily to the determination and accumulation of product, process, or service costs.

Managerial accounting is concerned with providing information to managers – that is, to those who are inside an organization and who are charged with directing and controlling its operations. We can identify major differences between financial and managerial accounting:

1.MA focuses on providing data for internal uses by the manager.

2.MA places more emphasis on the future.

3.MA is not governed by generally accepted accounting principles.

4.MA emphasizes the segments of an organization, rather than just looking at the organization as a whole.

5.MA is not mandatory.

As with financial accounting, managerial accounting and cost accounting have special terminology. Most of the terms relate to different types of costs. There are different costs for different purposes. Costs used for valuing inventory are different from the costs that should be considered when analyzing a product modification or potential new product. The cost classifications most frequently encountered are: product cost, direct cost, indirect cost, fixed cost, controllable cost, etc.

Managerial accounting is in its infancy. Historically, it has played a secondary role to financial accounting, and in many organizations it still is little more than a by-product of the financial reporting process. However, the events of the last decades have shown the development of managerial accounting, and it is becoming widely recognized as a field of expertise separate from financial accounting.

Vocabulary Exercises

I. Find synonymous pairs:

Responsible, to buy, public, influence, earnings, costs, to purchase, information, impact, to provide with, to acquire, to employ, expenses, in charge of, to supply, to obtain, to hire, state-owned, evidence, income.

II. Find equivalents:

1.sale transaction a. облік витрат

2.a short-term analysis б. займатися чимось

3.a long-term impact в. процес фінансового звіту

4.management decision- г. довгостроковий вплив

making process

5.cost-accounting д. покладати зобов’язання

6.be concerned with е. трансакція збуту

7.be charged with є. короткостроковий аналіз бізнесу

8.financial reporting process ж. процес прийняття рішень з питань

управління

III. Match the terms with its definitions:

1.balance sheet а. buying some goods in any volumes.

2.financial accounting b. the theory or practice of keeping or inspecting

accounts.

3.profit c. deals with preparing a standard set of financial

statements for public publication at the end of

the fiscal year.

4.purchase transaction d. amount by which total revenue exceeds total cost.

5.managerial accounting e. expenditure on capital goods with a view to

achieving profitable production for consumption.

6.loss f. statement of the financial position of a company. It

must be always balance, that is the sum of all the

assets must equal the sum of all the liabilities.

7.investment g.amount by which total revenues are less than costs.

8.accountancy h. deals with preparing specialized reports for top

managers within the company.

IV. Answer the questions:

1.What does the classification of financial accounting transactions reflect?

2.How is the analysis of the profitability of the business done?

3.What is a short-term analysis of business activities?

4.What transactions are included into the long-term analysis of business activities?

5.What statement does financial accounting bring together investment and financial transactions in?

6.What information does MA involve to support management decision-making process?

7.What is a subset of MA?

8.What is the role of MA in business nowadays?