Tuesday, January 17, 2012

Managerial and Financial Accounting Essay

Managerial and Financial Accounting Essay

Accounting is the top sphere of activity of the enterprise. The enterprise is operating in cooperation with other representatives of business that is why the common rules should have been accepted. GAAP or Generally Accepted Accounting Principles is a set of standards for the accounting rules accepted worldwide. It is an information system that provides reports to stakeholders about the economic activities and condition of a business.

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The main principle of accounting is a double entry records. All transactions are recorded in books for debits and corresponding credits. There are two types of accounting, financial and a managerial one.
The financial accounting is mainly applied for the external use and a managerial one is used for the internal application.

Managerial accounting is used to assist the management of the company in planning, directing, motivating and controlling (Garrison, Noreen, 2005). The managerial accounting differs from the financial one. The managerial accounting is aimed to provide the management of the enterprise with the information necessary for the future activity. Its main objective is to assist the management in the decision taking. It is not obligatory one, i.e. it does not have the fiscal function.

The brief differences between the managerial accounting and the financial one are following. The financial accounting provides the information for external users who plan the financial decisions, creditors, stakeholders etc. The managerial accounting is objected to managers who control the company.

The financial accounting is characterized by the verifiability. One of the main objectives of the financial accounting is to provide the owners with the financial reports on investments involved and the effectiveness of the financial activity of the enterprise. The investors who are not involved into enterprise activity directly get the information on the financial state of the enterprise from the financial accounting. Managerial accounting is focused on the future planning.

The financial accounting is mainly focused on the past activity, i.e. it has the reporting function, while the managerial one is focused on the future decisions.

Normally investors are not interested in the inner operations of the enterprise that is why the financial accounting reflects the operations of the enterprise as a whole. Managerial accounting presupposes the detailed information on the operation of the enterprise divisions.

The financial accounting is focused on the precision of the figures; the managerial accounting is focused on the timeliness.

The financial accounting is the subject of precision. The financial accounting need to follow the requirements of GAAP, while there is no strict obligation for the managerial accounting to follow the GAAP.

The modern business environment requires special approach towards the managerial accounting. The increase of its significance is defined by a number of factors. They are the competitive environment of business, the implementation of the new technologies, regulatory changes and the increasing complexity of the enterprises.

Normally the decisions are taken on the basis of analysis and recommendations worked out by CFO.

The success of the enterprise depends upon the CFO. It is naturally the financial officers should follow certain ethic principles. These ethic principles have been worked out by The Institute of Management Accountants. Sometimes the accountants face the ethic dilemma. On one hand they should follow the CEO instructions; on the other hand these instructions may contradict to the certain ethic principles. The Institute of Management Accountants has worked out the Code of Ethics for the accountants. The Code includes some major divisions. All these requirements may be classified according to four principles (Code of Ethics, 2005).

COMPETENCE – Defines the professional skills of the accountants. The accountant is the key figure on the enterprise and his/her professionalism is among main factors defining the successful operation.

CONFIDENTIALITY – Accountant is a person who has access to the financial state of the enterprise. The disclosure of the financial operation of the enterprise may bring big losses for the enterprise.

Unfortunately, some CFO’s do not follow these principles. Andrew Fastow, the CFO of the biggest American corporation Enron was in the centre of the scandal charged with securities, mail and wire fraud, as well as money laundering and conspiracy, for actions between 1997 and 2001 that officials say helped Enron trick investors, while Fastow and his associates allegedly pocketed millions (CNN, 2002).

The Enron management got involved into insider trading, a disgracing phenomenon which led to the collapse of the enterprise. The key information on the financial activity of the enterprise was used for gaining the personal goals.

INTEGRITY – Accountant should avoid any conflicts of interests of the enterprise as well as any other actions which may bring the losses to the enterprise.

OBJECTIVITY – The information released by the accountant should be objective and fair. Accountant should disclose fully all-relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented (Code of Ethics, 2005).
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