That part of accounting system which facilitates the management process of decision-making is called management accounting. Basically it is the study of managerial aspect of financial accounting, “accounting in relation to management function”. It shows how the accounting function can be re-oriented so as to fit it within the framework of management activity. It presents accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking. Management accounting has the ability to communicate a great variety of facts in a systematic and meaningful manner. The task of management accounting is not to make decisions; rather it facilitates the process of decision-making. Management accounting is a systematic approach to planning and control functions of management. It generates information for establishing plans and controls. Definition of Management Accounting According to the Chartered Institute of Management Continue reading
Financial Management Concepts
Advantages and Disadvantages of Historical Cost Accounting
The historical cost accounting values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.The historical cost accounting is the situation in which accountants record revenue, expenditure and asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money’s worth, received or paid to complete the transaction. Historical cost principle means that assets and liabilities are recorded at their actual historical cost. When an asset is written off, the loss is recorded as the historical cost of the asset less any accumulated depreciation. Typically, the asset would be fully depreciated and thus no loss recorded but this isn’t always the case. If the asset is sold the gain or loss is recorded as the amount received for the asset less the historical cost (net of any accumulated depreciation). In both cases, you’re using the historical cost Continue reading
Importance and Limitations of Financial Statements
Importance of Financial Statements Financial statements are the important sources of information to all the users of accounting information like; management, owners, debtors, creditors, employees, government agencies, financial analysts, etc. The following are the points which highlight the importance of financial statements: Financial statements are the summary of information relating to profitability, and resources owned by the firm. Financial statements provide the information which can be compared with those of other firms. Employees can use financial statements to demand for increment in salary and other benefits. Bankers and other financial institutions can use financial statements to make the lending decisions. Government bases on financial statements of the companies for the calculation of tax revenue from the firms. Financial statements can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc. Existing investors can use financial statements to assess how efficiently the firm is Continue reading
Goals of Financial Management
The goals of financial management can be classified in many ways. Official goals, operative goals and operational goals are one classification. Official goals are the general aims of the organization. Maximization of return on investment and market value per share may be termed as official goals of financial management. Operative goals indicate what the organization is really attempting to do. They are focused and help in choice making. Expected return on investment, cost of capital, debt-equity norms, etc dong with time horizon are specified or their acceptable ranges/limits are static keeping in view the official goals. The operational goals of financial management are more directed quantitative and verifiable. The scale, mix and timing of specific form of finance are detailed. The official, operative and operational goals are structured with a pyramidal shape, the official goals at the top (concerned with the top executives), operative goals at the middle (concerned with Continue reading
Conflicts between Managers and Shareholders
Agency theory portrayed the fundamental problems in an organization that is self-interested behavior. Self interested behavior was usually direct to an unfavorable effect on any organization which was by and large for the purpose of getting highest share holder wealth. Company managers could have personal objectives that compete with the owner’s objective of maximization of shareholder wealth. Since the shareholders approved managers to administer the firm’s assets, a possible difference of interest occurred between the two groups. Self-Interested Behavior Agency theory argued that, in imperfect capital and labor markets, managers were trying to find make best use of their own values without regard for corporate shareholders. Agents have the capability to manage their own self-interest comparatively more then the best interests of the firm because of asymmetric information (e.g., managers know better than shareholders either they are talented and capable of meeting the shareholders’ objectives and vagueness. Facts of self-interested Continue reading
Creative Accounting – Definition, Techniques and Ethical Considerations
Definition of Creative Accounting Creative accounting is accounting practice that falls outside the regulation and give benefit to certain people. It can be described as a practice with a clear aim to interrupt the financial reporting process which affects reported income to make it looked normal and provides no true economic advantages to relevant parties like shareholders. Concisely, creative accounting is the transformation of financial accounting figures from what they actually are to what users’ desire by taking advantage of the accounting policies which is permitted by accounting standards. Creative accounting is a practice that potentially being undertaken as a result from some individual care more on their own interest and indirectly causes issues arise in ethical dimension of creative accounting. From information perspective, agency theory gives a clear picture on creative accounting scenario. Whereby managers misuse their privileged position in manipulating financial reporting in their own interest which Continue reading