Accounting Articles™

Objective of Internal Audit

2014-11-06T05:04:00.000-08:00

The objective of internal audit is ...? give your answer.

Here is answer

The Statement of Cash Flows

2013-08-12T04:06:00.001-07:00

A third financial statement prepared by businesses is the statement of cash flows. The statement of cash flows reports events that affected a company’s cash account during a fiscal period. The statement contains three sections corresponding to operating, investing, and financing activities.

The operating activities section reports cash from selling goods and services and cash paid for expense-related activities. The investing activities section reports cash paid for equipment and other long-term assets and cash received from selling these assets. The financing activities section reports cash received from creditors and owners, cash paid to creditors as a repayment of amounts borrowed by the company, and cash paid to owners.

Exhibit below provides a statement of cash flows for Mom’s Cookie Company for January 2004 (Source data is given at the end). The results of these transactions are organized into the sections contained in the statement of cash flows.

The statement of cash flows describes the events that affected a company’s cash account during a fiscal period. The amount reported as net cash flow for the period is the change in the cash balance. The final line of the statement reports the cash balance at the end of the month and corresponds with the amount reported on the company’s balance sheet (see Exhibit). Thus, the statement of cash flows is useful for identifying how much cash a company has, where that cash came from, and how the company used its cash during a fiscal period.

Source data for the Statement of Cash Flows above:

The Balance Sheet

2013-06-09T01:18:00.000-07:00

A balance sheet identifies a company’s assets and claims to those assets by creditors and owners at a specific date.

It is a summary of the accounting equation and, like the equation, the total of assets reported on the balance sheet must equal the combined total of liabilities and owners’ equity. Exhibit below provides a balance sheet for Mom’s Cookie Company at January 31, 2004.

It reports dollar amounts associated with a company’s assets and the sources of financing for those assets. It reports resources and claims at a particular point in time rather than results of activities over a period of time. A balance sheet usually is prepared at the end of each fiscal period. It reports amounts of assets, liabilities, and owners’ equity at that time.

Profit is earned by a business for its owners. It may be paid to the owners as a return on their investments, or it may be retained in the business as a means of acquiring additional assets. Thus, retained earnings is the total amount of net income earned over the life of a company minus the portion of net income paid out to owners.

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January is the first month of operations of Mom’s Cookie Company, so the company has earned net income for only one month. The income statement reported net income for January of $1,700. None of the net income was paid out to owners. Consequently, retained earnings at the end of January is $1,700.

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Retained earnings is separated from contributed capital in above Exhibit to distinguish between the amount paid into the company by Maria and Stan from the amount of profit earned and retained by the company. Amounts paid to owners normally should come from the company’s profits. If a company pays its owners more than the company has earned, it is returning a portion of their investment to them. Owners need to know whether amounts paid to them are a return on their investments, from profits, or a return of their investments, from amounts invested directly by the owners. Thus, Mom’s Cookie Company could pay Maria and Stan up to $1,700 from profits earned in January as a return on their investment. Any amount paid in excess of $1,700 would be a return of their investment.

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2013-05-30T14:21:00.001-07:00

Operating Decisions

2013-05-25T08:07:00.001-07:00

In particular, we need to determine how to price our products so that they continue to be competitive and profitable. First, let’s think about the basic factors that affect profitability. Net income is revenues minus expenses. Return on assets is net income divided by total assets.

Net income = revenues + expenses
Return on assets = net income ÷ total assets

“Return on assets provides a simple measure for evaluating how well we use our
assets to create profits. We need to determine how to create a return on assets that will satisfy our stockholders.

Let us assume we have decided on an automated production process that will require an initial investment in assets of $5 million. Also, expenses created by this process are mostly fixed. Exhibit below summarizes, from our prior discussions, our expected initial investment and expected operating results for the next two years.

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We expect our return on assets to be only 2.5% ($126 $5,000) in the first year. By the second year, we expect to be earning a higher profit, and we believe our future profitability will be much higher. If our investment in assets remains at approximately $5 million, our return on assets should increase to 8.7% in year two. What we can see from above Exhibit is that assets and expenses are pretty well determined by our production process and will not increase much until we can sell more of our product than we can produce. The real issue, then, is how to generate as much revenue as possible from our product.

As the major purpose of our company is to earn a satisfactory return for our stockholders by creating value for our customers. We have a valuable product, and we can produce it efficiently. Though these are necessary attributes of a successful business, they do not guarantee our success. We have to develop a strategy for creating profits by competing with other producers. Again, the basics are pretty straightforward. Revenue depends on two factors, number of units sold (generally referred to as sales volume) and price per unit.

Sales revenues = sales volume x price per unit

The more units we sell at a given price, the more revenue we earn. More revenue means higher net income and higher return on assets. Also, we know that sales volume and price are indirectly related. As price goes up, sales volume goes down. Therefore, we need to determine a price that will allow us to maximize our revenues. What we can charge is affected by the prices charged by our competitors and what our customers are willing to pay.

The industry is dominated by a few major producers. All of these companies produce very similar products. Consequently, competition is based largely on price. Each company attempts to sell its products at as low a price as possible. All of the companies charge about the same amount. One company cannot raise its prices without losing customers. If a company’s prices get much higher than those of other companies, customers simply will buy from a competitor who sells at a lower price.

Producers, then, must set prices that are close to their competitors’ and that allow them to earn a reasonable profit. The most efficient producers earn the most money because they keep their production and marketing costs low. To keep these costs low, it is usually necessary to produce in high volume because so many of the costs are fixed, as we have seen for our company. Companies have to invest a lot in plant assets to get into this business. Therefore, we have to sell a lot of product to cover the costs of our investment and earn a reasonable return on assets.”

How do operations create value for business?

2013-05-25T07:47:00.002-07:00

A goal of operating activities is to create value for customers who purchase a company’s products. By creating value for customers, a company also can create value for its owners. To do this, a company must produce and sell its products efficiently and effectively. The opportunities, challenges, and uncertainties that arise from operating activities require managers to make operating decisions. Accounting information describes the results of operating activities. It can be used to identify and evaluate management decisions. Also, it can help decision makers form expectations about a company’s economic future and make decisions that will affect that future.

Company managers make strategic decisions that determine how a company will compete in its product markets. The managers, investors, creditors, and other stakeholders must then evaluate how successful the strategy has been.

Business and Quality Improvement Programs

2013-05-21T13:06:00.000-07:00

The last two decades have been a period of tremendous upheaval and change in the business environment, including the explosive growth of the internet.

Competition in many industries has become world wide in scope, and the space of innovation in products and services has accelerated. This has been good news for consumers, since intensified competition has generally led to lower prices, higher quality and more choices. However, the last two decades have been a period of wrenching change for many businesses and their employees. Many managers have learned that cherished ways of doing business don't work any more and that major changes must be made in how organizations are managed and in how work gets done. These changes are so great that some observers view them as a second industrial revolution. This revolution is having a profound effect on the practice of managerial accounting - as we will see through the rest of the text. First, however. it is necessary to have an appreciation of the ways in which organizations are transforming themselves to become more competitive. Since the early 1980s, many companies have gone through several waves of Business and Quality improvement programs, starting with Just-In-Time (JIT) and passing onto Total Quality Management (TQM), Process re-engineering, and various other management programs-including in some companies The Theory of Constrains (COT), When properly implemented, these improvement programs can enhance quality, reduce cost, increase output, eliminate delays in responding to customers, and ultimately increase profits. They have not, however, always been wisely implemented, and there is considerable controversy concerning the ultimate value of each of these programs. Nevertheless, the current business environment cannot be properly understood without some appreciation of what each of these approaches attempts to accomplish. Each is worthy of extended study, but we will discuss them only in the broadest terms the details are best handled in operations management courses.

Just-in-Time (JIT) Manufacturing and Inventory Control System: Traditionally manufacturers have forecasted demand for their products into the future and then have attempted to smooth out production to meet that forecasted demand. At the same time, they have also attempted to keep everyone as busy as possible producing output so as to maximize "efficiency" and (hopefully) reduce costs. Unfortunately, this approach has a number of major drawbacks including large inventories, long production times, high defect rates, production obsolescence, inability to meet delivery schedules, and (ironically) high costs. Non of this is obvious-if it were, companies would long ago have abandoned this approach.
KANBAN:

A KANBAN system is a means to achieve just in time (JIT) production. It works on the basis that each process on a production line pulls just the number and type of components the process requires, at just the right time. The mechanism used is a KANBAN card. This is usually a physical card but other devices can be used Two types of such cards are usually used.
Total Quality Management (TQM) System:
Total quality management (TQM) is an improvement program which provides tools and techniques for continuous improvement based on facts and analysis; and if properly implemented, it avoids counterproductive organizational infighting.
Six Sigma:
Motorola popularized the use of stringent quality standards more than 30 years ago through a trade marked quality improvement program called six sigma.
Business Process Re-engineering (BPR):
Business Process re-engineering (BPR) is a more radical approach to improvement than total quality management (TQM). Instead of tweaking the existing system in a series of incremental improvements, in process re-engineering a business process is diagrammed in detail, questioned, and then completely redesigned to eliminate unnecessary steps, to reduce opportunities for errors, and to reduce costs.
Theory of Constraints (TOC):
Theory of constraints (TOC) is a management approach that emphasizes the importance of managing constraints. A constraint or bottleneck is any thing that prevents you from getting more of what you want. Study of constraints or bottlenecks, keeping their record and taking necessary steps to improve them is also known as bottleneck accounting.

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Who is A Certified Management Accountant

2013-05-20T23:50:00.000-07:00

A management accountant who possesses the necessary qualification and who possesses a rigorous professional exam earns the right to be known as a certified Management Accountant (CMA).
In addition to the prestige that accompanies a professional designation, CMAs are often given greater responsibilities and higher compensation than those who do not have such a designation. Information about becoming a CMA and CMA program can be accessed on the Institute of Management Accountants.
To become a Certified Management Accountant, the following four steps must be completed:

File an application for admission and register for the CMA examination

Pass all four parts of the CMA examination within a three year period

Satisfy the experience requirement of two continuous years of professional experience in management and/or financial accounting prior to or within seven years of passing the CMA examination.

Comply with the standards of ethical conduct for practitioners of management accounting and financial management.

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Code of Conduct for Management Accountants

2013-05-20T23:48:00.005-07:00

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Learning objectives of this article:

What are the standards of ethical conduct for practitioners of management accounting and financial management

Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management. Adherence to these standards internationally is integral to achieving objective of management accounting.

Competence:

Practitioners of management accounting and financial management have a responsibility to:

Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.

Perform their professional duties in accordance with relevant laws, regulations and technical standards.

Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information

Confidentiality:

Practitioners of management accounting and financial management have a responsibility to:

Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.

Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality

Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

Integrity:

Practitioners of management accounting and financial management have a responsibility to:

Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.

Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.

Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.

Refrain from either activity or passively subverting the attainment of the organization's legitimate and ethical objectives.

Recognize and and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Communicate unfavorable as well as favorable information and professional judgment or opinion.

Refrain from engaging or supporting any activity that would discredit the profession.

Objectivity:

Practitioners of management accounting and financial management have a responsibility to:

Communicate information fairly and objectively

Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.

Resolution of Ethical Conflicts:

In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following course of action.

Discuss such problems with immediate superior except when it appears that superior is involved, in which case the problem should be presented to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issue to the next higher managerial level.

If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with a level above the immediate superior should be initiated only with the superior's knowledge. assuming the superior is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.

Clarify relevant ethical issues by confidential discussion with an objective adviser to obtain a better understanding of possible course of action

Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

If the ethical conflict still exists after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.

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History of Managerial Accounting

2013-05-20T23:47:00.000-07:00

Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets.

Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and provided the essential information needed to manage the early large scale production of textile, steel, and other products. After the turn of the century, financial accounting requirements burgeoned because of new pressures placed on companies by capital markets, creditors, regulatory bodies, and federal taxation of income. Johnson and Kaplan state that "many firms needed to raise funds from increasingly widespread and detached suppliers of capital. To tap these vast reservoirs of outside capital, firms' managers had to supply audited financial reports. And because outside suppliers of capital relied on audited financial statements, independent accountants had a keen interest in establishing well defined procedures for corporate financial reporting. The inventory costing procedure adopted by public accountants after the turn of the century had a profound effect on management accounting. As a consequence, for many decades, management accountants increasingly focused their efforts on ensuring that financial accounting requirements were met and financial reports were released on time.

The practice of management accounting stagnated. In the early part of the century, as product line expanded operations became more complex, forward looking companies saw a renewed need for management-oriented reports that was separate from financial reports. But in most companies, management accounting practices up through the mid-1980s were largely indistinguishable from practices that were common prior to world war I. In recent years, however, new economic forces have led to many important innovations in management accounting. These new practices are discussed in other chapters.

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Need for Managerial Accounting Information

2013-05-20T23:44:00.004-07:00

Every organization - large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where mangers carry out three major activities - planning, directing and motivating, and controlling.

Planning:

Planning involves selecting a course of action and specifying how the action will be implemented. The first step in planning is to identify the alternatives and then to select from among the alternatives the one that does the best job of furthering the organization's objectives. While making choices management must balance the opportunity against the demands made on the companies resources.

The plans of management are often expressed formally in budgets, and the term budgeting is applied to generally describe the planning process. Budgets are usually prepared under the direction of controller, who is the manager in charge of the accounting department. Typically, budgets are prepared annually and represent management's plans in specific, quantitative terms.

Directing and Motivating:

In addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the manager's work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports are often used in this type of day-to-day decision making.

Controlling:

In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance report. Performance report suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention.

The Planning and Control Cycle:

The work of management can be summarized in a model. The model, which depicts the planning and control cycle, illustrates the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. all of these activities involve decision making. So it is depicted as the hub around which the activities revolve.

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Difference Between Financial and Managerial Accounting (Financial Accounting Vs Managerial Accounting)

2013-05-20T23:42:00.001-07:00

Financial accounting reports are prepared for the use of external parties such as shareholders and creditors, whereas managerial accounting reports are prepared for managers inside the organization.

This contrast in basic orientation results in a number of major differences between financial and managerial accounting, even though both financial and managerial accounting often rely on the same underlying financial data. In addition to the to the differences in who the reports are prepared for, financial and managerial accounting also differ in their emphasis between the past and the future, in the type of data provided to users, and in several other ways. These differences are discussed in the following paragraphs.

Emphasis on the Future:

Since planning is such an important part of the manager's job, managerial accounting has a strong future orientation. In contrast, financial accounting primarily provides summaries of past financial transactions. These summaries may be useful in planning, but only to a point. The future is not simply a reflection of what has happened in the past. Changes are constantly taking place in economic conditions, and so on. All of these changes demand that the manager's planning be based in large part on estimates of what will happen rather than on summaries of what has already happened.

Relevance of Data:

Financial accounting data are expected to be objective and verifiable. However, for internal use the manager wants information that is relevant even if it is not completely objective or verifiable. By relevant, we mean appropriate for the problem at hand. For example, it is difficult to verify estimated sales volumes for a proposed new store at good Vibrations, Inc., but this is exactly the type of information that is most useful to managers in their decision making. The managerial accounting information system should be flexible enough to provide whatever data are relevant for a particular decision.

Less Emphasis on Precision:

Timeliness is often more important than precision to managers. If a decision must be made, a manager would rather have a good estimate now than wait a week for a more precise answer. A decision involving tens of millions of dollars does not have to be based on estimates that are precise down to the penny, or even to the dollar. In fact, one authoritative source recommends that, "as a general rule, no one needs more than three significant digits., this means, for example, that if a company's sales are in the hundreds of millions of dollars, than nothing on an income statement needs to be more accurate than the nearest million dollars. Estimates that accurate to the nearest million dollars may be precise enough to make a good decision. Since precision is costly in terms of both time and resources, managerial accounting places less emphasis on precision than does financial accounting. In addition, managerial accounting places considerable weight on non monitory data, for example, information about customer satisfaction is tremendous importance even though it would be difficult to express such data in monitory form.

Segments of an Organization:

Financial accounting is primarily concerned with reporting for the company as a whole. By contrast, managerial accounting forces much more on the parts, or segments, of a company. These segments may be product lines, sales territories divisions, departments, or any other categorizations of the company's activities that management finds useful. Financial accounting does require breakdowns of revenues and cost by major segments in external reports, but this is secondary emphasis. In managerial accounting segment reporting is the primary emphasis.

Generally Accepted Accounting Principles (GAAP):

Financial accounting statements prepared for external users must be prepared in accordance with generally accepted accounting principles (GAAP). External users must have some assurance that the reports have been prepared in accordance with some common set of ground rules. These common ground rules enhance comparability and help reduce fraud and misrepresentations, but they do not necessarily lead to the type of reports that would be most useful in internal decision making. For example, GAAP requires that land be stated at its historical cost on financial reports. However if, management is considering moving a store to a new location and then selling the land the store currently sits on, management would like to know the current market value of the land, a vital piece of information that is ignored under generally accepted accounting principles (GAAP).

Managerial Accounting is Not Mandatory:

Financial accounting is mandatory; that is, it must be done. Various out side parties such as Securities and exchange commission (SEC) and the tax authorities require periodic financial statements. Managerial accounting, on the other hand, is not mandatory. A company is completely free to do as much or as little as it wishes . No regularity bodies or other outside agencies specify what is to be done, for that matter, weather anything is to be done at all. Since managerial accounting is completely optional, the important question is always, "Is the information useful?" rather than, "Is the information required?"

Summary:

Financial Accounting	Managerial Accounting
Reports to those outside the organization owners, lenders, tax authorities and regulators.	Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation.
Emphasis is on summaries of financial consequences of past activities.	Emphasis is on decisions affecting the future.
Objectivity and verifiability of data are emphasized.	Relevance of items relating to decision making is emphasized.
Precision of information is required.	Timeliness of information is required.
Only summarized data for the entire organization is prepared.	Detailed segment reports about departments, products, customers, and employees are prepared.
Must follow Generally Accepted Accounting Principles (GAAP).	Need not follow Generally Accepted Accounting Principles (GAAP).
Mandatory for external reports.	Not mandatory.

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Top Managers Definition

2013-05-20T23:33:00.004-07:00

Managers at or near the top level of the organization who are responsible for making organization-wide decisions and establishing the goal and plans that effect the entire organization.

Relevant Terms:

Manager

First Line Managers

Middle Managers

Top Level Managers

Middle Managers Definition

2013-05-20T23:32:00.002-07:00

Middle Managers are managers at the lowest level of the organization who manage the work of non-managerial employees who are directly involved with the production or creation of the organization's products.

Relevant Terms:

Manager

First Line Managers

Middle Managers

Top Level Managers

First Line Managers Definition

2013-05-20T23:31:00.002-07:00

Managers at the lowest level of the organization who manage the work of non-managerial employees who are directly involved with the production or creation of the organization's products.

Relevant Terms:

Manager

First Line Managers

Middle Managers

Top Level Managers

Manager Definition

2013-05-20T23:29:00.005-07:00

Someone who works with and through other people by coordinating their work activities in order to accomplish organizational goals.

One who handles, controls, or directs, especially:

One who directs a business or other enterprise.
One who controls resources and expenditures, as of a household.

OROne who is in charge of the business affairs of an entertainer.

Relevant Terms:

Manager

First Line Managers

Middle Managers

Top Level Managers

Management Definition

2013-05-20T23:27:00.000-07:00

Coordinating work activities so that they are completed efficiently and effectively with and through other people.

Relevant Terms:

Manager

First Line Managers

Middle Managers

Top Level Managers

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Cost Accounting Definition

2013-05-20T23:23:00.000-07:00

Different authorities have defined the term "cost accounting" which help in reflecting the multi-sided meaning the subject contains. The definition given by J. W. Neuner is considered more satisfactory and concise which is as following:

"Cost accounting is an expanded phase of the general or financial accounting of a business concern which provides management promptly with the cost of producing or selling each article or of rendering a particular service". In other words, cost accounting is a step further to and a refinement of financial accounting. in which cost of manufacturing and selling each product or job or rendering service is determined, not at the time of accounting period but at the time when the product is manufactured or any service is rendered. In simple words, costing is a systematic procedure for determining the unit cost of output produced or services rendered. It provides for an analysis of the expenditure which enables the management to know not only the total cost but also its constituents.

In short, cost accounting is the process of accounting for cost, which begins with regarding and classifying of incomes and expenditures and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.

As predicted today, cost accounting may be defined as the process of measuring, analyzing, computing, and reporting the cost, profitability and performance of operations.

What is Managerial Accounting

2013-05-20T23:17:00.003-07:00

Learning objectives of this article:

What is managerial accounting?
What are functions of managerial accounting?

Managerial accounting is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.

Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks.

Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast, financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with Generally Accepted Accounting Principles (GAAP). (Ray H. Garrison Eric W Noreen 1999).

Managerial accounting is managers oriented therefore its study must be preceded by some understanding of what managers do, the information managers need, and the general business environment.

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Introduction to Managerial Accounting

2013-05-20T22:54:00.001-07:00

After studying this chapter you should be able to:

Identify the major differences and similarities between financial and managerial accounting.

Understand the role of management accountants in an organization.

Understand the importance of upholding ethical standards.
1. What is managerial accounting?
  Managerial accounting is concerned with providing information to managers-that is, people inside an organization who direct and control its operation...... What is managerial accounting
2. Difference between financial and managerial accounting (Financial accounting vs. managerial accounting):
  Financial accounting reports are prepared for the use of external parties such as shareholders and creditors, whereas managerial accounting reports are prepared for managers inside the organization...... Click here to read full article.
3. Need for managerial accounting information:
  Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations.......Click here to read full article.
4. History of managerial accounting:
  Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets......Click here to read full article.
5. Code of conduct for management accountants:
  Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct......Click here to read full article.
6. The certified management accountants (CMA):
  A management accountant who possesses the necessary qualification and who possesses a rigorous professional exam earns the right to be known as a certified Management Accountant (CMA)......Click here to read full article.

Recording Transactions of Bill of Exchange

2011-07-05T14:46:00.000-07:00

For the purpose of accounting, bills are classified under two heads:

Bills receivable

Bills payable

Bills Receivable:

A bill of exchange is treated as a bill receivable by one who is entitled to receive the sum due on it. When we draw a bill or receive it by endorsement from our debtors, it is our bill receivable (B/R) and on maturity of such bill if it is held up to that time, we shall receive specified amount from the acceptor.

Bills Payable:

A bills payable is regarded as bill payable by one who has to pay it on the due date. When we accept a bill and thereby become liable to pay on its maturity, it is our bill payable (B/P).

It means the same bill is a bill receivable to one party and a bill payable to the other.

The accounting aspect of a bill of exchange can be divided into following parts:

When a bill is drawn, accepted and discharged.

When the drawer discounted it with the bank

When the drawer sends it for collection to the banker.

When the drawer endorses it to a third party

When a bill is dishonored.

When a bill is renewed for another period of time.

When a bill is retired.

When there is an accommodation bill (including the insolvency of one of the parties).

Difference Between Bill of Exchange and Cheque/Check

2011-07-05T14:42:00.000-07:00

A cheque differs from a bill of exchange in the following respects:

1. Drawee:

A cheque is always drawn on a bank or a banker while a bill of exchange can be drawn on any person including a banker.

2. Acceptance:

A cheque does not require any acceptance while a bill must be accepted before the drawee can be made liable upon it.

3. Payment:

A cheque is payable immediately on demand without any days of grace, but a bill of exchange is normally entitled to three days of grace unless it is payable on demand.

4. Crossing:

A cheque may be crossed but there is no such provision in the case of a bill of exchange.

5. Notice of dishonor:

When a cheque is not met, notice of dishonor is not necessary. Want of assets in the hands of the banker is sufficient notice. It is necessary to give a notice of dishonor in order to make the drawer of a bill liable.

6. Payable to bearer on demand:

A cheque can be drawn payable to bearer on demand. But a bill of exchange cannot be so drawn.

7. Stamp:

A bill of exchange must be stamped, whereas a cheque does not require any stamp.

8. Countermanding payment:

A cheque may be revoked by countermand of payment. The payment of a bill, however cannot be countermanded.

9. Noting and protesting:

A cheque is not noted or protested for dishonor and is generally inland.

10. Presentment:

A bill of exchange must be duly presented for payment otherwise the drawer will be discharged. The drawer of a cheque is not discharged by failure of the holder to present it in due time unless the drawer has sustained damage by the delay.

11. Protection:

A banker is given statutory protection with regard to payment of cheques in certain circumstances. No such protection is available to the drawee or acceptor of a bill of exchange.

Difference Between Bill of Exchange and Promissory Note

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(1) Parties.

There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee; while in a promissory note there are only two parties – maker and payee.

(2) Nature of payment.

In a bill of exchange, there is an unconditional order to pay, while in a promissory note there is an unconditional promise to pay.

(3) Acceptance.

A bill of exchange requires an acceptance of the drawee before it is presented for payment, while a promissory note does not require any acceptance since it is signed by the persons who is liable to pay.

(4) Liability.

The liability of the maker of a promissory note is primary and absolute, while the liability of a drawer of bill of exchange is secondary and conditional. It is only when the drawee fails to pay that the drawer would be liable as a surety.

(5) Notice of dishonor.

In case of dishonor of bill of exchange either due to non-payment or non-acceptance, notice must be given to all persons liable to pay. But in the case of a promissory note, notice of dishonor to the maker is not necessary.

(6) Maker’s position.

The drawer of a bill of exchange stands in immediate relationship with the acceptor and not the payee. While in the case of a promissory note, the maker stands in immediate relationship with the payee.

(7) Nature of acceptance.

A promissory note can never be conditional, while a bill of exchange can be accepted conditionally.

(8) Copies.

A bill of exchange can be drawn in sets, but a promissory note cannot be drawn in sets.

(9) Payable to bearer.

A promissory note cannot be made payable to a bearer, while a bill of exchange can be so drawn provided it is not payable to bearer on demand.

(10) Payable to maker.

In a promissory note, the maker cannot pay to himself. While in the case of a bill of exchange, the drawer and the payee may be one person.

(11) Protest.

Foreign bills must be protested for dishonor when such protest is required by the law of the place where they are drawn. But no such protest is required in the case of a promissory note.

Promissory Note

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There is another method of payment similar to bill of exchange i.e., promissory note. In this method, in place of the seller drawing a bill of exchange on the purchaser, the purchaser himself makes a written promise to pay the amount to the seller. It is defined as an instrument in writing containing an unconditional promise, signed by the maker to pay on demand or at a fixed or determinable future time, a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

How a Bill of Exchange Functions

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In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. The following example will make it clear.

Suppose A sells goods to the value of $500 to B. The most ready means of closing the transaction will be cash payment by B to A. But payment of this nature are not many in actual practice. The greatest volume of business is done on credit. That being the case A will have to wait for some time to receive payment from B. A, merchant can hardly afford to be out of funds for long. Moreover, to sell goods on credit is rather a risky job. Therefore as soon as A sells goods to B, he will draw a bill for $500 on B and forward the same to him together with the goods with instructions to B to accept the bill and return the same to A. Upon receipt of the bill, B would write on the face of the bill "accepted" and put his signature below. It means that B approves the bill and also binds himself to pay the amount thereof when due. The bill is thus complete and comes back to A to remain in his possession till maturity or can be endorsed or discounted by him. On the due date the holder of the bill presents it before the acceptor and receives payment of the bill from the acceptor.

Thus the bill of exchange is the instrument, rather the mechanism which finances the major portion of all commercial transactions these days and it helps both the debtor and the creditor alike.

Tenor and Usance:

Tenor is the period of time after which a bill becomes payable. Thus, where a bill is payable after 90 days from the date of drawing or acceptance, the tenor of the bill is 90 days. Bill may be made payable:

On Demand. The bill so drawn is payable as soon as its payment is demanded by the holder of the bill.

A Sight. A bill of exchange so drawn becomes payable immediately it is brought to the notice of the drawee.

After Date. When a bill is drawn 'after date' its due date is calculated from the date of the bill.

After Sight. When a bill is drawn 'after sight' its due date is calculated from the date on which it is sighted or seen by the drawee i.e., from the date of acceptance by the drawee.

Usance. It is the usual time of payment of a bill of exchange as fixed by custom.

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Days of grace:

In calculating the due date of payment it is customary in business circle to allow three additional days to the drawee or acceptor to meet the bill. The extra days are called "days of grace" or "grace days". Thus a bill dated 15th March, for three months becomes payable on the 18th June and this is the due date.

Holder:

Holder of a bill is a person who is entitled in his own right to the possession thereof and to claim the amount due thereon.

Holder in Due Course:

When a person takes a bill, complete and regular on the face of it and before its due date, in good faith and for valuable consideration he is called the holder in due course.

Acceptance:

When a drawee signs his name across the face of along with the word "accepted" the bill is said to be accepted and this act of the drawee is called acceptance of a bill. Before this is done, the drawee cannot be made liable for the bill.

Different Kinds of Acceptance:

General Acceptance:

When a bill is accepted without any condition to the order of the drawer, it is called general acceptance.

Qualified Acceptance:

When a bill is accepted with some qualifications to the order of the drawer it is called qualified acceptance.

A qualified acceptance again may be of five different types. These are following types:

Time. When the acceptor agrees to pay the bill on some day other than the date required by the drawer, it is called qualified acceptance as to time.

Place. When a bill is payable at a particular place and there only, it is called local qualified acceptance.

Partial. When a bill is accepted for a part of the amount of a bill, it is called partial qualified acceptance.

Parties. When a bill is accepted by one or two of the drawees, but not all, it is called qualified acceptance as to parties.

Condition. When a bill is accepted subject to a certain condition being fulfilled it is called conditional qualified acceptance.