Nature and Scope of Management Accounting

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Nature and Scope of Management Accounting : 

Nature and Scope of Management Accounting PRESENTED BY:- RITU GUPTA Asst. Prof. Commerce, PGGC-11

Slide 2: 

The maintenance and creation of economic value or wealth.

Management accounting : 

Management accounting It measures and reports financial and non-financial information that helps managers make decisions to fulfill the goals of an organization.

EVOLUTION OF MANAGEMENT ACCOUNTING : 

EVOLUTION OF MANAGEMENT ACCOUNTING TRADITIONAL VIEW MODERN VIEW

TRADITIONAL VIEW : 

TRADITIONAL VIEW PRE- 1930s 1. EMPHASIS ON FINANCIAL MARKETS AND SECURITIES. 2. LITTLE ATTENTION ON ASSET MANAGEMENT.

TRADITIONAL VIEW contd… : 

TRADITIONAL VIEW contd… 1930s AND 1940s 1. FOCUS ON LEGAL MATTERS DEALING WITH BANKRUPTCY. 2. RECOGNITION OF NEWLY EMERGING GOVT. REGULATIONS.

CRITICISM OF TRADITIONAL VIEW : 

CRITICISM OF TRADITIONAL VIEW TREATS THE ENTIRE SUBJECT OF FINANCE FROM VIEW POINT OF INVESTMENT BANKER. RATHER THAN A FINANCIAL DECISION MAKER WITH IN THE ENTERPRISE. HEAVY EMPHASIS ON LONG TERM FINANCIAL INSTRUMENTS AND LACK OF EMPHASIS ON WORKING CAPITAL MANAGEMENT.

CRITICISM OF TRADITIONAL VIEW contd…. : 

CRITICISM OF TRADITIONAL VIEW contd…. MUCH EMPHASIS ON CORPORATE FINANCE, LITTLE ATTENTION ON THE PROBLEMS OF NON-CORPORATE ENTERPRISES. DUE TO DEPRESSION IN 1930s AND 1940s EMPHASIS SHIFTED MUCH ON BANKRUPTCY PROBLEMS AND LIQUIDITY CRISIS.

MODERN VIEW : 

MODERN VIEW 1950s INCREASED EMPHASIS ON ASSET MANAGEMENT. 1960s APPLICATION OF MATHEMATICAL MODELS. THEORATICAL DEVELOPMENTS IN COST OF CAPITAL, DIVIDEND POLICY AND RISK ANALYSIS.

MODERN VIEW contd…. : 

MODERN VIEW contd…. 1980s APPLICATION OF COMPUTER TECHNOLOGY TO ASSIST IN FINANCIALDECISION MAKING. 1990s INCREASED ATTENTION TO INTERNATIONAL COMPETITION AND MANAGEMENT OF MULTINATIONAL FIRMS.

DIFFERENCE : 

DIFFERENCE TRADITIONAL VIEW FOCUS ON THE ACQUISITION OF FUNDS. MODERN VIEW EXPANDS THE FOCUS ON BOTH USE AND ACQUISITION OF FUNDS.

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1) Profit Maximization? This Goal Ignores: a) Timing of Returns b) Uncertainty of Returns

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2) Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

OBJECTIVES OF MANAGEMENT ACCOUNTING : 

OBJECTIVES OF MANAGEMENT ACCOUNTING Relevant To Making Decisions Types Of Decisions Investing Financing Operating

INVESTMENT DECISIONS : 

INVESTMENT DECISIONS DETERMINIG THE TOTAL AMOUNT OF ASSETS NEEDED TO BE HELD BY THE FIRM. (ASSETS SIDE OF THE B/S) INVESTMENT CAN BE: 1. INVESTMENT IN FIXED ASSETS 2. INVESTMENT IN WORKING CAPITAL DECISIONS RULE: INVESTMENT IN A PARTICULAR ASSET CAN BE ACCEPTED ONLY IF THE RETURN ON INVESTMENT IS MORE THAN THE MINIMUM ACCEPTABLE RATE

INVESTMENT DECISIONS : 

INVESTMENT DECISIONS THE MAIN TYPES OF INVESTMENT DECISIONS CAN BE: 1. FIXED ASSETS TO BE ACQUIRED. 2. INVESTMENT IN CURRENT ASSETS. 3. BUY OR LEASE DECISIONS. 4. ASSET REPLACEMENT DECISIONS. 5. RESTRUCTURING, MERGER AND ACQUISITION DECISIONS

FINANCE DECISIONS : 

FINANCE DECISIONS RELATED TO THE PROCUREMENT OF FUNDS. (LIABILITY SIDE OF THE B/S). DECISIONS ABOUT DEBT AND EQUITY MIX. THE LONG TERM ASSETS SHOULD BE FINANCED WITH LONG TERM FUNDS AND SHORT TERM ASSETS SHOULD BE FINANCED WITH SHORT TERM FUNDS.

FINANCE DECISIONS : 

FINANCE DECISIONS THE MAIN TYPES OF FINANCE DECISIONS CAN BE: 1. DETERMINING THE DEGREE OF LEVERAGE 2. DETERMINIG THE FINANCING PATTERN OF LONG, MEDIAM AND SHORT TERM FUNDS. 3. ARRANGING FINANCE FOR WORKING CAPITAL. 4. DECISION ABOUT THE INTEREST BURDEN ON THE FIRM.

DIVIDEND DECISION : 

DIVIDEND DECISION CONCERNED WITH HOW MUCH PROFITS TO BE DISTRIBUTED AS DIVIDEND AND HOW MUCH TO BE RETAINED IN THE BUSINESS. IF PROFIT IS PAID AS DIVIDEND IT INFLUENCE THE SHARE PRICE. IF PROFIT IS NOT PAID AS DIVIDEND IT MAXIMISES THE WEALTH OF THE SHAREHOLDER.

Functions of Management Accounting : 

Functions of Management Accounting Management accountants perform these functions Planning & Forecasting Financial analysis & interpretation Communication Facilitates managerial controls Helpful in taking strategic decisions Use of qualitative information Co-ordinating

Financial and Management Accounting : 

Financial and Management Accounting The primary questions about an organization’s success that decision makers want to know are: What is the financial picture of the organization on a given day? How well did the organization do during a given period?

Financial and Management Accounting : 

Financial and Management Accounting Accountants answer these primary questions with three major financial statements. Balance sheet – shows financial picture on a given day Income statement – shows performance over a given period Statement of cash flows – shows performance over a given period

Financial and Management Accounting : 

Financial and Management Accounting Annual report - a document prepared by management and distributed to current and potential investors to inform them about the company’s past performance and future prospects The annual report is one of the most common sources of financial information used by investors and managers.

Financial and Management Accounting : 

Financial and Management Accounting 1. The major distinction between financial and management accounting is the users of the information. Financial accounting serves external users, such as investors, creditors, and suppliers. Management accounting serves internal users, such as top executives, management, and administrators within organizations.

Management Accounting and Financial Accounting : 

Management Accounting and Financial Accounting Help managers plan and control business operations Help investors, creditors, and others make investment, credit, and other decisions 2. Purpose of Information

Management Accounting and Financial Accounting : 

Management Accounting and Financial Accounting Relevance Reliability, objectivity, and focus on the past 3. Focus and Time Dimension

Management Accounting and Financial Accounting : 

Management Accounting and Financial Accounting Internal reports not restricted by GAAP Financial statements restricted by GAAP 4. Type of Report

Management Accounting and Financial Accounting : 

Management Accounting and Financial Accounting No independent audit Annual independent audit 5.Verification

Management Accounting and Financial Accounting : 

Management Accounting and Financial Accounting Detailed reports on parts of the company Summary reports primarily on the company as a whole 6.Scope of Information

Scope of Management Accounting : 

Scope of Management Accounting Financial Accounting Cost Accounting Budgeting & Forecasting Inventory control Reporting to management Internal audit Tax accounting

Tools & Techniques of Management Accounting : 

Tools & Techniques of Management Accounting Financial Management Analysis Comparative financial statements Ratio analysis Fund flow statement Trend analysis CVP analysis Cash Flow Analysis

Tools & Techniques of Management Accounting contd. : 

Tools & Techniques of Management Accounting contd. Budgetary Control Standard costing Marginal costing Responsibility accounting Price level accounting Human resource accounting Social cost benefit analysis

Importance : 

Importance Increases efficiency Proper planning Measurement of performance Maximising profitability Improve service to customers Effective management control

Limitations of Management Accounting : 

Limitations of Management Accounting Based on accounting information Lack of knowledge Intuitive decisions Not an alternative to the administration Top heavy structure Evolutionary stage Personal biasness Psychological resistance

Slide 35: 

Thank you