Module – 3

Funds flow Statement and Cash flow Statement

Introduction of Management Accounting

Management accounting also is known as managerial accounting and can be

defined as a process of providing financial information and resources to the
managers in decision making. Management accounting is only used by the internal
team of the organization, and this is the only thing which makes it different from
financial accounting. In this process, financial information and reports such as
invoice, financial balance statement is shared by finance administration with the
management team of the company. Objective of management accounting is to use
this statistical data and take a better and accurate decision, controlling the enterprise,
business activities, and development.

Definition of Management Accounting

Management accounting is the process of identification, measurement,

accumulation, analysis, preparation, interpretation, and communication of
information that assists executives in fulfilling organizational objectives.

Financial Accounting

Financial accounting is the recording and presentation of information for the benefit
of the various stakeholders of an organization. Management accounting, on the
other hand, is the presentation of financial data and business activities for the
internal management of the organization. In this article, we will learn what is
management accounting and its functions.
Advantages / Objectives of Management Accounting

There are many objectives but the prime objective is to assist the management team
of an organization in improving the quality of their decisions. The purpose of
management accounting is to help the managerial team with financial information
so that they can execute business operations and activities more efficiently.
Following is the list of all benefits of management accounting –

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problem areas
7. Strategic Management

Decision Making

This is the most important benefit of the process of management accounting. In fact,
it is the main purpose of it. In this form of accounting, we use techniques from all
fields like costing, economics, statistics, etc.

It provides us with charts, tables, forecasts and various such analysis that makes the
process of decision making easier and more justified.

Planning

Managerial accounting does not have any strict timelines like financial accounting.
It is, in fact, a continuous and ongoing process.

So financial and other information is presented to the management at regular

intervals like weekly, monthly or sometimes even daily.

Hence managers can use this analysis and data to plan the activities of the
organization. For example, if the recent data shows a dip in the sales for a certain
region, then the sales manager can advise his team and plan some action to rectify
the situation.
Identifying Business Problem Areas

If some product is not performing well, or some department is running into

unexpected losses, etc. managerial accounting can help us identify the underlying
cause.

Actually, if the management is diligent and their data and reports are frequent,
they can identify the problem very early on. This will allow the management to
get ahead of the problem.

Strategic Management

Concept of management accounting is not mandatory by any law. So it can have its
own structure according to the company’s requirements. So if the company feels
certain areas need more in-depth analysis or investigation it can do so freely.

This allows them to focus on some core areas. The information presented to them
allows them to make strategic management decisions.

Like if the company wishes to launch a new product line, or discontinue an existing
one, management accounting will play a huge part in this strategy.

Limitations of Management Accounting

• Data based on Financial accounting – Decisions taken by the

management team are based on the data provided by Financial
Accounting
• Less knowledge – Management has insufficient knowledge of
economics, finance, statistics, etc.
• Outdated data – Management team receives historical data, which
may change eventually when management is taking the decisions.
• Expensive – Setting up a management accounting system requires a
lot of investment.
Techniques of Management Accounting
1. Financial Planning
The main objective of any business organization is maximization of profits. This
objective is achieved by making proper or sound financial planning. Hence,
financial planning is considered as best tool for achieving business objectives.

2. Financial Statement Analysis

Profit and Loss account and Balance Sheet are important financial statements.
These statements are analyzed for different period. This type of analysis helps the
management to know the rate of growth of business concern. This analysis is done
through comparative financial statements, common size statements and ratio
analysis.

3. Cost Accounting
Cost accounting presents cost data in product wise, process wise, department
wise, branch wise and the like. These cost data are compared with predetermined
one. This comparison of two costs enables the management to decide the reasons
responsible for the difference between these costs.

4. Fund Flow Analysis

This analysis find out the movement of fund from one period to another.
Moreover, this analysis is very useful to know whether the fund is properly used
or not in a year when compared to the previous year. The working capital
changes and funds from operation are also find out through this analysis.

5. Cash Flow Analysis

The movement of cash from one period to another can be find out through this
analysis. Besides, the reasons for cash balance and changes between two periods
are also find out. It studies the cash from operation and the movement of cash in
a period.

6. Standard Costing
Standard costing is predetermined cost. It provides a yard stick for measuring
actual performance. It is used to find the reasons for the deviations if any.
7. Marginal Costing
Marginal costing technique is used to fix the selling price, selection of best sales
mix, best use of scarce raw materials or resources, to take make or buy decision,
acceptance or rejection of bulk order and foreign order and the like. This is based
on the fixed cost, variable cost and contribution.

8. Budgetary Control
Under Budgetary control techniques, future financial needs are estimated and
arranged according to an orderly basis. It is used to control the financial
performances of business concern. Business operations are directed in a desired
direction.

9. Revaluation Accounting
The fixed assets are revalued as per the revaluation accounting method so that the
capital is properly represented with the assets value. It helps to find out the fair
return on capital employed.

10. Decision-making Accounting

A business problem can be solved by choosing any one of the best and most
profitable alternative. To select such alternative, the relevant costs are compared.
Thus, accounting information are used to solve the business problem which are
arising out of increasing complexity of nature of business.

11. Management Information System

The free flow communication within the organization is essential for effective
functioning of business. Hence, the management can design the system through
which every employee of an organization can assess the information and used for
discharging their duties and taking quality decisions.

12. Statistical Techniques

There are a lot of statistical techniques used in removing management problems.
Methods of least square, regression and quality control etc. are some examples of
statistical techniques.
13. Management Reporting
The management accountant is preparing the report on the basis of the contents
of profit and loss account and balance sheet and submit the same before the top
management. Thus prepared reports disclose the strength and weakness
indifferent areas of operating activities and financial activities. These
identification are highly useful to management for exercising control and
decision-making.

14. Historical Cost Accounting

It means that costs are recorded after being incurred. This is used for comparing
with predetermined costs to evaluate performance.

15. Ratio Analysis

It is used to management in the discharge of its basic functions of forecasting,
planning, coordination, communication and control. It paves the way for effective
control of business operations by undertaking an appraisal of both the physical
and monetary targets.

Different between Financial Accounting and Management Accounting

BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON
Meaning Financial Accounting is an The accounting system which
accounting system that focuses provides relevant information to
on the preparation of a financial the managers to make policies,
statement of an organization to plans and strategies for running
provide financial information to the business effectively is known
the interested parties. as Management Accounting.
Orientation Historical Future
Users Both internal and external users Only internal users
Nature of General-purpose financial Special purpose financial
statements statements statements
prepared
Rules Rules of GAAP are followed No fixed rules for the preparation
of reports
 BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON
Reports Only financial aspects Both financial and non-financial
aspects
Time Span Financial statements are Management Reports are
prepared for a fixed period, i.e. prepared whenever needed.
one year.
Objective To create periodical reports To assist internal management in
planning and decision-making
process by providing detailed
information on various matters.
Publishing and Required to be published and It is not meant to be published or
auditing audited by statutory auditors audited. It is for internal use only.
Format Specified Not Specified