Financial accounting is concerned with reporting to external parties such as owners, analysts, and creditors. These external users rarely have access to the information that is internal to the organization, nor do they specify the exact information that will be presented. Instead, they must rely on the general reports presented by the company.
Therefore, the reporting structure is well defined and standardized. The methods of preparation and the reports presented are governed by rules of various standard-setting organizations. Furthermore, external users generally see only summarized or aggregated data.
In contrast, managers of a business oftentimes need or desire far more detailed information. This information can sometimes take on familiar formats. Subsequent chapters will reveal typical examples of budgets, segment income reports, and so forth. A fundamental awareness of the financial accounting processes and resulting financial statements is a vital prerequisite to understanding the framework for these typical managerial accounting reports. In addition, managers usually request reports that are tailored to specific decision-making tasks. These reports are apt to become more “free formed.” Managerial accountants must be able to adapt their generalized knowledge of accounting to develop customized data and reports that are logical and support sound management processes.
Managerial accounting information tends to be focused on products, departments, and activities. It necessarily crosses over a broad range of functional areas including marketing, finance, and other disciplines. Many organizations refer to their internal accounting units as departments of strategic finance, given their wide scope of duties.
Managerial accounting information is ultimately based on internal specifications for data accumulation and presentation. These internal specifications should be clear and consistent. Great care must be taken to insure that resulting reports are sufficiently logical to enable good decisions. Specific reporting periods may be replaced with real-time data that enable quick response. And, forecasted outcomes become critical for planning. Further, cost information should be disseminated in a way that managers can focus on (and be held accountable for!) their business components (“segments”).
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| Distinguish between financial and managerial accounting, and note the importance of specific rules to each. |