Dell, Inc
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Simply stated, the financial accountant is the number cruncher while the managerial accountant is the analyzer. However, it is not that simple. Most experts are fairly consistent with their definitions of what the financial accounting entails, however, defining managerial accounting appears to be opinion dependent. As the population of the occupation grows so does the defined responsibilities involved.
The general consensus of financial accounting is that it reports past results using historical-cost accounting. Financial accounting is backward-looking and sacrifices decision relevancy for objectivity (Bromwich, 1988, p. 26). According to Answers.com accounting is defined as “the bookkeeping methods involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, and operating results of a business. When I envision an accountant I cannot help but see the squirrelly little FBI CPA in “the Untouchables”, the one that took down Capone on tax evasion. I see stereotyped, the short, bawling guy with the genius IQ, in glasses, “crunching” numbers in the adding machine. The Financial accountant or CFO is the head of the finance department that runs all the reports, puts all the numbers in, takes care of the assets, liabilities, payroll, and taxes. The managerial accountant goes one step beyond by using the historical data compiled to make decisions for the present and future direction of the company. Managerial accountants are becoming more and more beneficial to companies and their future.
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Managerial accountants have many definitions, with several very constant characteristics. Professor Michael Bromwich (1988) states that management accounting is “future-oriented, is dynamic, produces forward looking figures and is meant to be decision and control relevant, should not be too concerned with objectivity and is not generally subject to external regulations” (p. 26).
In a message from the chair, Larry White (2005) states that management accounting is about building quality decision-support, planning, and control processes over the value-creating operations inside organizations. He believes the without strong internal processes and management, there is nothing for the capital markets to value or auditors to check (p. 6). He further states that inside a company is the only place in the economy where sustainable value is created; therefore, it should be a priority focus of the financial professionals.
The most recent and widely accepted definition of management accounting comes from the International Federation of Accountants and is fully supported by the CIMA. IFAC defines management accounting as:
“The process of identification, measurement,
accumulation, analysis, preparation, interpretation, and
communication of information (both financial and operating)
used by management to plan, evaluate, and control within
an organization and to assure use of and accountability for
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its resources” (Bromwich, 1988, p. 27).
Management accounting is used by management to plan, evaluate, control and assure accountability. Bromwich criticizes the definition as it is mostly concerned with compiling and communicating information and believes strongly that management accounting needs to be dynamic and forward-looking.
To place the differences in perspective, financial accounting is historical based, compiling information for mostly external users where managerial accounting is more internally driven and forms opinions based on the financial accounting facts. Managerial accounting isnt about just compiling information but rather analyzing it and then using it in making decisions. And here is the difference. Decision making, managerial accounting is about utilizing the information AND making decisions based on the analysis of the data. They are part of the management team and take part in management decisions that affect the future of the company.
In a previous discussion, Bromwich was quotes as stating that “management accounting …should not be too concerned with objectivity and is not generally subject to external regulation.” Contrary to Bromwich beliefs is the Institute of Management Accountants Standards of Ethical Conduct, which states four behaviors for all management accountants. The IMA holds Management accountants to the
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highest standards of ethical conduct. The four standards of ethical conduct are Competence, Confidentiality, Integrity, and Objectivity.
Competence. Managerial accountants have a responsibility to maintain an appropriate level of professional competence, perform their duties in accordance with laws, regulations and technical standards, and prepare reports and recommendations after analysis of relevant and reliable information. In the restaurant business management is held accountable for the units inventory, food costs and labor costs. It is important that the data provided is accurate and reliable. Falsifying information to make the “numbers” look good can be detrimental to the operations of the unit.
Confidentiality. It is the managers responsibility to refrain from disclosing confidential information, informing subordinates appropriately in regards to confidentiality and to monitor activities to ensure compliance. Confidentiality agreements are part of the managers paperwork. Agreements pertaining to salary, “secret recipes” and procedure were signed and were expected to never be topics of idle conversation.
Integrity. Managerial accountants have a responsibility to avoid conflicts of interest and advise all parties of potential conflict.