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Chapter 1: Question 1Q (page 22)

Differentiate broadly between financial accounting and managerial accounting.

Short Answer

Expert verified

The major difference is that financial accounting is performed for external users and management accounting is performed for internal users.

Step by step solution

01

Definition of Accounting

Accounting is defined as a system that records, processes, and manages the financial activities of a particular business entity for a particular period. Accounting can be further bifurcated into two separate parts that are financial accounting and managerial accounting.

02

Definition of Financial and managerial accounting

Financial accounting is the subdivision of accounting that deals in the preparation of financial statements of a company by utilizing the financial data abstracted from the accounting process; these financial statements are used to illustrate their financial performance and

Managerial accounting is an accounting field that deals with identifying, measuring, analyzing, and interpreting accounting data to assist managers in making informed operational decisions.

03

Conclusion

The major difference between financial and managerial accounting is that financial accounting is performed to represent the financial situation to outside parties such as investors, creditors, suppliers, and customers, whereas managerial accounting is performed for effective decision making and for internal use only.

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Most popular questions from this chapter

Presented below are three models for setting GAAP.

  1. The purely political approach, where national legislative action decrees GAAP.
  2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
  3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

  1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
  2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
  3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

What are the primary advantages of having a codification of generally accepted accounting principles?

(FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

  1. GAAP is the term used to indicate the whole body of FASB authoritative literature.
  2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.
  3. The primary governmental body that has influence over the FASB is the SEC.
  4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

If you were given complete authority in the matter, how would you propose that GAAP should be developed and enforced?

Economic consequences of accounting standard-setting means:

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.
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