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Difference between financial & Mgt accounting
Module 1
Management Accounting
According to Robert Anthony "Management
accounting is concerned with accounting
information which is useful to management.”
Nature of Management Accounting
1) Provides accounting information. 2) Decision
Making. 3) Studies cause and effect relationship.
4) Uses special techniques. 5) Quantitative and
Qualitative information. 6) Multi-disciplinary.
7) Accounting for future 8)Management oriented
Objectives of Management Accounting
1)To collect & supply data for financial analysis 2)
To helps in future planning, controlling and
decision making. 3) To evaluate performance.
4) To motivate employees. 5) To communicate up
to date information. 6) To helps in policy
formulation. 7) To prepare reports.
Scope of Management Accounting
1) Financial accounting. 2) Cost accounting.
3) Statistical methods. 4) Budgeting. 5) Tax
accounting. 6) Reporting. 7) Office services.
8) Internal auditing. 9) Interpretation.
Functions of management accounting
1. Planning and forecasting 2. Modification and
verification of data 3. Analysis and interpretation
of data 4. Communication 5. Coordination
6. Control 7. Decision making
Basic Principles of Management Accounting
1) Principle of exception. 2) Principle of objectivity.
3) Principle of consistency.
4) Principle of relevancy. 5) Principle of exception.
6) Principle of objectivity. 7) Principle of
consistency. 8) Principle of relevancy.
Need and Importance (Advantages or Uses) of
Management Accounting
1) Proper planning. 2) Effective control.
3) Increased efficiency. 4) Measurement of
performance. 5) Maximising profitability.
6) Increase in production. 7) Better customer
service. 8) Quick decision making.
Limitations of Management Accounting
1) Based on accounting information. 2) Lack of
knowledge. 3) Not a substitute for management.
4) Personal judgement. 5) Costly.6) Resistance.
Tools & Techniques of Management Accounting
1) Financial Accounting. 2) Financial Analysis.
3) Historical Cost Accounting. 4) Budgetary Control.
5) Standard Costing. 6) Marginal Costing. 7)
Decision Accounting. 8) Revaluation Accounting.
Functions of Management Accountant
A. Analytical and advisory functions
1) Planning and control of operations.
2)Measuring the performance of theorganisation
3) Reporting the operational performance.
4) Evaluating policies and program. 5) Preparing
reports and statements. 6) Evaluating external
factors of the business.
B. Administrative and procedural functions
1) Installation of accounting system 2) Arranging
audit. 3) Introduction of budgeting system.
4) Making capital expenditure decisions.
5) Management of cash. 6) Preparation of financial
statement.
Installation of management accounting system
1) Preparing organisational manual. 2) Preparing
forms and returns. 3) Requisite staffing.
4) Classifying records and integrating the systems.
5) Introducing standard cost techniques. 6) Setting
up budgetary control system. 7) Introducing
operation research techniques.
Recent trends in management reporting
1) Cash flow reporting.2) Segment reporting.
3) Financial reporting using. 4) Interim financial
reporting 5) Economic value added. 6) Corporate
governance report. 7) Environmental reporting. 8)
Brand valuation. 9) Vertical form of financial
analysis. 10) Uses chart, graphs and diagrams. 11)
Business responsibility reporting.
12) Management discussion and analysis report.
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Comparative Statement Current Ratio
Financial Accounting It is a statement used to compare a particular It is the ratio of current asset to current liabilities. It
• The purpose is to ascertain profit or loss and financial statement with prior period statements. shows the relationship between total current assets
financial position • Records historical data relating Comparative balance sheet and current liabilities. It is also known as working
to past • Compulsory • Lays more emphasis on Its a statement that shows the financial position of capital ratio or bankers ratio.
accuracy • Based on generally accepted accounting an organisation over different periods. Quick Ratio
principles and conventions Comparative income statement It is the ratio of quick asset to current liabilities. It is
Prepared for a particular period • Limited scope It is a statement that present the result of multiple the measure of
•External parties are the users •Audit is compulsory account periods in separate columns. the instant debt paying ability of a business. It is
• Stock is valued on the principle of cost or market Common size statement also called acid test ratio or liquid ratio. Difference
price whichever is less It is a tool of financial managers to use analysis of between current ratio and quick ratio
Management Accounting financial statement. These are expressed in Current Ratio Quick Ratio
• The purpose is to provide information to mgt for percentage form. It indicates whether It indicates whether
decision making • Concerned with future plans and Common size income statement a firm is able to pay a firm is able to pay
operations • Optional • Lays more emphasis on It is an income statement in which each line item is its current liabilities its current liabilities
quick and prompt reporting • Not based on rigid expressed as a percentage of the value of revenue within a year quickly or within a
principles • No specific period or sales. month
• Wider scope • Internal parties are the users Common size balance sheet It expresses It expresses the
• Audit is not compulsory • No such principle is It is a balance sheet that display both the numerical relationship relationship between
followed for value of stock value and relative percentage for total assets, total between current quick assets and
Difference between cost accounting and liabilities and equity accounts. assets and current current liabilities
Management Accounting Trend Analysis liabilities
Cost Accounting It is an analysis of trend of the firm by comparing its Ideal standard is 2:1 Ideal standard is 1:1
• It is used for cost control and cost reduction financial statements to analyse the trend of the
Inventories are Inventories is
• The scope of cost accounting is narrow market or future.
taken into account I ignored in the
• Statutory audit is mandatory for big business Income statement (profit or loss account)
the calculation of calculation of quick
• It is used for management, shareholders, and It is one of the financial statements of a company
current ratio ratio
vendors • It considers only quantitative data and shows the company's revenues and expenses
Window Dressing
• Only cost accounting principles are used • Cost during a particular period.
It is a practice of improving current ratio through
accounting is restricted to cost related data • It Difference betwen horizontal & vertical Analysis
manipulation of accounts. Window dressing can be
deals with both present and future transactions Horizontal Analysis Vertical Analysis
done in the following ways
Management Accounting Requires comparative Requires financial
1. Increase in the inventory values
• It is used for managerial decision making • The financial statements statement of one
2. Postponement of purchase of fixed assets for
scope of management accounting is broader for a certain number year
cash 3. Selling a fixed asset for cash 4. Paying of
• No statutory audit requirement • It is only for of years
current liabilities 5. Considering short term liabilities
management • It considers both quantitative and Deals with same item Deals with
as long term
qualitative data • Principles of cost accounting & of different periods different items of
Debt Equity Ratio
financial accounting are used • It uses financial as the same period
Is a type of ratio which expresses therelationship
well as cost accounting data • It deals with future Provides information Provides
between debt and equity.This ratio is also knownas
transactions in absolute figures and information in
security ratio/external internal ratio
Module 2 percentages percentages Total Asset to Debt Ratio
Financial Analysis Generally used for Generally used for Its a type of ratio which expresses the relationship
Financial analysis simply refers to analysis of time series analysis interfirm analysis between total asset and total liabilities of a
financial statement of a company. Dynamic analysis Static analysis business. It is also called solvency ratio.
Purpose/objectives/features of financial analysis Proprietary Ratio
1. To helps in decision making 2. To know the It is a ratio which establishes the relationship
Module 3
efficiency of the firm 3. To make inter firm between shareholders fund&total assetThis ratio is
Ratio
comparison 4. To determine solvency of the also known as equity ratio or net worth ratio
Ratio is the simple arithmetic expression of the
business 5. To determine liquidity of the business 6. Fixed Asset Ratio
relationship of one number to another.
To ascertain operating performance of the business It is a ratio of fixed asset to long term funds or
Ratio analysis
7.To judge profitability ofthe firm capital employed.
It is a technique of analysis and interpretation of
Uses/ significance / importance of financial Capital Gearing Ratio
financial statements.
statement analysis It is a ratio which indicates the relationship between
Accounting Ratio
1. Safety of the investment 2.Growth of business 3. fixed interest bearing securities and equity
Ratio calculated in the basis of accounting
Effective utilization of resources 4. To assess the shareholders fund.
information are called accounting ratio.
profitability 5. To assess the liquidity Interest Coverage Ratio
Objectives / Purpose of Ratio analysis
Financial statement It is a ratio which establishes the relationship
1. To study short term solvency of a firm 2. To study
These are formal records of the financial activities between operating profits and interest charges.
long term solvency of a firm 3. To determine
and position of a business. Dividend coverage ratio
profitability of a firm 4. To facilitate comparison 5.
Analysis & interpretation of financial statement It is a ratio which measures the ability of a company
To helps in managerial decision making 6. To
It is an attempt to determine the significance and to pay dividend or preference shares carrying a
measure the performance of a firm 7.To
meaning of financial statement data. fixed rate of dividend.
communicate strength &weakness of a firm
Features of financial analysis Overall coverage ratio
Advantages/ Importance of Ratio Analysis
1. To know the profitability of the firm 2. To know It measures the ability of a company to service all
1. Advantages to Management
the solvency of the firm 3. To know the liquidity of fixed obligations out of its earnings.
a)Helps in formulating policies b)Helps in planning
the firm 4. To know the efficiency of the Return on investment (ROI)
&forecasting c)Helps in decisionmaking
management of the firm 5. To know the financial ROI measure the overall profitability. It establishes
2. Advantages to shareholders
strength and weakness of the firm. the relationship between profit or return on
a) Helps in investors in selecting best companies for
Types of financial analysis investment
investment b)Help in evaluating performance of
1. Internal analysis :- These are those analysis done Uses / Advantages of ROI
companies c) Helps in calculating values of shares
by internal parties. It is a detailed financial analysis. 1. It measures overall profitability 2. It measures
3. Advantages to government
2. External analysis :- These are those analysis done success of business 3. It helps in investment
a) Helps in tax planning b) Helps government to
by external parties. It is not a detailed decision 4. It is useful for planning capital structure
study cost structure of industries.
financial analysis. 5. It is a foundation of optimum utilisation of assets.
4. Advantages to Creditors
3. Long term analysis :- These are those analysis for 6. It can be used to determine price of a product.
a) Helps in measuring liquidity positions b) Helps to
ascertaining long term profitability, solvency, and Market Test Ratios
know strength and weakness of companies.
stability of the firm. Market test ratios are used for evaluating shares
5. Advantages to employees
4. Short term analysis :- These are those analysis for and stock which are traded in the market. Market
a) Demand more wages and benefits b) Know the
ascertaining short term solvency of the firm. test ratios are also known as investors ratios or
financial health of companies.
5. Horizontal analysis :- It refers to comparison of stock market ratios or market valuation ratios.
Limitations of Ratio Analysis
financial data of a company for several years. Du Pont Chart Du Pont Chart shows the analysis of
1. Inherent limitations of accounting 2. Non-
6. Vertical analysis :- It refers to the study of profitability that breaks down ROI between profit
monetary factors ignored 3. qualitative factors
relationship of the various items in the financial margin and capital turnover. It shows the
ignored 4. Window dressing 5. Not a substitute for
statements of one accounting period. interaction of operating net profit ratio and capital
judgement 6. Price level changes 7. Lack of
Tools & techniques for financial statement analysis turnover ratio. It helps the management to visualise
adequate standard 8.Need for comparative analysis.
1.Comparative statements 2.Common size the different forces affecting profits.
Liquid Ratio It refers to ability of a concern to meet
statements 3.Trend analysis 4.Ratio analysis
its current obligations.
5.Cashflow analysis
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Activity ratios Difference between fund flow statement and Classification of cash flows Cost Volume Profit Analysis (CVP Analysis)
It shows how effectively a firm uses its available balance sheet (Position statement) 1. Cash flow from operating activities. CVP analysis is the study of the effect on future
resources or assets. These ratios indicate efficiency Fund flowstatement Balance Sheet 2. Cash flow from investing activities. profit of changes in fixed cost, variable cost, sales
in asset management. It is a statement of It is a statement of 3. Cash flow from financing activities. price, quantity and mix.
a) Inventory turnover Ratio changes in assets and assets and 1. Cash flow from operating activities Objectives / Uses of CVP analysis
It is a type of ratio which shows the relationship liabilities liabilities These are cash flows from regular course of 1. To forecast profit. 2. To determine pricing
between cost of goods sold and average inventory. It is optional It is statutory operations of a business. policies. 3. To evaluate business performance.
It is also known as stock turnover ratio It is useful to internal It is useful to Examples: 4. To facilitate budget preparation. 5. To achieve
Stock Velocity parties external parties a) Cash sales b) Cash received from debtors c) cash cost control 6. To helps in decision making.
Stock turnover ratio expressed in time. It can also purchase of goods d) Cash paid to suppliers. e) 7. to determine break even point.
It is a supplementary It is a primary
be expressed in days or months. It is called stock Wage paid to employees. Technique of CVP analysis
financial statement financial statement
velocity or stock turnover period. 2. Cash flow from investing activities 1. Contribution margin analysis. 2. Margin of safety
It is prepared after It is prepared at
b) Debtors turnover ratio Investing activities includes purchase and sale of analysis
balance sheet is the end of the
It is a ratio which explains the relationship between fixed assets. Contribution
prepared accounting period
net credit sales and average debtors. It is also Examples It refers to excess of sales over variable costs. It is
It is prepared to show It is prepared to
known as receivable turnover ratio. Average a) Cash payment to purchase fixed asset. the marginal profit. It is also known as gross margin.
sources and uses of show financial
collection period b) Cash receipts from sale of fixed assets. Uses / Importance of contribution
fund position
Debtors turnover ratio expressed in days or c) Cash payment to purchase shares, debentures 1. It helps in fixing selling pricem 2. It determines
Fund from operation
months. It is called average collection period or etc. d) Cash receipts from sales of shares, break even point. 3. It helps to find out profitability
It is the fund generated from business operation. It
debtors velocity debentures etc. of various products. 4. It helps in make or buy
is an internal source of fund. Sales are the main
c) Creditors turnover ratio 3. Cash flow from financing activities decisions. 5. It helps to determine key factor. 6. It
source of inflow of fund.
It shows relationship between net credit purchases The financing activities of a firm include issuing or indicates profit potential of a business. 7. It
Schedule of changes in working capital
and average creditors. It is also called payable redemption of share capital, debentures and highlights relationship of cost, sales and profit.
It is a statement which is prepared by recording
turnover ratio. raising and repayment of loans. Break Even Point
changes in current assets and current liabilities
Average payment period Examples Its the point at which total sales revenue is equal to
during the accounting period.
Creditors turnover ratio expressed in days or a) Cash proceeds from issue of sharesmb) Cash total cost. It is the point of no profit no loss.
Sources and applications of fund
months. It is known as average payment period or proceeds from issue of debentures. c) Cash Break Even Analysis
Sources of Fund Applications of fund
creditors velocity. proceeds from raising of loans. d) Redemption of It is a method of studying the relationship amongst
d) Working capital turnover ratio Issue of shares Redemption of shares shares. e) Redemption of debentures. sales, revenue, fixed costs and variable costs to
The relation between sales and working capital is Issue of Redemption of f) Repayment of loans. determine the level of activities at which costs are
called working capital turnover ratio. debentures debentures Steps for preparation of cash flow statements equal to sales revenue.
e) Fixed asset turnover ratio Medium and long Repayment of loans 1. Compute the net increase or decrease in cash or Assumptions of CVP / Break Even analysis
It is a ratio which establishes the relationship term loan cash equivalents. 2. Calculate net cash flow from 1. All costs can be divided into fixed and variable. 2.
between net sales and fixed assets. Sales of fixed Purchase of fixed operating activities. 3. Calculate net cash flow from Variable costs are vary in direct proportion. 3. Fixed
Profitability Ratios assets. assets investing activities. 4. Calculate net cash flow from cost remains constant.
It refers to ability of a firm to earn income. Sale of Purchase of financing activities. 5. Prepare a formal cash flow 4. Selling price per unit remains constant.
Gross profit ratio investment investment statement highlighting the net cash flow from 5. Sales mix remains constant. 6. Efficiency of plant
This is the ratio of gross profit to sales expressed as Cash operating, investing and financing activities. 6. remains constant. 7. Productivity per work remains
percentage. It is also known as gross margin. Cash comprises of cash in hand and demand Make an aggregate net cash flow from these three constant.
Operating ratio deposits with bank. activities. 7. Report significant non cash Break Even Chart
It is a ratio expresses the relationship between Cash Equivalents transactions. It is the graphical presentation of break even point.
operating cost and sales. It indicates overall These are short term, highly liquid investment that It shows relationship between sales, volume,
efficiency in operating the business. are readily convertible into cash. variable and fixed cost.
Module 5
Operating profit ratio Cash Flow Angle of incidence
Variable Cost
It is a ratio which explains the relationship between Inflow and outflow of cash and cash equivalents in a It is the angle caused by the intersection of the total
Variable costs are those costs which vary in
operating profits and net sales. business is called cash flow. sales line and total cost line at the break-even point.
proportion to change in the volume of production
Net profit Ratio Cash flow statement Margin of Safety
or level of activity.
It is a ratio of net profit earned by business and its It is a statement which describes the inflow and It is the difference between actual sales and break-
Fixed Cost
net sales. It measures overall profitability. outflow of cash and cash equivalents in an even sales.
Fixed costs are those costs which do not change as
Earnings Per Share (EPS) enterprise during a specified period of time. Cash break even point
the volume of production or level of activity
This ratio indicates the profits available for each Objectives of cash flow statement It is the number of units to be produced to give a
changes.
equity share. It is calculated by dividing the 1. To assess and monitor liquid resources in the contribution equal to cash fixed cost.
Marginal Cost
earnings (profits)available to equity shareholders enterprise. 2. To control liquid resources in Profit Volume Chart (P/V Chart)
It is the additional cost of producing an additional
by the number of equity shares issued. enterprise. 3. To prevent holding of excessive cash It is a chart which shows the amount of profit or loss
unit.
Dividend Per Share (DPS) resources. 4. To help in capital budgeting. at different levels of output.
Marginal Costing
It is the amount of profit distributed to equity 5. To maintain optimum level of cash resources. Marginal Costing in Managerial decision making
It is the ascertainment by differentiating between
shareholders divided by the number of equity Importance / Uses / Advantages of Cash flow 1. Fixation of selling price. 2. Whether to accept a
fixed cost and variable cost.
shares outstanding. Statement special order or not. 3. Whether to accept an export
Characteristics of marginal costing
1. Helpful in short term planning. 2. Helpful in order or not. 4. selection of suitable sales mix. 5.
Module 4 1. It is a technique for managerial decision making.
formulation of financial policies. 3. Provide a basis Make or buy decision. 6. Whether to discontinue a
Fund 2. All costs are classified into fixed and variable. 3.
for cash budget. 4. Helpful in control. product or not. 7. Key factor
Fund means working capital of the excess of Fixed costs are charged against profit of the period.
5. Helpful in financial decision 6. Reveals liquidity 8. Shut down point
current assets over current liabilities. 4. Selling price is equal to variable cost plus
and solvency 7.Helps in efficient cash Managmt Make or Buy Decision
Fund flow contribution.
Limitations of cash flow statement Marginalcosting helps the managmnt in deciding
Inflow and outflow of fund in a business is called Assumptions of marginal costing
1. Ignores non-cash transactions. 2. Not a substitute whether to make a component part within the
fund flow. 1. All costs are divided into fixed and variable.
for income statement. 3. Historical in nature. 4. factory/to buy it from outside suppliers
Fund flow statement 2. Fixed cost remains constant at all levels of
Limited scope. 5. Does not present true picture of Key Factor
It is a statement showing sources and applications activities. 3. Total variable costs vary, but variable
liquidity. 6. Easily influenced by managerial A factor which restricts the volume of operation of
of fund in a business. cost per unit does not vary. 4. There is no stock 5.
decisions. the firm is knowns as key factor.
Objectives of fund flow statement Selling price remains constant.
Difference between cash flow statement and fund Difference between absorption costing and
1. To serve as a technique of managing working 6. Price of material remains constant. 7. Rates of
flow statement marginal costing
capital. 2. to know changes in working capital. labour remains constant.
Cash Flow Statement Fund Flow Absorption Costing Marginal Costing
3. To anticipate position of working capital. 4. To Advantages / Importance of marginal costing
Statement All costs are charged. Only variable cost is
reveal short term financial strength and weakness 1. Easy and simple. 2. Simple valuation of stock.
It is prepared on cash It is prepared on charged.
of business. 5. To provide basis for budgeting. 6. To 3. Better cost control. 4. Ascertainment of
assess growth of a firm. basis working capital profitability. 5. Profit planning. Not useful for Useful for decision
Importance / Uses / Benefits of fund flow basis 6. Decision making 7. Pricing policy. decision making. making.
statement It is prepared on cash It is prepared on Disadvantages of marginal costing Suitable for external Suitable for internal
1. Financial analysis and control. 2. Financial concept accrual concept. 1. Difficulty in separating cost. 2. Under valuation reporting. reporting.
planning and budget preparation. 3. Helpful in It is presented in It is not presented of stock. 3. Time factor ignored. 4. Wrong basis for The decisions are The decisions are
comparative study. 4. Knowledge of managerial prescribed format in prescribed pricing. 5. More emphasis on sales. 6. Short run based on profit. based on
policies. 5. Useful to bankers and money lenders. 6. format analysis. 7. Difficulty in application. contribution
Act as a future guide. 7. Proper allocation of It is useful for short It is useful for long Absorption costing When production Cost per unit same
resources. term analysis term analysis It is a technique whereby fixed costs as well as increases, cost per at all levels of
Limitations of fund flow statement It is used for cash It is used for variable costs are allotted to cost units. unit reduces production
1. It does not reveal cash positions. 2. It is not planning financial planning Direct costing It is a specialised form of cost
useful as cash flow statement. 3. It is not a Schedule of changes Schedule of analysis that only uses variable costs to make
substitute for income statement. 4. It is not a in working capital is changes in working decisions.
substitute for balance sheet 5. It cannot reveal not required capital is required
continuous changes 6.It not original in character
Preliminary Techniques of Fund flow statement 1.
Classification of items into current and non-
current. 2. Identification of transactions which
cause flow of fund. 3. Calculation of fund from
operation. 4. Preparation of fund flow statement.

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