CHAPTER 1:

Managerial
Accounting and
the Business
Environment
Prepared by
Shannon Butler,
CPA, CA
Carleton
University
 Learning Objectives
1 Describe the functions performed by managers.
2 Identify the major differences and similarities
between financial and managerial accounting.
3 Explain the basic concept of enterprise risk
management.
4 Explain the nature and importance of ethics for
accountants.
5 Explain the elements of corporate social
responsibility.
6 Explain how intrinsic motivation, extrinsic
incentives, and cognitive biases affect employee
behaviour.

© 2021 McGraw-Hill Limited 1-2

 Work of Management
• Every organization has managers
who perform several major activities
such as:
• Planning
• Controlling
• Directing and Motivating
• Decision making

© 2021 McGraw-Hill Limited 1-3

 Planning
• Identify alternatives.
• Select alternative that does the best
job of furthering organization’s
objectives.
• Develop budgets to guide progress
toward the selected alternative.

© 2021 McGraw-Hill Limited 1-4

 Directing and Motivating
• Directing and motivating involves
managing day-to-day activities to keep
the organization running smoothly.
• Employee work assignments.
• Routine problem solving.
• Conflict resolution.
• Effective communications.

© 2021 McGraw-Hill Limited 1-5

 Controlling

• The control function ensures that

plans are being followed.

• Feedback in the form of performance

reports that compare actual results
with the budget are an essential part
of the control function.

© 2021 McGraw-Hill Limited 1-6

 Decision Making
• The most basic managerial skill is the
ability to make intelligent, data driven
decisions. Many of these decisions
revolve around the following three
questions:
• What should we be selling?
• Who should we be serving?
• How should we execute?
© 2021 McGraw-Hill Limited 1-7
 Big Data Part 1
• Companies are now making decisions
using analytical approaches that employ
extensive amounts of data from a variety of
sources.
• It is estimated that less than 0.5% of
available data is currently being analyzed
and used to support decision making. This
suggests that business managers have an
opportunity to harness the big
data phenomenon.
© 2021 McGraw-Hill Limited 1-8
 Big Data Part 2
• Big data refers to large collections of data
that are gathered from inside or outside a
company to provide opportunities for
ongoing reporting and analysis.
• Big data can be both “structured,” such as
memos and reports, and “unstructured,”
such as videos, pictures, audio, and other
digital forms.

© 2021 McGraw-Hill Limited 1-9

 Big Data Part 3
• Big data is often discussed in terms of 5 Vs.
• The first three of those Vs—variety,
volume, and velocity—refine the definition
of big data.
• Variety refers to the data formats in which
information is stored.

© 2021 McGraw-Hill Limited 1-10

 Big Data Part 4
• Volume refers to the continuously
expanding quantity of data that
companies must gather, cleanse, organize,
and analyze.

• Velocity speaks to the rate at which data

are received and acted on by
organizations. This is particularly
important where the data have a limited
shelf life.
© 2021 McGraw-Hill Limited 1-11
 Big Data Part 5
• The remaining Vs—value and veracity—
define users’ expectations with respect to
big data.

• Value implies that the expenditure of time

and money by organizations to analyze
big data needs to result in insights that are
valued by stakeholders.

© 2021 McGraw-Hill Limited 1-12

 Big Data Part 6
• Veracity refers to the fact that users expect
their data to be accurate and trustworthy.
• For management accounting professionals,
veracity may be the most important of the
five Vs because their analysis and
opinions, which are relied on by numerous
stakeholders must be supported by
verifiable data.

© 2021 McGraw-Hill Limited 1-13

 Data Analytics Part 1
• From a managerial accounting standpoint, the
goal for managers is to use data analytics to
derive value from big data.
• Data analytics refers to the process of analyzing
data with the aid of specialized systems and
software to draw conclusions about the
information they contain.
• Managers often communicate the findings from
their data analysis to others through the use
of data visualization techniques, such as graphs,
charts, maps, and diagrams.
© 2021 McGraw-Hill Limited 1-14
 Data Analytics Part 2
• Data analytics can be used for descriptive,
diagnostic, predictive, and prescriptive purposes.
• Descriptive analytics are used to answer the
question: What happened?
• Diagnostic analytics are used to answer the
question: Why did it happen?
• Predictive analytics are used to answer the
question: What will happen?
• Prescriptive analytics can be used to answer the
question: What should I do?

© 2021 McGraw-Hill Limited 1-15

Planning and Control Cycle

Exhibit 1-2

© 2021 McGraw-Hill Limited 1-16

 Strategy Part 1
• A strategy is a “game plan” that enables
a company to attract customers by
distinguishing itself from competitors.

• The focal point of a company’s strategy

should be its target customers.

• Customer value propositions, are the

essence of strategy.

© 2021 McGraw-Hill Limited 1-17

 Strategy Part 2
• Value propositions typically focus on
providing customers with one of the
following:
• Products or services with exceptional
quality and innovation, operational
excellence (i.e., low-cost products or
services with reliable service), or
outstanding customer service.

© 2021 McGraw-Hill Limited 1-18

Comparison of Financial and
Managerial Accounting

Accounting
• Recording
• Estimating Financial and
• Organizing Operational Data
• Summarizing

Financial Managerial
Accounting Accounting

© 2021 McGraw-Hill Limited 1-19

 Comparison of Financial and
Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on
versus relevance objectivity and verifiability relevance
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focus on
companywide reports segment reports
6. Rules Must follow Not bound by
GAAP/ASPE/IFRS GAAP/ASPE/IFRS
7. Requirement Mandatory for Not
external reports Mandatory

© 2021 McGraw-Hill Limited 1-20

 Managerial Accounting: The
Broader Context
• A business process is a series of steps
that are followed in order to carry out
some task in a business.
• A value chain consists of the major
business functions that add value to a
company’s products and services.
• Business functions making up the value
chain →
Research and Product Manufacturing Marketing Distribution Customer
Development Design Service

© 2021 McGraw-Hill Limited 1-21

Enterprise Risk Management
• Every business strategy or decision
involves risks.
• Enterprise risk management is a process
used to proactively identify and manage
these risks.
• Companies should identify foreseeable
risks before they occur.
• Can reduce risks by implementing
specific controls to mitigate the identified
foreseeable risks.
© 2021 McGraw-Hill Limited 1-22
Enterprise Risk Management
Examples of Business Risks
● Products harming customers
● Losing market share due to the
unforeseen actions of competitors
● Poor weather conditions shutting
down operations
● Website malfunction
● A supplier strike halting the flow
of raw materials
● Financial statements unfairly
reporting the value of inventory
● An employee accessing
unauthorized information
© 2021 McGraw-Hill Limited
Examples of Controls to
Reduce Business Risks
● Develop a formal and rigorous
new product testing program
● Develop an approach for legally
gathering information about
competitors' plans and practices
● Develop contingency plans for
overcoming weather-related
disruptions
● Thoroughly test the website
before going "live" on the Internet
● Establish a relationship with two
companies capable of providing
raw materials
● Count the physical inventory on
hand to make sure that it agrees
with the accounting records
● Create passwords barriers that
prohibit employees from obtaining
information not needed to do their
jobs
1-23
 Ethics

• Accountants must maintain a level of

competence appropriate to their
designation.
• Confidentiality
• Integrity
• Objectivity

© 2021 McGraw-Hill Limited 1-24

 Ethics
• Confidentiality → is essential because of the
importance of the information they analyze.
• Integrity → is maintained by avoiding conflicts of
interest with their employers or clients, by
communicating the limits of professional
competence, and by not accepting favours that
would compromise their judgment.
• Objectivity → must be present in communications,
so that recipients can receive both favourable and
unfavourable information.
© 2021 McGraw-Hill Limited 1-25
 Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Shareholders & Human Rights
Advocates

CSR extends beyond legal compliance

to include voluntary actions that satisfy
stakeholder expectations.
© 2021 McGraw-Hill Limited 1-26
 Leadership Part 1
• Leaders must be able to unite the
behaviours of employees around two
common themes – pursuing strategic
goals and making optimal decisions.
• Therefore, intrinsic motivation, extrinsic
incentives, and cognitive biases need to
be understood how they influence
human behaviour.

© 2021 McGraw-Hill Limited 1-27

 Leadership Part 2
• Intrinsic Motivation → Motivation that
comes from within us.
• Extrinsic Incentives → A way to
highlight important goals and to
motivate employees to achieve them by
offering a type of reward.
• Cognitive Biases → Everyone possess
cognitive biases, or distorted thought
processes; it is important for leaders to
recognize this.
© 2021 McGraw-Hill Limited 1-28
 End of Chapter Summary
Part 1
• Managerial accounting assists managers in
carrying out their responsibilities, which
include planning, directing and motivating,
controlling, and decision making.

• Managerial accounting differs from financial

accounting in that it is more toward the future,
emphasizes relevant data, places less emphasis
on precision, emphasizes segments of an
organization, is not governed by generally
accepted accounting principles, and is not
mandatory.
© 2021 McGraw-Hill Limited 1-29
 End of Chapter Summary
Part 2
• Enterprise risk management involves
proactively identifying and managing key risks
faced by an organization.

• Professional accounting organizations have

their own code of professional ethics to provide
guidance for members, regardless of their
place of employment.

© 2021 McGraw-Hill Limited 1-30

 End of Chapter Summary
Part 3
• Many companies have embraced corporate
social responsibility, whereby the needs of
various stakeholders are considered when
making decisions.

• It is important for management accountants to

understand how behaviour is influenced by
intrinsic motivation, extrinsic incentives, and
cognitive biases.

© 2021 McGraw-Hill Limited 1-31