AMERICAN COLLEGE OF TECHNOLOGY

Department of Business Administration

Online MBA Program

Course: Financial and Managerial Accounting (MBA 521)

Individual Assignment

Submitted to: Dr. Habtamu Gemeda

Student Name: Abdulmenan Ahmed
Student ID: OMBA-239-21A

February, 2022
Addis Ababa, Ethiopia
1. What is accounting, why accounting is considered a means to an end?
Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by the users of the information. This information is primarily financial
—stated in money terms. Accounting is not an end, but rather a means to an end. The primary objective
of accounting is to provide information that is useful for decision-making purposes. The final product of
accounting information is the decision that is enhanced by the use of that information.

2. Discuss accounting from the user’s perspective (manager’s viewpoint)

Accounting from a manager’s perspective is the practice of identifying, measuring, analyzing,
interpreting, and communicating financial information to managers for the pursuit of an organization's
goals. It is aimed to assist users internal to the company in making well-informed business decisions.

3. Identify and discuss the different types of accounting information

There are several types of accounting information but the main types of accounting information widely
used in the business community are as follows:
 Financial Accounting Information
It mainly focuses on the tracking and preparation of financial statements for internal management and
external stakeholders, such as suppliers, investors, government agencies, owners, and other interest
groups. These financial statements are consistent with accounting guidelines and formatting, particularly
for publicly traded organizations. This allows individuals unfamiliar with day to day operations to see the
overall performance, health, and relative profitability of a given organization.

 Managerial Accounting Information

The design and use of accounting is to obtain and prepare financial information for management and
other higher-level staff to help them make the most appropriate business decisions and manage costs. This
will help achieve the organization’s objectives by supporting decision makers inside the organization.
 Tax Accounting Information
Involves planning for tax time and the preparation of tax returns based on the financial accounting
information. It also helps businesses figure out their income tax and other taxes and how to legally reduce
their amount of tax owing. Tax accounting information also analyzes tax-related business decisions and
any other issues related to taxes.

4. Determine the information needs of users (consider multiple scenarios).

We can broadly divide the users of accounting information into two groups – internal users and external
users. Internal users use a mix of management and financial accounting information. Some internal users
of accounting information and their needs are briefly discussed below:
 Management: Accounting information is of great assistance to management for planning,
controlling and decision making process. Also, management needs the accounting information to
evaluate the performance of the organization and position, so that the necessary measures may be
taken to bring improvements in terms of business results.
 Employees: Employees use the accounting information to find out the financial health, amount of
sales and profitability of business to determine their job security, the possibility of future
remuneration, retirement benefits and employment opportunities.
 Owners: Owners invest capital to start and run business with the primary objective to earn profit.
They need accurate financial information to know what they have earned or lost during a
 particular period of time. On the basis of accounting information they decide their future course
of actions such as expansion or contraction of business.

External users of accounting information include:

 Investors: In corporate form of business, the ownership is often separated from the management.
Normally investors provide capital and management runs the business of the entity. The
accounting information is used by both actual and potential investors. Actual investors use this
information to know how their funds are being used by the management and what the expected
performance of business in future is in terms of profitability and growth. On the basis of this
information, they decide whether to increase or decrease their investment in future. Potential
investors use accounting information to decide whether or not a particular corporation is suitable
for their investment needs.
 Lenders: Lenders are individuals or financial institutions that normally lend money to businesses
and earn interest income on it. They need accounting information to assess both financial
performance and financial position of the business, and to have a reasonable assurance that the
entity to whom they are going to lend money would be able to return their principal amount as
well as pay interest thereon.
 Customers – Customers have interest in the accounting information for assessing the financial
position of a business, especially, when they have a long term involvement with, as it enables to
maintain a steady source of business. Customers can be divided into three groups – manufactures
or producers at various stages of production, wholesalers & retailers, and end users or final con-
sumers.
 Regulatory Authorities – The accounting information is needed for them to ensure that it is in
accordance with the rules and regulations and that it protects the interests of the stake holders
who rely on such information.

5. Discuss the basic functions of accounting information in decision making (consider multiple
scenarios)
 Business Performance Management: A common use of accounting information is measuring
the performance of various business operations.
 Create Company Budgets: Business owners often use accounting information to create budgets
for their companies.
 Make Business Decisions: Accounting information is commonly used to make business
decisions. Decisions may include expanding current operations, using different economic
resources, purchasing new equipment or facilities, estimating future sales or reviewing new
business opportunities.
 Inform Investment Decisions: External business stakeholders often use accounting information
to make investment decisions. Banks, lenders, venture capitalists or private investors often
review a company's accounting information to review its financial health and operational
profitability.
6. What are the internal and external users of accounting information?
 Internal users are those within an organization who use financial information to make day-to-day
decisions. Internal users include managers and other employees who use financial information to
confirm past results and help make adjustments for future activities.
 External users are those outside of the organization who use the financial information to make
decisions or to evaluate an entity’s performance. External users include potential investors,
stockholders, banks and finance companies, as well as local taxing authorities.

7. Differentiate financial and management accounting information.

 Management accounting information is presented to a company’s internal community, while
financial accounting information is prepared for an external audience.
 Financial accounting information is exact and must adhere to Generally Accepted Accounting
Principles (GAAP), while management accounting information can be based off a guess or
estimate since most managers do not have time to get exact numbers by the time a decision needs
to be made.

8. Outline the objectives of financial accounting and characteristics of management accounting

information.
The primary objective of financial accounting information is to reveal the profits and losses of the
business and provide a true and fair view of the business which is aimed at safeguarding the interest of
various stakeholders internal as well as external which are connected to the business.
Some of the objectives of financial accounting information can be described as follows:
 Systematic Recording of Financial Transactions
Since human memory is short, systematic recording of financial transactions that took place in the past is
essential. Therefore, one important objective is to maintain systematic and permanent records of the
financial transactions in a set of books called journal and ledger.
 Revealing the Financial Position of the Firm
The soundness of financial position of a firm ensures its survival and growth. Therefore financial
accounting information aims at revealing the soundness of its financial position by preparing the balance
sheet.
 Ascertaining the Result of Business Operations
Profit is the main motive of every business firm. That is the result of its operations carried on throughout
a financial year. Therefore, another important objective of is to ascertain the result of business operations
in terms of profit or loss by preparing income statement of the firm.
 Reporting Past Performance And Future Prospect
The shareholders of the firm want to ensure security and growth in the value of their investment.
Therefore, financial accounting information seeks to report to the shareholders about the firm's past
performances and future prospect.

Furthermore, the below are some of the main characteristics of management accounting information:
 Providing Financial Information
The main emphasis of management accounting is to provide financial information to management. The
information is provided in a manner suitable to various levels of management for reviewing policies and
decision making.
  Decision Making
Main objective of management accounting is to provide relevant information-to management to take
various important decisions. Historical information provides a base on which the future impact is
predicted, alternatives are developed and decisions are made to select to select the most beneficial course
of action.
 Achievement of Objectives
Management accounting is helpful in realizing the enterprise objectives. Based on the historical
information and with adjustments for predicate future changes, objectives are laid down. Actual
performance is recorded. Comparison of actual with predetermined results is made. If there are
deviations of actual from the predetermined results, corrective action is taken and predicted ob-
jectives are achieved. This becomes possible with the help of management accounting techniques
of standard costing and budgetary control.
 Forecasting
Management accounting is concerned with taking decisions for future implementation. This involves
prediction and forecasting of future. It is helpful in planning and laying down objectives.

9. Substantiate the need for accounting for business administrators and managers.
An administrator of a business is responsible for managing the organization. Accounting activities help
administrators make important decisions regarding the operation of the business. Areas of accounting
such as financial reporting, budgeting and cost information help managers make planning and controlling
decisions. Financial reporting is important to a business administrators because it shows how much the
business is earning or losing. Accounting can also help business administrators make planning decisions
regarding the organization. Planning involves setting organizational goals, devising strategies to meet
goals and determining the resources needed. Accounting provides managers with information that allows
them to determine the effectiveness of prior decisions and what decisions need to be made in the future.
Accounting also helps business administrators determine the company’s budgeting needs. Budgets are
important because they help an administrator determine if a company is meeting its organizational goals
with the resources allotted. Managers compare budgets to actual performances to determine if the
company is under budget or over budget. An administrator may decide to cut certain programs or services
within an organization that does not fit within the budgets developed by accountants.

10. Discuss financial statements, their purposes, and their types.

Financial statements are written records that convey the business activities and the financial performance
of a company. The general purpose of the financial statements is to provide information about the results
of operations, financial position, and cash flows of an organization. This information is used by the
readers of financial statements to make decisions regarding the allocation of resources. Financial
statements include: Balance sheet, Income statement, Cash flow statement and statements of shareholders'
equity.

11. Discuss the statement of financial position; identify its major parts and elements.
The balance sheet - also called the Statement of Financial Position - serves as a snapshot, providing the
most comprehensive picture of an organization's financial situation. It reports on an organization's assets
(what is owned) and liabilities (what is owed). The statement of financial position includes assets,
liabilities, and equity. Elements of those sections which are mentioned above are as follows:
  Assets
 Cash
 Accounts receivable
 Inventory
 Fixed assets
 Other assets
 Liabilities
 Accounts payable
 Accrued expenses
 Sales tax liability
 Income taxes payable
 Debt

 Equity
 Common stock
 Additional paid-in capital
 Retained earnings

12. What are assets, liabilities, and shareholders’ equity/capital, owners’ equity, dividends,
drawing?
 An asset is a resource with economic value that an individual, corporation owns or controls with
the expectation that it will provide a future benefit.
 A liability is a financial obligation of a company that results in the company’s future sacrifices of
economic benefits to other entities or businesses.
 For corporations, shareholder equity (SE), also referred to as stockholders' equity, is the
remaining amount of assets available to shareholders after all liabilities have been paid.
 Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be
claimed by its owners (sole proprietorship or partnership).
 A dividend is a share of profits and retained earnings that a company pays out to its shareholders.
 Drawings refers to the act of withdrawing cash or assets from the company by the owner(s) for
personal use

13. Discuss the income statement; identify its purpose, types, major parts, and elements.
An income statement is a financial statement that shows you the company’s income and expenditures. It
also shows whether a company is making profit or loss for a given period.
The purpose of an income statement is to provide financial information to investors, creditors, and
readers, whether the company is profitable during the financial year.

There are two types of income statements which are as follows:

 Single-step income statement: It is a basic report of a company's profit prepared using a single
equation to calculate net income using the below formula.
Net Income = (Revenues + Gains) – (Expenses + Losses)
  Multi-step income statement: It calculates the net income using a three-step process. It separates
operational revenues and expenses from non-operational ones using the below formula.
Gross Profit= Net Sales - Cost of Goods Sold
Operating income = Gross Profit - Operating Expense
Net Income = Operating Income + Non Operating Items

The major parts of income statement include revenues, expenses, and net income.

 Revenue: Revenue is the money an entity receives from the sale of goods or services. Other
terms frequently used for revenue are sales, net sales, or sale revenue. It is also referred to as the
“top line” because revenues are reported at the top of the income statement.

 Expenses: Expenses are the money or cost the company spends in the business to generate
revenues. Expenses are the second element of income statement which consists of two main
categories which are the cost of goods sold and operating expenses.

o Cost of Goods Sold: Cost of goods sold are the direct costs of producing the goods being
offered by the entity. This would include the materials, labor, and other resources
required for production.
 Gross Profit: Gross profit is the difference between the revenue received for the product less the
cost of goods sold.
 Operating Expenses: Operating expenses are expenses other than the cost of goods sold that the
company spends in the operation of the business, including salaries, advertising, rental, utilities,
office supplies, and depreciation expenses. In addition, when an entity purchases a capital asset,
such as a building or equipment, they expense a portion of the asset over a number of years; this
is called depreciation. Depreciation expense is an accounting expense that is deducted from net
income.
 Operating Income: Operating income is equal to revenues minus cost of goods sold and
operating expenses. In other words, it measures the profits or losses of the day to day operations
of the business.
 Net Income: Net income or net profit is the profit that the company earns after deducting all the
costs and expenses including the interest and tax expenses. Net income is the third main element
of income statement which shows the net result of the company’s performance during the
accounting period.

14. What are revenue, costs, expenditure, expenses, profit, loss, and income?
Revenue: is the total amount of income generated by the sale of goods or services related to the
company's primary operations.
Cost: is the value of money that has been used up to produce something or deliver a service, and hence is
not available for use anymore.
Expenditure: is funds used by a business, organization, or corporation to attain new assets, improve
existing ones, or reduce a liability. In other words, it’s the use of a resource in the operations of a
business. Expenditure represents a payment with either cash or credit to purchase goods or services.
Expense: is the reduction in value of an asset as it is used to generate revenue. It is an outflow of
cash or other valuable assets from a person or company to another person or company.
Profit: is the financial benefit realized when revenue generated from a business activity exceeds the
expenses, costs, and taxes involved in sustaining the activity in question.
Loss: is an excess of expenses over revenues, either for a single business transaction or in reference to the
sum of all transactions for an accounting period.
Income: is the revenue that is earned by a business or an individual for providing a service or as an
exchange for providing a product.

15. Discuss the different types of costs and give examples of each.
The types of cost accounting are explained below the classification of major accounting costs.
 Direct Costs: Direct costs are related to producing a good or service. A direct cost includes raw
materials, labour, and expense or distribution costs associated with producing a product. The cost
can easily be traced to a product, department, or project.
 Indirect Costs: Indirect costs are expenses unrelated to producing a good or service. They
include office expenses, utilities, etc. An indirect cost cannot be easily traced to a product,
department, activity, or project.
 Fixed Cost: refers to a cost that does not change with an increase or decrease in the number of
goods or services produced or sold. Fixed costs are expenses that have to be paid by a company,
independent of any specific business activities. Examples of fixed costs are rent and lease costs,
salaries, utility bills, insurance, and loan repayments.
 Variable Costs: change in proportion to how much a company produces or sells. Variable costs
increase or decrease depending on a company's production or sales volume—they rise as
production increases and fall as production decreases. Examples of variable costs are raw
materials, piece-rate labour, production supplies, commissions, delivery costs and packaging
supplies

16. Differentiate product costs and period costs.

The key difference between product costs and period costs is that product costs are only incurred if
products are acquired or produced. Before the products are sold, these costs are recorded in inventory
accounts on the balance sheet. Period costs are the costs that cannot be directly linked to the production
of end-products. Essentially, a period cost is any cost that is not a product cost. Thus, a business that has
no production or inventory purchasing activities will incur no product costs, but will still incur period
costs. Period costs are always expensed on the income statement during the period in which they are
incurred.

17. Differentiate variable, fixed, and mixed costs.

Fixed costs do not increase or decrease in conjunction with any activities , while variable costs vary
in relation to either production volume or the amount of services provided . Thus, fixed costs are
incurred over a period of time, while variable costs are incurred as units are produced. Mixed costs are a
combination of fixed and variable costs. Although the fixed portion of a mixed cost remains the same, the
variable portion changes along with sales or production.

18. Discuss the statement of cash flow; identify its purpose, major parts, and sections.
The statement of cash flows, or the cash flow statement (CFS), is a financial statement that summarizes
the amount of cash and cash equivalents entering and leaving a company. It is used to measure the
performance of a company by providing information of how an organization generates cash, and how
the funds are then used.
The main components of the cash flow statement are:

 Cash from Operating Activities: The operating activities on the CFS include any sources and
uses of cash from business activities. In other words, it reflects how much cash is generated from
a company’s products or services. These operating activities might include: Receipts from sales
of goods and services, Interest payments, Income tax payments, Payments made to suppliers of
goods and services used in production, Salary and wage payments to employees, Rent payments
and any other type of operating expenses.
 Cash from Investing Activities: Investing activities include any sources and uses of cash from a
company’s investments. A purchase or sale of an asset, loans made to vendors or received from
customers, or any payments related to a merger or acquisition are included in this category. In
short, changes in equipment, assets, or investments relate to cash from investing.
 Cash from Financing Activities: Cash from financing activities includes the sources of cash
from investors or banks, as well as the uses of cash paid to shareholders. Payment of dividends,
payments for stock repurchases, and repayment of debt principal (loan) are included in this
category.

19. What is the relationship among financial statements (clearly indicate which financial statement
should be prepared first and why)?
Financial statements-income statement, balance sheet, and statement of cash flows-are interrelated in
several ways as noted below.
 The net income figure in the income statement is added to the retained earnings line item in the
balance sheet, which alters the amount of equity listed on the balance sheet.
 The net income figure also appears as a line item in the cash flows from operating activities
section of the statement of cash flows.
 Changes in various line items in the balance sheet roll forward into the cash flow line items listed
on the statement of cash flows. For example, an increase in the outstanding amount of a loan
appears in both the liabilities section of the balance sheet (as an ongoing balance) and in the cash
flows from financing activities section of the statement of cash flows (in the amount of the
incremental change).
 The ending cash balance in the balance sheet also appears in the statement of cash flows.
 The purchase, sale, or other disposition of assets appears on both the balance sheet (as an asset
reduction) and the income statement (as a gain or loss, if any).

The income statement is the first statement prepared and includes a calculation for net income. Income
statement is prepared first so that one can see a firm’s net income and analyze the sales vs. debt.

20. Identify and discuss the different forms of business organizations and indicate what types of
financial statements they are expected to prepare (use types of activities and form of ownership as a
basis of classification).
Business organizations come in different types and in different forms of ownership. The three major types
of businesses (as to product offered) are:
  Service Business: A service type business provides intangible products (products with no
physical form). Service type firms offer skills, labour, expertise, and other similar work in return
for professional or talent fees.
Service businesses include business services, such as accounting, advisory, advertising, legal
services, personal services, such as laundry, beauty salon, photography, car rental, car wash, etc.
 Merchandising Business: This type of business buys products at wholesale price and sells the
same product at a retail price without changing the product’s form. They are known as "buy and
sell" or "reseller" businesses. They make profit by selling their goods at prices higher than their
purchase costs.
Merchandising Businesses include department store, grocery, hardware, clothes and accessories
shop, consumer electronics, home furniture, appliance stores, drug stores
 Manufacturing Business: a manufacturing business buys products with the intention of using
them as raw materials to make a new product. Thus, there is transformation of the products
purchased. A manufacturing business combines raw materials, labour, and overhead costs in its
production process. The goods produced are then sold to customers. Examples include Food
processing, such as producing canned meat, frozen goods, dairy products, bottled drinks, also
bakeries and oil mills etc.
These are the basic forms of business ownership:
 Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least
costly among all forms of ownership. The owner faces unlimited liability; meaning, the creditors
of the business may go after the personal assets of the owner if the business cannot pay them. The
sole proprietorship form is usually adopted by small business entities.
 Partnership
A partnership is owned by two or more persons who contribute capital to conduct business. The
partners divide the profits of the business among themselves based on agreed terms.
In general partnerships, all partners are have unlimited liability. In limited partnership, at least
one partner is a limited partner. The creditors cannot go after personal assets of limited partners.
 Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
The owners, known as stockholders, enjoy limited liability but have limited involvement in the
company's operations. The board of directors elected from the stockholders, controls the activ-
ities and direction of the corporation.

 The financial statements for sole proprietorship are the balance sheet, the income statement,
statement of change in owner's equity and the statement of cash flows.
 The financial statements of a partnership business are similar to those of a proprietorship. The income
statement, statement of changes in partners’ equity and the balance sheet follow.
 There are four main financial statements for corporate businesses. They are balance sheets, income
statements, cash flow statements, and statements of shareholders’ equity.