Types of Accounting: Management Accounting and Financial Accounting

This report provides an overview of management accounting and financial accounting, including their functions and techniques. It also discusses investment appraisal and financial analysis.

EXECUTIVE SUMMARY
Report is about the accounting and the types of accounting. Report will include the
understanding of management accounting and financial accounting. Function of both the
accounting methods are also discussed in the report. This will also include the concepts and
techniques that are used in management and financial accounting.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
RESEARCH/ FINDINGS / ANALYSIS.........................................................................................1
Question 1....................................................................................................................................1
Question 2....................................................................................................................................3
Question 3....................................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting is medium for communicating the results of the business operations for
various parties that are interested or are associated with business. They are owners, investors,
creditors, bank and the financial institutions. This is known as the business language. Accounting
is not limited to business, but extends to everyone that is required to keep record of monetary
transactions. As per Smith and Ashburne Accounting refers to science of recording & classifying
the business events and transactions of financial character (Otley, 2016). It is also art of creating
significant summaries, analysing and interpreting the transactions and communicating results to
judgement and decision makers. The report will provide about the branches of accounting that
are management accounting and the financial accounting. It will also cover the numericals on
capital budgeting and analysis of financial statements using ratio analysis.
RESEARCH/ FINDINGS / ANALYSIS
Question 1
Financial accounting
Financial Accounting refers to specialized accounting branch keeping track of the
financial transactions of company. Companies using standards and guidelines record transaction,
summarize and present the information in financial statements or the financial reports. These
reports include profit or loss statements, balance sheet and cash flow statements.
Financial statement are to be issued by the companies on routine basis. Financial
statements are considered external to the as given outside people of the company. The motive of
financial accounting is not only of reporting value of company. Purpose is of providing
information for assessing value of company and its financial position (Mårtensson and et.al.,
2016). They are prepared mainly for the external users of the company. Use of financial
statements is for assessing financial health before the investments could be made.
Functions of Financial Accounting
Systematic Record
Main Function of financial accounting is of recording the financial transactions of
business. Systematic refers to recording using financial standards and national guidelines for
recording every transaction of business.
Analysing & Summarizing
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After the financial transactions are recorded in systematic way. Financial accountants are
required to analyses as well as summarize transactions for representing the accurate financial
position of business. They are analysed into trial balance and summarizing it into final accounts
for measuring the profit or loss from the business.
Communicating results
Financial accounting team is required to communicate the results from the business and
its financial position in a business year. Financial statements are prepared for Shareholders,
investors, government and other related parties.
Meeting legal requirements
Financial accountants have to meet legal requirements such as auditing the books or
account for relevant financial year from the external auditors (Cooper, Ezzamel and Qu, 2017).
They are also required to pay the tax liabilities calculated under the taxation system of the
jurisdictions.
Management Accounting
Management Accounting is defined as process of providing financial information to
managers for decision making. It is used mainly by the internal team of corporations. This makes
MA different from the financial accounting. Financial reports and informations like invoice and
balance statements are shared with the management of company. Aim of management
accounting is of using the statistical data and taking accurate and better decision making,
controlling enterprise and business development. Primary objective of management accounting is
in improving quality of decision making (Weygandt, Kimmel and Kieso, 2019). It helps the
managers with the financial information for effectively executing the business activities and
operations. The report are prepared mainly for the internal management for making budgets and
reducing the costs.
Functions of management accounting
The reports are directed to the management of companies rather than external parties.
Margin Analysis - To determine the profit amount or the cash flows generated by business from
specific products, product line, store, customer or region.
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Break-even analysis – To calculate unit volume and contribution margin mix where the business
breaks even exactly that is helpful in determining the prices of products & services.
Constraint analysis – To understand the main bottlenecks in company, and how their ability is
impacting the ability of business in earning profits and revenues.
Target Costing – To assist in designing the new products through accumulation of new design's
cost, comparing them with targeted cost levels & reporting these information to the management.
Inventory valuation – To determine direct costs associated with the cost of goods sold as well as
the inventory items and allocation of overhead cost to the items (Schaltegger and Burritt, 2017).
Trend Analysis – For reviewing trend line related to various costs incurred to identify if any
unusual variances are seen in the long term patterns.
Question 2
Investment Appraisal
Cost Benefit analysis shows that cost of investment for all the there project is same. The
benefits arising from the project will be highest in Project B. The cash flows will be highest in
Project B in comparison with other projects.
Payback Period Method
Computation of Payback period
Project A Project B Project C
Year
Cash
inflows
Cumulative
cash
inflows
Cash
inflows
Cumulative
cash
inflows
Cash
inflows
Cumulative
cash
inflows
1 25000 25000 150000 150000 200000 200000
2 100000 125000 150000 300000 250000 450000
3 250000 375000 150000 450000 25000 475000
4 300000 675000 200000 650000 25000 500000
5 50000 725000 200000 850000 100000 600000
6 50000 725000 20000 870000 275000 875000
Initial
investment 600000 600000 600000
Payback
period 6 6 6
0.3 -1.0 -1.2
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Payback
period
5 year and
3 months 5 years
4 years and
10 months
Accounting Rate of Return
Computation of Average rate of return
Project A Project B Project C
Year
Cash
inflows
Cash
inflows
Cash
inflows
1 25000 150000 200000
2 100000 150000 250000
3 250000 150000 25000
4 300000 200000 25000
5 50000 200000 100000
6 50000 20000 275000
Average
profit or
cash inflow 129166.66 145000 145833.33
Average
initial
investment 600000 600000 600000
average
initial
investment
[(initial
investment +
scrap
value) / 2]
ARR 22% 24% 24%
Net Present Value
Computation of NPV
Project A
Year
Cash
inflows
PV factor
@ 10%
Discounted
cash
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inflows
1 25000 0.909 22727.27
2 100000 0.826 82645
3 250000 0.751 187829
4 300000 0.683 204904
5 50000 0.621 31046
6 50000 0.564 28224
Total
discounted
cash inflow 557374
Initial
investment 600000
NPV (Total
discounted
cash inflows
- initial
investment) -42626
Project B
Year
Cash
inflows
PV factor
@ 10%
Discounted
cash
inflows
1 150000 0.909 136363.64
2 150000 0.826 123966.94
3 150000 0.751 112697.22
4 200000 0.683 136602.69
5 200000 0.621 124184.26
6 20000 0.564 11289.48
Total
discounted
cash inflow 645104
Initial
investment 600000
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NPV (Total
discounted
cash inflows
- initial
investment) 45104
Project C
Year
Cash
inflows
PV factor
@ 10%
Discounted
cash
inflows
1 200000 0.909 181818.18
2 250000 0.826 206611.57
3 25000 0.751 18782.87
4 25000 0.683 17075.34
5 100000 0.621 62092.13
6 275000 0.564 155230.33
Total
discounted
cash inflow 641610
Initial
investment 600000
NPV (Total
discounted
cash inflows
- initial
investment) 41610
Internal Rate of Return
Computation of IRR
Project A Project B Project C
Year
Cash
inflows
Cash
inflows
Cash
inflows
0 -600000 -600000 -600000
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1 25000 150000 200000
2 100000 150000 250000
3 250000 150000 25000
4 300000 200000 25000
5 50000 200000 100000
6 50000 20000 275000
Internal
rate of
return
(IRR) 8% 13% 12%
Analysis and Conclusion
The company is proposing to adopt for new project for the expansion with investment of
£600,000. For analysing the viability various capital budgeting techniques are used like payback
period, accounting rate of return, internal rate of return and net present value (Alkaraan, 2017).
Company has 3 investment proposal with the initial investment of same £600,000. Using the
NPV method it is analysed that Project B is having highest positive value in comparison to other
two projects. Adequate cash flows will be generated by Project B and C. The IRR using on these
Projects is highest in B of 13% where it is 8% in A and 12% in C. IRR represent the return
generated by the project if the investment is made.
ARR shows that rate of return over the investments made. The project B and C will
generate adequate return of 24% where Project A will be having return of 22%. If the rate of
return is lower projects should not be adopted. Project with highest payback period is Project A
where with lowest is C and project B is having payback period of 5 years . The payback period
of project should be lower as it is the time within which the investments will be recovered by
project.
Company from the above three projects should adopt for Project A as this project is
having the most beneficial results for the company. The expansion plan will be beneficial for the
company as this project is having the highest NPV that shows the present value of future value of
cash flows (Mahmoud and Neale, 2016). The highest Internal rate of return is generated by
Project A of 13%. Accounting Rate of Return is same for Project B and C. The payback period is
5 year that is 2 months more than C. The payback period will not make much difference. All the
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techniques of capital budgeting provides for the viability of project B and after that for C.
Project A should not be adopted by the company.
Question 3
Financial Analysis
Particulars Formula 2018 2017 Change
Profitability Ratios
Return on
capital
employed
Net
operating
profit/Empl
oyed Capital 7.96% 5.77% 38.05%
Employed
Capital
Total assets
– Current
liabilities
(640000-
75000) 565000
(600000-
80000) 520000
Net
operating
profit 45000 30000
Return on
Equity
Net
Income /
Shareholder'
s Equity 9.28% 6.90% 34.54%
Net Income 45000 30000
Shareholde
r's Equity 485000 435000
Gross profit
margin
Total Sales
–
COGS/Total
Sales 40.00% 38.46% 4.00%
COGS 420000 400000
Sales 700000 650000
Net profit
margin
Operating
Income/ Net
Sales 6.43% 4.62% 39.29%
Net Income 45000 30000
Revenues 700000 650000
Mark Up
Ratio 0.4 0.38 4.00%
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Gross
Profit 280000 250000
Sales 700000 650000
Assets
Turnover
Sales / Net
assets 144.33% 149.43% -3.41%
Sales 700000 650000
Net assets 485000 435000
Liquidity Ratios
Current
assets 165000 160000
Current
liabilities 75000 80000
Inventory 90000 95000
Quick
assets 75000 65000
Current
ratio
Current
assets /
current
liabilities 2.20 2.00 10.00%
Quick ratio
Current
assets -
(stock +
prepaid
expenses) 1.00 0.81 23.08%
Long-term
debt 80000 85000
Shareholder'
s equity 485000 435000
Debt-equity
ratio 16.49% 19.54% -15.59%
Analysis and Interpretation
The financial position and health of the company can be analysed by the company using
ratio analysis. This is essential to know whether the business carried out is profitable or not.
Before investing funds in the company it is important to identify the financial status of company.
Profitability of the company is analysed using various ratios
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Return on Capital Invested of company has improved from last year with rise of 38.05%.
This is significant rise but still the return against the capital invested has to be increased. Return
over equity of the company is 9.28% in year 2018 and has increased with 34.54%. It is essential
to earn sufficient return over equity capital (Choi and et.al., 2018). Investment of funds is made
for earning returns.
Gross Profit Margin and net profit of company has shown rise of 4% and 39.29%. The
net profit margin of the company is 6.43% where company is required to increase it further. Net
profit of the company should be increased further. Gross margin of company is adequate and
shows that company effectively manages its cost of production. Asset Turnover of Company is
144.3% and has gone down by 3.41%.
The profitability ration of company can be improved using more effective sales
promotional strategies. So that revenues can be increased that will help in increasing the
revenues. Company has to also focus over adopt cost effective strategies for controlling the costs.
The operational cost that are not helping company to generate revenues should be eliminated
The current ratio of company is 2.2 and has raised by 10%. This shows improvement in
the liquidity position of company. Quick ratio of company has raised by 23.08% as current assets
have increased and short term obligation has been reduced (Zolfani, Yazdani and Zavadskas,
2018). The liquidity position of company is strong and it should use its funds for short term
investments.
Debt to equity ration of company is 16.49% and has reduced by 15.59%. The rise is seen
as company has repaid some amount of debt and has issued new share capital. Company should
in case of need should raise debt finance as tax benefits will be available and also the cost of debt
is lower than equity.
CONCLUSION
The above research shows that financial and management accounting both are important
for the business enterprise. Management accounting helps in internal decision making where the
financial accounting helps in external decision making. Both these accounting are used for
different purposes. Main motive is to enable the user in making informed business decisions.
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REFERENCES
Books and Journals
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31.pp.45-62.
Mårtensson, M. and et.al., 2016. Management accounting of control practices: a matter of and for
strategy. In The 9th International EIASM Public Sector Conference, Lisbon, Portugal,
September 6-8. 2016. EIASM.
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The
case of the balanced scorecard. Contemporary Accounting Research.34(2).pp.991-1025.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2019. Financial accounting. Wiley.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions (pp. 67-82). Emerald Publishing Limited.
Mahmoud, O. and Neale, B., 2016. Managerial judgment factors and the real options approach in
the investment appraisal process: evidence from UK automotive firms. International
Journal of Business and Social Science.7(5).pp.71-84.
Zolfani, S.H., Yazdani, M. and Zavadskas, E.K., 2018. An extended stepwise weight assessment
ratio analysis (SWARA) method for improving criteria prioritization process. Soft
Computing.22(22).pp.7399-7405.
Choi, K.B. and et.al., 2018. Amplification ratio analysis of a bridge-type mechanical
amplification mechanism based on a fully compliant model. Mechanism and Machine
Theory.121. pp.355-372.
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