Meaning of management accounting

Management accounting is a branch of accounting that

focuses on providing financial and non-financial
information to internal users within an organization, such
as managers, executives, and decision-makers. Its
primary purpose is to assist management in planning,
controlling, and making informed decisions to achieve
organizational goals.
The nature of management accounting can be described
by the following key characteristics:

1. Forward-looking: Management accounting emphasizes

future-oriented information rather than historical data.
It involves forecasting, budgeting, and strategic
planning to assist in decision-making.
2. Internal focus: Unlike financial accounting, which
primarily serves external stakeholders, management
accounting is designed to meet the needs of internal
users within the organization. It provides information
 tailored to the specific requirements of managers at
different levels.
3. 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.
4. Cause and Effect Analysis:
Financial accounting confines itself to presentation of
P&L account and Balance Sheet. Management
accounting analyses the cause and effect of the facts
and figures thereon. If there is loss causes for the
losses are investigated. If there is profit the variable
affecting the profit are also analysed. The amount of
profit is compared with expenditure, sales, capital
employed, etc., to draw appropriate conclusions
relating to the effect of those items on profit.
5. Use of Special Techniques and Concepts:
Management accounting employs special techniques
like standard costing, budgetary control, marginal
 costing, fund flow, cash flow, ratio analysis,
responsibility accounting, etc. to make accounting data
more useful and helpful to the management. Each of
these techniques or concepts is a useful tool for
specific purpose in analysis and interpretation of data,
establishing control over operations, etc.
6. Achievement of Objectives:
Management accounting is helpful in realising 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 actuals from
the predetermined results, corrective action is taken
and predicted objectives are achieved. This becomes
possible with the help of management accounting
techniques of standard costing and budgetary control.
7. Improving Efficiency: The purpose of accounting is to
provide information to increase efficiency. The
efficiency of departments, and divisions can be
improved by fixation of targets or goals for a specific
period. The actual performance is compared with that
 of targets. Positive deviations are reviewed. The
negative deviations are probed to ascertain the causes.
The ways and means to tackle the causes are analysed
and targets are achieved. The process of fixing and
achieving the targets leads to gradual improvement in
overall efficiency.
8. 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 of objectives.

9. Timeliness: Management accounting emphasizes the

provision of timely information, enabling managers to
make quick and effective decisions. It involves frequent
reporting cycles and the use of real-time data where
possible.
10. Decision-making tool: Management accounting
provides relevant and reliable information to support
decision-making processes. It helps managers evaluate
 alternatives, assess performance, identify areas for
improvement, and allocate resources efficiently.
11. Cost determination and control: Management
accounting focuses on cost analysis, cost behavior, and
cost control. It helps in understanding the cost
structure of products, services, and activities within an
organization and assists in cost optimization.
12. Performance evaluation: Management accounting
measures and evaluates the performance of different
departments, business units, and individuals within the
organization. It includes the use of key performance
indicators (KPIs) and performance measurement
techniques to assess efficiency and effectiveness.
13. Flexibility and customization: Management
accounting recognizes the diverse information needs
of managers and provides flexibility in terms of
reporting formats, analysis techniques, and decision-
support tools. It can be tailored to suit the specific
requirements of different organizational levels and
functions.
14. Confidentiality: Management accounting deals with
sensitive information regarding the organization's
operations, costs, and strategies. It is crucial to
maintain confidentiality to ensure that the information
is used appropriately within the organization and not
disclosed to external parties.
15. Provides Data and not the Decisions: The
management accountant is not taking any decision by
provides data which is helpful to the management in
decision-making. It can inform but cannot prescribe. It
is just like a map which guides the traveller where he
will be if he travels in one direction or another. Much
depends on the efficiency and wisdom of the
management for utilizing the information provided by
the management accountant
16. Concerned with Future: Management accounting
unlike the financial accounting deals with the forecast
with the future. It helps in planning the future because
decisions are always taken for the future course of
action. (iv) Analysis of Different Variables:
Management accounting helps in analysing the
reasons as to why the profit or loss is more or less as
 compared to the past period. Moreover, it tries to
analyse the effect of different variables on the profits
and profitability of the concern.
Overall, management accounting plays a vital role in
providing internal stakeholders with the necessary
information and tools to make informed decisions, plan
for the future, control costs, and evaluate performance
effectively.
Scope Of Management Accounting
Management accounting covers a wide range of areas,
such as financial accounting, cost accounting, budgeting,
and taxes. The primary goal is to assist management in
performing its planning, directing, and managing tasks.
The following are some of the areas of management
accounting specialty. The scope of management
accounting is vast and can be divided into several
categories:
1. Cost Accounting
2. Financial Accounting
3. Budget and Forecast
4. Interpretation of Data
 5. Financial Management
6. Management Reporting
7. Financial Statement Analysis
8. Inflation Accounting
A detailed description of the various scopes of
management accounting is as follows:
1. Cost Accounting
Cost accounting is a crucial accounting technique
because it provides cost analysis tools for a business,
such as marginal cost, operational cost, inventory
costing, budget control, etc. These are required by
business management to draft and outline the business
needs.
Cost accounting assists in determining the total budget
for any firm and gives several methods for estimating
and calculating the entire cost of providing a service to
the consumer. Cost accounting is also essential for
business analysts and executives since each company's
activity depends on the cost involved.
2. Financial Accounting
Financial accounting and cost-accounting are not the
same things. As mentioned earlier, cost accounting
involves calculating and analyzing the overall cost of a
business process. Conversely, financial accounting
calculates and analyses business transactions, including
expenses, inventories, assets, and reporting. Financial
statements are critical in financial accounting and are
prepared regularly at the end of each fiscal year.
Financial statements comprise the company's balance
sheet and the overall profit or loss produced by the
business or company in the current fiscal year. Financial
accounting is critical for the organization's financial
forecasts because it provides the general financial
information incurred throughout the current fiscal year.
Financial accounting is also significant in that it assists
management in operating successfully and implementing
coordination across corporate processes to carry out
business planning.
3. Budgeting and Forecasting
Budgeting and forecasting are also part of the
management accounting scope, including budget control
and business forecasting trends. Budget management
systems are based on financial data and business
performance. Budget control aids in identifying and
analyzing the causes and weak points that slow down
coordination and decrease business performance.
On the other hand, forecasting is an essential function of
management accounting because it provides a business
view from the stakeholders' perspective. Business
budgeting and forecasting outline the company's goals
and plans and the expected outcomes of the activities
carried out to help prepare the company in case of an
emergency.
4. Data Interpretation
Data interpretation is described as converting business
data into facts and statistics that business management
can easily understand. Interpreting your work is just as
crucial to your business as financial reporting because it
helps you avoid drawing erroneous conclusions from
your business data. If the data is not appropriately
comprehended and evaluated, it might spell doom for a
market business.
The data for the current year is analyzed and compared
to past data to better understand the business's growth.
5. Financial Administration
Financial management is the administration and planning
of a company's financial resources. Raising cash and
using them wisely is critical for sound financial
management. The purpose of considering financial
management as managerial accounting in terms of scale
is to optimize a company's profits through the efficient
use of cash. Finance was and continues to be the most
crucial part of every organization, and a business cannot
function without effective financial management.
6. Management Reporting/Reporting
Reporting is essential for each business manager.
Obtaining reports on time is critical for managing
corporate growth and resources. The timely report
assists management in making successful decisions and
keeps management informed of ongoing operations.
Data and reports are presented to management in simple
graphs, charts, and presentations. According to the
company requirements, reports are retrieved weekly,
monthly, quarterly, and yearly, and these reports are
beneficial when examining corporate data.
7. Accounting for Inflation
Inflation analysis is critical in business and is described as
a drastic change in financial results when market prices
change. Inflation accounting refers to inflation analysis
tools that aid in identifying the causes of inflation and
eradicating them for improved performance.
8. Analysis of Financial Statements
As mentioned earlier in financial accounting, financial
statements are prepared after each fiscal year to study
and analyze the financial growth of a business. The
financial accounts provide insights into the business and
aid in its growth through their interpretations and
conclusions.

Functions of Management Accounting

The basic function of management accounting is to assist

the management in performing its functions effectively.
The functions of the management are planning,
organizing, directing, and controlling.
Management accounting is a part of accounting. It has
developed out of the need for making more use of
accounting for making managerial decisions.
Management accounting helps in the performance of
each of these functions in the following ways:
1. Provides data
Management accounting serves as a vital source of data
for management planning. The accounts and documents
are a repository of a vast quantity of data about the past
progress of the enterprise, which is a must for making
forecasts for the future.
2. Modifies data
Management accounting modifies the available
accounting data rearranging in such a way that it
becomes useful for management.
The modification of data in similar groups makes the data
more useful and understandable. The accounting data
required for management decisions is properly compiled
and classifies.
For example, purchase figures for different months may
be classified to know total purchases made during each
period product-wise, supplier-wise, and territory-wise.
3. Communication
Management accounting is an important medium of
communication. Different levels of management (top,
middle, and lower) need different types of information.
The top management needs concise information at
relatively long intervals, middle management needs
information regularly, and lower management is
interested in detailed information at short-intervals.
Management accounting establishes communication
within the organization and with the outside world.
4. Analyses and interprets data
The accounting data is analyzed meaningfully for
effective planning and decision-making. For this purpose,
the data is presented in a comparative form, Ratios are
calculated, and likely trends are projected.
 5. Serves as a means of communicating
Management accounting provides a means of
communicating management plans upward, downward,
and outward through the organization.
Initially, it means identifying the feasibility and
consistency of the various segments of the plan. The
later stages it keeps all parties informed about the plans
they have been agreed upon and their roles in these
plans.
6. Facilitates control
Management accounting helps in translating given
objectives and strategy into specified goals for
attainment t by a specified time and secures the effective
accomplishment of these goals efficiently. All this is made
possible through budgetary control and standard costing,
which is an integral part of management accounting.
7. Uses also qualitative information
Management accounting does not restrict itself to
financial data for helping the management in decision
making but also uses such information that may be
capable of being measured in monetary terms. Such
information may be collected from special surveys,
statistical compilations, engineering records, etc.
8. To assist in planning.
Management Accounting assists the management in
planning as well as to formulate policies by making
forecasts about the production, selling the inflow and
outflow of cash, etc.
Not only that, but it may also forecast how much may be
needed from alternative courses of action or the
expected rate of return from that place and at the same
time decides upon the programmed of activities to be
undertaken.
9. To assist in organizing.
By preparing budgets and ascertaining specific cost
centers, it delivers the resources to each center and
delegates the respective responsibilities to ensure their
proper utilization.
As a result, an interrelationship grows among the
different parts of the enterprise.
10. Decision-Making
Management accounting furnishes accounting data and
statistical information required for the decision-making
process, which vitally affects the survival and the success
of the business.
Management accounting supplies analytical information
regarding various alternatives, and the choice of
management is made easy.
11. To assist in motivation.
By setting goals, planning the best and economic courses
of action, and also by measuring the performances of the
employees, it tries to increase their efficiency and,
ultimately, motivate the organization as a whole.
12. To Coordinate
It helps the management in coordination the whole
activities of the enterprise, firstly by preparing the
functional budgets, then co-coordinating the whole
activities of the enterprise, firstly, by preparing the
functional budgets, then co-coordinating the whole
activities by integrating all functional budgets into one
which goes by the name of ‘Master Budget.’
In this way, it helps the management by con-coordinating
the different parts of the enterprise. Besides, overall
coordination is not at all possible without budgetary
control.’
13. To Control
The actual work done can be compared with ‘Standards’
to enable the management to control the performances
effectively.

Purpose and Objectives of Management Accounting

The primary objective of Management Accounting is to
enable the management to maximize profits or minimize
losses.
The fundamental objective of management accounting
provides information to the managers for use in
planning, controlling operations, and decision making.
Main purpose and objectives of management accounting
may be summarized as under:
 1. Uses of Information
The primary functions of management are the uses of
information. It presents accounting information in a form
that enables the management, investors, and creditors to
analyze the financial statements.
2. Planning and Policy Formulation
Planning is deciding in advance what is to be done. It
helps the management of ineffective planning. It
provides costing and statistical data to be utilized in
setting goals and formulating future policies.
3. Decision Making
Decision making is defined as the selection of a course of
action from among alternatives. It helps the
management in decision-making. It uses accounting data
to solve various management problems.
Management accounting techniques like cost-volume-
profit analysis, standard costing, budgetary control,
capital budgeting, funds flow analysis, etc. Assist the
management in arriving at the correct decision.
4. Motivating
Motivation means individuals need, desires, and
concepts that cause him or her to act in a particular
manner. Delegation serves as a motivation device
because it increases the job satisfaction of employees
and encourages them to look forward.
By setting goals, planning the best and economic courses
of action, and also by measuring the performances of the
employees, it tries to increase their efficiency and,
ultimately, motivate the organization as a whole.
5. Controlling
Management accounting helps management in
controlling the performance of the organization. Actual
performance is compared with operating plans,
standards, and budgets, and deviations are reported to
the management so that corrective measures may be
taken.
6. Coordinating Operations
It helps the management in controlling the performance
of the organization.
Actual performance is compared with operating plans,
standards, and budgets, and deviations are reported to
the management so that corrective measures may be
taken.
7. Reporting
One of the primary objectives of management
accounting is to keep the management fully informed
about the latest positions of the concern. The facilitates
management to take proper and timely decisions.
The object of management accounting is to provide data.
It presents the different alternative plans before the
management in a comparative manner. The performance
of various departments is also regularly communicated
to the top management.
8. Help in Organizing
Organizing is the process of allocating and arranging
human and nonhuman resources so that plans can be
carried out successfully.

Tools or Techniques of Management Accounting

Management Accountant applies many of the financial
and cost accounting systems, as techniques, to assist the
management. Management accounting is concerned
with accounting information that is useful to
management.

Tools or Techniques of Management Accounting

Management Accountant applies many of the financial
and cost accounting systems, as techniques, to assist the
management. Management accounting is concerned
with accounting information that is useful to
management.
Management accounting, like accounting, as an
accounting service to management through its .various
functions, has to employ several tools, techniques, and
methods. Now one technique can satisfy managerial
needs.
These are placed here in brief to have some idea about
those.
1. Financial Planning
A business requires finance. Financial planning involves
determining both long-term and short-term financing
objectives of the firm. Every firm has to decide on the
sources of raising funds.
The funds can be raised either through the issue of share
capital or through raising loans. Again a decision is to be
taken about the type of capital, equity share capital, or
preference share capital.
When it decides to raise funds through loans,
management is to decide the extent of borrowing, long-
term, or short term. All these decisions are important for
financing planning.
2. Budgetary Control
There are a number of the device which help in
controlling. The most widely used device for
management control is “Budget.”
Budgetary control is a system that resorts to budget as a
means of planning and controlling and coordinating
different types of activities, like the production and
distribution of goods and services as designed.
3. Marginal Costing
Marginal costing is helpful for the measurement of
profitability of different lines of production. This
technique helps in identifying the nature of costs like
marginal costs (variable) and fixed costs.
This is a method of costing which is concerned with
changes in costs resulting from changes in the volume of
production.
4. Historical Cost Accounting
The statement of actual costs after they have been
incurred is called Historical cost accounting.
Historical cost accounting is a system of accounting that
records all transactions at costs incurred as soon as they
take place or on a date immediately after their
occurrence.
5. Decision Accounting
One of the most important functions of top management
is to make decisions. Decision making involves a choice
from several alternatives.
The decision is taken after studying the alternative data
in terms of costs, prices, and profits furnished by
management accounting and exercising the best choice
after considering other non-financial factors. The
objective is to maximize profit through the use of the
best alternative method.
The management accounting uses Marginal Costing
techniques, Capital Expenditure Budget, and separation
of production costs to achieve this end.
6. Standard Costing
Standard costing is an important tool of cost control,
which is one of the main objectives of management
accounting.
Standard costing techniques compare the standard costs
of materials, labor, and expenses incidental to
production, which is predetermined, with the actual
costs that have occurred in the course of carrying out
production.
It is the most effective technique available for controlling
performances and costs.
7. Analysis of Financial Statement
The technique of financial analysis includes comparative
financial statements, ratios, fund flow statements, Cash
flow statements, and comparative financial statement
analysis tools to management for decision making.
The financial statements reveal the past performances of
business in respect of dividend-paying capacity, nature of
debts services, profit-earning capacity, and solvency
position.
Based on these past events, the future course of action is
projected.
8. Revaluation Accounting
This is an important tool for management accounting.
Revaluation or Replacement accounting revere to the
maintenance of capital in real terms. This term is used to
denote the methods employed for overcoming the
problems connect with fixed asset replacement in a
period of rising prices.
It is a fact that a problem arises in connection with the
replacement of fixed assets in terms of rising prices. It
ensures the maintenance of the capital of the firm.
 9. Control Accounting
It is not a separate accounting system. It consists of
techniques of standard costing, budgetary control,
control reports and statement, internal check, internal
audit, and reports.
It is in this field that the management has scope to
display ingenuity in the’ analysis, interpretation, and
presentation of information at all levels of management.
10. Management Information System
It has already been stated that the management
accounting of an enterprise is to provide management
and other operations as a basis of protective and
constructive to management.
The management accountant provides all these data and
information relevant to the enterprise for the purpose.
With the development of electronic devices for recording
and classifying data, reporting to management has
considerably improved. Feed-back of information can be
used as control techniques.
11. Statistical Techniques
There is a large number of statistical and graphical
techniques that are used in management accounting.
Some common examples are the master chart, chart of
sales and earnings, investment chart, etc.
12. Ratio Accounting
Ratio accounting signifies the technique and
methodology of analysis and interpretation of financial
statements using accounting ratios derived from such
statements.
Ratio accounting included trend analysis, comparative
financial statements, ratio analysis, fund flow
statements, etc.

Limitations of Management Accounting

Though management accounting in helpful too to the
management as it provides information for planning,
controlling, and decision making.
Still, its effectiveness is limited by several reasons.
Management Accounting is a recent discipline, and
therefore, it is in the process of development.
Hence, it suffers from all the limitations of a new
discipline. Some of the limitations of management
accounting follow:
1. Management Accounting is only a tool.
Management accounting should never be considered as
an alternative or substitute for management. The tools
and techniques of management accounting provide only
information and not decisions.
Decisions are to be taken by management, and
implementation of decisions is also done by
management.
2. Evolutionary’ Stage
Management accounting is still in its initial stage.
Management accounting is only in a developmental stage
that has not reached the final stage.
The techniques and tools used by this system give
varying and deferring results.
3. Limitations of Basic Records
Management accounting is mainly concerned with the
rearrangement or modification of data. It derives its
information from financing accounting, cost accounting,
and other records.
The correctness of management accounting depends
upon the correctness of these basic records: that is, their
limitations are also the; limitations of a management
accountant.
4. Lack of knowledge
The use of management accounting requires knowledge
of several related subjects.
Deficiency in knowledge in related subjects like
accounting principles statistics, economics, principles of
management, etc. will limit the use of management
accounting.
5. Persistent Efforts
The conclusions and decisions drawn by the
management accountant are not executed automatically.
Thus, there is a need for continuous and coordinated
efforts of each management level to execute these
decisions.
He has to convince people at all levels. In other words, he
must be an efficient salesman in selling his ideas.
6. Intensive Decision
Decision making based on management accounting that
provides scientific analysis of various situations will be a
time-consuming one.
As such, management may avoid systematic procedures
for making a decision and arrive at a decision using
intuitive and intuitive limits the usefulness of
management accounting.
7. Costly Installation
It is very costly. The installation of a management
accounting system needs a very elaborate organization
and numerous rules and regulations. This results in heavy
investment, which only bill concerns can afford.
8. Personal Bias
The interpretation of financial information depends on
the capacity of an interpreter as one has to make a
personal judgment, personal prejudices and bias affect
the objectivity of decisions.
9. Resistance
The installation of management accounting involves a
basic change in an organizational setup.
New rules and regulations are also required to be
framed, which affects many personal, and hence there is
a possibility of resistance from some quarters or the
other.
10. Top-heavy Structure
The installation of a management accounting system
requires high costs on account of an elaborate
organization and numerous rules and regulations. It can,
therefore, be adopted only by big concerns.
11. Provides Only Data
The main function of management accounting is to
provide data and not decisions. It can only inform, not
prescribe.
12. Broad-Based Scope
Management accounting has a very wide scope
incorporating many disciplines. Management requires
information from both accounting as w£fl as non-
accounting sources.
This creates many problems and brings a degree of
inexactness and subjectivity in conclusion obtained
through it.
13. Not an alternation to administration
Management accounting is a tool of management, not an
alternative to management. It cannot replace the
management or administration.
14. Opposition to Change
Management accounting demands a break away from
traditional accounting practices.
It calls for a rearrangement of the personal and their
activities, which is generally not like by the people
involved.
Importance or Roles of Management Accounting
The importance/role of management accounting can be
stated as follows:
1. Efficient Planning
Management accounting plays a vital role in taking an
efficient plan providing necessary information.
Through the capital budget, sales budget, Cost-volume-
profit analysis, management accountants provide
information for making plans.
2. Increasing Efficiency to Business Operations
Management accounting also plays an important role in
increasing efficiency in business operations through
budgeting, ratio analysis, variance analysis, standard
costing, etc.
3. Efficient Control
Management accounting takes pan inefficient control
through JIT philosophy and total quality control system.
4. Increase Labor Efficiency
Management accounting helps to increase labor
efficiency through standard labor costing, linking bonus
with productivity and budgeting.
5. Achieve Management Efficiency
Management accounting contributes a lot to increase the
management efficiency of the organization providing
managers with the correct information.
6. Help Management Function
We know that the main functions of management are
planning, organizing, leading, and controlling
management accounting helps management personnel
to perform the functions properly, providing necessary
accounting information.
7. Communicating
For performing the functions efficiently and effectively,
managers need to communicate with the various parties
and parts of the organization.
Management accounting helps in this respect preparing
various reports.
Last of all, we can say that the activities of management
accounting are occurred only to perform a vital role in
the decision-making process in an organization.
Distinctions between Management Accounting and
Financial Accounting
Financial accounting and management accounting are
closely inter-related since management accounting
draws out a major part of the information form financial
accounting and modifies the same for managerial use.
Financial accounting ensures that the assets and
liabilities of a business are properly accounted for and
provides shareholder investors, tax authority, creditors,
etc.
On the other hand, management accounting provides
information, especially for the use of managers who are
responsible for making proper decisions within an
organization.
Financial accounting is concerned with the recording of
day-to-day transactions of the business.
Though both financial and management accounting relies
on the same financial data, there are some differences
between financial and management accounting.

Point of Management Financial

difference Accounting Accounting

Management
accounting is Financial accounting
especially for is both for internal
internal users. and external users.
Financial accounting
Users Management reports are primarily
accounting used by external
reports are users, such as
exclusively used shareholders, banks,
by internal users and creditors.
viz. managers and
employees.
 The objective of
The objective of
financial accounting
management
is to assist both
Objective accounting is to
internal and
assist internal
external decision-
management.
makers.

GAAP is not
mandatory to GAAP is mandatory
Uses of GAAP follow in to follow in financial
management accounting.
accounting.

It emphasizes It emphasizes
Events decisions on decisions on past
future events. events.

Freedom of No constraints are Constrained

choices other than costs by generally
about the benefits accepted accounting
of improved principles (GAAP).
 management
decisions.

Detailed reports:
concern about
Summary reports
details of parts of
Type of concern primarily
the entity,
Reports with the entity as a
products,
whole.
departments,
territories, etc.

Concern about
how Concern about how
measurements to measure and
Behavioral
and reports will communicate
implications
influence a economic
manager’s daily phenomena.
behavior.

Delineation of The field is less The field is more

Activities sharply defined— sharply defined—
 heavier use of
economic,
lighter use of
decision science,
related disciplines.
and behavioral
sciences.

Flexible, varying
Less flexible; usually
Timespan from hours to
1 month to 1 year.
years

In management Financial accounting

accounting, cost, records are
and revenue are maintaining in the
Methodology mostly reported form of revenue,
by responsibility income and
centers or profit expenditure, and
centers. property accounts.

Annual reporting Annual reporting of

Annual
of management financial accounting
Reporting
accounting is not is mandatory.
 mandatory.

It holds qualitative It holds quantitative

Characteristics
characteristics. characteristics.

Emphasizes
Fundamental Emphasizes
objectivity and
quality relevance.
verifiability.

Enhancing Emphasizes Emphasizes

Quality timeliness. precision.

It has the It has no

Rules managers’ own accountants’ own
rules. rules.

External vs. Management A financial

Internal accounting system accounting system
produces produces
information that is information that is
used within an used by parties
 external to the
organization, by organization, such
managers and as shareholders,
employees. banks, and
creditors.

May pertain to
smaller business Pertains to the
units or individual entire organization
Segment
departments, in or materially
reporting
addition to the significant business
entire units.
organization.

Management
accounting
Financial accounting
Focus focuses on the
focuses on history.
future and
present.

Format No specific format Financial accounts

 are supposed to be
in accordance with a
is designed for specific format so
management that financial
accounting accounts of
systems. (Formal different
and informal organizations can be
recordkeeping) easily compared.
(Formal
recordkeeping)

Management
accounting helps
Financial accounting
management to
helps in making
Planning and record, plan, and
investment
Control control activities
decisions and in
to aid the
credit rating.
decisionmaking
process.

Information Quantitative and Quantitative and

qualitative. monetary.
 Monetary and
non-monetary.

Well-defined –
Reporting
As needed – daily, annually, semi-
frequency and
weekly, monthly. annually, quarterly.
duration.
(Verifiable)

Preparing financial
accounting There are no legal
reports is requirements to
Optional mandatory, prepare reports on
especially for management
limited accounting.
companies.

Drafted according to
Drafted according GAAP – Generally
Legal / Rules to management Accepted
suitability. Accounting
Procedure.
 Cost accounts are
Follows a full
not Reserved
process of
under
recording,
Management
classifying, and
Accounting Accounting. The
summarizing for
Process data from
analysis and
financial
interpretation of the
statement and
financial
cost ledgers are
information.
analyzed.

Difference between Cost Accounting and Management

Accounting
Management accounting and Cost accounting are two
important branches of accounting. Both of these
branches of accounting help the management in
accomplishing their assigned task. Management
accounting and cost accounting involves the presentation
of accounting information in a manner that facilitates a
prudent planning, correct decision-making, and effective
controlling of day-to-day operations.
It goes without saying that both the systems overlap
each other in some areas of functioning. Most of the cost
accounting concepts are freely used in management
accounting for assisting the management.
Naturally, it is difficult to draw a sharp distinction
between the two. Despite this situation, some
distinctions which can be identified, are placed in the
following manner:

Point of Management
Cost Accounting
difference Accounting

Objective The main object of The main object of

management cost accounting to
accounting is to determine and
provide control the cost of
 information to the
managers for use in
planning,
production.
controlling
operations, and
decision making.

In management
In Cost Accounting,
Accounting, no
Accounting Double Entry
such system is
system System be applied
needed for the
in case of need.
application.

Guiding Management Cost Accounting

principles Accounting has got usually follows
no Generally some specific
Accepted principles. These
principles. It are cost concepts
follows such and principles for
principles as would the determination
be necessary of costs.
according to the
 demand for the
situation.

Management
accounting is
It is based on past
related to future
Nature and present
programs,
financial figures.
planning, and
decision making.

Generally accepted
It is not necessary
accounting
to follow Generally
principles (GAAP)
Rules accepted
are strictly followed
accounting
in preparing cost
principles (GAAP).
statement.

Unit of Non-physical units Both of these

measuremen like labor Hours. systems of
t Machine Hours etc. accounting use
are also important physical and
bases for financial units of
 measurement in
measurement.
both the systems.

The main function

of management The main function
accounting is to of cost accounting
Functions provide data and is to record classify
not decisions. It can and concentrate
only inform, not costs.
prescribe.

Only top-level
management needs Top and mid-level
management managers are
Related
accounting related to cost
information to accounting activity.
make a decision.

Data used Management Only quantitative

accounting uses aspect is recoded in
both quantitative cost accounting.
 and qualitative
information.

Cost Accounting
information are
This is because
concerned with the
management
Duration of current year
accounting is to
the ignoring future
serf the purpose of
accounting years while
decision making for
period management
a future course of
accounting is
action.
mainly future-
oriented.

In management Generally, cost

accounting system statements are
Time of
reports can be prepared at the
prepare
prepared when it is end of the financial
needed. period.

Focal point In the case of In cost accounting,

 the cost of
Management production is
Accounting, an arrived at based on
individual segment cost-centers,
of business comes production
under the purview. departments, and
Sometimes the work processes. It
entire business is does not consider
considered to the the same from the
principal object of standpoint of
study. business as a
whole.

The users of The users of cost

management accounting
Users accounting are the information may be
manger and other both internal and
internal users. external.
 In both trading and In the
Scope manufacturing manufacturing
concerns. concern.

It follows the It doesn’t follow

Rules managers’ own the accountants’
rules. own rules.
Chapter -2
Financial statement analysis
Financial statement analysis refers to the process of
evaluating and interpreting a company's financial
statements to gain insights into its financial health,
performance, and overall business operations. It involves
examining various financial reports and documents, such
as the balance sheet, income statement, cash flow
statement, and accompanying notes, to assess the
company's past, present, and potential future financial
condition.
The main objectives of financial statement analysis are
to:
1. Assess Financial Performance: Analyzing financial
statements helps assess a company's profitability,
efficiency, and effectiveness in generating returns for
its investors and shareholders.
2. Understand Financial Position: It provides insights
into a company's assets, liabilities, and equity,
helping stakeholders understand the company's
financial stability and ability to meet its obligations.
3. Evaluate Liquidity and Solvency: Financial statement
analysis helps determine a company's ability to meet
its short-term and long-term financial obligations by
examining its liquidity (ability to cover short-term
obligations) and solvency (ability to cover long-term
obligations).
4. Make Investment Decisions: Investors use financial
statement analysis to make informed decisions
about buying, holding, or selling a company's
securities, such as stocks or bonds.
5. Assess Risk: It helps identify potential risks and
vulnerabilities that may affect a company's financial
performance, such as high levels of debt, poor cash
flow management, or dependence on a single
customer.
6. Compare Performance: Financial statement analysis
enables benchmarking a company's performance
against industry peers and competitors to identify
relative strengths and weaknesses.
7. Aid in Decision-Making: It assists management in
making strategic and operational decisions by
 providing a clearer understanding of the company's
financial situation.

Types of financial statement analysis

Financial statement analysis encompasses various

approaches and techniques that can be classified into
different types based on the focus and objectives of the
analysis. Here are some of the key types of financial
statement analysis:
1. Vertical Analysis (Common-Size Analysis): In this
type of analysis, financial statements are converted
into percentages to compare each line item to a
common base, often total revenue or total assets.
This helps to understand the relative proportion of
each item and identify trends over time.
2. Horizontal Analysis (Trend Analysis): Horizontal
analysis involves comparing financial data across
multiple periods to identify trends and changes over
time. This can highlight growth rates, shifts in
financial patterns, and potential areas of concern.
3. Cross-Sectional Analysis: In this type of analysis, the
financial performance of a company is compared to
that of its industry peers or competitors. This helps
to assess how a company is performing relative to its
competitors within the same industry.

4. Long term analysis

There must be a minimum rate of return on
investment. It is necessary for the growth and
development of the company and to meet the cost
of capital. Financial planning is also necessary for the
continued success of a company. The fixed assets
structure, leverage analysis, ownership pattern of
securities and the like are made in the long term
analysis.
5. short term analysis
The short term analysis of financial statement is
primarily concerned with the working capital
analysis so that a forecast may be made of the
prospects for future earnings, ability to pay interest,
 debt maturities – both current and long term and
probability of a sound dividend policy.
6. Internal Analysis
Internal analysis is made by the top management
executives with the help of Management
Accountant. The finance and accounting department
of the business concern have direct approach to all
the relevant financial records. Such analysis
emphasis on the overall performance of the business
concern and assessing the profitability of various
activities and operations.

7. External analysis
Shareholders as investors, banks, financial institutions,
material suppliers, government department and tax
authorities and the like are doing the external analysis.
They are fully depending upon the published financial
statements. The objective of analysis is varying from
one party to another.

Tools and methods of financial statement analysis

1) Ratio Analysis
Ratio Analysis is a quantitative analysis technique that
establishes the relationship between two or a
combination of more than two items of financial
statements. Both are Balance Sheet, Income
Statement, and Cash Flow Statement. It is usually used
to evaluate various aspects of a company’s operating
and financial performance. That financial performance,
like its efficiency, liquidity, profitability, and solvency, is
helpful for the management in making certain
decisions.
2.Common-Size Statements
A common-size statement play an essential role in the
tools and techniques of financial statement Analysis.
Its direct impact on the company’s financial
statements displays all items as a percentage of a
common base figure. It is one of the financial analysis
techniques. It is known as the Common-Size
Statements. It facilitates comparative analysis between
two or more companies or between two or more
periods of a company.
3.Comparative Statements
An organization’s financial statements for different
periods are called Comparative Financial Statements.
To know about the comparative statement users need
to use the tools or techniques of financial statement
analysis. Various items of financial statements are
presented in a comparative form which may be a table.
It enables one to have a comparative view of multiple
parameters for two or more periods at a glance.
Comparative statement is important in the sense of
financial tools and techniques.
4.Trend Analysis
Trend analysis is also an important part of the tools
and financial analysis techniques. It is based on the
underlying premise that what has happened in the past
indicates what will happen in the future. Trend analysis
is the techniques of financial analysis. It may be
defined as a mathematical technique that uses
historical data to forecast future outcomes. Trend
Analysis may be undertaken in respect of two
organizations for the same period or an organization
for a different period. A trend is a series of information
from the financial statements analyzed to arrive at
meaningful conclusions. To know about the trend of
financial trend user need to use the tools of financial
statement analysis.
5) Funds Flow Analysis/Statement
If we have no funds flow statement, we cannot use the
tools and techniques of financial statement analysis. It
is a statement that depicts the sources. Applications of
funds for a specific period. Through the fund flow
statement, research concerning the changes in the
financial position of an organization from the
beginning of a period to its end is undertaken. It is the
most valuable financial analysis tools that are using in
financial statement analysis.
6) Cash Flow Analysis/Statement
A cash flow statement is a financial statement, which
shows how Cash and Cash Equivalents in a business are
affected by changes. It is one of the techniques of
 financial analysis. And, it also describes how-to guides
in various components of Balance Sheet and Profit and
Loss Accounts. Cash Flow statement is the financial
analysis techniques. It summarizes the reasons behind
the changes in the cash position of a business entity
between the dates of the two balance sheets.

Limitations of financial statement analysis

1. Not a Substitute of Judgement

An analysis of financial statement cannot take place of
sound judgement. It is only a means to reach
conclusions. Ultimately, the judgements are taken by an
interested party or analyst on his/ her intelligence and
skill.
2. Based on Past Data
Only past data of accounting information is included in
the financial statements, which are analyzed. The future
cannot be just like past. Hence, the analysis of financial
statements cannot provide a basis for future estimation,
forecasting, budgeting and planning.
3. Problem in Comparability
The size of business concern is varying according to the
volume of transactions. Hence, the figures of different
financial statements lose the characteristic of
comparability.
4. Reliability of Figures
Sometimes, the contents of the financial statements are
manipulated by window dressing. If so, the analysis of
financial statements results in misleading or meaningless.
5. Various methods of Accounting and Financing
The closing stock of raw material is valued at purchase
cost. The closing stock of finished goods is value at
market price or cost price whichever is less. In general,
the closing stock is valued at cost price or market price
which ever is less. It means that the closing stock of raw
material is valued at cost price or market price whichever
is less. So; an analyst should keep in view these points
while making analysis and interpretation otherwise the
results would be misleading.
6. Change in Accounting Methods
There must be uniform accounting policies and methods
for number of years. If there are frequent changes, the
figures of different periods will be different and
incomparable. In such a case, the analysis has no value
and meaning.
7. Changes in the Value of Money
The purchasing power of money is reduced from one
year to subsequent year due to inflation. It creates
problems in comparative study of financial statements of
different years.
8. Limitations of the Tools Application for Analysis
There are different tools applied by an analyst for an
analysis. Even though, the application of a particular tool
or technique is based on the skill and experience of the
analyst. If an unsuitable tool or technique is applied,
certainly, the results are misleading.
9. No Assessment of Managerial Ability
The results of the analysis of financial statements should
not be taken as an indication of good or bad
management. Hence, the managerial ability can not be
assessed by analysis.
10. Change of Business Condition
The conditions and circumstances of one firm can never
be similar to another firm. Likewise, the business
condition and circumstances of one year to subsequent
can never be similar. Hence, it is very difficult for analysis
and comparison of one firm with another.
 Unit-2
Chapter -1
Ratio analysis

Ratio analysis is a fundamental technique in financial

statement analysis that involves the calculation and
interpretation of various financial ratios to assess a
company's performance, financial health, and overall
efficiency. Ratios are quantitative indicators derived from
financial statement data, and they provide insights into
different aspects of a company's operations and financial
position. These ratios are used to evaluate relationships
between different financial variables and make informed
decisions about a company's investment potential,
creditworthiness, and operational efficiency.
Uses and Significance of Ratio Analysis:
1. Performance Evaluation: Ratio analysis helps assess
a company's financial performance over time. By
comparing ratios from different periods, analysts can
 identify trends, improvements, or deterioration in
key financial areas.
2. Liquidity Analysis: Liquidity ratios, such as the
current ratio and quick ratio, indicate a company's
ability to meet short-term obligations. A higher
liquidity ratio suggests better short-term solvency.
3. Profitability Assessment: Profitability ratios,
including gross profit margin, operating profit
margin, and net profit margin, help evaluate a
company's ability to generate profits relative to its
revenue and costs.
4. Efficiency and Activity Analysis: Activity ratios, like
inventory turnover and accounts receivable
turnover, provide insights into how efficiently a
company utilizes its assets to generate revenue.
5. Leverage and Solvency Analysis: Leverage ratios,
such as debt-to-equity ratio and interest coverage
ratio, help assess a company's long-term solvency
and its ability to service debt.
6. Investment Decision-Making: Investors use ratio
analysis to make informed investment decisions by
 comparing a company's financial performance and
position with its competitors or industry peers.
7. Creditworthiness Evaluation: Creditors and lenders
use ratio analysis to evaluate a company's ability to
repay loans and its overall creditworthiness.
8. Risk Assessment: Ratios help identify potential
financial risks, such as high debt levels, inadequate
liquidity, or poor profitability, which could impact a
company's stability.
9. Comparative Analysis: Ratios allow for easy
comparison of different companies or divisions
within the same company, aiding in benchmarking
and identifying relative strengths and weaknesses.
10. Budgeting and Forecasting: Ratios can assist in
setting realistic financial goals, creating budgets, and
making financial projections based on historical
trends.
11. Managerial Decision-Making: Ratio analysis
helps management assess the effectiveness of
various operational and financial strategies and
make informed decisions to improve performance.
 12. External Reporting: Ratios are often included in
financial reports and presentations to provide a
concise summary of a company's financial
performance and position to external stakeholders.
13. Communication with Stakeholders: Ratio
analysis provides a standardized way to
communicate a company's financial performance to
stakeholders, such as investors, analysts, regulators,
and employees.
In summary, ratio analysis is a valuable tool for
understanding a company's financial strengths and
weaknesses, identifying areas for improvement, and
making informed decisions across various aspects of
business management, investment, and financial
planning.
Limitations of ratio analysis

While ratio analysis is a valuable and widely used tool for

assessing a company's financial performance and
position, it has certain limitations that need to be
considered when interpreting the results. Some of the
key limitations of ratio analysis include:
1. Lack of Context: Ratios provide numerical insights,
but they lack context. Interpretation without
understanding the industry norms, business cycle,
and specific circumstances can lead to incorrect
conclusions.
2. Interpretation Challenges: Ratios can be complex to
interpret, especially for those without a strong
financial background. A single ratio might have
different interpretations depending on the
company's industry, size, and operational
characteristics.
3. Financial Statement Limitations: The accuracy of
ratios depends on the accuracy of the financial
statements themselves. If financial statements
contain errors or are manipulated, ratios can be
misleading.
4. Historical Data: Ratios are based on historical
financial data, which may not accurately reflect a
company's future prospects or changes in the
business environment.
5. Different Accounting Policies: Companies may use
different accounting policies for recognizing
revenue, valuing assets, and reporting expenses. This
can make comparisons between companies or
periods challenging.
6. Changing Business Models: Rapid changes in a
company's business model, products, or services can
render historical ratios less relevant and meaningful.
7. Seasonal Variations: Certain businesses experience
significant seasonal fluctuations in revenue and
expenses, which can distort ratio analysis results.
8. Non-Financial Factors: Ratios focus on financial data
and may not consider important non-financial
factors, such as changes in management,
technological advancements, or shifts in consumer
preferences.
9. Comparability Issues: Companies within the same
industry may have different operations, risk profiles,
and business strategies, making direct comparisons
less meaningful.
10. Influence of External Factors: Ratios can be
influenced by external factors like changes in
interest rates, inflation, or regulatory changes,
making it challenging to isolate a company's true
performance.
11. Manipulation and Fraud: Companies might
manipulate financial statements to improve certain
ratios or present a more favorable picture to
stakeholders.
12. Limitation of Quantitative Analysis: Ratios are
quantitative measures and might not capture
qualitative aspects of a company's performance,
 such as innovation, brand strength, or customer
loyalty.
13. Limited Scope: Ratios provide insights into
specific financial aspects but may not provide a
comprehensive view of a company's overall
performance or strategic direction.
14. Influence of Capital Structure: Capital structure
decisions, such as debt financing, can impact ratios
and make cross-company or cross-industry
comparisons challenging.
15. Cyclical Industries: Ratios might not effectively
capture the nuances of businesses in cyclical
industries, where financial performance is heavily
influenced by economic cycles.
To address these limitations, it's important to
complement ratio analysis with other forms of analysis,
such as qualitative assessments, trend analysis, industry
comparisons, and scenario modeling. Additionally,
understanding the specific context of the company,
industry, and economic environment is crucial for
meaningful interpretation of ratio analysis results.