Management Accounting

Dr Hla Hla Mon

 Introduction
• How much did the business earn in revenue for
a given period?
• How much did the business spend in earning its
revenue during the period?
• How much does the business own in terms of
assets or possessions, both cash and non cash?
• How much does the business owe others in
terms of borrowings, either in cash or goods?
• What is the amount of the owner’s investment in
the business?
 Terms & Definitions
• Bookkeeping
– The process of recording data relating to accounting
transaction in the accounting books
• Accounting
– The system that measures business activities,
processes that information into reports, and financial
statements, and communicates the findings to
decision makers
 The
accounting
process

Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities ⎯ and
with the results of
their decisions.

Actions
(decisions) Decision
makers
The Concept of the Business
Entity

A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
 Basic Functions of an
Accounting System
● Interpret
and record
business
transactions.

Payment

Car
 Basic Functions of an
Accounting System
● Interpret ❷ Classify
and record similar
business transactions
transactions. into useful ● Summarize
reports. and
communicate
information to
decision
makers.
Objectives of External Financial
Reporting
The primary external users of financial information are
investors and creditors.
 Internal Users of Accounting
Information
● Board of Directors
● Chief Executive Officer
● Chief Financial Officer
● Vice Presidents
● Business Unit Managers
● Plant Managers
● Store Managers
● Line Supervisors
 The Use of Financial
Statements by Outsiders

Two concerns:
Creditors Solvency
Profitability

Investors
 Readers of Financial Analysis

Owners Track and evaluate management’s performance

Determine the risk of the business defaulting on

Lenders
its loan

Managers Compare actual and budgeted results

Government Ensure that taxes have been paid

Readers of Financial Analysis cont.

Evaluate the company’s ability to pay its

Suppliers
obligations

Investment
Evaluate the company’s performance
Analysts

Mergers and Highlight financial strengths, upside potential, and

Acquisitions future value
 Introduction to Financial
Statements
Companies prepare interim
financial statements and annual
financial statements.

2007

X
Introduction to Financial
Statements
Balance Sheet or
Statement of Financial Position
Income Statement
The primary
Statement of Cash Flows
financial
statements.
 The Annual Report
Statement of Financial Position or Balance
sheet
• Provides a snapshot of a firm’s financial
position at one point in time
• Assets, liabilities and equity at one point in
time
Income statement
• Summarizes a firm’s revenues and
expenses over a given period of time
 The Annual Report
Statement of Retained Earnings
• Shows how much of the firm’s earnings were
retained, rather than paid out as dividends
• Changes in contributed and earned capital
Statement of Cash Flows
• Reports the impact of a firm’s activities on cash
flows over a given period of time
• Net cash inflows (outflows) form operating,
investing and financing activities
 Introduction to Financial
Statements
Balance Sheet or Describes
Statement of Financial Position
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.
Balance Sheet or Statement of
Financial Position
Current Assets
Cash
Accounts Receivable
Inventories
Other current assets
Total current assets
Current Liabilities
Accounts payable
Short-term debt
Other current liabilities
Total current liabilities

Long-term (fixed) assets Long-term Liabilities

Gross PPE Long-term debt
Less: Accumulated depreciation
Net property, plant and equip. Owner’s Equity
Par value of common stock
Other long-term assets Paid-in-capital
Retained earnings
Total long-term assets Total equity

Total Assets Total Liabilities and

Owners’ equity

19
• Assets
• Current
• - Easily converted into cash near future
• - cash, bank, inventory, account receivable, etc.

• Non-current assets
• - Use for long-term
• -not intended for resale
• - e.g. land, building, premises, furniture and fixtures,
motor vehicles, etc.
 Non-current Assets
Long-lived assets acquired for use in
business operations.
Major Categories of Non-current
Assets
 The Nature of Liabilities
Defined as debts or obligations
arising from past transactions or
events.

Maturity = 1 year or less Maturity > 1 year

Current Noncurrent
Liabilities Liabilities
I.O.U.
• Liability
• Current
• -Repay within one year
• - e.g. bank overdraft, account payable, short-term bank loans, etc.

• Non-current
• -Repay more than one year
• - e.g. mortgage loans, long-term bank loans, bonds, etc.
 Distinction Between
Debt and Equity
The acquisition of assets is financed
from two sources:
DEBT EQUITY

Funds from creditors, with Funds from

a definite due date, and owners
sometimes bearing
interest.
 Rights of Stockholders

Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.
 Rights of Stockholders

When the stock

is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.
 Stockholders’ Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market price is
the amount that
each share of
stock will sell
for in the
market.
 Introduction to Financial
Statements
Balance Sheet or
Statement of Financial Position

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
 An Income Statement
❑ Sales
❑ Minus Cost of Goods Sold
❑ = Gross Profit
❑ Minus Operating Expenses
❑ Selling expenses
❑ General and Administrative expenses
❑ Depreciation and Amortization Expense
❑ = Operating income (EBIT)
❑ Minus Interest Expense
❑ = Earnings before taxes (EBT)
❑ Minus Income taxes
❑ = Net income (EAT)

30
 Income Statement
Revenues
Less: Cost of goods sold

Equals Gross
profit
Less: Operating expenses
Equals: net
Operating income
Less: Interest expense

Equals: earnings
Before taxes
Less: Income taxes
Equals:
NET INCOME

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 Introduction to Financial
Statements

Revenues Expenses
result in result in
positive negative
cash flow. cash flow.

Either in the past, present, or future.

 Introduction to Financial
Statements
Balance Sheet or
Statement of Financial Position
Income Statement
Net income (or
net loss) is
Statement of Cash Flows simply the
difference
between
revenues and
expenses.
 Introduction to Financial
Statements
Balance Sheet or
Statement of Financial Position
Income Statement

Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.
A Starting Point: Statement of
Financial Position
Assets

Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
 Assets
Cost
Principle

Stable- These accounting Going-

Dollar principles support Concern
Assumpti cost as the basis Assumptio
for asset valuation.
on n
Objectivit
y
Principle
 Liabilities

Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
 Owners’ Equity

Owners’ equity
represents the
owner’s claim to
the assets of the
business.
 Owners’ Equity
Changes in Owners’
Equity

• Owners’ • Payments
Investments to Owners
• Business • Business
Earnings Losses
 The Accounting Equation
Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

 Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.
 On May 1, 2003, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service and
received 800 shares of stock.
On May 2, JJ’s purchased a riding lawn
mower for $2,500 cash.
 On May 8, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a note payable
for the remaining $13,000.
On May 11, JJ’s purchased some repair
parts for $300 on account.
 Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for
$150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.
On May 25, ABC Lawns pays JJ’s $75 as a partial
settlement of its accounts receivable.
On May 28, JJ’s pays $150 of its accounts
payable.
 On May 29, JJ’s recorded lawn care services
provided during May of $750. All clients paid in
cash.
On May 31, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.

Now, let’s review how JJ’s transactions

affected the accounting equation.
 Let’s prepare the Income Statement and
Statement of Cash Flows for JJ’s Lawn Care
Service for the month ending May 31, 2003.

These transactions
impact the
Statement of Cash
Flows.

These transactions
impact the Income
Statement.
Investments by and payments to the owners
are not included on the Income Statement.
Revenue and Expenses
The price for
goods sold
and services Increases
rendered during a owner’s equity.
given accounting
period.

The costs of
goods and Decreases
services used up owner’s equity.
in the process of
earning revenue.
 The Realization Principle:
When To Record Revenue

Realization Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.
 The Matching Principle: When
To Record Expenses

Matching Principle
Expenses should be
recorded in the
period in which they
are used up.
 Purpose of the Statement of
Cash Flows
Provides information about the cash receipts
and cash payments of a business entity
during the accounting period.
Helps investors with questions about
the company’s:
● Ability to generate positive cash flows.
● Ability to meet its obligations and to
pay dividends.
● Need for external financing.
● Investing and financing transactions
for the period.
 Classification of Cash Flows

The Statement of Cash Flows must

include the following three sections:
● Cash Flows from Operating Activities
● Cash Flows from Investing Activities
● Cash Flows from Financing Activities
 Operating Activities
Inflows from:
● Sales to customers.
● Interest and dividends
received. + Cash
Flows
Outflows to: from
● Suppliers of merchandise Operating
and services.
● Employees. _ Activities
● Lenders for interest.
● Governments for taxes.
 Investing Activities
Inflows from:
● Selling investments and plant
assets.
● Collecting of principal on +
loans. Cash
Flows
from
Outflows to:
● Payments to acquire
Investing
investments and plant assets. _ Activities
● Purchase debt or equity
investments.
● Make loans.
 Financing Activities
Inflows from:
● Short-term and long-
term borrowing. +
● Owners (for example, Cash
from issuing stock). Flows
from
Outflows to: Financing
● Repayments of borrowed _
funds. Activities
● Owners for dividends.
● Purchase treasury stock.
 Cash and Cash Equivalents

Cash Cash
Equivalents Currency

● Short-term, highly liquid investments.

● Readily convertible into cash.
● So near maturity that market value is unaffected by
interest rate changes.
Operating activities include the cash
effects of revenue and expense
transactions.
Investing activities include the cash
effects of purchasing and selling
assets.
 Financing activities include the cash
effects of transactions with the owners
and creditors.
 Relationships Among Financial
Statements

Beginning End of
of period Time period

Balance Balance
Sheet Sheet

Income Statement
Statement of Cash Flows
 Forms of Business
Organizations

Sole
Partnership Corporation
Proprietorship
 Reporting Ownership Equity in
the Balance Sheet
Sole
Proprietorship

Partnership

Corporation
 The Need for Adequate
Disclosure
Balance Sheet Notes to the
Income Statement
financial
statements often
Statement of Cash Flows
provide facts
necessary for the
proper
interpretation of
the statements.
 Drafting Notes to the Financial
Statements
Examples of Items Disclosed
●Lawsuits pending
Notes to the
Financial Statements ●Scheduled plant closings
●Governmental investigations
●Significant events occurring
after the balance sheet date
●Specific customers that
account for a large portion of
revenue
●Unusual transactions and
related party transactions
 Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.

Balance Sheet
Cost of Assets:
plant Plant and
assets equipment

as the services
Income Statement
are received
Revenues:
Expenses:
Depreciation
 Depreciation
Book Value
– Cost – Accumulated
Depreciation
Accumulated Depreciation
– Contra-asset
– Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
– Physical deterioration
– Obsolescence
 Straight-Line Depreciation

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life
 Straight-Line Depreciation
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.