Can you think of factors that differentiate financial accounting from managerial accounting?
Suggested answers to practice activity 1.4
The factors that differentiate financial accounting from managerial accounting are explained as follows.
Users: Financial accounting provides accounting information for persons and institutions external to the reporting company, for example, investors (existing and potential), creditors, and industry regulators. Managerial accounting provides accounting information for a company’s management internal decision-making. Examples of the decisions made by a company’s management are planning capital expenditure projects, planning recurrent expenditures, setting achievable goals, encouraging the use of company resources in a manner that guarantees the inflow of economic rewards, and control of cost.
Type of data: Financial accounting is based on historical data, and the information produced by financial accounting is historical. Managerial accounting is based on past financial performance and future performance simulation (economic forecasts). Financial analysts who represent investors can use general purpose financial statements to simulate future financial performance based on the current year’s performance. Not all investors and creditors know financial accounting, financial information, analysis, and interpretation.
Amounts in financial statements: Financial accounting features aggregated amounts in financial statements. These amounts reveal less information about the reporting entity. Still, they are more transparent through adherence to measurement, recognition, and accounting standards' disclosure requirements. Managerial accounting reports are more detailed, technical, and specific to a reporting entity.
Can you think of more differences between financial accounting and managerial accounting?
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