Solutions Manual: Introduction To Management Accounting

SOLUTIONS MANUAL
CHAPTER
Introduction to
1 Management
Accounting
Answers to Review Questions

1 (a) Stock valuation
(b) Decision-making
(c) Planning and control
2 (a) Management accounting role
(b) Financial accounting role
(c) Management accounting role
(d) Management accounting role
3 For management accounting information to be valuable to management, it should possess the
following characteristics:
• Relevance is an important factor to consider particularly with the development of computers
and technology. Managers are overwhelmed with an endless stream of information. Due
to information overload, management needs to determine which information should be
considered and which should be ignored. The choice of information is made on the basis of
relevance.
• Accuracy of information is important if it is to have any value. Most of the management
accounting information is based on estimates and forecast. As such, all relevant information
should be evaluated for accuracy before making judgement. For example, a sales manager
needs to use accurate information to forecast next year’s demand.
• Timeliness simply means that information should be as current as possible. This is important
because historical information may not represent the current or future environment. However,
a trade-off between accuracy and timeliness is often required to ensure that information is
available for effective decision-making.
• The management accounting information must also be understandable for effective decision-
making. This means technical jargon should be avoided where possible. Failure to understand
technical jargon can result in wrong judgement and decisions.
• Finally, the provision of management accounting information must be cost-effective. This means
a cost and benefit test must be used to assess the effectiveness of providing such information
for planning and decision-making.
4 The scope of management accounting is widely concerned with the provision of detailed
information for internal users. The objective of the detailed information is to assist internal users
in planning, making informed decisions as well as implementing appropriate controls.
Solutions Manual
2
Financial accounting on the other hand is concerned with the analysis, classification and recording
of historical information. Through financial accounting, a company’s financial statements are
prepared, and these statements must adhere to the financial reporting standards as well as local
jurisdiction laws. These financial statements are prepared with external users in mind, investors,
bankers, creditors, loan providers as well as employees for various purposes.
Differences between management accounting and financial accounting
Standpoint Management accounting Financial accounting
Scope of accounting Management accounting Financial accounting information
information system information systems are systems are historical in nature
forward-looking
Recording Costs are recorded according to Proper ledgers maintained for
cost functions and cost units expenses, income, assets and
liabilities
Purpose Provides information for stock Provides general information on the
valuation, decision-making, financial position of an enterprise
planning and control
Target users Internal users such as managers External users such as shareholders
and creditors
Regulatory No mandatory rules or Must follow regulatory requirements
requirements regulations needed for preparing such as the Companies Act,
reports Financial Standards, and GAAP
when preparing financial statements
Types of information Both financial and non-financial Financial information supported by
information for internal notes to accounts for external users
decision-makers
Nature of Detailed information about Concise information about overall
information product line, departments, etc. firm performance
Reporting Involves continuous system of Financial statements are prepared at
reporting—management reports the end of each accounting year
are prepared weekly or on
monthly basis
Governance Management report presented Audited accounts signed and filed
to board members on a monthly annually
basis
5 When faced with ethical issues, you should follow your organization’s established policies on
the resolution of such conflict. If these policies do not resolve the ethical conflict, you should
consider the following courses of action:
(a) Discuss the issue with your immediate supervisor. If you cannot achieve a satisfactory
resolution, submit the issue to the next management level. If your immediate superior is the
chief executive officer or equivalent, the acceptable reviewing authority may be a group such
as the audit committee, executive committee, board of directors, board of trustees, or owners.
(b) Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics
Counselor or other impartial advisor to obtain a better understanding of possible courses of
action.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

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SOLUTIONS MANUAL

Answers to Review Questions

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