The role of accounting and finance
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•Consider the role that accounting and finance play in organisations and how accounting and finance information can add to the value chain of an organisation.
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SAMPLE ANSWER
Introduction
The role of accounting and finance
Accounting provides the basis for assisting managers in organizations, creditors, bond holders, suppliers, customers and many other stake holders make effective decisions.
The major role of accounting is to provide financial information in a way that it’s understandable to most stakeholders. Accounting provides financial information for the following three reasons,
- External reporting: Entails preparation of financial reports that are used by investors, government authorities, creditors among other stakeholders.
- Routine internal financial reports: These are reports that are generated periodically by the accountants to be used by the management of the company for making internal decisions.
- Non-routine internal reports: These financial reports are mostly generated to support decisions and other projects that need clarification when necessary. Accounting information is prepared in different formats depending on the users of the financial information
There are also three types of accounting information; Management accounting, Financial accounting and cost accounting. Management accounting focuses on financial information that
assists managers make decision in organization. The reports generated for the management are mostly routine but they can also fall on non-routine reports (Garrison, Noreen & Brewer, 2009).
Financial accounting generates reports, measures and also records all the business transactions according to the principles as set out by the policies and concepts of Generally Accepted Accounting Principles (GAAP). Financial accounting generates information that are used by the creditors who need to know the financial leverage of the company before extending any loans or financial assistance to the company. This information can be derived from the statement of financial position of the company or the balance sheet. Investors need to know if the company is liquid or not. Companies that are insolvent find it difficult to find investors as their profitability is not guaranteed. Information on the company’s profitability is obtained from the company’s income statement or cash flows (Atrill & Mclaney, 2013).
Cost accounting on the other hand provides information that facilitates decision making for both financial accounting and management accounting. Cost accounting measures and reports financial and also non financial information in a company that is associated with the costs of acquisition, production and consumption of an organization’s resources. Managers require information to make certain decisions. The costs of manufacturing a product and the expenses involved in sales and distribution are added together to determine the products total cost per unit to facilitate calculations of breakeven costs and the contribution margins. Managers need this kind of information to make decisions on the minimum number of units to produce in order to breakeven. This is a situation where all the fixed costs and other expenses have been covered but no profits have been realized. Its critical because without the production of the minimum units required for the company to honor its fixed expenses and other basic costs then the company will be insolvent and finally file for bankruptcy.
Cost Management
It’s an activity that is mostly carried out by the managers and it relates to cost control and planning. Managers have to constantly make decisions regarding the cost of materials, production processes and designs. The items to be included on annual budgets that target annual costs and expenses must be generated through information generated by cost accountants during cost management activities. Cost management ensures that costs are incurred with expectation of profits in future. Cost accounting provides the different combinations of expenses and the expected profits for different purposes and projects (Dayananda, Irons, Harrison, Herbohn and Rowland, 2002).
Cost management provides the system that managers require to record all the required information needed to make the right decisions. Cost management involves the production of such reports that are based on different formats and which have been prepared using different concepts such as absorption, marginal costing or activity based accounting. All these processes are applicable but certain concepts and procedures apply to different setups and conditions. Cost management determines the best method to be applied and also when to apply them.
Management Accounting
The main role of management accounting is to solve management’s problems, maintain the production scores and other costs while also directing the company to profitability. Scorekeeping maintains all the results that occur as a result of the actions of various managers and head of sections. These scores are also compared with the reaction of other companies in the same industry.
Value Chain
It’s the overall visualization of the entire business a series of activities that occur in a sequence of processes and activities that add value and usefulness to the services or products in the company and which are later sold. Management accountants are instrumental in providing decision support for each activity that is forms part of the value chain. The processes involved in value chain require careful analysis which can only be achieved through cost accounting to determine their profitability and other variable costs involved (Drucker, 1999).
Management accounting provides the various accounting reports for all the work in progress and finished goods. The various types of information that are required to maximize profits and minimize cost are generated by the cost accountants. The role of accounting in global business is critical as it provides a unified standard system for preparing financial statements in a way that is understandable by all accountants and auditors globally.
References
Atrill, P. & Mclaney, E. (2013) Accounting and Finance for Non-Specialists. 8th Ed. Harlow, UK: Pearson Publishing.
Dayananda, D., Irons, R., Harrison, S., Herbohn, J. and P. Rowland (2002) Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press. pp. 150.
Drucker P. F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
Garrison, R., Noreen, W. & Brewer, P. (2009). Managerial Accounting, McGraw-Hill Irwin.
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