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Financial Accounting as compared to Managerial Accounting

Financial Accounting as compared to Managerial Accounting

Author: James Howard

This lesson explains the differences between financial accounting and managerial accounting.

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Hello, and welcome to this tutorial on Financial Accounting as Compared to Managerial Accounting. Now, as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you're going to spend here.

So let me ask you a question. What do you think are the different roles that financial managers take on in their day-to-day operation? Now, we've talked a little bit about what a financial manager is and what they do. What are some of those roles you think that they may take on in a business?

Well, what we're going to be talking about in this lesson are those financial managers that we mentioned. We're also going to be looking at the four responsibilities of financial managers, and we're going to be talking about the different types of financial managers that are out there. Lastly, we're going to be comparing financial accounting with managerial accounting.

Now, the key terms for this lesson are going to be "financial accounting" and "managerial accounting". So financial managers-- so what's a financial manager? Now, the thing about a financial manager is they have to balance the need to borrow versus the needs of production. And they need to make sure that they've gotten the best deal possible to borrow the money and ensure that the money is being used carefully within these organizations and that it's not wasted on things that the organization doesn't need.

Now, let's take, for example, a company who wants to install solar in their plant or at their headquarters. Some of the things that a financial manager might do would be to look at the needs for funding. And also, they're going to look at how much it's going to cost and the potential return on their investment for this-- and how long and when they're going to be able to make that money back and to get ahead.

In some cases, it may be a very, very smart idea to put the solar panels on, because I'm going to save a lot of money up front on my electrical bills. And I'm going to be able to pay back that money that I had to borrow to put them on there in the first place fairly quickly. In cases where I'm not making that savings in my anticipated electrical bills and it's going to take me a very long time to pay that money back, and that interest is going to sit there and sit there and sit there in my financial reports, I may want to rethink that as an option and look somewhere else.

Now, a financial manager has four main responsibilities. And those are-- one, determining long-term investments. What are those things that we want to invest in long-term that's going to bring us money in down the road several years from now?

Financial managers are also going to be getting the funds for these investments. What are the things that we want to buy? What are the things that we're going to use for a long time? And how do we get the money to make sure we can acquire these things?

We're going to oversee the day-to-day operations of the financial activities, making sure that that money's controlled and it's spent where it needs to be spent-- and not other places that may end up being wasteful for the company, where we end up not using that money as efficiently as we can.

And lastly, we're going to be helping managers take risk or manage those risks that the firm takes. Looking at the payoff, for example-- how long does it take me to make this money back? Or if I invest in a certain product or a certain improvement, will it actually help make the money back? If it's not benefiting the company, we probably shouldn't do it.

Now, there are several different types of financial managers that we want to look at. And the first one is a Certified Public Accountant, or CPA. Now, a CPA is licensed to work by the state, and they work with things called Generally Accepted Accounting Practices, or GAAP. This is the standard that accountants use so that everybody's books look basically the same, and what appears in one financial record as one thing, will translate directly to a financial record in another company. And they're generally involved in the tax part of the business and also with financial auditing to make sure that things are going well.

Next is the Chief Financial Officer, or CFO. Now a CFO is involved in financial planning that big 30,000 foot view, and they're considered part of executive management, the people that sit in the way-high offices. And they're the overseers of the entire financial department, so everything that happens from a financial standpoint in the whole company is their responsibility. Now, that's a pretty big job. Isn't it?

Next is the Chief Accounting Officer. Now, the Chief Accounting Officer overseas Accounting operations only-- only Accounting. That's the only part that e deals with. But it's the accounting for the entire firm. And again, they are considered a part of higher management-- not necessarily the executive management, but higher management. These will be folks who report directly to the Chief Financial Officer.

Now, you can have your CPA for any one of these roles, and these roles differ quite a bit in how they are organized in a business, based on the size of the organization. For instance, in a small business, typically you have one person that may be both the CFO, the CPA. Or they may outsource the CPA, and they may not have a CFO. So depending on the size of the business, these folks' roles can vary dramatically.

So we talked about financial accounting and managerial accounting at the beginning of the lesson. Well, let's take a look and see how these things differ. Let's look at them one at a time. Financial accounting is the sphere of accountancy that is focused on the creation of financial statements for stakeholders outside the organization. So these are going to be the folks who prepare the financial statements for the people outside, the folks who are looking in-- those shareholders and maybe the owners of the company.

Now financial accounting, as we've mentioned, is focused on the external user. And these are maybe stockholders. It could be unions, creditors, the government, possibly even suppliers. And they're going to be preparing income statements and balance sheets, and we'll talk more about these just a little bit in a different tutorial. Typically, these reports that they're going to be filing are filed annually-- things like the annual report to the shareholders. And this is also sent to the government through the Securities and Exchange Commission, or the SEC.

Now, managerial accounting is a little different. Managerial accounting is the sphere of accountancy that is focused on the creation of financial statements to assist organizational managers in making decisions. So this is going to be something that's internally focused, not necessarily meant for the folks that are outside of the business.

And as we mentioned, it's internal user focused. It's those managers that are making decisions everyday and running the business every day. And they can be used to help set performance goals. Where do we want to be? And how well are we doing in getting there? We want to make sure that we're filing these reports.

But you know what? There's no release set schedule. They can be filed in a variety of times. You can be looking at weekly, monthly, biweekly, every two or three months, semiannually-- whatever it takes to make sure that we're staying on top of our performance goals and doing the job that we need to do as a company.

And we're also going to be looking at things like trends, or predictions, forecasting where we want to be and where we're going to be in the future based on the trends that we're seeing within the finances.

Now, managers in all departments will need to have some type of managerial accounting skills for their department. If you're going to work in business-- especially if you're going to be a manager-- it's important that you understand these numbers so that you can participate in this conversation. If you have no idea what the numbers say, it doesn't do you a lot of good to see them. And they can really help drive your department and drive the business toward success.

So what was it we've talked about today? Well, we looked at financial managers. We also look at the four main responsibilities of financial managers. We looked at types of financial managers-- the CFO, the CPA, the Chief Accounting Officer. And we've looked at financial and managerial accounting and see how those compared as to who the intended user is for those two types of accounting.

Now as always, I want to thank you for spending some time with me today. And you folks have a great day.

Terms to Know
Financial Accounting

The sphere of accountancy that is focused on the creation of financial statements for stakeholders outside the organization.

Managerial Accounting

The sphere of accountancy that is focused on the creation of financial statements to assist organizational managers in making decisions.