Managerial Accounting

Introduction

This particular research paper seeks to address a diverse array of sub-topics. First, it begins by offering a contrasting analysis of the reports used by managers and those used in GAAP financial statements. The paper also outlines the author’s researched ideas on the reasons on why he (the author) believes that investors should have access to managerial reports. Additionally, the paper will coherently outline the pros as well as cons of providing investors with access to managerial reports. Lastly, the paper will also incorporate an analysis of Activity Based Costing compared to traditionally costing, and absorption costing compared to traditional costing methods used in GAAP reports.

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Main Body

The reports utilized by managers and those used in the GAAP financial statements are distinct in several ways. Different from the reports used in the GAAP financial statements, the reports utilized by managers do not require public accountability (Thornton 2014). Moreover, the reports utilized by managers normally “publish general purpose financial statements for external users” (Thornton 2014, p.7). The reports used by managers’ majorly present statements which encompass the profits, losses, as well as the other incomes generated by a business in a financial period (Lindahl and Schadewitz 2016). Alternatively, the statements used in GAAPs are usually income statements (Lindahl and Schadewitz 2016). The reports used by managers are also statements that document the transitions that had taken place in equity during the financial period. Conversely, a report used in the GAAP financial statement usually “displays total comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements” (Thornton 2014, p.8).

It is also crucial to note that the reports utilized by managers normally portray the cash flows from that particular financial period (Thornton 2014). On the other hand, a report utilized in GAAP financial statement states any of the transitions that had taken place in the equity’s stockholders (Miko 1998). In addition to this, it discloses the “changes in the separate accounts comprising stockholders’ equity (in addition to retained earnings) could be made in the notes to financial statements” (Thornton 2014, p.8). The reports used by managers are largely notes. These notes are made up of summaries relating to policies that are associated with accounting (Miko 1998). Conversely, the notes are not only made up of policies related to accounting. However, they also comprise of other various information that serves to be explanatory to its intended audience (Thornton 2014).

Unlike the reports used by managers, the reports used in the GAAP financial statements are not notes comprised of particular summaries. Rather, the reports used in the GAAP financial statements are statements representing the cash flows that took place in that particular financial period (Lindahl and Schadewitz 2016). According to Lindahl and Schadewitz (2016) and Thornton (2014), the reports used by managers are, on most occasions, a reference to the financial year that had ended previously. Distinctively, the reports used in the GAAP financial statements are purely notes with reference to the business’ financial statements (Lindahl and Schadewitz 2016; Thornton 2014). Moreover, Thornton (2014) suggests that the reports utilized by managers are usually “statements of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements” (p.8). On the other hand, the reports in the GAAP financial statements are alternate to the antecedent.

From my own personal conscience, I am of the opinion that investors in a particular company or business must be permitted access to the managerial reports concerned with those particular businesses. It is vital for any investor to gain access to managerial reports due to various, distinct ways. First, by gaining access to these particular managerial reports, an investor would be enabled to “perceive and understand the wealth-generating activities of a company and the results of those activities” (Centre for Financial Market Integrity 2007, p.1). From the above, it would be explicit that the business would stand a better chance basing on whether the managerial reports would portray a more comprehensive, clear, and concise summary of the activities that result to its generation of incoming as well as the grossing of dudgeon profits (Centre for Financial Market Integrity 2007).

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Additionally, I am of the opinion that investors should be permitted access to managerial reports due to the fact that the nature of business practices are often transitioning (The Association of Certified Chartered Accountants 2013). The former change in discrete ways. For instance, the business practices may force the business to either join or break away from certain markets. Additionally, the products manufactured by a business may be changed to fit a certain market or to achieve a particular market share. Conversely, the business may adjust some of its practices or alternatively, install other practices for the purposes of attracting more customers or alternatively, retaining its current customers (The Association of Certified Chartered Accountants 2013). This should be well-conversant with the investors in order to help them evaluate any chances for prospective investments. Moreover, by making the investors aware of the business’ changing practices, investors are able to “evaluate investments and make financial decisions” (Centre for Financial Market Integrity 2007, p.1).

However, by permitting investors full access to the managerial reports, both pros as well as cons of such a situation would be predominant. This particular section will coherently outline both the pros and cons that may result from the permitting of managerial reports to a business’ investors. Among the major pros is the fact that permitting these particular reports to the investors enables them to come up with appropriate evaluations with regards to crucial investment decisions (Larcker and Tayan 2010). Not only does access to these reports enable them to come up with crucial investment decisions but also, equips them (the investors) with the ability to assess the performance of either the business or firm as well as its managers for quite a lengthy period of time (Larcker and Tayan 2010). This is of extremely dudgeon benefit to the capital markets too since it aggravates its efficiency (Dilla, Janvrin, and Jeffrey 2014). This is due to the fact that there would be an ease in the process of valuing the assets by the investor and thus, bringing about the efficiency.

In addition to the antecedent, it is also quite vital to note that another significant but obvious pro that could culminate from the providence of managerial reports to investors is the fact that the transparency of the dealings conducted by the firm would be sustained (Dilla et al. 2014). Transparency and credibility among all of the deals conducted by the company would definitely install significant confidence among the investors and thus, facilitate more solid investments (Larcker and Tayan 2010). Apart from the advantages I have comprehensively outlined above, permitting access of the managerial reports to managers may also present its own set of challenges. For instance, the quality of the managerial reports would determine the continued stability of the business or alternatively, its downfall. By virtue of this, in an event that the managerial reports may be of poor quality or lack clarity as well as transparency, the investor may experience a hard time while evaluating the value of his/her assets. In addition to this, the investor may definitely perceive this as poor management of the company’s activities and hence, exemplify some sort of laxity in effecting more investments.

Similar to the con discussed above, managerial reports that do not exemplify absolute transparency may result in a laxity of solid investments from the investors and may also lead to withdrawal of investments by other investors (Dilla et al. 2014). Additionally, if the managerial reports would indicate poor future earnings, it is quite probable that the investors would either withdraw their investments or avert from any further potential investments. This may result to the gradual destabilization of the particular business.

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An Analysis of Activity-Based Costing as Compared to Traditional Costing

Akyol, Tuncel, and Bayhan (2005) define activity-based costing “as a methodology that measures the cost and performance of activities, resources and cost objects” (p.1). In an activity-based costing model, the total sum of expenditures spent on raw materials of a particular product as well as the whole costs involved in its production often match the total amount of money that the product would ultimately cost at the end (Akyol et al. 2005). Akyol et al. (2005) further suggest that “In other words, the ABC method models the usage of the organization resources by the activities performed and links the cost of these activities to outputs, such as products, customers, and services” (p.1). Related costs may include the number of hours spent on the labour for producing that particular product, et cetera. On the other hand, the traditional costing model contrasts this. As such, only costs affiliated to the labour involved in the production of the product as well as direct materials’ costs may be reflected on the final cost of that particular product (Akyol et al. 2005).

Another major difference or contrast between the activity-based costing model and the traditional costing model is the fact that the activity-based costing model possess higher rates of accuracy as compared to the traditional costing models. This may be attributed to the fact that the activity-based costing systems offer way more explicit indirect costs’ breakdowns. On the other hand, it is suggested that the traditional costing systems are tougher to implement. This is as a result of the fact that they are too costly. Moreover, the traditional costing systems are also not as clear as the activity-based costing model but rather, are quite complex.

Analysis of Absorption Costing as Compared to Activity-Based Costing

Majorly, the major difference between the former and the latter is more concentrated from the angle in which they are approached from as well as the methodologies utilized in both. Absorption costing is also referred to as full costing (Richardson 1966). The major difference between the duos is that whereas absorption costing incorporates the costs of labour i.e. any wages affiliated to the direct labour involved in production, any of the costs covered in the purchase of materials directly, as well as the costs of the product’s units manufactured, activity-based costing majorly bases on the activities carried out on each product while on the production line to assign costs to the final product (Richardson 1966).