Question

Ch. 1 p.18

1. How does Managerial accounting differ from financial accounting?

Ch. 1 p.18

4) Name the three types of business entities and briefly describe the nature of each.

6) Pick any large company and identify which type of business entity it is.

Ch. 2 p.51

4) Name the three inventory accounts maintained by manufacturing firms and briefly describe the nature of each.

5) Name and briefly describe the three major categories used to account for manufacturing costs.

Answer 1

1) Managerial accounting differ from financial accounting:

1. Objective: The objective of managerial accounting is to produce useful information for a organisation’s internal use. Management collects information useful for strategic planning and decision making.

   On the other hand, Financial accounting is very much concerned of rendering information to those outside of a company. It is concerned with preparation and presentation of financial statements to disclose the firm's business performance and financial position.

2. Reporting Techniques: Financial accounting reports are totaled, in brief, and generalized. Information are easily drafted, are transparent and may not reveal too much of information. Managerial accounting however is highly detailed, technical, specific, and often requires interpretation skills.

3. Time: The information generated through financial accounting is entirely historical in nature. Financial statements reports data for a defined period of time that’s already over. Managerial accounting looks at past performance for creating business forecasts and for taking corrective future actions/decisions.

4. Regulation: Reports generated through managerial accounting are solely internal purposes. Management is free to decide the rules/system on management reports. There is no regulating authority/framework to regulate such accounting system. On the other hand, financial accounting reports are highly regulated by Financial Accounting Standards Board (FASB), Securities and Exchange Commission (SEC), etc. Since this information is released for public consumption, companies must be very careful about how figures are to be reported, how they make calculations and in what order those reports are prepared and presented.

2) There are three basic types of legal entities in which business can be conducted:

1. Sole proprietorship: This is a form of business entity involving one and only one owner. No special legal documents are required to establish a sole proprietorship and it does not have any separate legal entity away from its owner. Hence, the owner alone will be liable for all of the debts and liabilities of the business, however he has total control over the business and its income too.
2. Partnership: A partnerships is a form of business entity having two or more owners. A partnership is not taxed as a separate entity and all profits and losses go through from the partnership to the individual partners and must be included in their individual return. There are several types of partnerships: viz., general partnership, joint venture, and limited liability partnership (L.L.P.), etc.
3. Corporation: A corporation is a separate legal entity owned by its shareholders, managed by a board of directors, and operated by its employees. Establishment of a corporation requires preparation and filing/submission of Articles of Incorporation and other information to various government offices. If legal formalities are followed, the owners are not liable for the debts or liabilities of the corporation. Further, shares of stock of a corporation may be freely transferred too. A corporation is taxed separately from its owners.

3) Kirkland and Ellis is the largest law firm in the United States by revenue and the seventh largest in terms of number of attorneys. It is a Partnership firm (ie LLP)

4) Manufacturing companies maintain three inventory accounts. They are:

1. Raw materials inventory: Raw material is the basic material that is procured, processed and then converted into finished goods. The cost incurred to obtain raw materials that have not yet been placed into production at the end of the given period is reported as raw materials inventory under the current assets section of the balance sheet.
2. Work-in-process inventory: The units that remain yet to be completed/ in progress while in production at the end of a period are known as work-in-process inventory. These units require the addition of more materials, labor or manufacturing overhead to be completed int the coming period. Like raw materials, work-in-process inventory is also reported under the current assets section of the balance sheet.
3. Finished goods inventory: Finished goods are completed goods remaining unsold at the end of the given period. The total cost incurred to complete these unsold goods are reported as finished goods inventory under the current assets section of the balance sheet.

5)  Three major categories used to account for manufacturing cost:

1. Direct materials cost: Direct materials refers to the raw material which is the basic material that is procured, processed and then converted into finished goods. Manufacturing adds value to raw materials by applying a chain of operations to maintain a deliverable product. It is important to differentiate between the direct and indirect materials.
2. Direct labor cost: The direct labour cost is the cost of labour who can be easily identified against the unit of production produced. It includes the labour costs incurred in converting the raw materials by applying a chain of operations to maintain a deliverable product.
3. Manufacturing/factory overhead: Manufacturing overhead is any manufacturing cost that is neither direct materials cost or direct labor cost. Manufacturing overhead includes all other expenses to provide support to the manufacturing activity.