Question

QUESTION 1 Using relevant examples, outline four differences between financial accounting and management accounting.

QUESTION 2 a. Explain how an organisation’s growth objective may conflict with its profit objective.

b. Describe three alternative objectives that an organisation might have other than growth and profit.

QUESTION 3

Various stakeholders require different types of information from the financial statement of an organisation. From the following list, identify which user category would most likely be served better by the information and give at least two examples of the type of information they would be looking for.

a. Information about employment prospects and the maintenance of pension funding and retirement benefits.

b. Information about the company’s range of products and services and its ability to survive and prosper.

c. Information about the liquidity of the business. I.e. Its ability to pay its liabilities when they become due.

QUESTION 4

Explain how, in the absence of International Financial Reporting Standards, the following factors would affect the accounting systems of different countries.

a. The age and size of the accounting profession.

b. The legal system.

Answer 1

Question 1

Accounting is the systematic and comprehensive recording of financial transactions of a business. It also refers to the process of summarizing, analyzing and reporting these transactions to the stakeholders of the business. Accounting has been classified mainly into three categories; Financial accounting, Management accounting and cost accounting.

Financial accounting vs Management accounting

Financial accounting	Management accounting
It records the financial transactions of the business	It records both the financial and managerial information
Follows rules and double entry system of accounting	No such rules for recording and following single entry system or can say collection of information.
Use Generally Accepted Accounting Principles for recording transactions	No such international rules, rather information collected according to the purpose of the business.
Results are used by external parties: shareholders, creditors, government, etc	Results are used by different levels of management or departments responsible for respective activities
Reports are prepared for a definite period, usually yearly and half yearly	Reports are prepared whenever needed. They may be prepared on a weekly or daily basis
Past orientation: use of historic data for reporting and evaluation	Future orientation: forecasts, estimates and historic data for management actions
Financial summary of the whole organization	Detailed analysis of parts of the entity, products, regions, etc
Examples; income statement, Balance sheet	Example; Budgets, fund flow statements

Question 2(a)

Growth of a business always does not mean profit. Growth and profit can be extremely different as a growing firm might suffer losses at times. In the initial stages of a business, the entrepreneure may not be focusing on the profit maximisation rather he/she would be focusing on maximising the customer base and supplier base of the business. As a part of sales drive as a part of sales drive business will be focusing on credit sales at the beginning period of the business. At this stage they will not be focusing on profit motive rather there will be focusing on increasing the growth of the business. So basically business will be focusing on the wealth maximization over long term rather than short term period. Business might be getting some losses in the early years but still it can be compensated in the upcoming years as a result of what they are doing in the past. Though there are some pending bills or any bank loans which have been taken in the early stages of the business it can be paid off by the business when they are getting enough profit in the following years. Therefore profit making is entirely different from the growth maximization.

(b) Apart from making profits for the business, management will have other aims as well.

Example; Increasing market share of the business, after sales services, social and ethical matters, customer satisfaction, welfare of employees etc

Question 3(a) Employement prosects of the company will have a great impact on the existing employees as welll as potential employees. They will be looking forward to seeing a better opportunity within the organisation and also some promotions and other benefits in the future. For people who are trying to get employed will also be checking on the performance and attitudes toward the employees who have already been employed. Example employees already employed potential candidates.

(b) Information about the companies range of products and services and its ability to survive and prosper will always be monitored by the potential customers and also by the competitors. Customers are always keen to check on variety of products and competitors will be trying to find out the mistakes and the improvement from their rival products.

(c) Information about the liquidity of the business will be checked by both internal members and also by external parties. The creditors will always be checking up on the financial stability of the business in order to give them goods on credit or not. Bank will be checking on the credibility and the financial stability to pay the liabilities on time. So liquidity will always be checked by both internal and external parties.

Question 4(a)

In the absence of international financial reporting standard business will be suffering to prepare their financial statements in an uniform way and also it will be difficult for them to compare their results from the previous year and also with the similar business over time to time. When a business want to compare the results there should be some rules and regulations which are followed universally. If there is no such rules and regulations such as accounting concepts and conventions the results what they are comparing will not be measurable and also there will not be any uniformity and reliability.

(b) In case of any legal disputes business cannot claim there valid points in the absence of the legal reporting standards if one business is following one method and the other one is following another method it will be difficult for the entire business and also industry to take a decision based on their financial information.