Question

In looking at the differences between financial and managerial accounting, discuss the information an banker would need to evaluate a mid-sized business for a loan. Assume the business has been in existence for 5 years and has a fair record of paying on existing loans. The loan is to help expand the business into a new market. In looking at financial accounting financial statements and managerial accounting financial statements, which will provide the best information to the loan officer and why? Feel free to pull the best from each type. Feel free to suggest information you would want to know in making your decision.

Answer 1

Case Analysis – Major difference between Financial Accounting and Managerial Accounting financial Statement and impact on Loan office while taking and disbursement of further Loan amount

Financial Accounting of any organization represents whether companies financial report and disclosure as per Accounting standard or not . Financial accounting report used for multiple stakeholder . Where as Managerial Accounting base financial statement used for internal purpose . this reports mainly represents “ Operational Report”

As per Question , Notice that company is a mid sized business and company is a existing business for 5 years and gas a fair record of paying on Existing loan . In this situation ,

In case of financial Accounting base financial statement , normally highlighted following point and capture important standard , KPI to judge or understand whether companies real position :

1) One of the most important part is cash flow – With help of cash flow position, Stakeholders can understand whether company having Free cash flow available or not , They can understand complete movement of Fund / Financial movement . With help of Investment movement , need to ensure whether companies loan movement – short term as well as long term , repayable of loan . With help of Investment activity – need to understand movement of capex . With help of this Capex , need to understand whether company will grow in future or not .

2) Financial Accounting report consist of multiple accounting standard and disclosure in the financial . One of the most important standard is “ IFRS 9 , 7 – Financial Instrument “

With hep of this standard , outsider , Banker can get to know complete Risk position of the company – like Credit risk , Liquidity risk , sensitivity analysis , market – Interest risk . With help of Financial Instrument disclosure – Banker can get to know repayment plan of companies less than 5 year and more than 5 year with Interest .

3) Financial accounting cover assurance from Independent Auditor , materiality determination

4) This report consist of Income Statement , Balance Sheet , cash flow along with complete Notes to accounts + Management Discussion and Analysis + corporate Givernance report

Where as in Case of Managerial Accounting base financial statement mainly cover Operational Report . This report more detail note on Segment , Line of business performance in details with lots of Ratio. This report cover following details – like :

EBITDA % of Gross Sales , Fixed Asset Turnover, Return on Asset , Retrun on Capital Employed , Gross Profit Margin , EBIt Margin , Economic value added ,

This report mainly cover Segment wise Past trend analysis of Revenue , Operating Margin , EBITDA margin and compare with Budget and determined the variance . Provide more reason for variance and future plan to improve company growth . Managerial accounting mainly cover more deep dive analysis and do root cause analysis

This report will highlight management about major pain area and how to overcome those area . This report does not follow any specific accounting standard . This report always help internal management to understand companies real operation position with more in depth analysis .

This report do compete fund flow analysis and determined daily and Monthly cahs flow movement. Through analysis of cash flow , project wise , Line of business wise . With help of this report , management can easily identified which Line of business gaining profitability , making money and which segment of business burning cash and lower in generating revenue and margin .

From the loan officer point - Officer should consider Financial reporting accounting statement because Managerial accounting is being preprared Only for Internal Management and not to circulate outsider . Officer with help of Financial reporting financial statement - mainly with hlpe of Cash flow , Manageemnt discussion , analysis , Corporate Governance report , with compliance of multiple accounting standard as per US GAAP , they can judge companies position and replayment capacity with help of EBITDA position ( after excluded Non cash item ) .