Question

Managerial and financial accountants use accounting information differently. Using an income statement, balance sheet, or statement of cash flows from a real company, discuss the different ways internal and external users will use the information to make investment or business decisions.

Answer 1

In general, financial accounting refers to the aggregation of accounting information into financial statements, while managerial accounting refers to the internal processes used to account for business transactions. ... Managerial accounting frequently deals with estimates, rather than proven and verifiable facts

The three financial reports that are usually used to make a business decision are the Balance Sheet, Income Statement, and Cash Flow statements
The Cash Flow Statement:

1. Reduce costs.
2. Increase sales.
3. Raise profitability.
4. Purchase new capital assets.
5. Best sources of financing, duration, etc

Managerial accounting, on the other hand, seeks to provide relevant information to internal company managers so they can make decisions about how to better run the company. In this sense, financial accounting focuses on the needs of outside stakeholders and managerial accounting focuses on the needs of internal users.

Because so many people rely on financial statements for information, federal regulation, and generally accepted accounting principles (GAAP) have standardized the formats. One big difference between internal and external users' statements is that financial statements for external use must fit these standard formats. If internal users such as your company's management or owners want information, you can use any format that works for them, or you.

The essential financial statements are:

• The income statement, which shows how much revenue you took in, and how much money you spent. It includes money earned but not paid to you, and money you owe but haven't paid. This statement provides a sense of how profitable the business is.
• The cash flow statement, which looks at how much money changes hands. This knowledge is important because you can have a profitable company that can't pay its bills if customers don't pay quickly enough. If you operate on a cash basis, cash flow equals income.
• The balance sheet is like an equation with one side of the equal sign comprised of your total assets, and the other, your total debts and the owners' equity. This statement shows how much the company is worth over and above the debt load.
• The supplemental notes cover various technical points and details that give perspective on the big three.  

Internal Users of Financial Statements

Internal users of financial statements fall into three main groups: management, owners and, sometimes, employees. In many small businesses, the owners are the managers. The key users of financial information in a partnership, for instance, are usually the partners themselves.

• Managers are the primary users of financial statements because they need the information to do their jobs. They have to make decisions such as whether to add debt or how to maintain cash flow. Making those calls requires detailed knowledge about company finances.
• Owners can use the statements to evaluate whether their investment is safe and whether the company is providing an acceptable return on their money.
• Some employees, such as accountants or the finance department, are users of financial statements because it's part of their job. If other employees have access to the information, it can help them judge whether the firm is in good shape or if it's time to jump ship.

Because those in management have to make decisions for the business, they need different information than other internal users of financial statements. For example, they may want income statements for each product line or store rather than for the business as a whole.

External User Statements

If someone wants to know about your finances but isn't part of your business, they're external users of financial statements. They fall into many more categories than internal users of financial statements:

• Lenders. If you want money from the bank, they're going to want to see your financial data first.
• Regulators. If you're a publicly traded corporation, you'll have to send the Securities and Exchange Commission copies of your statements.
• Outside investors. Like lenders, stockholders and venture capitalists will want to review your statements before they write you a check.
• Creditors. If you owe money or you're slow paying your bills, your creditors may want to double-check your statements. Suppliers may review your financial health before deciding to extend credit.
• Unions. If your cash flow and income are steady, the union may decide you can offer a more generous employment package.
• Publicly traded companies' financial statements are public information. Anyone who takes an interest in your business may become an external user. That could include customers, competitors and the media.

External users' statements have to follow GAAP or similar accounting frameworks. That doesn't mean they all want the same information. Investors may be most interested in your financial performance, while lenders might focus on your current debt load.