Management Accounting and Financial Reporting System
The accounting discipline has always been a primary tool in organization’s decision making processes. Accounting basically gives information for two related purposes: (1) provides report to the managers on a particular organization; and (2) provides report to other individuals within the organization that has expressed a legitimate interest in the workings of the organization . The global Civil Aerospace Industry has faced a lot of challenges more specifically on 2001.
Passenger traffic has reduced due to threats of terrorism, oil prices in the Middle East soared; major airlines have declared bankruptcy and a lot of employees lost their jobs. Most of the airline companies have found it hard to get back to the mainstream despite the financial support given by the American government. One of the major determining factors that significantly affected such a state is due to the fact that the civil aerospace is a “long-cycle sector” .
Such a state is primarily determined by the “health of the airline industry” and “airline profitability” . In addition, airline profitability is also determined by a number of factors, such as “passenger demand, industry-wide aircraft capacity and ticket pricing” . Such factors determine the number of airplanes ordered by airlines to various manufacturers
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Management accounting has been viewed by the American Accounting Association (AAA) Committee on Management Accounting as the “consideration of the ways in which accounting information may be accumulated, synthesized, analyzed, and presented in relation to specific problems, decisions, and day-to-day tasks of business management. ” Management Accounting is more inclined to serve internal decision making, providing information to internal managers. As such, in managerial accounting, it is expected that one’s knowledge of the business realm would be applied in order to make business decisions based on accounting data at hand.
More importantly, management accounting also deals with the proper distribution of resources in the organization. Having a primary focus on probity maximization, the management accountant is expected to reduce costs and at the same time provide an increased or sustained productivity in the organization . As such, it is in this regard that management accounting is expected to aid the planning functions of managers, aid in solving organizational problems such as goal achievements, creating and maintaining a strong communication and reposting system, and the likes.
In addition with this, management accounting is also expected to know economic characteristics of certain performance areas that are very relevant most specially in organizational goals; as such it is in this regard that management accounting is also directly related to management control functions. Finally, management accounting also serves to the aid of operating systems management in order to measure costs input and statistical measures of output . Financial Reporting System Financial reporting reveals how managers strategize for their respective companies while taking into consideration opportunities and risks .
Financial Reporting then is a process which requires firms to show the market value of their assets and their liabilities. The asset market values and revaluations of an organization could be physical assets such as property plans, and equipments . As such “financial reporting aims to provide information to actual and potential contracting partners of an enterprise and to the public. The information shows the results of management’s stewardship and should be seen as supporting well-founded decisions” .
The Financial Accounting Standards Board (FASB) said that financial reporting should “aid users in assessing the amounts, timing, and uncertainty of prospective net cash inflows into the enterprise” . This aspect then of financial reporting gears towards creating a strong investor base as it provides necessary information for decision relevancy. As such, it is in this respect that financial accounting could be said as having a predictive value. There are also other assumptions that financial information leads stock prices .
The International Financial Reporting Standards (IFRS) states on the 12th paragraph of its framework that the primary purpose of financial statements is to provide information regarding the financial state of a particular organization that could serve in conducting economic decisions. In relation with this, the Statement of Financial Accounting Concepts (SFAC) on its 16th paragraph says that financial reporting is made in order to provide information for those individuals who make economic decisions with regard to business enterprises, investments, or loans . Management Information Systems (MIS)
The necessity of change for all sizes of organizations is imperative in this age. There is a need for new types of systems that would cater to the demands of the ever changing business environment. Through previous information systems have served businesses before, new ones such as the Management Information Systems (MIS) is deemed as highly relevant most specially in the current times . Management Information Systems (MIS) involve both the information system and the organization. MIS has four interrelated dimensions. First, MIS reports involve both information technology and its instantiation.
Second, it is comprised of the elements of both the information system and the organization. Third, MIS makes information technology as a form of intellectual technology; and fourth MIS involves the function of a profession or a corporate function . As such it is with this respect that MIS primarily focuses on the application of information technology in order to cater to the needs of the organization and the management. Ratio Analysis Ratio Analysis is used in order to predict financial variables and evaluate relative performance of a particular organization.
Ratios are grouped between liquidity and profitability categories that would enable organizations to predict bankruptcy profitability of loans and stock prices. Relative performance evaluation is a process wherein a particular company’s performance is compared to a particular industry or another company . Financial ratios are perceived to be relatively more convenient to interpret than financial statement accounts because they are primarily done in reference to other firms, or expressed “significant relationships” among firms.
Another type of ratio analysis is the cross-sectional analysis wherein ratios between various firms for a significant number of years are compared. Various company dimensions that are measured using ratios are: “(1) the firm’s ability to meet its short-term obligations, (2) the capital structure of the firm and its ability to meet its long-term obligations, (3) the profitability and efficiency resulting from the use of capital, and (4) the efficiency resulting from the operational use of its assets” .
Liquidity ratios are often used to know the ability of a particular organization to meet its financial obligations, and more importantly, if they will be able to meet it on time. These ratios are of utmost importance to short-term lenders. In relation with this, current ratios are the current assets of the company which includes “cash, short-term marketable securities, accounts receivable, inventories, and prepaid expenses” . On the other hand, current ratios also include liabilities of the organizations like “accounts payable, dividends, taxes payable, and short-term bank loans” .
It is with this respect that it is said that a firm’s current ratio is a signifier of its liquidity. Quick (Acid-Test) Ratios are those quick assets of a firm that are comprised of short-term marketable securities and receivables . Leverage or Capital structure Ratios usually assesses the long-term solvency risk of an organization. It identifies weather the firm is able to meet its interest and principal payments and long-term obligations before they are due.
Examples of these are Debt-to-Equity Ratios and Times Interest Earned Ratios . Profitability ratios are often used in order to know if a firm is able to efficiently use its capital from its stockholders and lenders in order to generate revenues. Profitability ratios are often composed of Rate of Return on Assets and Return on Equity. Turnover Ratios are intended to know if the operational efficiency of a firm. These are composed of Inventory Turnover, Accounts Receivable Turnover and Plant Assets Turnover .