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Unformatted text preview: Chapter 1 - Management Accounting and Corporate Governance Answers to Questions 1. Financial accounting deals with regulated, historical, financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders. Managerial accounting is concerned with unregulated financial, economic as well as physical data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders. 2. The value-added principle means that management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost. Estimates of future product costs are permissible in managerial accounting reports for budgeting and product costing but would not be allowed by financial regulations in financial accounting. 3. The two dimensions of the TQM program are: (1) management should follow a continuous, systematic problem solving philosophy that engages all employees to eliminate waste and errors and to simplify the design and delivery of products and services to customers, and (2) organizations need a strong commitment to customer satisfaction. TQM is being used in business to maintain profitability in an increasingly competitive global market. In this environment profit margins are tight, and therefore, inefficiencies can more easily erode business profits. To eliminate waste, errors, and dissatisfied customers, information must be timely and relevant in order to prevent or discover and correct mistakes immediately. 1-1 Chapter 1 - Management Accounting and Corporate Governance 4. Both financial and managerial accountants need cost information about the companys products and services. In managerial accounting cost information is useful in product pricing decisions and is an essential part of cost control (comparing actual product cost to budgeted product cost to assess needed improvement) and performance evaluation (assess managers success in controlling and eliminating unnecessary cost). In financial accounting cost information about the product is needed to determine ending inventory on the balance sheet and cost of goods sold on the income statement. Product costing in financial accounting can impact the decisions of not only managers but also outsiders such as investors, creditors, and taxing authorities. Product costing information in managerial accounting can affect the products price as well as managements decisions as to whether cost correction changes are needed. 5. A cost that has the future economic potential to increase assets is recorded as an asset (e.g. cost of products purchased). A cost that is used in the process of earning revenue is recorded as an expense (e.g. administrative salaries, and product cost for products sold)....
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