Financial vs. Managerial Accounting

This chapter introduces the principles of managerial accounting and points out the differences between managerial accounting and financial accounting. Outside parties do not use managerial accounting; it is primarily used internally by management to make decisions that affect the organization's efficiency.

What Is Managerial Accounting?

Dana Matthews is the president of Sportswear Company, a producer of hats and jerseys for fans of several professional sports teams. Imagine you are the accountant in charge of all accounting functions at Sportswear. Dana just reviewed the financial statements for the most recent fiscal year for the first time and has the following conversation with you:

President (Dana): I just reviewed our most recent financial statements, and I noticed we did not do as well as we had planned. I would like to look more closely at the profitability of each of our products to determine exactly what happened, but I don’t have this information in the financial statements. Is there a reason we don’t include this in the financial statements?
Accountant: Yes, the financial statements are prepared following U.S. Generally Accepted Accounting Principles (U.S. GAAP) and are intended for outside users, such as owners, banks, and suppliers. U.S. GAAP does not require us to disclose profitability by product, and we prefer not to make this information public. Product profitability information stays in-house and is prepared by our managerial accountant, Dave Hicks.
President: That makes sense. Can you have Dave pull together product profitability information for the past year so we can take a close look at which products are doing well and which are not?
Accountant: You bet. We'll have the information for you early next week.

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