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CHAPTER ONE
Introduction to Managerial Accounting
This chapter examines accounting as an information system. It also
examines the information needs of internal and external users. It
Key Concepts
• Accounting information includes both financial and nonfinancial
information used by decision makers.
• Financial accounting information is focused on the information needs
Learning Objectives
LO1— Describe the contemporary view of accounting information systems and
describe and give examples of financial and nonfinancial accounting
information.
LO2— Compare and contrast managerial accounting with financial accounting
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Lecture Outline
A. Introduction
1. Business environments have changed dramatically in the past few
3. Although the terms data, information, and knowledge are
sometimes used interchangeably, knowledge should not be
confused with data or information.
a. Data are reports such as financial statements, customer
lists, and inventory records.
B. Accounting Information (LO1)
1. Accounting information is provided by the accounting information
system (AIS).
o The traditional AIS processes financial data resulting from
2. Enterprise resource planning (ERP) systems have been developed
in an attempt to address the shortcomings of traditional accounting
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o ERP systems capture both quantitative and qualitative data
C. A Comparison of Financial and Managerial Accounting (LO2)
Financial accounting is primarily concerned with the preparation of general–
use financial statements for external users while managerial accounting is
primarily concerned with generating financial and nonfinancial information
for internal users.
1. External users: Stockholders, potential investors, creditors,
governmental taxing agencies and regulators, suppliers, and
customers are external users.
o Stockholders and potential investors want information to
Key Concept
Accounting information includes both financial and nonfinancial
information used by decision makers.
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2. Internal Users: Employers, teams, departments, regions, and top
management are internal users of accounting information. These
internal users are often referred to as managers. Managers are
involved in three primary activities, commonly referred to as
planning, operating, and controlling.
3. The Functional Areas of Management
o The operations and production function produces the
products or services that an organization sells to its
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4. The Information Needs of Internal and External Users:
o The information needs of internal users and external users
differ in significant ways. The following table shows the
accounting information needed by different users of
accounting information.
Users
Type of Accounting
Information Needed
Source
External
Shareholders
and creditors
Sales, gross profit, net income,
cash flow, assets and
liabilities, earnings per share,
etc.
Annual reports,
financial statements,
and other available
documents
expenditures with budgets, etc.
and suppliers
information on sales and
and measures of performance.
and other internal
o Because of the varying needs of internal users,
managerial accounting is more flexible than financial
accounting.
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under managerial accounting can be customized to a
specific company or segment of a company.
o Financial accounting is concerned primarily with reporting
on the company as a whole while managerial accounting
emphasizes the various segments of a company, such as
divisions, departments, sales regions, and product lines.
5. The Role of the Managerial Accountant
o Managerial accountants are no longer the “bean counters”
or “number crunchers” in the organization.
o Automation of traditional accounting functions allows
D. Relevant Factors and Decision Making (LO3)
1. Relevant costs are costs which differ among alternatives. Another
way to view relevant costs is to identify those which are avoidable,
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or those which can be eliminated by choosing one alternative over
2. Sunk costs are costs that have already been incurred. Because
sunk costs cannot be avoided, they are not relevant in a decision.
3. Opportunity costs are the benefits forgone by choosing one
E. Ethics and Decision Making (LO4)
In today’s business environment, companies have to be aware not only of
1. Ethics Programs:
o Companies frequently create ethics programs to establish
and help maintain an ethical business environment.
Key Concept
Sunk costs and future costs that do not differ among alternatives are not
relevant. Opportunity costs, however, are relevant.
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2. Corporate Wrongdoing:
o Even though companies establish ethics programs to
3. Sarbanes-Oxley Act of 2002
o It was passed as a response to corporate scandals which
began with implosion of Enron in late 2001.
o The law requires:
Key Concept
Establishing an ethical business environment encourages employees to act
with integrity and conduct business in a fair and just manner.
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End-of-Chapter Material
Brief exercises, exercises, and problems based on different learning objectives
have been provided at the end of the chapter. These end-of-chapter materials