What Is the Role of Management Accounting?
Management accounting is an internal business function that includes the recording and reporting of a company's financial transactions. The accounting department also supports management in different business operations, providing analysis and support for different decisions and investments.
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Financial Reporting
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Management accountants work at the beginning of the accounting cycle, recording the financial transactions of a company as they occur. This business role ensures that companies have a good understanding of their financial health, giving executive management the ability to make informed decisions. Financial reporting also allows external stakeholders to review the company based on financial information and deciding whether to invest money into the company. Financial reporting leads to other business roles for management accountants, including budgeting, forecasting and internal controls.
Budgets
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Companies use budgets to ensure that they do not spend more money on business operations than is necessary to generate profits. Management accountants will prepare budgets for each department and then add them together to create one companywide budget. The accounting department is responsible for managing the budget and tracking expenses that are higher than the budgeted expense. Most budgets are created on an annual basis; capital improvements are also included in the budgeting process so businesses can plan on improving current facilities.
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Forecasting
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Forecasting is the crucial part of determining the amount of sales a business can generate from current operations and production facilities. Management accountants will conduct a market analysis and determine where the industry is in the business cycle. If the current industry is in a declining stage, then management accountants will help produce information for executive managers to use when finding new consumer markets. Forecasting also includes reviewing current competitors and finding ways to take market share from those companies through improved products and services.
Internal Controls
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Most private accounting departments create and implement the internal controls needed to protect a company's financial information. Internal controls protect cash, fixed assets and the integrity of financial statements. While most companies have existing internal controls, publicly held companies are required to meet the standards of the Sarbanes-Oxley Act of 2002 (SOX). SOX requires companies to prepare financial statements under tight preparation and review functions; after the statements are prepared, executive management must sign off on the financials to declare the statements are a true and accurate representation of the company.
Management Support
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Accountants support management decisions by evaluating the company's investment decisions. Businesses choose investments based on the future profitability of cash flows; these calculations are prepared by the accounting department and submitted to executive management. Most investment decisions require large amounts of financial information so the best decisions can be made. Most businesses accept investments with low risk and moderate reward, although a high-risk/high-reward investment may be considered.
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