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While the information needs of internal and external users overlap, the needs of managers generally differ from those of investors or creditors. Some distinguishing characteristics are discussed in the following section. Users and Types of InformationFinancial accounting provides information used primarily by investors, creditors, and others outside a business. In contrast, managerial accounting focuses on information used by executives, managers, and employees who work inside the business. These two user groups need different types of information. Internal users need information to plan, direct, and control business operations. The nature of information needed is related to an employee’s job level. Lower level employees use nonfinancial information such as work schedules, store hours, and customer service policies. Moving up the organizational ladder, financial information becomes increasingly important. Middle managers use a blend of financial and nonfinancial information, while senior executives concentrate on financial data. To a lesser degree, senior executives also use general economic data and nonfinancial operating information. For example, an executive may consider the growth rate of the economy before deciding to expand the company’s workforce. External users (investors and creditors) have greater needs for general economic information than do internal users. For example, an investor debating whether to purchase stock versus bond securities might be more interested in government tax policy than financial statement data. Exhibit 1.1 summarizes the information needs of different user groups.
Level of AggregationExternal users generally desire global information that reflects the performance of a company as a whole. For example, an investor is not so much interested in the performance of a particular Sears store as she is in the performance of Sears Roebuck Company versus that of JC Penney Company. In contrast, internal users focus on detailed information about specific subunits of the company. To meet the needs of the different user groups financial accounting data are more aggregated than managerial accounting data. Regulation
Beyond financial statement data, much of the information generated by management accounting systems is proprietary information not available to the public. Since this information is not distributed to the public, it need not be regulated to protect the public interest. Management accounting is restricted only by the value-added principleThe benefits attained (value added) from a process should exceed the cost of the process.. 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. For example, management accountants are free to provide forecasted information to internal users. In contrast, financial accounting as prescribed by GAAP does not permit forecasting. Information CharacteristicsWhile financial accounting is characterized by its objectivity, reliability, consistency, and historical nature, managerial accounting is more concerned with relevance and timeliness. Managerial accounting uses more estimates and fewer facts than financial accounting. Financial accounting reports what happened yesterday; managerial accounting reports what is expected to happen tomorrow. Time Horizon and Reporting FrequencyFinancial accounting information is reported periodically, normally at the end of a year. Management cannot wait until the end of the year to discover problems. Planning, controlling, and directing require immediate attention. Managerial accounting information is delivered on a continual basis. Exhibit 1.2 summarizes significant differences between financial and managerial accounting.
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