Generally Accepted Accounting Principles (GAAP)
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A. James Henderson is the president of York Athletics, a producer of hats and jerseys and other accessories for fans of several professional sports teams. Imagine you are the accountant in charge of all accounting functions at Sportswear. She reviewed the most recent financial statements, and noticed that the company did not do as well as they had planned. She wanted to look more closely at the profitability of each of our products to determine exactly what happened, but realized that she did not have this information in the financial statements. According to the accountant, financial statements are prepared according to the Generally Accepted Accounting Principles (GAAP) and do not require their company to disclose profitability by product, and therefore did not prefer not to make this information public. Accordingly, product profitability information stays in-house and is prepared by the company’s managerial accountant.
It is common among companies like York Athletics to prefer not to disclose more information than is required by the GAAP, but they would like to have more detailed information for internal decision-making and performance-evaluation purposes. This is why it is important to distinguish between financial and managerial accounting.
1. What is the difference between information prepared by financial accountants and information prepared by managerial accountants? (3 Marks)
2. It is clear that financial accounting focuses on reporting to outside users while managerial accounting focuses on reporting to inside users. What specific characteristics would we expect to see in managerial accounting information? (6 Marks)
B. Suppose you are the co-owner and manager of a retail store that sells and repairs racing bicycles.
1. Provide one example of a financial accounting report that would be useful to you and your co-owner. Provide two examples of managerial accounting reports that would be useful to you as the manager. (3 Marks)
2. Provide two examples of nonfinancial measures used by a pizza parlor that serves food in the restaurant and offers delivery services. (2 Marks)
3. For each report listed in the following, indicate whether it relates to financial or managerial accounting. Clearly explain the reasoning behind your answer for each item. (6 Marks)
a. Defective goods produced as a percentage of all goods produced
b. Income statement for the most current year, prepared in accordance with GAAP
c. Production department budget for the next quarter
d. Balance sheet at the end of the current year, prepared in accordance with GAAP
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