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1.2. What is accounting? Financial vs. managerial accounting

Course video 3 of 72

In Week 1 we discuss the scope of accounting and its two major areas – financial and managerial accounting. In the first part of the Course – Weeks 1 through 3 – we talk about financial accounting (FA). First, the key financial statements – the Balance Sheet (BS), the Income Statement (IS), and the Statement of Cash Flows (SCF) – are introduced, and the accounting equation is analyzed. Then we move on to the basic accounting principles, standards, and approaches – from double-entry bookkeeping to GAAP. Equipped with the general understanding of the financial accounting approach, we apply accounting procedures to transaction analysis. Then we study revenue and expense recognition, and focus on accounts receivable and bad debts. Finally, you will learn how financial accounting deals with inventories.

Core Concepts of Accounting – Numbers and People

莫斯科物理科学与技术学院

課程 3（共 5 門，Understanding Modern Finance 專項課程）

Whenever the word “accounting” is pronounced, it is immediately associated with the need to memorize endless boring numbers. However, it is the common financial statements that contain important information that provides inputs for valuation of investment projects. The only challenge is how to properly extract them. Accounting and finance are indeed intertwined. Sometimes people that are not experienced in the area even mix them up. But most often emphasis in accounting is on numbers. Still, the deep understanding of key accounting concepts helps reveal the interests and actions of people behind these numbers. And the human dimension of accounting adds invaluable insight in the potential of successful project implementation. This Course discusses core ideas and concepts of both financial and managerial accounting. It by no means pretends to be comprehensive to any extent. But, being rather an accounting overview, it focuses on the issues that are most relevant and important for effective valuation of investment projects. The learners will gain insight into the essence of accounting. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. To pursue a career in accounting, a more detailed study is strongly recommended.

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教學方

Konstantin Kontor
Director and Professor of Finance and Strategy

腳本

Now let's address the question of what is accounting?

Well, there are many definitions of that, but for

us the most suitable one will be the following.

Accounting is an information processing system that is designed to

capture, measure and report the information

about the enterprise, the economic activity of the enterprise.

Let's put it not to forget.

So accounting is the information processing,

System, That, Captures,

Measures, And reports.

And this is all the economic

activity of an enterprise.

Now, why am I putting that, because I just said that?

Because now, we will take a closer look at that and

will see that, what does it mean, captures?

That means that people, who are engaged in accounting,

they have to somewhat understand what's going on in this enterprise.

Well, that seems to be trivial given this definition, but

often times this is not the case, and that creates problems or misunderstandings.

By the same token, the key idea here is also to measure.

Now it also seems trivial, but we will see that most actions in accounting

they're aimed at measuring things in the, quote, accurate or correct way.

And then final reports.

Now from here, the immediate question is, reports to whom?

And at the very end of the previous episode, we said that financial

accounting, most of the information is designed to be reported to the external

users, while managerial accounting is dealing more with the internal users.

And again, although this breakdown is somewhat artificial,

but we'll keep this in mind.

And that brings us to the point, if to whom, we know the answer.

And the answer is stakeholders.

Well, for the people who are in this specialization, you might be a little

bit bored or even offended by the fact that I mention stakeholders so many times.

We talked about it in capital markets.

We talked about that in corporate finance, we're talking about that right now.

In our M and A course, which is the final in this specialization,

we have the special episodes about that.

Why am I so obsessed about stakeholders?

Because, they're key.

These are the people, who are, although some of them are decision makers and

others decision takers, but these are the people whose actions and

whose attitude openly and directly affects

the efficiency performance of any enterprise and any project.

So if we ignore the interest of these people,

we're almost positive to make the wrong judgement.

So let's say a few words about these stakeholders for now.

So these are stakeholders in accounting.

Well, again, I'm not trying to be comprehensive here,

but some of the important groups of them we will identify.

Financial stakeholders, these are investors,

These are creditors, both private and public.

So most of them are, as you can see, external.

You can say, well, wait a minute, if investors are shareholders of the company.

Well, we talked about that before in our first two courses.

And we said that in a modern cooperation,

if you see shareholders that have little packages of shares,

they're actually effectively external.

Because they affect the decision making process in the corporation

in the extremely indirect way.

Now, then in accounting there's a very special role of regulators.

You know that many statements in accounting are prepared specifically for

tax inspectors.

And although in finance and the capital markets we sometimes can postpone this

idea about treatment of taxes, here this bubbles up in a more direct way.

Then, as always, this is the management.

Because the management is always the key decision maker.

And you can say, well, wait a minute, you just talked about that that the management

is more or less the recipient that deals with information in managerial accounting.

Well, first of all we talk about accounting in general.

But, the management also deals with financial statements.

Many of their decisions are based on the same information that goes

to the external users.

Well, clearly there are some other people, like

employees, although those are more or less decision takers.

Then there are competitors,

customer, Suppliers and others.

And then clearly there is public at large.

And we can always say that this is sort of the market at large, and

even society at large, and even this global market at large, if you will.

So here, we can see that these are sets of stakeholders.

Now, next question is what kind of decisions

are they basing on the accounting information?

And these decisions, well, you can say, well, wait a minute,

some of these people are decision takers.

I say, fine, but those who are decision makers, they use that for

planning, Control.

Then, let's say, performance, Evaluation.

And you can say, well, wait a minute,

you are talking about things that are sort of very distant from evaluation thing.

And then finally are able to determine, this is pricing,

Investing and valuation.

So welcome back.

So this information is being used for what is the key idea and

the core meaning of this specialization.

So that is all important here.

And then finally, in this part,

because this is basically we are trying to answer the question, what is accounting?

We are back to this distinction

of financial accounting versus managerial accounting.

Here, when I said we are back,

I will reproduce that financial accounting is more of external users.

While managerial accounting is the information that is used by internal.

And for us, the question is, if we talk about evaluation, what is more direct?

At a first glance,

it seems that for valuation we are in the shoes of the external users.

So we are most linked to financial accounting.

But, if the management engages in certain actions,

now these actions openly affect the performance of the enterprise.

Therefore, there is a link here.

So we can say that what is more direct and

what is more indirect maybe is a poor way to study that.

Instead, what we are doing,

we focus, On what,

Affects, Valuation.

And that may be value drivers.

And of all, because you can say well, all affects valuation,

but we obviously concentrate on key ideas here.

And then, so strictly speaking,

within this course, we talk abut details

only when relevant to valuation.

So basically we can say, the learners, who would like to be more proficient

in the accounting profession, who would like to build a career in accounting,

clearly, this course is not sufficient at all.

You have to go further and

study all these things that we previously posed as challenges.

Memorize a lot, read a lot of information, then solve huge number of problems,

and so on and so forth.

But this focus approach,

although that might sound strange, may be very interesting even to those who

already have professional certificates, like CPAs or ACCAs.

Because oftentimes being really overloaded with these standards and

procedures and pronouncements, oftentimes people lack to see the big picture.

So basically, this is the distinction.

And although I'm to an extent repeating myself, but I just want to

immediately not only put the rails along which we will roll, but also the focus.

And that will make our view consistent, because if not,

then people say, well, why are we studying this and why are we not studying that?

Why this is in greater detail and this is more in general or even superficial?

That is because of the purpose that we set here, so

we would like to avoid using that only

as a supportive thing, but still we have to make focus.

And that allows us to see some overall fabric of accounting,

consistent to our goal to talk about things that are relevant to valuation.

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