Introduction

Advanced Accounting covers accounting operations, patterns, merger of public holding

companies, foreign currency operations, changing financial statement prepared in foreign and

local currencies. Advanced accounting also includes a variety of advanced financial accounting

issues such as lease contracts, pension funds, end of service severance payments, etc.

Role of Accounting in the Business

The role of accounting in business is to help interested parties, both internal and external, to

make business decisions. The accounting process consists of measuring and summarizing

business activities, interpreting financial information, and communicating the results to

management and other decision makers.

Financial accounting generates some of the key company documents, including profit and loss

statement or P&Ls. P&Ls show the financial details of a business over a specific period.

Financial accounting also produces the balance sheet which provides a snapshot of a business's

assets, debts, and equity at a specific moment in time.. Financial accounting also helps the

managers in the business to manage more efficiently by providing them views of financial

information which may include monthly management reports presenting costs and profits against

budgets, sales, or other key metrics. Reporting can be customized for the specific needs of the

business.

Without these financial documents it would be very difficult to run the business or to make

decisions regarding the business.

Outside parties may decided to invest in a company based on its economic performance as

shown on the financial statements, but there are other ways to use the financials statements to

make business decisions. By carefully reviewing the financial statements companies can make

best use of their assets.

Companies can use the statement of cash flows to make sure they are collecting all the cash they

are due. Companies can also choose to delay major purchases or the retirement of equipment

based on the affect that transaction would have on the financials statements.

1

Role of Advanced Accounting in Research and Development

In general, research and development (R&D) activities are conducted by specialized units or

centers belonging to a company, or can be outsourced to contract research organizations,

universities, or state agencies . In the context of commerce, research and development normally

refers to future-oriented, long-term activities in science or technology, using similar techniques

to scientific research but directed toward desired outcomes and with broad forecasts of

commercial yield.

In many countries of Europe and America, a typical ratio of research and development for an

industrial company is about 3.5% of revenues. A high technology company such as a computer

manufacturer might spend 7%. Although Allergan (a biotech company) tops the spending table

with 43.4% investment, anything over 15% is remarkable and usually gains a reputation for

being a high technology company. Companies in this category include pharmaceutical

companies such as Merck & Co. (14.1%) or Novartis (15.1%), and engineering companies like

Ericsson (24.9%). Such companies are often seen as credit risks because their spending ratios are

so unusual.

Research and development costs are the costs incurred in a planned search for new knowledge

and in translating such knowledge into new products or processes. Prior to 1975, businesses

often capitalized research and development costs as intangible assets when future benefits were

expected from their incurrence. Due to the difficulty of determining the costs applicable to future

benefits, many companies expensed all such costs as incurred. Other companies capitalized those

costs that related to proven products and expensed the rest as incurred.

As a result of these varied accounting practices, in 1974 the Financial Accounting Standards

Board in Statement No. 2 ruled that firms must expense all research and development costs when

incurred, unless they were directly reimbursable by government agencies and others. Immediate

expensing is justified on the following grounds:

2

The amount of costs applicable to the future cannot be measured with any high degree of

precision

Doubt exists as to whether any future benefits will be received

Even if benefits are expected, they cannot be measured

Research and development costs thus no longer appear as intangible assets on the balance sheet.

The Board applies the same line of reasoning to other costs associated with internally generated

intangible assets, such as the internal costs of developing a patent.

Administrative costs are non-manufacturing costs that include the costs of top administrative

functions and various staff departments such as accounting, data processing, and personnel.

Executive salaries, clerical salaries, office expenses, office rent, donations, research and

development costs, and legal costs are also administrative costs. As with selling costs, all

organizations have administrative costs.

Role of Advanced Accounting in Management

The purpose of advanced accounting in the organization is to support competitive decision

making by collecting, processing, and communicating information that helps management plan,

control, and evaluate business processes and company strategy. The interesting thing about

management accounting is that it is rare to find an individual within a company with the title of

“management accountant.” Often many individuals function as accountants within the

organization, but these individuals typically operate as financial accountants, costs accountants,

tax accountants, or internal auditors. However, the ability to develop and use good management

accounting (which covers a lot more ground than the product costing done by cost accountants)

is actually an important ability for many individuals, including finance professionals, operational

and marketing managers, top-level executives, and information technologists.

Generally, in a very large company, each division has a top accountant called the controller, and

much of the management accounting that is done in these divisions comes under the leadership

of the controller. On the other hand, the controller usually reports to the vice president of

3

finance for the division who, in turn, reports to the division’s president and/or overall chief

financial officer (CFO). All of these individuals are responsible for the flow of good accounting

information that supports the planning, control, and evaluation work that takes place within the

organization.

As should be clear by now, the process of management accounting is the process of creating and

using cost, quality, and time-based information to make effective decisions within the

organization. Many people in the organization play a role in this process. The internal audit

department has the responsibility of ensuring that controls are followed and operations are

efficient. Financial accounting, while providing information to outsiders (such as creditors,

investors, and government agencies), must also provide relevant financial reports to decision

makers within the organization. Systems professionals have the responsibility to process

information so that it is available to management in formats useful for decision making. Tax

department experts make sure that the organization complies with the tax laws and pays no more

than its legally obligated tax liability, but these people also participate in good planning, control,

and evaluation of processes and decisions that will affect future tax expense exposure. Finally,

cost accounting obviously plays a key role in tracking and reporting relevant product and service

costs. Overall, the controller works to bring together all this information as an integral part of

the planning, controlling, evaluating, and decision-making activities that take place throughout

the organization.

The goals of Advanced accounting information provided to the management and executive teams

inside the organization are quite different from the financial accounting information provided to

groups outside the organization, such as investors, creditors, and regulators. You may even ask how

information and performance measures regarding quality and time can be provided by a typical

general ledger system that is limited to debits and credits of dollar amounts. This is a good

question! For most of the twentieth century, management accountants have been able to

successfully produce management accounting information using the general ledger system of

financial accounting. This marriage of management accounting and financial accounting

information systems worked as long as the goal of management accounting was strictly to track

cost information. Now, however, the emergence of JIT, coupled with increased competition in a

4

worldwide market, has forced most organizations to compete on issues of quality and timeliness,

as well as cost. The problem is that it is very difficult to use a debit/credit system to track

organizational performance regarding quality and time. Thankfully, computerized information

systems, specifically database systems, have progressed to a point where it is economically

feasible for organizations to track just about any kind of information. Now the real challenge for

current and future management accountants is to organize the immense amount of data that can

be provided to support decision making without creating information overload in managers and

executives. In this process, management accountants should understand how to use the most

current technology. Typically, developing knowledge and skills in computer technologies will

require additional courses of study for the future business professional. The goal of the

remainder of this book is to provide you with a framework for developing cost, quality, and time-

based information that supports the management process. This framework must then be used

with top-notch technology in order to provide information that truly adds competitive value to

organizations!

Conclusion

Advanced accounting plays a key role in organizations today. The top accountant in most

organizations is the controller. All accounting functions report to this individual, including the

cost accountants, the financial and tax accountants, the internal auditors, and systems support

personnel. Though much management accounting originates within these positions, all decision

makers in the organization must understand how to create and use good management accounting

information. Management accounting is also being significantly affected by dramatic

improvements in computer technology. Today’s technology allows management to track

performance information that goes beyond the cost-based information of historic general ledger

systems. Good management accounting involves a responsibility to manage a wide variety of

critical information. Hence, those involved need to anticipate and be prepared to deal with

various ethical dilemmas. Further, the advent of the Internet and e-commerce is bringing

dramatic changes to many companies and industries. This textbook will explore management

accounting in all types of business. As you work through the remainder of this textbook, you

should consider how each new concept you learn could be applied in multiple types of business

settings.

5

References:

Needles, Belverd E.; Powers, Marian (2013). Principles of Financial Accounting. Financial

Accounting Series (12 ed.). Cengage Learning.

Lung, Henry (2009). Fundamentals of Financial Accounting. Elsevier.

Perks, R. W. (1993). Accounting and Society. London: Chapman & Hall. p. 16.

6