Both types of accounting requite accuracy of information, but there is a different degree of data reliability in the two of them. Financial accounting requires much more accuracy than managerial accounting does. There are several reasons for the need for precision in financial accounting data.
The main cause for requiring accuracy in financial accounting is associated with the aim of such accounting. The reports on financial accounting are aimed to be analyzed by professionals or institutions from outside the organization in which they are prepared (Narayanaswamy, 2017). Therefore, it is of utmost importance to provide the most authentic data so as not to misguide anyone checking it. Another reason for the reliability of information in financial accounting is that usually, reports comprise data of a large period of time, which means that a small mistake or an inaccurate statement may undermine the dependability of the whole paper. Therefore, financial accounting is highly strict when it concerns the reliability of data used in the reports.
In managerial accounting, the demand for information reliability is not as high as it is in financial accounting. Managerial accounting is aimed at preparing reports not for external but for internal use (Warren, Reeve, & Duchac, 2016). These papers are necessary to build the future perspectives rather than analyze past achievements and losses. As a result, the major requirement for the data mentioned in such reports is their relevance rather than accuracy.
Therefore, it is necessary to keep in mind that both managerial and financial accounting presuppose accuracy, but they do not require it to the same extent. While in managerial accounting, the emphasis is put on data relevance, in financial accounting, the primary requirement to information is accuracy and reliability.
References
Narayanaswamy, R. (2017). Financial accounting: A managerial perspective (6th ed.). Delhi, India: PHI Learning Private Limited.
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2016). Financial and managerial accounting (14th ed.). Boston, MA: Cengage Learning.
Traditionally, accounting is divided into two subsystems financial and managerial accounting. This separation is due to the difference in goals and objectives, solved in the interests of external and internal users of information (Ashar, 2019). The managerial accounting system forms information necessary for internal analytical and control purposes; this information is not regulated by law. Management of the enterprise independently determines the management objects, accounting methods, and forms of reporting (Hilton & Platt, 2019).
Because management accounting is not regulated to the same extent as financial accounting, some ethical problems can occur. They are connected with the opportunity to hide some financial information or distort it. Management accounting activities are more difficult to control; therefore, it is almost impossible for an employer to monitor all of an accountants actions, and there is a high probability that some of those actions go against the interests of the company. Moreover, specialists might conceal or distort information about a companys deteriorating performance. Therefore, specific requirements on reporting, such as a united accounting format and financial reporting, should exist to avoid data falsification and acting in ones interests.
Another important ethical issue is competence, which an accountant needs to improve constantly. The legislation makes frequent changes in the financial sector. Without knowing them, the accountant risks committing illegal actions and leading the company to unfortunate consequences. In managerial accounting, it is important to express competence not only in the area of legislation but also in the area of highly specialized skills. Thus, in order to do their job more effectively, accountants need to keep up with technology and software developments in their industry. Organizational capacity and productivity rely on the precise order of actions, and therefore, there is a need for specific regulations which might facilitate better outcomes. All of the above ethical issues should be regulated by internal rules and reporting, as they significantly affect the companys efficiency.
References
Ashar, K. (2019). Financial accounting essentials you always wanted to know (4th ed.). Vibrant Publishers.
Hilton, R., & Platt, D. (2019). Managerial accounting: Creating value in a dynamic business environment (12th ed.). McGraw-Hill Education.
Various business traits determine the techniques that are used in managerial accounting decision-making processes. For example, during a business start-up phase, management accountants may deploy budgeting and capital investment techniques. However, in case of a business that is in the mature phase, such accountants may depend on cost management and quality control to make their ultimate decisions.
However, irrespective of the technique, the decisions should enable an organization to achieve short-term and long-term goals and objectives. Hence, managerial accounting is an important aspect of the decision-making process within any organization. This section provides an overview of managerial accounting.
Defining Managerial Accounting
Management accounting is an important tool for making decisions in an organization. The Institute of Certified Management Accountants (ICMA) defines management accountants as people who deploy their proficient knowledge and talents to prepare and present financial information in a way that makes it possible to arrive at requisite decision on policy construction, development, and control (Clinton & Anton, 2006).
Hence, management accounting refers to the provision and deployment of accounting information by various organizations managers to arrive at subtle decisions that can permit them to advance their management and control functions.
Role of Managerial Accounting and Management Accountants in an Organization
To arrive at an appropriate decision, it is important for decision makers to have a realistic prediction of deals, outlays, cash flows, and procurement net margins among other costs. With such forecasts, Porteous and Tapadar (2005) assert that managers make important decisions concerning the future of an organization, including, decisions on the level of employment, investment, salaries, sales, stock levels, debtors and creditors, and overdraft requirements among others (p.72).
Indeed, management accounting is responsible for making such forecasts. Accounting management professionals act as strategic partners with the organizations they serve (Sebastian, 2000). They also act as risk management partners. Risk management entails developing practices and frameworks for risk documentation, quantification, risk alleviation, and reporting in the attempt to attain organizational objectives and goals (Sharman, 2003).
As performance managers, management accountants focus on the development of business decisions, which make it possible to increase an organizations performance.
Ethical Issues/Concerns in Managerial Accounting
Management accountants have the responsibility to observe various ethical issues or concerns in their work. The Institute of Management Accountants prescribes proficiency, concealment, reliability, and believability as key ethical issues of consideration by all financial and accounting managers.
Credibility requires accounting managers to communicate objectively and fairly. They should disclose important information for enhancing users understanding of reports, recommendations, and comments that are presented to them (Atrill & McLaney, 2007). Integrity encompasses an obligation for refusal to participate or collude in activities that discredit the accounting management profession.
For example, they should not engage in subversion or the realization of ethical objectives and illegitimate goals of an organization. The ethical concern of confidentiality implies the obligation of not disclosing confidential information without authentication from the owners.
Any manager who wants to acquire private information must seek a legal permission to do so. Competence is an aspect that requires accounting managers to perform their duties in compliance with regulations, technical standards, and the relevant laws and regulations that guide the profession.
Managerial Accounting Techniques and their Application
Decision-making requires budgeting, which is a critical tool that is employed in managerial accounting to facilitate planning. Apart from planning, budgeting also facilities control. For example, in an attempt to cope with the challenges of the previous recession, organizations use budgeting in their planning for various reasons.
For instance, planning involves the establishment of frameworks on which decision-making is pegged in the quest to achieve organizational goals and objectives. Indeed, Porteous and Tapadar (2005) confirm how many organizations deploy budgets in the evaluation of divisional managers performance. They also use budgeting to tie bonuses to levels that do not go beyond the set goals.
Investment Appraisals
Investment appraisal involves the evaluation of the attractiveness of any investment proposal. It deploys various techniques such as the average rate of return, payback period, internal rate of return, and the net present value among others (Clinton & Anton, 2006, p.788).
In this context, managerial accounting finds application in an organization as a tool for profitability monitoring. Elements of investment appraisal are crucial in forecasting organizational performance. For example, using break-even analysis, managerial accountants can precisely determine the quantities that are necessary for sale to ensure sustained performance without necessarily making profits.
In investment appraisal, the ability of an organization to break even within the minimal time is crucial. It gives a rough approximation of the time that the business will start making profits (Sharman, 2003).
Cost Management
Cost management is a technique that is aimed at reducing an organizations costs to achieve optimal profitability. Cost volume profit analysis (CVP) exemplifies how the cost management technique can be applied in an organization. CVP is an essential component of managerial cost accounting. It aids in making interim decisions and elementary instructions.
During the times of economic hardships, the focus of any organization is mainly on covering all its costs without necessarily making profits to ensure that its operations are not brought to a halt (Sharman, 2003). CVP defines the point at which the revenue equals the total expenses. The point forms the basic tenet of a detailed analysis.
Managerial accounting techniques are used as tools for making critical decisions. This section provides examples of how managerial accounting theories and principles are applied in the business world. However, its focus is on only three theories and principles, namely cost management, budgeting, and quality control.
Several techniques may be employed in cost management based on the phase and status of the operations of a given business entity. For example, for an organization that is experiencing operational hardships, for instance, during the recession, management accountants deploy cost management approaches to minimize costs.
The goal is to ensure that companies do not become bankrupt. A service sector organization such as a hotel may illustrate well a real world case of the applicability of the principle of cost management in management accounting. During recessions, organizations experience reduced business profits due to the prevailing minimal economic activities, household incomes, inflation, and employment opportunities.
Indeed, one of the most pronounced impacts of the recession on service sector organizations such as hotels is the declined sales due to the decreased consumer spending (Friedl, Hans-Ulrich, & Burkhard, 2005). A decrease in sales means that hotels need to adjust their costs if they have to survive the recession. Therefore, they need to make sales that are sufficient to service all their expenses (Sharman, 2003).
This scenario underlines the applicability of the CVP under such circumstances. The formula that is applied in managerial accounting for CVP analysis is:
px = vx + FC + Profit
The value p denotes the price for each item while v is flexible cost per unit. The value x denotes the produced units, which have been sold. FC is the total stable rate (Atrill & McLaney, 2007). From this formula, it is clear that apart from determining the break-even point, the CVP defines the appropriate sale mixes.
It also helps in determining the variable charge per item, the unit selling prices, the level of activity, and the total stable price. To this extent, cost management through CVP constitutes an important tool for making key decisions for financially struggling organizations.
Budgeting
The case of Southwest Airlines demonstrates the application of the budgeting technique in management accounting. Established in 1967, Southwest Airlines is a United States major air transport company. It also stands out as one of the largest airlines in the world whose main current success strategy is driven by the low-cost operational strategy (Garrison & Keller, 2005).
As of August 2012, the company employed more than 46000 people. Within the same period, the company recorded about 34000 flights on a daily basis. In mid-2011, the company recorded having carried majority of the US airlines domestic passengers. In fact, at the beginning of 2013, Southwest Airlines had a schedule for flights in 79 destinations across 39 States.
The success of the company in its competitive industry may be explained by different factors such as the effective financial management through budgeting controls. At Southwest Airlines, budgeting constitutes an important aspect of the planning process. It outlines the companys financial plan.
The companys management accountants have the responsibility of developing or participating in the development of a budget that incorporates aspects of the ongoing operations of the company, corporate financing, and any expenditure plans. The operational aspect defines various expected sources of the organizations proceeds and costs.
Capital budgeting at the company entails the contemplation of the disbursement of the financial resources in the procurement of equipment and/or establishment of new facilities, including the purchasing of new planes and cargo-handling equipment.
Financial budgeting involves evaluating Southwest Airlines anticipated cash shortages. This strategy facilitates the company to meet its lenders obligations and requirements while at the same time demonstrating the necessity for extra financial support.
Quality Control
Managerial accounting is critical to the provision of quality and quantitative data in the financial and operational performance. At the Toyota Company, the tool is used for installing controls and/or planning for operations in a bid to support decision-making at the company.
At the Toyota Company, some of the most important decisions, which management accountants have inputs on relate to quality control and continuous improvement. The quality control measures for the company include waste elimination and a reduction of inventory levels.
Managerial accountants for the Toyota Company embrace quality control, waste minimization, reduction of production complexities, and transparency. Increasing the competitive advantage of the company through quality control rests on the need to satisfy customers.
According to Toyota (2013), this goal is accomplished by, fulfilling customer demand efficiently and promptly by linking all production activities to real marketplace demand (Para.2). Its processes are finely tuned so that an assembly sequence only uses only the demanded materials, which are of the right quality and quantity.
Through forecasting, which is a function of managerial accounting, the Toyota Company can predict the anticipated sales that can yield certain profitability levels. For instance, based on the 2012 financial accounting information, the company anticipated regaining its title as the globally leading automaker by raising its sales by 2 percent.
Conclusion
This section has provided working illustrations of how managerial accounting principles have been applied in various corporations. The paper has shown how cost management can be applied in the hotel industry. Southwest Airlines has been used to demonstrate how the concept of budgeting is utilized. On the other hand, the Toyota Company has succeeded in adopting the concept of quality control.
Reference List
Atrill, P., & McLaney, E. (2007). Accounting and Finance for non-specialists. New York, NY: Prentice Hall.
Clinton, D., &, Anton, V. (2006). Management Accounting Approaches, Techniques, and Management Processes. Cost Management, 5(3), 786-793.
Friedl, G., Hans-Ulrich, K., & Burkhard, P. (2005). Relevance Added: Combining ABC with German Cost Accounting. Strategic Finance, 7(2) 5661.
Garrison, G., & Keller, H. (2005). Case Study: Southwest Airlines. New York, NY: Prentice Hall.
Porteous, B., & Tapadar, P. (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. New York, NY: Palgrave Macmillan.
Sebastian, N. (2000). Taking Control of Costs. London: Prentice Hall.
Sharman, P. (2003). Bring on German Cost Accounting. Strategic Finance, 3(2), 29.
The current report summarizes the information related to technological advancements in financial and managerial accounting. These technological advances prove to be beneficial for improving various processes involved in these two types of accounting. However, the challenges associated with these advances cannot be ignored. The purpose of this report is to highlight and discuss critically the technological advancements that resulted in transforming all processes involved in accounting. The executive summary of the overall analysis in this report is presented in the conclusion section. Three main recommendations are included at the end of this report to bring specific improvements in the use of technological advances in managerial and financial accounting.
Research on Technological Advances in Accounting Data Security
Technology plays a vital role in bookkeeping and other accounting processes. Accountants require comprehensive data to record and report business transactions (Huber, 2015). The three key processes of accounting are record keeping, analysis, and finalizing transactions to present them to the users of accounting and financial reports. Due to globalization, many transformational changes have influenced businesses requiring them to generate comprehensive information. The use of accounting software has also become standard for all types of businesses due to their accuracy. Therefore, researchers have signified many advanced technologies that could ensure continuous development in managerial and financial accounting methods and procedures.
Cloud Computing
Cloud computing refers to storing, processing, and sorting data by using the internet network rather than a personal computer (Chou, 2015). The technology provides a large space for storing large data that is difficult to maintain on a personal computer. Aliac, Khan, and Vasilakos (2015) state that cloud computing is beneficial for reducing the cost of storage for businesses as the storage of data requires many hardware devices. Large institutions, including hospitals, hotels, educational institutes, and multinational companies, etc., have adopted this technology to ensure the availability and accessibility of their data over the internet.
Díaz, Martín, and Rubio (2016) argue regarding outsourcing of cloud services that could be a threat for businesses. The data stored on a cloud network contains private and confidential information of users that is the big corporate responsibility for businesses. Companies outsource their clouding services to minimize their cost and address issues that are not within their control. However, its use can compromise data, which raises the security risk that could prevent accountants from using this technology.
Tax Software
Taxation is also a significant part of financial accounting. Businesses are required to prepare strategies for managing their taxation requirements and issues. Taxation includes direct and indirect taxes such as income tax and Value Added Tax (VAT). Technological advancements have enabled users to calculate taxes according to the taxation rules in a specific country. Brandas, Megan, and Didraga (2015) highlight the importance of tax software in financial accounting by explaining the application of taxes on business transactions. The preparation of payroll is also a critical task that involves tax calculations. Large companies have more than 10,000 employees working at different levels. Therefore, the primary benefit of this technology is to reduce the cost and time for payroll management to prepare employees’ accounts.
Brauner and Moreno (2015) criticize the use of the software by claiming that numerous factors could discontinue tax software in the digital economy. The main reason is the input of taxation rates for different transactions. Taxation rates are different in each country, and there are many types of taxes, such as withholding tax, that apply to a single transaction, which makes it all complex. Therefore, the calculation of the tax liability and income tax is complicated by using the software. The complicated and time-consuming practices of this technology prohibit companies from adopting it for financial accounting.
Mobile Accounting
The use of mobile is prevalent in today’s modern environment. Businesspersons also utilize this technology to record and view business transactions (Mougayar, 2016). A few common uses of smartphones are checking bank balances, online transfers, and reviewing product rates in the online market. Kavoura (2016) highlights the importance of mobile accounting by claiming that it keeps users informed about the business environment. The increasing trend of remaining online all the time suggests more significant benefits for small and large organizations as they can take advantage of the opportunities in their industries. Businesses require upgraded and complete information of the business world to make quick decisions. Furthermore, taxpayers can easily determine their income by using various mobile applications. The use of mobile accounting is also useful in assessing the feasibility of a new project, which relates to managerial accounting.
Yang et al. (2016) highlight that the use of internet devices, including mobile accounting, is risky in a critical situation. Mobile accounting is preferable only when it ensures quick results at any time without a security breach. However, there could be internet connectivity issues and hardware problems that could undermine its use for business purposes. The uninterrupted presence of users on the platform is necessary, which, in some cases, becomes difficult due to the lack of gradation in the technological products or services.
OCR Technology
OCR technology is a new technology that enables users to transform printed data, including images, scanned documents, and PDF files, into editable formats (Knight, Rowe, McCarthy, Tilley, & Walker, 2017). The technology is commonly used in managerial accounting, especially for analyzing the printed data generated by different functions to determine the feasibility of a new project. Wang and Wang (2016) also highlight the benefit of this technology by stating that the information available in the form of documents require editing. PDF files and images need editing for presentation purposes, and OCR helps to do that. If an accountant receives a report showing the loan amount provided in a foreign currency, then OCR can be used for extracting this information and converting the amount into the local currency for decision-makers.
Gross, Neely, and Sidgman (2015) state that there is a threat of theft or malfunctioning of the accounting system or information due to OCR technology. It is not possible to detect incorrect editing in the document. The risk of wrong details was lower in olden times due to the use of paper, but now it had become easier to change the information falsely. The OCR technology is risky that increases the chances of fraud in the recordkeeping process of accounting.
Social Media
Social media is also beneficial for accounting purposes as businesses require to engage people in achieving their financial objectives (Livingston, 2016). The information of customers, suppliers, and peers is also important for accountants. Chung and Koo (2015) also signify that businesses such as tourism companies require comprehensive data of consumers to engage with them. Therefore, this technology is beneficial for collecting large data sets and communicating with people to improve the business and its financial performance. The use of social media is increasing, which also allows firms to increase the number of their customers.
Vasarhelyi, Kogan, and Tuttle (2015) criticize the use of this technology due to the lack of security of data. The information on social media is not safe that may hinder the financial objectives of a business. Therefore, the risk of a privacy breach is present in the adoption of this technology, which prohibits accountants from using it.
Analysis and Discussion
The research shows that the use of technology is common in small and large businesses. Technology has enabled organizations to achieve their short-term and long-term financial objectives. The significant impact of the rapid adoption of technology is noticed in large companies that require extensive data or information to improve their businesses. There is intense competition in different industries that force small businesses to adopt the rapid change in technology.
Businesses now operate in the global competitive environment. Companies cannot survive without adopting rapid changes in technology. The accounting function has a crucial place in all businesses, which enables accountants to show an accurate and fair view of the firm’s position to all types of users. Financial and managerial accounting are two different types, but they require technology to ensure the fulfillment of all principles, including completeness and integrity of financial and managerial information. Financial accounting refers to the processes from recordkeeping to the presentation of business transactions. On the other hand, the managerial accounting involves budgeting with estimations and predictions. However, both types of accounting require the use of technology, which is vital for managing data generated by various business processes.
The research also indicates that many challenges and issues are obstacles to the adoption of technology. However, the nature of these risks is different, and, in some cases, their effects are less. Technological experts are continuously working on finding better ways to minimize these risks. They have already received a lot of success in reducing the threats of loss or theft of information. Although there are privacy concerns when using technology, the critical step is to estimate the benefit of its use and then implement it efficiently and effectively.
The research also shows that the efficiency of accountants is also significant to achieve the financial objectives. The main obstacle to doing so is the lack of control that could become a significant big issue for any business. The control and management of large data are also crucial for protecting all stakeholders of a company. The primary objectives of any business include increasing sales, but there is a need to ensure control over business operations, which is essential for revenue growth.
The adoption of technology saves both cost and time through efficient management of data that is generated on a daily basis. However, data security may require additional cost to ensure that such information systems remain intact. Accountants cannot merely adopt new technology and extensively use it without knowing its consequences. Therefore, it could be stated that the adoption of technological advances is slow in financial and management accounting. Accountants require complete knowledge of the necessary technological changes that can resolve the issues faced by a business. Therefore, they need to remain up to date with the current trends and adopt technological advances that are beneficial for their companies.
Conclusion
The analysis of the current research indicates that the use of technology is important for financial and managerial accounting as it helps in data management and analysis. The benefits of technology adoption outweigh its risks. However, the continuous adoption to bring improvement in accounting practices by using technological advances can mitigate other risks. Therefore, it cannot be denied that technology has importance for bringing improvement in the accounting function of all businesses.
Recommendations
The comprehensive research highlights that there are few critical challenges faced by accountants to adopt and use technological advances. Therefore, it is necessary to focus mainly on those challenges and ensure more significant use of technology in accounting. Three main recommendations based on the analysis of the report are given as follows.
There is a need to focus on securing the data on clouding and social media technologies.
The availability of high-speed internet with low resistance and disruption should be ensured.
Mobile accounting requires the rapid adoption of new changes by accountants.
Regular changes are also important in using different technologies. Accountants should be aware of the available technology and ensure that the most appropriate solutions are adopted in their work. A well-informed accountant should be able to analyze the benefits and risks of all technologies to bring improvement in their work.
Executive Summary
The comprehensive research presented in this report highlights the specific benefits and challenges of using technological advances in both financial and managerial accounting. The technological advancements have enabled accountants to benefits from quicker data collection and analysis for better decision-making. However, some challenges or threats prohibit them from using some of these technologies.
Five main technologies for accountants are cloud computing, tax software, mobile accounting, OCR technology, and social media. The main benefit of cloud computing is a large data storage capacity, but it has a risk of privacy loss. The advantage of tax software is that it makes the calculation of the tax amount easier, but there could be an issue of correct data input. The primary advantage of mobile accounting is easy to access accounts and statements, but there is an issue with internet connectivity. The ability to edit printed documents and images is the primary benefit of OCR technology. However, there is a chance of data manipulation that is often untraceable. The use of social media is beneficial for increasing sales, but there could issue related to customer data security.
There is a need to bring improvement in business functions, including accounting, while operating in a globally competitive environment. Accountants may adopt a technology to improve the effectiveness of their roles. However, there is a need to consider all the risks and challenges of utilizing the new technology. Although the intensity of adoption risk is lower than its benefits, continuous improvement is essential for fulfilling financial objectives. The role of accountants is also crucial in this change within organizations. Accountants must collect relevant and specific information about changes in technology as businesses rely heavily on the data generated by their various business functions to make decisions efficiently and quickly.
The use of technology is beneficial for the accounting function in small and large businesses. However, their ability to use a specific technology differs due to their access to resource pools required for technological adoption. The three main recommendations given in this report for accountants are related to data security, high-speed internet connectivity, and new technological changes such as mobile accounting applications.
References
Aliac, M., Khan, S. U., & Vasilakos, A. V. (2015). Security in cloud computing: Opportunities and challenges. Information Sciences, 305(1), 357-383.
Brandas, C., Megan, O., & Didraga, O. (2015). Global perspectives on accounting information systems: Mobile and cloud approach. Procedia Economics and Finance, 20(1), 88-93.
Brauner, Y., & Moreno, A. B. (2015). Withholding taxes in the service of beps action 1: Address the tax challenges of the digital economy. WU International Taxation Research Paper, 14(1), 1-34.
Chou, D. C. (2015). Cloud computing: A value creation model. Computer Standards & Interfaces, 38(1), 72-77.
Chung, N., & Koo, C. (2015). The use of social media in travel information search. Telematics and Informatics, 32(2), 215-229.
Díaz, M., Martín, C., & Rubio, B. (2016). State-of-the-art, challenges, and open issues in the integration of Internet of things and cloud computing. Journal of Network and Computer Applications, 67(1), 99-117.
Gross, A. D., Neely, D. G., & Sidgman, J. (2015). When paper meets the paperless world. The CPA Journal, 85(5), 1-64.
Kavoura, A. (2016). How can mobile accounting reporting benefit from the ‘imagined communities’?: A conceptual communication framework. International Journal of Mobile Computing and Multimedia Communications (IJMCMC), 7(2), 36-52.
Knight, A., Rowe, C., McCarthy, S., Tilley, J., & Walker, C. (2017). OCR GCSE (9-1) design and technology. New York, NY: Hodder Education.
Livingston, B. (2016). The accountant’s social media handbook: The step-by-step guide for establishing a social media business development strategy. New York, NY: Bay Street Group LLC.
Mougayar, W. (2016). The business blockchain: Promise, practice, and application of the next internet technology. Hoboken, NJ: John Wiley & Sons.
Vasarhelyi, M. A., Kogan, A., & Tuttle, B. M. (2015). Big data in accounting: An overview. Accounting Horizons, 29(2), 381-396.
Wang, Y., & Wang, Z. (2016). Integrating data mining into managerial accounting system: Challenges and opportunities. Chinese Business Review, 15(1), 33-41.
Yang, J., Wang, H., Ding, Z., Zhihan, L., Wei, W., & Song, H. (2016). Energy-efficient dynamic traffic offloading and reconfiguration of networked data centers for big data stream mobile computing: Review, challenges, and a case study. IEEE, 4(2), 4840-4847.
Making a sound investment decision is one of the biggest challenges that investors encounter, especially when they want to explore the stock market. As Doepke and Schneider (2017) note, before investing money in the stock market, numerous factors have to be taken into consideration. The driving factor that makes one invest in a given company is the hope that the company will make profits and the value invested will increase after a given desired period. However, the truth is that market forces and the strategies used by the company can have a varying impact on its financial performance.
In some cases, the investor’s value is increased as was desired because of the impressive performance of the company within a specific period. In other cases, a firm may face challenging economic forces that may lead to a financial loss and a drop in the value of the investment made. Graham (2017) notes that many investors are always keen on ensuring that the value of their investment is not significantly lost in such situations. It means that selecting the most appropriate company in which to invest is critical. Making the right decision on whether to invest in shares or debentures is the next important step that one has to make. In this paper, the researcher seeks to determine whether it is prudent to invest in Qatar National Bank’s shares and debentures.
Critical Appraisal of the Financial Objectives of Qatar National Bank
Background of the Company
Qatar National Bank, also known as QNB Group, is a commercial bank that has its headquarters in Doha, Qatar. The company was founded on June 6, 1964, as the first commercial bank owned by the locals. The company experienced massive success in its early years, and it started spreading its operations to different parts of the country as Qatar’s population continued to increase. The rapid expansion of the company began to spread beyond the national borders in 1980. Acquisition has been the bank’s main expansion strategy in the regional and global market. In Egypt, it acquired ALAHLI Bank, and in Togo, it acquired over 20% stakes in Ecobank Transnational Inc.
It has used the same strategy in Jordan, the United Arab Emirates, the Kingdom of Saudi Arabia, Sudan, South Sudan, and Tunisia. The company has a strong presence in Libya, Syria, Turkey, Yemen, Kuwait, Oman, Jordan, Lebanon, and Iraq. In Asia, it has branches in India, China, Myanmar, Indonesia, Vietnam, and Singapore. In Europe, it has made an entry into the United Kingdom, France, and Switzerland. Bruner (2016) observes that Qatar National Bank currently has 4,300 branches spread across 31 countries.
From a small number of 35 employees that the company had in its first year of operation, the bank currently employs over 28,000 in different parts of the world. Its revenue has increased to over USD 6.4 billion for the financial year that ended on December 31, 2016. Ulrichsen (2014) says that 50% of the company’s stakes are owned by the Qatar Investment Authority while the other 50% are owned by the public.
Company’s Financial Objectives
As an investor, it is important to evaluate the financial objectives of the targeted company after analyzing its background. Azevedo and Gottlieb (2017) explain that a prudent investor should ensure that the financial objectives of the desired company are in line with the personal objectives to avoid the need to sell one’s shares only after a short period. Qatar National Bank’s primary financial objective is to expand its profits in the global market. After years of massive expansion in the Middle East, North America, Asia, and Europe, the company is now focused on making profits and improving the value of investment for its shareholders.
According to a report by Ghantous and Zhdannikov (2018), the company seeks to increase its profits by about 8% for the financial year ending on December 31, 2018. The company’s chief executive officer, Ahmed al-Kuwari explained, “Our strategy and vision is to become among the leading banks in the Middle East, Africa, and Southeast Asia,” (Ghantous & Zhdannikov 2018, para. 2). The statement from the chief executive officer of the company demonstrates that the focus of Qatar National Bank is to not only make impressive profits but also to promote its growth. The current market size of the company may increase, especially as the company focuses its attention on the South West.
As the company is setting ambitious financial goals of increasing its profits both in the local and global market, it is prudent for an investor to analyse the historical financial records to determine the possibility. As Kübler and Polemarchakis (2017) explain, a firm that has been making impressive profits and showing growth in the market over the past few financial years may have a solid ground of proposing higher rates of profitability. This bank is the largest in the Middle East and African market, and for it to set a goal of making a profit increase by 8%, it must have a clear approach to achieving that. A critical review of the financial records of the company over the past few years shows that the set financial objective is realistically possible. In the financial year that ended on December 31, 2017, the company’s profit increased by 6% to USD 3.59 billion. The company’s profits have been consistently growing in the past ten years, as evident in its financial documents, which is a sign that the management understands the changing trends in the market and the needs of its customers. It is aligning its products and strategies with these needs, and it explains why it has registered such impressive levels of success.
It is necessary to evaluate the strategies that the company seeks to use to achieve the set financial objectives. According to Ghantous and Zhdannikov (2018), Qatar National Bank’s operations have been affected by the strained relationship between Qatar and other regional economies such as Saudi Arabia, the United Arab Emirates, and Egypt. The economic sanction that was placed by these countries against Qatar has affected its growth. In Egypt, the company was forced to sell about 3% of its market share in response to new policies put in place by the Egyptian stock exchange market (Arnold & Awadalla 2018). In response to these market challenges, the company has taken various initiatives to ensure that its expansion and profitability is not affected. The company is currently using diversification as a means through which it seeks to achieve its financial objectives. It is currently holding the United States public bond to a tune of $ 17.5 billion (Ghantous & Zhdannikov 2018).
The company’s chief executive officer stated that the firm is not planning to cash in on the bond in the current financial year because it is not experiencing any liquidity challenges. It means that it will continue earning interest on such bonds. The company has also introduced new debt instruments into its products portfolio. Ghantous and Zhdannikov (2018) observe that the company introduced Formosa and Kangaroo bonds as a way of responding to the embargo placed on Qatar by the regional countries. Qatar has initiated an ambitious project of increasing its liquefied gas production from 77 million to 100 million tonnes, a project that is estimated to cost USD 40 billion (Ghantous & Zhdannikov 2018). The bank has put in place systems that will ensure that it becomes the main financier of the project. It is also keen on making aggressive growth in South East Asia. The company also has a raft of other initiatives meant to ensure that it increases its market share and profitability in the global market despite the challenges that it is currently facing. As an investor, these are some of the basic factors that must be considered when planning to buy shares of the company.
How the Objectives Satisfies My Personal Objectives
A critical analysis of the financial objectives of this financial institution demonstrates that it is keen on increasing the value of investment for its shareholders. The company’s financial statements and reports from media outlets show that it is willing to go an extra mile to ensure that it meets the goals and objectives of its customers. I am satisfied with the set financial objectives and the strategies that have been put in place to ensure that they are achieved. I believe that Qatar National Bank is one of the best financial institutions that an investor can bet on when planning to buy shares in the market. Its highly diversified product portfolio and operations in various countries around the world enable it to overcome shocks in some of its market both regionally and at the global level. Investment in Qatar National Bank would most likely guarantee impressive performance for the company.
The Role of an Accountant in Ensuring the Achievement of Financial Objectives
According to Kyle and Obizhaeva (2016), accountants play a critical role in ensuring that a company realizes its set objectives. Tian (2018) argues that different types of accountants perform varying duties in an organizational setting. One of the most important roles of an accountant is to prepare financial statements (income statements, cash flow statements, balance sheet, and profit and loss statements) used in determining the progress that a company is making towards its set financial objectives (Jiekun 2018).
Accountants are also expected to perform financial calculations, especially the relevant ratios that help in determining whether the company is moving towards the path of profitability or not. Once the documents have been compiled, it is the responsibility of accountants to make an ethical report to the management and other relevant external stakeholders about the firm’s financial position. Investors are able to determine the attractiveness of a company in the market by conducting a careful analysis of the documents prepared by accountants. Accountants play a critical role in the preparation of a budget. They have to balance expenses with available resources to ensure that the company achieves its goals. They are also expected to offer sound financial advice to the top management when planning to make major decisions that may affect the financial position of the firm both in the short and long term. As Tian (2018) puts it, accountants must ensure that their companies do not make serious financial blunders. These officers play a critical role in ensuring that Qatar National Bank remains on course towards achieving its set objectives.
Critical Evaluation of Financial Statements
According to Donaldson and Micheler (2018), making an investment decision may not be very easy. It is not as simple as placing the money on a fixed deposit account for a given period to earn a specific profit. One has to be keen on ensuring that the selected company will offer the desired returns. Jiekun (2018) warns that sometimes the financial objectives set by a company may not be enough to determine whether it is appropriate to invest in it. Other than the set financial objectives, an investor will be required to investigate the financial performance of the company within a specific period to determine if the set objectives can be realized. Tian (2018) advises that a critical analysis of the financial statement may offer an insight into the company’s actual performance. It will indicate what an investor should expect from the company. In this section, the researcher is interested in evaluating the income statement, the balance sheet, and cash flow statement of Qatar Investment Bank.
Income Statement
According to Broer (2018), some investors are always keen on determining the sources of income of a company before making investments. It is a necessary concern because some companies may have deceptive financial records because of involvement in shady businesses or highly volatile products whose future success cannot be guaranteed. The income statement shows that the main source of revenue for the company is net interest income. The interest earned from loans and investment into government bonds increased from QR 4,176,473,000 in the first quarter of the 2017 financial year to QR 4,665,083,000 in the first quarter of the 2018 financial year. Fees from commission also increased within that period of one year. Other important sources of income for the company within the period that was analysed include foreign exchange gains, income from investment securities, and other operating income. Tian (2018) observes that an investor will be interested in determining how well the company is diversifying on its products and the stability of each product in the market. It is important to note that this bank avoids the volatile mortgage market, which makes it even more attractive to an investor.
It is always in the interest of shareholders to have the expenses drop consistently over the years to increase a company’s profitability. Improving efficiency through the use of emerging technologies has helped financial institutions to cut their expenses on labour (Moreno, Rodríguez & Zambrana 2018). However, it is necessary to note that the consistent reduction of expenses may be possible to a given level. The income statement shows that the net expense of the company increased in the first quarter of 2018 when compared with that of 2017 (Figure 1).
Figure 1. Income statement (Qatar National Bank (QNB) 2018, p.4).
The increased expenses are attributed to the expansion strategies of the company and increased impairment losses on loans and advances to customers (Bruner 2016). It is satisfying to note that the company’s net profit rose from QR 3,216,225,000 in the first quarter of 2017 to QR 3,447,432,000 in the first quarter of 2018. It is also of interest to note that the company’s earnings per share increased from QR 3.3 to 3.6 within the same period. The information further supports the financial relevance of investing in this company.
Balance Sheet
An investor will need to review the balance sheet of a company of interest to evaluate its financial position as at a given period. Bernile, Bhagwat, and Yonker (2018) explain that the size and growth of the asset, the company’s liabilities, and the equity are always of interest to the investor. The assets of the company as of December 31, 2017, were valued at QR 811,077,990,000. The asset value increased in the first quarter of 2018 to QR 833,682,070,000 as at March 31, 2018.
Within a span of one year, the company had made an attractive increase in the value of its assets because their value as of March 31, 2017, was 742,959,488,000. It means that the accounts of the company show that it has registered a consistent increase in the value of its assets within that trading period. Tian (2018) argues that the consistency is essential to an investor. It enables an individual to predict the possible trend that is likely to be witnessed in the future.
Liabilities, as Broer (2018) explains, are not undesirable elements in a company’s balance sheet as long as they can be paid in full within the desired period. A company that is expanding rapidly such as Qatar National Bank may not avoid taking loans. Given that the bank’s liabilities also include deposits from its customers, its growth is an indication that the company is attracting more clients interested in making their savings with the company.
Figure 2. Balance sheet (Qatar National Bank (QNB) 2018, p. 3).
On March 31, 2017, the company’s total liabilities stood at QR 671,931,878,000. It increased to QR 732,331,650,000 as of December 31, 2017. The amount raised to QR 761,182,383,000 in the first quarter of 2018. It is worth noting that there was a consistent increase in cash deposits received from customers within the same period, a sign that the bank is attracting more customers and winning their trust in the market. Total equity at the company has registered mixed performance. It increased in the last quarter of 2017 but dropped in the first quarter of 2018.
Cash Flow Statement
An investor may also be interested in the analysis of cash flow statement (Figure 3). It may be a further demonstration of the sources of cash for the company and areas where it is spent in normal operational activities. The statement shows that the company’s cash inflow from operating activities increased from QR 15,999,754,000 in the first quarter to QR 25,252,539 in the last quarter of 2017.
Figure 3. Cash flow statement (Qatar National Bank (QNB) 2018, p.7).
However, it experienced a slight drop in the first quarter of 2018. The drop is attributed to larger amount of investment activities that increased cash outflows. The document shows that financing activities is the main area of expense for this company. Although there has been a consistent drop in this area, it still makes a significant percentage of the amount of money that the bank spends in each accounting period.
On March 31, 2017, it was QR 9,568,331,000. It dropped to QR 2,637,589,000 in the last quarter of that financial year. It registered a further drop to QR 2,372,042,000 in the first quarter of the 2018 financial year. The document shows that the management of the company has been keen on reducing the expenses to help increase profits and the value of investment for shareholders. The company’s cash and cash equivalents vary based on a number of factors, but that is not a major concern to an investor.
Information Gathered by Other Stakeholders from the Statements
According to Broer (2018), it is always prudent for an investor to evaluate what other experts say about financial statements of a given company. The experts may provide an important warning about the documents. For that reason, the researcher embraced due diligence by reviewing responses made by others about the financial health and position of this financial institution. A report by Bruner (2016) indicates that Qatar National Bank is the largest financial institution by asset base. The document shows how the bank has experienced consistent growth over the years and the impressive records that have been witnessed in its balance sheet. Ulrichsen (2014) looked at the company’s profit and loss statements and income statement over the past ten years. In the report, it is clear that the company has registered a consistent increase in its profitability.
The company’s approach to diversifying its product portfolio has registered it to earn significant earnings from various sources. According to Bruner (2016), Qatar National Bank is one of the most financially sound banks in the Middle East and African markets. When a section of the GCC countries placed an embargo on Qatar, many expected that this giant financial institution might experience serious challenges, especially in countries such as the United Arab Emirates, the Kingdom of Saudi Arabia, and Egypt. However, that was not the case, as Ulrichsen (2014) observes. The company has remained resilient in the face of these challenges and even registered an impressive increase in profits. It is a further confirmation that the company is capable of dealing with challenges that emerge in the local and global market as it strives to offer the best value to its shareholders. This information is crucial for an investor who is cautious enough to avoid making mistakes but is interested in the company.
Critical Assessment of the Performance of the Company
After a critical assessment of the company’s financial objectives and evaluation of the financial statements, the next important step is to assess its performance. According to Tian (2018), before investing in a given company, a firm must evaluate its financial health. One must determine whether it is capable of meeting its financial obligations within the expected period. A firm that is incapable of meeting its financial obligations within the required period may not be an attractive company to invest money into even if it is making impressive progress in the market growth. Jiekun (2018) gives an example of Lehman Brothers that collapsed during the 2008 global financial crisis.
At that time, Lehman Brothers was one of the leading global financial companies. It was in active operation in North America and Europe, and it was almost impossible to imagine that such a large company would fall. However, some of its unattractive products, especially in the increasing rates of bad debts in the mortgage segment of the market, had a serious impact on the company. Investors lost their money to the company that they had so much faith in for decades. If a large and successful company such as Lehman Brothers could fall, then anything is possible even for a company such as Qatar National Bank. As an investor, it will be necessary to avoid a similar fate by evaluating the performance of the company using accounting ratios and appraisal ratios.
Accounting Ratios
The accounting ratios are critical when an investor is making a decision on whether to buy shares of a given company. Broer (2018) explains that the financial capacity of a company is often determined by these ratios. In this section, the report will focus on the liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios, and what they mean to say about Qatar National Bank.
Liquidity ratios
The liquidity ratios determine the capacity of a firm to meet its short-term financial obligations. For this bank, it should be able to pay its short-term debtors and money should always be available for the depositors who wish to make a withdrawal. A cash ratio analysis is necessary to determine the liquidity of this company.
Current ratio = Current assets/Current liabilities
Current assets = (cash and balances with the central banks+ due from banks+ loans and advances to customers+ investment in associated) = 807,138,887
Current liabilities = (Due to banks+ customer deposits+ debt securities+ other borrowings) = 733,058,064
Current ration = 807,138,887/733,058,064 = 1.101
With a cash ratio value that is greater than 1, it means that the bank has no liquidity challenges. It can address all short-term financial needs without having to borrow or liquidate some of its long-term assets.
Asset turnover ratios
It may be appropriate to determine asset turnover ratios, especially the inventory turnover. However, Broer (2018) observes that Cost of Goods Sold does not apply to banks and insurance companies. As such, it is not possible to calculate the inventory turnover and receivables turnover because of the unique nature of products offered in the banking sector. In its place, an investor may be interested in determining the number of new customers the firm has attracted and the number of deposits they have made. This is addressed in a different section of this document.
Financial leverage ratios
The financial leverage ratios help in measuring the overall debt picture of a company, as Zhaogang and Haoxiang (2018) note. In this analysis focused on determining the debt-to-equity ratio. The information from the financial documents enabled the analysis of this ratio.
Debt-to-Equity ratio = Total debt/total assets = 761,182,383/833,682,070 = 0.913
The outcome shows that the company’s debts are less than its assets. It is a further assurance that the company can meet its long-term financial obligations.
Profitability ratios
The return on investment is determined by the profitability ratio. The investor will be interested in knowing how much to expect from the company based on the investment that is to be made. In this analysis, return on assets was considered an appropriate analysis.
Return on assets = Net income/Total assets = 3,447,432/833,682,070 = 0.004
The positive value, although it may appear to be small, is what an investor needs to determine whether the investment will yield the desired results. The outcome of the analysis shows a positive value, which means that investors of this company should expect profits.
Dividend policy ratios
According to Broer (2018), one of the areas that is of great interest to an investor is the dividend policy. Even if a company is making impressive profits, its dividend policy determines how much of the earned profits will go to the shareholders. The analysis focused on the payout ratio analysis.
Payout ratio = Dividends per share/Earnings per share
Dividends per share = (5,489,946/923,642,857) = 0.006
Earnings per share = 3.6
Payout ratio= 600
It is clear that the company’s payout ratio is impressive. Other than focusing on development and expansion, the company is keen on meeting the financial needs of its customers.
Appraisal Ratios
Appraisal ratios are critical when measuring the quality of a fund’s investment-picking capacity. The researcher used equity multiplier as the tool of analysis. The outcome of this analysis is shown below.
Equity Multiplier = Total Assets/ Total Equity = 833,682,070/ 72,499,687 = 11.499
The equity multiplier analysis shows that the company uses less debt to finance assets. It is an indication this firm is able to finance its activities without relying on external help. The fact that this company has been involved in ambitious expansion projects without relying on debts from other financial institution is a demonstration of its worthiness for a potential investor.
The Performance of the Company and its Current Share Price
The critical analysis of the financial documents of Qatar National Bank shows that it has registered impressive financial performance over the recent past. It is able to meet its financial obligations. Although it has been expanding rapidly, the management has succeeded in ensuring that the total debts do not exceed the company’s assets. An investor who buys the company’s shares is guaranteed of impressive returns if the current performance is maintained. The current share price of the bank is QR 152.99.
The Company’s Capital Structure and Forward Strategy
The company’s capital structure demonstrates a commitment by the management to avoid debt funding and instead it is relying on its profits and earnings from its sale of shares. Its forward strategy is to expand its asset base and increase its market share in the global market, especially in South East Asia.
Conclusion
The critical analysis of accounts, strategies, and financial objectives of Qatar National Bank shows that this company is keen on offering the best value to its investors. The company has faced numerous challenges in the regional market, especially after governments of Saudi Arabia, Egypt, and the United Arab Emirates placed economic sanctions on Qatar because of socio-political alignments. These were crucial markets. The management of the company has maneuvered past these challenges and maintained its consistent increase in profitability.
The financial objectives and strategies put in place to achieve them are sound and realistic. The analysis of financial statements shows that the company’s asset value is increasing and its profits are attractive. The accounting ratios of the company show that it is capable of meeting both short-term and long-term financial obligations. The fear of a possible case of bankruptcy is not there based on these records.
As an expert in the field of investment, the researcher can make an informed advice to an investor that it is safe to invest in Qatar National Bank. Both short-term and long-term investors can consider this company as an appropriate avenue to increase the value of their money. Long-term investors are likely to benefit more because of the consistent increase in asset value, market share prices, and dividends paid to investors.
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The article by Halbouni and Hassan (2012) that is titled “The Domination of Financial Accounting on Managerial Accounting Information: An Empirical Investigation in the UAE” is devoted to the topic of the relationship between financial accounting (FA) and managerial accounting (MA).
The authors describe the theoretical debate around this issue to determine the position of their paper. The primary goal of the authors is to explore the relationship between FA and MA as perceived by the UAE accountants. The specifics of the UAE business environment that the authors mentioned include the usage of IFRS and the rapid evolution in an outward-oriented system.
The authors review prior literature (the debate over the topic that is described below). They pay particular attention to the claim of MA dependence and FA dominance. They point out that the results are not positive for MA: its orientation grows short-term, which makes it less suitable for making decisions. The authors also point out that a number of empirical studies found no proof for this claim, but it is still rather persistent.
The research of Halbouni and Hassan (2012) includes the results of a 29-question survey based on the study by Joseph et al. and distributed among 126 UAE companies in 2009. The survey was meant to determine the opinion of managerial and financial accountants on the issue of FA dominance; the usable number of questionnaires amounted to 89. Apart from that, the authors analyzed the context of the UAE business to define the influence that it exerts on the development and tendencies in the UAE accounting.
They conclude that this context is more favorable towards FA, even though MA is also being developed. The results of the survey indicated that the majority of the respondents appear to consider MA to be influenced by the requirements set for the FA. They also described earnings per share as the most important information for both internal and external accounting. Apart from that, they show that the influence of external auditors on the business is also significant.
The respondents do not consider it to be a negative factor, though. At the same time, 56% of respondents tend to believe that MA is the primary source of managerial decisions. Besides, the majority of respondents (55%) tended to agree that MA fits the needs of management decision-making.
The authors point out that the context of UAE (where FA importance is highlighted) could contribute to the perception of FA domination in the UAE. The authors conclude by the suggestion that future research should focus on the mutual influence of the two accounting types.
Main Keywords
The main keywords of the topic are, obviously, managerial (management) and financial accounting. The article is intended for a prepared reader, and the authors do not spell out these definitions. According to Heisinger (2008), FA is the type of accounting that focuses on “providing historical financial information to external users” (p. 7).
This definition highlights the main differences between FA and MA: the latter is meant for internal users to facilitate the managerial decisions. The rest of the features of the phenomena result from this discrepancy of purpose. In fact, the two types of accounting can also be called internal and external, which describes their nature.
Theoretical Debate
Halbouni and Hassan (2012) refer to the theoretical debate that has been revolving around the topic. They point out that MA has been attracting more attention in scientific circles, which is explained by the changes in the modern business environment. At the same time, they state that many researchers, who worked at the end of the previous century and the beginning of the new one, doubt the importance of MA.
Halbouni and Hassan (2012) mention Bhimani, Anderson, Alam, Adler, and some others (p. 307). According to Halbouni and Hassan (2012), many of these doubts follow the claim of Johnson and Kaplan, according to which FA had a significant influence on MA. At the same time, this claim was also criticized (the authors mention Porter, Akers, Hopper, Scapens, and others). Halbouni and Hassan (2012) assume that the differences between the studies make it difficult to compare their results.
Halbouni and Hassan (2012) enter this debate with the article, and they state its position very clearly, as it is demonstrated above. They point out that the paper was created in order to examine and review the claim of Johnson and Kaplan about the diminishing importance of MA. They hope to analyze it within the context of a developing country (the UAE). In the end, Halbouni and Hassan (2012) state that their paper proves this claim and contradicts the results of the studies by “Hopper et al., Joseph et al. and Scapens et al.” (p. 306).
Indeed, as Halbouni and Hassan (2012) or Richardson (2002) point out, the scientists of the previous century doubted in the significance of MA. In the new century, however, the suggestion of integrating the two types of accounting is being advocated, for example, in Jermakowicz and Gornik-Tomaszewski (2006) or Taipaleenmäki and Ikäheimo (2013). Hemmer and Labro (2008) insist that the two phenomena are closely interrelated and demonstrate the utilization of an integrated system for better managerial decisions.
The work of Montondon and Butler (2011) consists of an attempt at integrating the two phenomena by using them both for a strategic plan during a case study. The tendency is not all-encompassing. For example, Pilcher and Dean (2009) point out that the introduction of international accounting standards influences the managerial practices in a negative way making them downplayed.
The modern studies that are mentioned above tend to claim that academic literature draws too harsh a line between MA and FA; for example, see Hemmer and Labro (2008). Indeed, in modern accounting academic literature, FA and MA are often described in contrast, which could be explained by the needs of the students.
For example, the works by Needles, Powers, and Crosson (2013), as well as Heisinger (2008), mostly focus on contrasting MA and FA. At the same time, Griffin (2009) describes accounting as a system that consists of the two elements. Similarly, Needles and Crosson (2010), point out that MA and FA are “closely interrelated” (p. 737). In other words, it may be suggested that nowadays the tendency towards integrating the two types of accounting can be seen.
Impact and the Outcomes for the UAE
The study of Halbouni and Hassan (2012) is devoted to the perception of FA donation in UAE, which is why the results of the article are of particular importance for the country. The article demonstrates that at least 50% of the respondents (who are supposed to be knowledgeable in this respect) consider MA to be of vast importance for the company’s decision-making. This fact contradicts to the lack of MA encouragement in the UAE that Halbouni and Hassan (2012) describe.
From the analysis of the relevant theoretical debate, it follows that the two types of accounting are mutually interconnected and can be integrated for the benefit of a company. Halbouni and Hassan (2012) state that FA domination leads to MA neglect in the UAE. From the article, it follows that more attention should be paid to the development of MA and its practices in the UAE on the business and government levels.
References
Griffin, M. (2009). MBA Fundamentals. New York: Kaplan Publishing.
Halbouni, S. S., & Hassan, M. K. (2012). The domination of financial accounting on managerial accounting information. International Journal of Commerce And Management, 22(4), 306-327. doi:10.1108/10569211211284502
Heisinger, K. (2008). Introduction to managerial accounting. Boston, Mass.: Houghton Mifflin.
Hemmer, T., & Labro, E. (2008). On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems. Journal of Accounting Research, 46(5), 1209-1240. doi:10.1111/j.1475-679x.2008.00303.x
Jermakowicz, E., & Gornik-Tomaszewski, S. (2006). Implementing IFRS from the perspective of EU publicly traded companies. Journal of International Accounting, Auditing and Taxation, 15(2), 170-196. doi:10.1016/j.intaccaudtax.2006.08.003
Montondon, L. M., & Butler, J. B. (2011). Water world instructional case: integrating financial and managerial accounting with strategic planning. Journal of the International Academy for Case Studies, 17(3), 91-99. Web.
Needles, B., Powers, M., & Crosson, S. (2013). Financial and managerial accounting (10th ed.). Boston, MA: Cengage Learning.
Pilcher, R., & Dean, G. (2009). Implementing IFRS in local government: value adding or additional pain? Qualitative Research in Accounting & Management, 6(3), 180-196. doi:10.1108/11766090910973920
Richardson, A. J. (2002). Professional dominance: The relationship between financial accounting and managerial accounting, 1926-1986. The Accounting Historians Journal, 29(2), 91-121. Web.
Taipaleenmäki, J., & Ikäheimo, S. (2013). On the convergence of management accounting and financial accounting – the role of information technology in accounting change. International Journal of Accounting Information Systems, 14(4), 321-348. doi:10.1016/j.accinf.2013.09.003
Just in time is a strategy that is usually used by companies with the aim of increasing efficiency. Under this strategy, the company only receives goods when they are needed. The strategy has a number of benefits to the company. The major objective of the ‘just in time’ strategy is to reduce costs that are related to holding inventory. These are costs such as holding cost, opportunity cost for the inventory held and carrying cost. The company does not have to keep a lot of stock in its premises. As a result, the company is not required to incur costs related to acquiring a store for goods. The carrying cost is also reduced since the company does not have to transport goods in bulk. In addition, stock out cost is also avoided when a company adopts the JIT strategy. These are costs of lost sales as a result of stock out and loss of goodwill when customers do not get what they want and when they want, among other costs (Lu& Nihon, 2009).
The just in time strategy is highly effective in a production firm. Its functionality depends on signals from different points. A production unit is signaled by another unit on when to manufacture a certain part and how many units to manufacture. The signal is sent when the signaling party realizes that the part required at that production point is not present in the shelves or is reducing. This ensures that the production process runs smoothly and efficiently. For JIT to be effective, it has to be dependent on lean manufacturing. Lean manufacturing is the kind of manufacturing that seeks to consider usage of resources and ensure that value is preserved with less work. One of the companies that are known to use these methods of inventory management and production is Toyota in its ‘Toyota Production System’ (Neelankavil & Rai, 2009).
The term just in time was first introduced and described in the year 1923 by Henry Ford in his book known as ‘My Life and Work’. Ford wrote that their production unit at Ford Motor Company had found out that there was no need for buying materials and storing them when they are not needed. He wrote that they were planning to be buying only enough materials that were to fit their production needs. Ford realized that this was going to save the company a lot of money and reduce the amount of money that is tied up in materials at any one time. It would, thereby, increase the company’s productivity (Lu & Nihon, 1989).
Fundamental techniques used in JIT
JIT is a strategy whereby materials in a production company are delivered when required. Therefore, the technique used in JIT is that the company will make an order for raw materials just before the level of raw materials in stock depletes. Therefore, the company sets a certain level at which it will be ordering more raw materials. The level that the company sets is referred to as the re-order level. There should be a time that is set between which the materials are ordered and delivered. This period of time is referred to as lead time (Neelankavil & Rai, 2009). Therefore, the company should have supportive suppliers who will be able to deliver quality materials on time. The suppliers should be able to make deliveries direct to the work areas.
The workplace where JIT is applied should be highly organized. The workers should be highly experienced to reduce wastage of materials or eliminate it completely if possible. The parts delivered are highly specialized and, therefore, perfection should be highly maintained. This helps in increasing the quality of products. People who work in an organization that applies JIT strategy should be able to stay on their schedules strictly. This is because any delay in the production process might cause the whole process to fail. Quality production is the bottom line for JIT. Therefore, all production activities should be directed towards quality. The supplies should be of quality, statistical process control should be of quality, and there should be quality in all sections within the firm. Employee commitment and management support should also be embraced (Lu & Nihon, 1989).
Is JIT a success in Japan?
Just in time was first implemented in Japan by the Toyota Motor Corporation. Just in time was to be part of the company’s production system referred to as the ‘Toyota Production System’. Despite the fact that Henry Ford was the first person to describe this term, the Ford Motors Corporation did not fully implement the strategy immediately. Therefore, Toyota did not copy the strategy from Ford. One of the reasons why this strategy was first implemented in Japan is that there are no enough lands in the country for companies to build warehouses where they can store finished products, as well as parts at the same time. Reduced ‘economic lot size’ due to scarcity of land made Japanese companies think of innovative ways of dealing with the issue during the 1950s. The ‘economic lot size’ was leading to poor production and ROI recorded by the Japanese firms was low. The factories, therefore, had to find a way of turning this around (Singh, 2011).
It was in the 1950s that the then chief engineer of Toyota realized that a different method could be adapted to solve this problem, and he came up with the just in time system. The chief engineer was able to see that reducing costs incurred in having a warehouse would increase flexibility in the company. The program became a success for Toyota Motors Corporation. The company was able to produce cars at a relatively lower cost and was still able to meet the market demand. The return on investment for Toyota increased.
Other companies in Japan started following the same strategy as Toyota, and their returns on investment started to increase as well (Neelankavil & Rai, 2009). Some of the changes that the system brought to Japanese production companies include a significant increase in the amount of income. The time taken by companies to respond to an order was also reduced significantly. A customer would make an order and the final product could be delivered within a very short time. This was important in that it increased customers’ satisfaction and their loyalty to Japanese companies.
In addition, people working in assembly companies such as Toyota had to use the available parts efficiently. This is because they had little choices in the parts to use and, therefore, they had to use the available parts perfectly. They had to make the parts fit perfectly as well. As a result, this improved quality assurance. Total quality management was implemented to ensure quality and less wastage. Generally, the process has been highly successful in Japan. It has led to high quality production in Japan. In addition, Japanese products are sold at low prices due to their low production costs; hence more customers prefer the products since they get high value for their money. This has increased the sales turn over for the Japanese companies (Singh, 2011).
Is JIT applicable in the UAE?
The United Arab Emirates is a region that is emerging as a strong economy. The major product from the region is oil. UAE supplies oil to most parts of the world. The region is in the process of increasing its 2.9 million barrels production per day to 5 million barrels per day. The demand for oil has been on the increase as a result of increasing industrialization. There have been production companies established in the UAE as a result of the region’s oil reserves. Some of the factories in the UAE are the chemical and plastics factories, as well as other companies that have a close connection with the oil supplies in the region. UAE needs to improve its oil production efficiency to meet the demand in the market at the moment. The Just in time strategy will be significant in improving the efficiency (Ramos, 2010).
Another reason why ‘just in time’ should be applied in the UAE is the high risk that is associated with storage of oil. Oil is a highly flammable product and its storage should be done in a highly cautious manner. This means that the cost of storing oil will be high since special storage equipment is required. Oil companies need to improve their income, and they would welcome any strategy that would help them save on costs. Just in time system would be the optimum option for them; the oil companies can be delivering oil to production companies on demand rather than storing it as they await orders. In addition to the increasing number of factories being established in the United Arab Emirates, the application of JIT is possible since it is going to increase efficiency and return on investments for both the oil industries and other factories that are being established.
Dubai Aluminum (DUBAL)
Dubai Aluminum is a company that deals with aluminum production and is one of the largest companies currently in the UAE. The company is also ranked among the top five companies in a similar industry worldwide. All the smelting for Dubai Aluminium is done at one single site. Raw materials used by the company include alumina, petroleum coke and coal tar pitch. Storage of these raw materials is expensive as they require a large warehouse space. In addition, storage of finished metal products is also very expensive. It is actually not economical for the company to store large amounts of raw materials or finished goods. As a result, just in time strategy will be highly suitable and effective. JIT is has the capability of increasing the income for the company through savings on inventory. If the just in time strategy is applied in this company, the amount of space used for warehouse can be used for further production to increase efficiency and speed of production. The ability of the company to meet demand will be high since it will have more production plants (Ramos, 2010).
On the other hand, it might not be easy to implement the JIT strategy in Dubai Aluminium for some reasons. Dubai Aluminium is not similar to an assembly company like Toyota where parts are ordered when required. The demand for metals is from outside companies, which are not in the same production line with Dubai Aluminium. Therefore, it is difficult for Dubai Aluminium to know when metal will be ordered. As a result of this difficulty in demand prediction, implementation of the JIT strategy may be difficult. The company needs to have ready products to supply them on order.
Demand for aluminum may be urgent, giving the workers less time to produce the required aluminum. It is important to note that there is no known assembly industry in Dubai and, therefore, a large percentage of aluminum produced is exported. The foreign companies that purchase the metal may need it urgently. Due to the amount of time required to manufacture the metals, Dubai Aluminium may lose sales for lack of ready aluminum. In case the company loses such sales, a lot of money will be lost in the process. Loss of sales might be costly than the cost of storing metals in a warehouse. This makes it difficult for JIT to be implemented in the company.
Reference List
Lu, DJ & Nihon NK 1989 Kanban just-in-time at Toyota: Management begins at the workplace, Productivity Press, Cambridge, MA.
Neelankavil, JP, & Rai, A 2009 Basics of international business, M.E. Sharpe, Armonk, NY.
Ramos, SJ 2010 Dubai amplified: The engineering of a port geography, Ashgate Publishers, Farnham.
Singh, S 2011 ‘JIT system: A cultural difference between Japan and Indian Implementation’, International Journal of Research in Mechanical Engineering and Technology, vol. 1, no. 1, pp. 52-56.
Differences Between Financial Accounting and Managerial Accounting
As a rule, the area of financial accounting (FA) is restricted to the creation and further analysis of the company’s financial statements. The results of the analysis are then made available to all stakeholders involved. Managerial accounting (MA), on the other hand, views the financial analysis as a tool for the decision-making process. The results of the analysis are discussed to make a choice between the company’s options.
Therefore, the viewpoint that the company’s key processes are viewed can be deemed as the primary difference between the two concepts. However, there are other ways to consider the identified frameworks. For example, in the process of conducting an FA, one is supposed to consider the past performances of an organization. The MA approach, however, is directed at the current specifics of the staff’s performance.
The frequency of performing the FA is quite different from that of the MA as well. In contrast to FA, which must take place strictly on an annual basis, the MA may be used whenever there is the necessity to reconsider the current approach toward the management processes.
Another important issue, the objectives that the two types of analysis address, needs to be brought up as well. MA is used to complete day-to-day, short-term objectives, while the FA is used to consider the long-term ones.
Furthermore, when a publicly-traded company conducts an FA, the outcomes of the FA must be made available to the general public as a part of the corporate transparency principle (Marcinko & Hertico, 2013). The MA results, in their turn, do not have to be offered to wide audiences.
Finally, forecasting comprises a significant part of the MA. Although the FA is also used as the platform for designing the further financial strategy that entrepreneurship will use in the context of the global market, forecasting is not included in the report, unlike the MA framework suggests.
Managerial Accounting Profession: Change
The phenomenon of MA has experienced tremendous changes over the years of its evolution. Previously, the concept of managerial accounting was reduced to cost accounting. As the subject matter developed, the elements of a behavioral analysis were introduced.
As a result, the principles of HR were included in the managerial accounting system. The identified change allowed for executing better control over the corporate processes and maintaining sustainability. Consequently, the significance of the organizational behavior strategy, the satisfaction levels among the staff members, etc., were acknowledged as the factors that determine the choice of an MA strategy and the range of skills that an MA expert must possess.
Presently, managerial accounting is used as the tool for retrieving the data that helps improve all corporate activities and, therefore, enhances the profitability of the entrepreneurship. In other words, from the necessity to execute control over the essential financial processes, theorists redesigned the MA requirements to meet the need to control the factors that determine the employees’ performance in the company.
As a result, the current MA theory encompasses a wide array of activities that need to be supervised and puts a special emphasis on the necessity to use the human resources at the company’s disposal in a manner that is as efficient as possible. At this point, the significance of investing in the employees’ progress needs to be brought up. Indeed, a closer look at the present-day priorities of an HR department in a firm will show that any company is concerned with increasing the staff’s competencies and promoting their personal and professional growth (Needles, Powers, & Crosson, 2013).
Certified Management Accountant (CMA) and Certified Public Accountant (CPA): Definition and Comparison
A CMA is an accounting expert that operates in financial accounting and strategic management. As the very titles of the positions mentioned above show, the focus of the operations is the key difference between the two. Whereas the CMA addresses the issues related to management, the CPA manages the concerns linked to the area of finances. In other words, audits, financial reports, etc., are included in the range of the CPA’s competency.
In addition, the CPA’s certification may vary depending on the state, particularly the requirements for completing the degree, such as the number of hours, the specifics of the examination, etc., which are quite different from the CMA standards. Apart from the academic characteristics, there are the practical implications of earning the CPA degree that set it apart from the CMA.
It should be noted that both the CMA and CPA are geared toward maximizing profit. Every single step that the experts in the areas above make is supposed to address a particular problem that makes the company weaker and reduces its competitive advantage. The CMA certification, however, demands that the issues faced by the entrepreneurship should be viewed from the perspective of a manager and not merely a financial accountant.
Income Statements and the Financial Analysis
Absorption vs. Contribution Income Statements
For a company to be efficient in the target market, it is imperative to make as efficient use of the available resources as possible. An income statement, in turn, helps get the priorities in line, pointing out the advantages and disadvantages of the recurrent financial approach.
As a rule, a Traditional (i.e., Absorption) Income Statement (AIS) is defined as a tool for measuring the opportunities for an organization to gain profit within a particular time period. In the specified framework, both the variable and the fixed costs are viewed as a part of the cost of goods sold (Warren, Reeve, & Duchac, 2013).
Compiling a Contribution Income Statement (CIS), on the other hand, requires that the expenses should be deducted from sales. As a result, the calculation of the contribution margin becomes a possibility. In other words, the subject matter can be determined as a difference between the total revenues of a company and its variable costs.
Therefore, the AIS helps differentiate between the product costs and the period costs. As a result, when determining the expenses taken for the sold goods, one will be able to take both variable and fixed manufacturing costs into account. CIS, in turn, does not allow for including the fixed manufacturing costs into the calculation since it attributes them to the overseas costs.
Break-Even Analysis is an Essential Tool
Significance
By definition, a Breakeven Analysis (BEA) permits the identification of the point at which the expenses taken to run the entrepreneurship are equal to the revenues acquired in the process (Penner, 2013). The significance of the BEA is quite evident in the contemporary environment of the global economy. For instance, the BEA can be used to determine the company’s pricing strategy so that its customers can enjoy its flexibility and the company can gain a benefit. Similarly, the outcomes of the BEA can serve as the foundation for shaping the marketing approach. Finally, the identification of the point at which the firm’s revenues meet its costs may be used as the factor for making a choice between the investment options available.
Formula and Example
The formula used to carry out the BEA is fairly simple. To calculate the BEA of a particular product, one will have to add the Contribution Margin thereof to its Fixed Expenses: BEA = Contribution Margin + Fixed Expenses. The Contribution Margin is determined by subtracting the variable expenses from the revenues: Contribution Margin = Revenue – Variable Expenses. Therefore, the formula for the BEA can be shaped in the following manner: BEA = Revenue – Variable Expenses + Fixed Expenses. For example, the breakeven point (BP) for the company selling plush toys for $30, with each toy’s cost price being $7, will be 180 toys, as the table below shows (Kahn, 2015).
Table 1. Breakeven Analysis for a Toy Manufacturing Company.
Sales (180 toys priced at #30 per toy)
$5,400
Variable Expenses (180 toys at $7 per toy)
-$1,330
Contribution Margin
$4,070
Fixed Expenses
-$4,070
Net Income
0
As the example provided above shows, in order to reach its breakeven point, the company will have to make sure that the contribution margin of the production reaches $4,070. While the analysis carried out above is a rather rough draft of the actual calculations, it serves as a foundation for locating opportunities that entrepreneurship may explore in terms of investments, brand development, marketing, etc. Therefore, the further evolution of the organization can be outlined in a rather accurate manner.
Reference List
Kahn, K. B. (2015). Product planning essentials. Armonk, NY: M. E. Sharpe.
Marcinko, D. H., & Hertico, E. R. (2013). Financial management strategies for hospitals and healthcare organizations: Tools, techniques, checklists and case studies. Chicago, IL: CRC Press.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Stamford, CT: Cengage Learning.
Penner, S. J. (2013). Economics and financial management for nurses and nurse leaders (2nd ed.). New York, NY: Springer Publishing Company.
Warren, C. S., Reeve, J. M., & Duchac, J. (2013). Managerial accounting. Stamford, CT: Cengage Learning.
Managerial accounting is a key organizational activity that defines the quality of financial information and serves as a basis for the formulation and implementation of the strategic goals of a company. Rapidly changing conditions of the business environment and the need to analyze a large amount and scope of data have led to the transformation of the traditional managerial accounting frameworks.
Many managerial accounting tools have been developed and gradually adopted by major players in their fields in order to respond to the changing demands of the market. The purpose of the research proposal is to outline a research project that will assess the prevalence of managerial accounting tools and methods used in the UAE telecommunications sector in order to determine the preferred approach to accounting in the country’s organizations.
To achieve this aim, a series of open-ended, unstructured interviews will be conducted with experienced managers from management accounting divisions of leading telecommunications companies of the UAE: Etisalat and du. The expected outcomes of the research project are to analyze the existing tools and methods used by managerial accountants of the UAE telecommunications sector and determine the most frequently used approaches to managerial accounting. The researcher expects that ABC and ABM are the managerial accounting tools of choice for the telecommunications sector of the country.
Introduction
The last several decades saw a major shift in consumer preferences resulting in the increase of the amount and scope of data that must be produced and processed by management accounting. Therefore, these changes have affected not only companies’ manufacturing processes but also led to the transformation of management accounting strategies in order to accommodate the increased complexity of economic relations (Yalcin, 2012). Financial activities of the companies engaged in the production of goods and services have become even more complicated as globalization has facilitated the creation of complex supply chains and a full-scale expansion of capital across national borders.
The increase in the amount and scope of accounting information has forced many companies to adopt new accounting practices in order to better manage their cost and in a new, competitive environment. As a result, strategic management, strategic management accounting, and strategic cost management, among others, have emerged. Furthermore, in an attempt to retain and strengthen their competitive edge, big and medium-sized companies have started adopting new management accounting practices that include, but are not limited, to “planning and budgeting, costing systems, performance evaluation, decision-making, and strategic analysis” (Yalcin, 2012, p. 96).
However, the rate of adoption has not been even: some companies have not been willing to give up traditional accounting techniques such as “standard costing and variance analysis” (Sulaiman, Nazli, & Alwi, 2004, p. 493).
The aim of this research proposal is to outline a research project that will explore management accounting tools and methods used in the UAE telecommunications sector in order to determine the preferred approach to managerial accounting in the country’s organizations.
Managerial Accounting
Managerial or management accounting can be defined as “a profession that involves partnering I management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy” (Davis & Davis, 2014, p. 3). In other words, managerial accounting is the process of generating information that can be used by managers during their decision-making activities. In this context, it is clear that managerial accounting serves no other purpose than adding value to an organization by facilitating strategic management efforts of a business and supporting operational alignment across all its levels (Davis & Davis, 2014; Zheng, 2012).
Managerial accountants are professionals specializing in the use of managerial accounting tools for the purpose of value creation. It should be mentioned that the role of managerial accounting has drastically transformed over the last several decades (Ghanbari & Vaseli, 2015; Zheng, 2012). While in the past, managerial accounting specialists were organized in a separate department and were physically removed from managers who used their reports, now they comprise operating departments along with decision-makers who rely on their valuable information and insight (Davis & Davis, 2014).
Before proceeding with the discussion of managerial accounting, it is important to distinguish it from financial accounting. Whereas the former is concerned with the generation of information for internal use by managers within an organization, the latter refers to “reporting financial information to external parties, such as stockholders, creditors, and regulators” (Garrison, Noreen, & Brewer, 2012, p. 2).
Managerial Accounting Tools and Efficiency Maximization
The UAE organizations have a wide range of objectives that often overlap, thereby making it impossible to develop a uniform framework of management accounting that would work for all companies. Managerial accounting tools and methods seek to support companies in meeting those objectives. Profit maximization is one of the key functions of managerial tools that fall into the category of scientific management (Ghanbari & Vaseli, 2015).
Another function of management accounting methods is planning, which refers to the assignment of responsibilities and operational goals and falls into the category of management principles. Accounting management methods and tools also used to identify and correct subpar performance across all organizational levels (Abdel-Kader & Luther, 2008). It is important to remember that a combination of accounting management methods creates “an unbiased system of performance evaluation, in which personal desires are removed due to objectivity of the system” (Ghanbari & Vaseli, 2015, p. 1913). Another role of managerial accounting is the distribution of knowledge within an organization in order to ensure that costs and benefits of actions can be measured and compared.
The UAE Telecommunications Sector
The UAE telecommunications sector is one of the strongest and most developed industries in the Arab world (Flevy, n.d.). It quickly expands because of the growth in infrastructure and consumer purchasing power. The sector has evolved due to changing technology use patterns: the demand for voice services is not growing as fast as that for data services.
The country’s telecommunications needs are served by two operators: Etisalat and du (TRA, 2015). Even though several other companies such as Star Satellite Communications, Al Yah Satellite Services Company PJSC, and Media Zone Intaj FZ LLC, among others, were granted licenses to provide telecommunications services, their impact on the industry is yet to be seen. A report issued by telecommunications regulatory authority (TRA) of the UAE shows that in the period from 2013 to 2014 the number of fixed lines increased by 18, 000 (TRA, 2015). Total fixed telephony revenues have grown by almost 6 percent during the same period (TRA, 2015).
The number of total active mobile subscriptions “increased by 4.6 percent between 2013 and 2014” (TRA, 2015, p. 3), thereby making the mobile penetration rate almost 200 percent. The report also shows that “the percentage of internet subscribers using fiber technology increased by 14.7 percent” (TRA, 2015, p. 3) in the same period. As of 2014, the UAE had 88 percent of internet users connected via fiber lines (TRA, 2015).
Only managers from Etisalat and du were invited to participate in the research because the impact of other telecommunications operators on the industry is almost nonexistent.
Knowledge Management in Accounting
In order to better understand the preferred approach to managerial accounting in the UAE organizations, it is necessary to consider how the country’s managers use knowledge when making decisions associated with planning, investment, and resource allocation among others. Knowledge management refers to deliberate and comprehensive gathering, organizing, and analysis of information (Mubarak, 2013). Knowledge management is an integral part of accounting management decision-making process.
Knowledge management plays a key role in the utilization of managerial accounting tools in the UAE. The country is an emerging economy that has many giant companies with billions of dollars in revenues. For example, a telecommunication giant, Etisalat, had 20 billion worth of total assets as of 2011 (Mubarak, 2013). Another company specializing in real estate, Emmar, reported having 17.3 billion dollars in total assets in 2011 (Mubarak, 2013). Due to the fact that the UAE telecommunications, construction, and retail industries expand their activities abroad, the country is badly in need of knowledge management that can support its managerial accounting.
A study on the role of knowledge management in management accounting in the UAE indicates that decision-makers in big organizations “do not differentiate between information and knowledge” (Mubarak, 2013, p. 1).
Furthermore, the results of the study show that all companies located in the country have reliable tools for data gathering. Another finding of the study is that there are substantial differences in data collection methods between industries. This means that information used for making different managerial choices is strictly specific to those choices.
Furthermore, the study shows that unlike insurance and education sectors of the country’s economy, hotel and leisure sectors are the most flexible in their use of managerial accounting tools. The UAE’s industries are different in their choice of both financial and non-financial information and how it is used in the decision-making process (Mubarak, 2013). According to Mubarak (2013), the differences depend on whether a decision is strategic or operational and specificity of information.
Managerial Accounting Tools in the UAE
ABC
According to Behery, Jabeen, and Parakandi (2014), numerous fast-growth small-to-medium organizations in the UAE have adopted ABC in order to effectively respond to challenges of the ever-changing organizational environment. ABC is being used as a tool for “understanding product and customer cost and profitability based on the production or performing processes” (Wen-Cheng, 2012, p. 13). Therefore, the instrument has often been utilized in the sphere of strategic decision-making to inform pricing, outsourcing, and process improvement activities.
ABC helps to identify the interactions between products costs, and activities and assign indirect costs in a more effective manner that can be achieved with the help of traditional accounting tools (Jankala & Silvola, 2012).
According to Jankala and Silvola (2012), even small UAE firms increasingly rely on the instrument to achieve better cost efficiency. It must, however, be borne in mind that ABC is not perfectly suitable for assigning some types of indirect costs such as employees’ salaries and managerial expenses; therefore, the tool has been chiefly applied in the manufacturing sector. The use of the managerial accounting instrument in the manufacturing sector has quickly gained a widespread acceptance because it allows producing nearly-true costs, thereby justifying its application in “target costing, product costing, product line profitability analysis, customer profitability analysis and service pricing” (Investopedia, n.d.). Nonetheless, the instrument has been successfully used by international airlines from the UAE and other countries from Europe, North America, Latin America and Asia (Wen-Cheng, 2012).
A study on the use of ABC by 38 international airlines shows that proper application of the instrument can be more effective that the use of traditional accounting tools (Wen-Cheng, 2012). The study compared the use of ABC for two basic airline activities—provision of services and transactions accounting—between different airline carriers. The findings of the study suggest that the carriers such as the UAE-based Air Arabia and Etihad Airways, which relied on ABC, were more up to 27 percent more efficient in all areas of cost estimation than their counterparts that used traditional accounting methods (Wen-Cheng, 2012). Even though the instrument cannot provide a universal solution for all managerial decisions, it can offer a close cost estimation.
As has been mentioned above, ABC has been primarily used in the manufacturing sector; however, service organizations are applying it for optimizing their costs.
Cost Assignment
The extant literature suggests that the organizations utilize the following elements of ABC cost-assignment methodology: “resources, resources drivers, activity, activity drivers, and cost object” (Hardan & Shatnawi, 2013, p. 51). Resources are economic elements that are necessary for the performance of certain activities. Resources include, but are not limited to, salaries travel, rent utilities, supplies, and materials. Resources drivers is a factor of ABC that helps to link resources with activities. In case of rent, this component is being used to “trace a portion of the cost of operating the facilities to the activity” (Hardan & Shatnawi, 2013, p. 51).
Activities is another element of ABC that is being used by the telecommunications operators to measure work performed in a company and trace it to costs. Activity drivers help to link resources with activities and represent the intensity of demand for activities in respect to cost objects. The cost driver is a factor that can be traced to the consumption of resources. Managers of organizations use cost drivers to assign activity cost pools to their companies’ services.
Cost Structure
Cost structure in both small-and large-scale companies is divided into direct and indirect costs. The direct costs include calls, messages, data services, interconnection cost, revenue sharing, content costs, and network labor costs among others. Indirect cost items include, but are not limited to, amortization, rents, network labor costs, and utilities (Hardan & Shatnawi, 2013).
ABM
Another powerful managerial accounting tool for performance measurement that has being adopted by the UAE’s fast-growing enterprises is ABM (Behery et al., 2014). ABM refers to the use of ABC information in order to “support organizational strategy, improve operations, and manage costs” (Hilton & Platt, 2014 p. 182). ABM system can be pictured as a two-dimensional model in which vertical dimension represents the cost assignment viewpoint and horizontal dimension represents the process viewpoint.
The costs of product or services are assigned along the vertical dimension of the model in a two-stage process: assignment or resource costs to pools of activity an assignment of activity costs to cost units (Hilton & Platt, 2014). The process view dimension of the model entails activity analysis, which includes identification of a company’s activities. However, this dimension of ABC also presupposes the recognition of root causes of these activities and linkages between them. From this point of view, it is clear that activities as the focal point of the instrument.
ABM can be used to identify activities and costs that do not add to the overall value of a company, its products, or services. There are two types of non-value-added activities: activities that are not necessary and should be dispensed with and activities that are necessary but are conducted in an inefficient manner and can be improved (Hilton & Platt, 2014).
Research Objectives and Questions
The aim of this study is to explore management accounting tools and methods used in the UAE telecommunications sector in order to determine the preferred approach to managerial accounting in organizations. Despite the importance of the topic, very few studies have investigated the adoption of novel managerial accounting tools by the UAE companies (Dik, 2011). Therefore, the study aims to eliminate a paucity of research.
The following hypotheses were developed:
H1: The level of complexity of management accounting tools used in the UAE telecommunications sector has a positive correlation with an operator’s size
H2: Managers of telecommunications companies in the UAE rely on long-term budgeting and planning tools.
Research Methodology
Qualitative research was chosen in order to gain meaningful insights into the use of management accounting tools and methods by the country’s managers. This method of inquiry relies on the situational understanding of phenomena; therefore, it will allow gaining a holistic understanding of managerial accounting in a natural practice context. The researcher decided not to use a survey as a research method because the UAE is known for a low response rate to electronic mailing questionnaires (Dik, 2011). Therefore, the data will be gathered with the help of open-ended, in-depth interviews. The respondents will be provided with open-ended questions that prompted them to answer in their own words. The following questions will be asked during interviews:
Q1: What managerial accounting tools and methods are used within your organization?
Q2: What is the role of managerial accounting tools and methods in your organization?
These questions will allow the inquirer to identify interesting ideas that will emerge during the interview and explore them through the discussion. In addition to the two major, open-ended questions all interviewees will also be presented with other questions aimed at revealing relevant information about study participants and their companies. These questions can be divided into three groups: company profile, interviewee profile, and company structure.
Company profile questions will elicit additional information about a company. Interviewee profile questions will elicit facts and details about the study participants’ position and responsibilities, training, and professional certifications among others. Company structure questions will provide the researcher with information about management accounting departments and their place in organizational hierarchies.
Data Collection
The data will be collected from accounting managers working in the UAE telecommunications companies—Etisalat and du. All interviews will be recorded and transcribed verbatim. Transcriptions will be send to the participants of the study for feedback. Ten interviews will be conducted: two face to face interviews and eight telephone interviews. The duration of the interviews will vary according to the time that will be provided by the participants and will range from 10 to 50 minutes. The following criteria will be used for selecting interviewees:
An interviewee should have a position in managerial accounting division of one of the two major telecommunications companies of the UAE.
An interview should have a minimum of 5 years’ experience using managerial accounting tools and methods.
Data Analysis
During the process of data analysis text from articles and interview transcripts will be carefully examined and categorized. The categories will be united by similar meaning and help to conduct subjective interpretation though the identification of themes and patterns. Linkages between categories and text segments will be established during the analysis.
Expected Results
Base on the analysis of the extant literature on the topic it is safe to assume that the interviews will reveal that the use of contemporary management accounting tools is limited in the telecommunications industry of the UAE. The following management accounting practices are expected to be identified as the most common for the industry: “budgeting for planning, budgeting for controlling costs, performance evaluation based on financial measures and product profitability analysis” (Abdel-Kader & Luther, 2006, 350).
The participants of the study are most likely to rely on activity-based costing (ABC), economic value added (EVA), balanced scorecard (BSC), activity-based budgeting (ABB), cost-volume-profit (CVP) analysis, and activity-based management (ABM) to aid their decision-making process. The researcher expects that out of the six managerial accounting tools and methods that are frequently used by the UAE managers, ABC and ABM will be identified as the most popular instruments in the UAE telecommunications industry.
The UAE telecommunications industry is a fast-growing sector that requires the use of innovative managerial accounting tools and methods. The industry’s environment demands the companies to use the cost accounting tools to accomplish cost efficiency without reducing the quality of provided services. Taking into consideration the fact that the industry is subject to rapid innovations, the companies need to exert more efforts to control their profitability margins.
Therefore, the researcher expects Etisalat and du to use of ABC and ABM systems for improving their financial performance. The adoption of these instruments is justified by the rising competitive pressures as wells as “the information needs of commercial departments” (Major, 2014, p. 29) of the operators. The tools will provide managers of the companies with sound economic information for supporting their pricing, outsourcing, and investment decisions among others.
Conclusion
Companies of different scale and function rely on different managerial accounting tools and methods for measuring their performance. With the growing complexity of fast-growth businesses traditional performance measuring systems (PMSs) have become exceedingly complicated and unsuitable for keeping track of changes in the organizational environment. Therefore, new managerial accounting tools have been developed.
The UAE telecommunications sector is one of the most quickly developing industries in the Arab world; therefore, in order to respond to the information and competitive pressures of the changing environment, Etisalat and du are likely to adopt many managerial accounting tools and methods. The existing literature on the topic suggests that managers working in the UAE companies use the following instruments: ABC, EVA, BSC, ABB, CVP analysis, and ABM to aid their decision-making process.
The expected outcomes of the research project are to analysis the existing tools and methods used by managerial accountants of the UAE telecommunications sector and determine the most frequently used approaches to managerial accounting. The researcher expects that ABC and ABM are the managerial accounting tools of choice for the telecommunications sector of the country. The use of these two tools by managers from other industries is justified by their ability to inform pricing, outsourcing, and process improvement activities. By utilizing ABM, mangers are able to identify non-value-added activities in order to improve or eliminate them.
References
Abdel-Kader, M., & Luther, R. (2006). Management accounting practices in the British food and drinks industry. British Food Journal, 108(5), 336-357.
Abdel-Kader, M., & Luther, R. (2008). The impact of firm characteristics on management accounting practices: A UK-based empirical analysis. The British Accounting Review, 40(1), 2-27.
Behery, M., Jabeen, F., & Parakandi, M. (2014). Adopting a contemporary performance management system: A fast-growth small-to-medium enterprise (FGSME) in the UAE. International Journal of Productivity and Performance Management, 63(1): 73-94.
Davis, C., & Davis, E. (2014). Managerial accounting (2nd ed.). New York, NY: Wiley.
Dik, R. (2011). Arab management accounting systems under the influence of their culture (Unpublished doctoral dissertation). Dortmund University of Technology, Dortmund.
Garrison, R., Noreen, E., & Brewer, P. (2012). Managerial accounting (14th ed.). New York, NY: McGraw-Hill/Irwin.
Ghanbari, M., & Vaseli, S. (2015). The role of management accounting in the organization. International Research Journal of Applied and Basic Sciences, 9(11): 1912-1915.
Hardan, A., & Shatnawi, T. (2013). Impact of applying the ABC on improving the financial performance in telecom companies. International Journal of Business and Management, 8(12), 48-61.
Hilton, R., & Platt, D. (2014). Managerial accounting (10th ed.). New York, NY: McGraw-Hill Education.
Jankala, S., & Silvola, H. (2012). Lagging effects of the use of activity-based costing on the financial performance of small firms. Journal of Small Business Management, 50(3), 498-523.
Major, M. (2014). Implementing activity-based costing in the telecommunications sector: A case study. Journal of Telecommunications System Management, 3(1), 19-29.
Mubarak, A. (2013). Knowledge management and management accounting-decision-experimental study. Journal of Organizational Knowledge Management, 13(1), 1-14.
Sulaiman, M. B., Nazli, N., & Alwi, N. (2004). Management accounting practices in selected Asian countries: A review of the literature. Managerial Auditing Journal, 19(4), 493-508.
Wen-Cheng, L. (2012). Financial performance and customer service: An examination using activity-based costing of 38 international airlines. Journal of Air Transport Management, 19(1), 13-15.
Yalcin, S. (2012). Adoption and benefits of management accounting practices: An inter-country comparison. Accounting in Europe, 9(1), 95-110.
Zheng, X. (2012). Management accounting practices in China: Current key problems and solutions. Social Research, 29(4), 91-98.
Managerial accounting is an important component of organizational activity that defines the quality of financial information and serves as a basis for forming the strategic goals of the company. The rapidly changing business environment and the emergence of new concepts in the recent decades created the need for the update of the traditional managerial accounting frameworks. As a result, several tools were developed and gradually adopted by major players in the field that responded to the changing demands of the market.
However, the adoption was uneven, with some countries retaining the traditional frameworks and tools. The purpose of the research paper is to assess the prevalence of managerial accounting tools and methods used in the GCC countries in order to determine the preferred approach to accounting in organizations.
Main Body
The Gulf Cooperation Council (GCC) is an economic union formed of six states from the Arabian Gulf. In the recent decade, the GCC has displayed an impressive economic capacity and demonstrated a growth rate which allowed its members to emerge as key players on the global scene, mostly due to the abundance of valuable natural resources. In such setting, the importance of managerial accounting for facilitating the performance of the economies becomes obvious. It is, therefore, tempting to conclude that the described shift in the managerial accounting frameworks and tools is equally applicable to the situation.
However, the cultural and social specificities of the region pose a potential barrier to the update of the practices. Specifically, the ownership of the majority of businesses in the Arabian Gulf still remains predominantly owned by government or family-owned. In contrast, the majority of the countries which adopted the updated managerial accounting frameworks (e.g. the Western European countries) employ a number of diverse stakeholders. Therefore, it is reasonable to expect a much lower variety of frameworks and managerial accounting methods in the GCC countries compared to the rest of developed economies.
The purpose of the research paper is to assess the prevalence of managerial accounting tools and methods used in the GCC countries in order to determine the preferred approach to accounting in organizations. The focus of the research is on distinguishing between the traditional approaches, such as those based on the divisional profits versus the current-generation methods such as those involving costing-based activity.
The research will be based on the survey distributed among the managerial accountants employed by various firms across the GCC countries. The questions will be focused on the use of specific tools, methods, and analytical approaches utilized by the accounting departments of the organizations. The obtained results will then be analyzed to obtain a comprehensive picture of the involved methods which would allow extrapolating the integration of the modern frameworks. The existing literature will be surveyed for the presence of similar research in a similar setting in order to substantiate the findings, locate the possible differences, and possibly identify the causes of discrepancies.
The available body of research on managerial accounting contains several similar studies pertinent to different countries. However, the research often focuses on a specific area of managerial accounting.For instance, an exploratory study by Zheng and Alver (2015) identifies the growing need for the implementation of governmental management accounting in China. At the same time, the study points to the lack of recognition of the framework within the internal economic environment, insufficient knowledge of the matter, the disparity between managerial and financial subset of accounting, and significant complexity caused by the presence of complex governmental regulations, laws, and policies (Zheng & Alver, 2015).
A study by Zheng (2012) explored the key factors undermining the efficiency of managerial accounting within Chinese small and medium enterprises. The results of the survey identified the lack of relevance of the managerial practices with the needs of the economic environment and the lack of recognition of the role of managerial accounting in organizational performance as two leading factors identified by the respondents (Zheng, 2012).
Both sources have a certain degree of relevance for the GCC setting due to the relatively similar dynamics of the economic development. A literature review by Sulaiman, Nazli Nik Ahmad, and Alwi (2004) reached similar conclusions on a range of Asian countries, including Malaysia, India, and Singapore. All of the reviewed countries showed little to no implementation of the innovative techniques and accounting frameworks, lack of recognition of managerial accounting’s importance, and strong reliance on traditional methods (Sulaiman et al., 2004). Considering certain social similarities, it is reasonable to believe that the results are at least partially applicable to GCC countries.
Research by Abdel-Kader and Luther (2006) studied the use of managerial accounting practices (MAP) in the British food and drinks industry. The findings indicated the discrepancy between the perceived importance and voiced understanding of the innovative MAPs such as balanced scorecard and their implementation in real-world scenarios (Abdel-Kader & Luther, 2006). Interestingly, the actual percentage of traditional practices employed by the companies is comparable to that in Asian countries, which further complicates the matters. The phenomenon was further investigated by Abdel-Kader and Luther (2008) and identified as dependent upon several factors, with customer power being the most underrated factor (Abdel-Kader & Luther, 2008).
Based on the located sources, the alternative MA frameworks are under-researched in the GCC countries, which is unacceptable given the growing importance of MAPs in the region as well as its value for organizational performance (Ghanbari & Vaseli, 2015). Therefore, the proposed research is expected to enhance our understanding of the issue and identify directions for improvement in the area.
References
Abdel-Kader, M., & Luther, R. (2006). Management accounting practices in the British food and drinks industry. British Food Journal, 108(5), 336-357.
Abdel-Kader, M., & Luther, R. (2008). The impact of firm characteristics on management accounting practices: A UK-based empirical analysis. The British Accounting Review, 40(1), 2-27.
Ghanbari, M, & Vaseli, S. (2015). The role of management accounting in the organization. International Research Journal of Applied and Basic Sciences, 9(11), 1912-1915.
Sulaiman, M. B., Nazli Nik Ahmad, N., & Alwi, N. (2004). Management accounting practices in selected Asian countries: A review of the literature. Managerial Auditing Journal, 19(4), 493-508.
Zheng, X. (2012). Management accounting practices in China: Current key problems and solutions. Social Research, 29(4), 91-98.
Zheng, X., & Alver, J. (2015). An exploratory study of governmental management accounting in China. Journal of Applied Management and Investments, 4(2), 102-110.
