PACE Academic IG

Introduction

In an article titled "Why Not a Degree in Management Accounting?” I proposed a degree program in management accounting.  The reasoning behind this proposal as well as the organization of the program is in the article.  What I would like to describe in this article is the first of two parts associated with the two introductory courses in the program.  Like traditional accounting programs, the first course, which will be described in this article, is financial accounting.  Unlike traditional accounting programs, a different perspective on the course will be shared for the purpose of building a foundation in management accounting.

Foundation

Yesterday

Over the years, the foundation I built in teaching financial accounting was to describe accounting as a language, a system of communication.  Describing accounting as a language is not unusual because Warren Buffett has described accounting as “the language of business.”  I divided the definition into two sections for students to take from the course: Writing the story and reading the story.

The writing of the story began with the accounting equation, assets are equal to liabilities plus stockholders’ equity.  The accounting equation was used to introduce students to how the story is written for companies, and that is with journal entries.  I described journal entries as sentences in a book, and the book is the financial statements.

The financial statements were described as a book containing four chapters.  The four chapters are the four financial statements typically taught in financial accounting: Income statement, statement of stockholders’ equity, balance sheet, and statement of cash flows.  The income statement, chapter 1, describes how a company delivers its products or provides it services.  The statement of stockholders’ equity, chapter 2, describes the relationship between a company and its owners, i.e., stockholders.  The balance sheet, chapter 3, describes how a company received its resources.  The statement of cash flows, chapter 4, describes how a company receives and spends cash.

Reading the story was taught through financial statement analysis.  Horizontal analysis, or trend analysis, was taught to read how a company’s financial health – profitability, liquidity, and solvency – was changing.  Vertical analysis, or common size, was taught to see the income statement and balance sheet through percentages instead of dollars to identify changes in a company’s financial health or decision-making, something to be discussed in detail at a later date.  Ratio analysis was taught to read how financial health was affected by the relationships that companies have with their stakeholders, most notably, customers and suppliers.  The approach was an introduction to what students had in their future from the perspectives of education and employment.

I use the term “yesterday” to describe my approach to financial accounting because I am going to make changes to my approach, which I label “today.”

Today

Today, I will use what I did yesterday to some extent, but I have decided to change the narrative.  The narrative is centered on my definition of accounting, the study of transactions.  Transactions, therefore, are what I emphasize in teaching financial accounting.

I define transactions as the exchange or use of capital.  Whether it is financial capital, human capital, intangible capital, or physical capital, companies exchange or use capital to raise money, acquire assets, or earn income.  I have talked about this yesterday, and I am excited about taking this to a higher level.

Reaching the higher level begins with an understanding that all functions, not just accounting, are involved in transactions.  Production exchanges or uses capital to create what companies sell, selling exchanges or uses capital to distribute and promote what companies sell, administration exchanges or uses capital to support what companies.  For the aspiring management accountant, learning about transactions throughout a company prepares the student for one’s future.

To continue advancing to a higher level, the study of transactions can be connected to other studies.  Transactions can be connected to the study of wealth, finance.  Transactions can be connected to the study of effort, management.  Transactions can be connected to the study of persuasion, marketing.  Connecting the study of transactions to other studies can help the aspiring management accounting see how transactions affect other majors in business schools that can lead to an education that creates more opportunities for advancement in private industry.

The next level is building a bridge to analytics, and I use as my bridge a course that I have taught called data applications in business (DAB).  DAB comprises computer science, data analytics, and statistics, topics that can help an aspiring management accountant be better prepared for tomorrow.  Of course, we do not know for certain what tomorrow will bring, but the topics of DAB represent a reality that technology, computer science, converting observations into facts, data analytics, and the study of data, statistics, will continue to be a significant part of the ultimate role of a management accountant, helping others make decisions that improve the well-being of a company and its stakeholders.

Perhaps the highest level is perspective.  Chapter 1 in every financial accounting textbook I have used emphasizes the relationship between financial accounting and people outside of a company, i.e., creditors and investors.  This relationship can be kept, however, I propose an inside-outside approach.  This approach focuses on how financial accounting can help management make more appropriate decisions that strengthen the company from the inside in order to inspire confidence from people outside of the company.  Strengthening the company, through financial accounting, can come from improvements in how companies deliver their products or provide their services, from acquiring resources, assets, that support customer value proposition strategies, and validating strategies through robust net cash inflows.

That leads us to tomorrow.

Tomorrow

As I wrote, we do not know what tomorrow will bring, but I am reminded of a quote from a gentlemen who is recognized as the father of modern management, Peter Drucker: “The best way to predict the future is create it.”

Creating the future is a major part of building a management accounting foundation.  The foundation can be built with many substances.  One substance is the application of AI, another substance is the development of critical thinking, another substance is the interaction with professionals outside of the accounting function.  The substances may be endless.  The priority is to help the aspiring management accountant become one who can improve the well-being of others, i.e., become leaders.  Uncertainty about tomorrow creates obstacles, but uncertainty also creates opportunities.  Building a management accounting foundation, therefore, must help the aspiring management minimize the obstacles and maximize the opportunities.

Conclusion

In building any foundation, the foundation must adapt to change.  I have mentioned in this article that we do not know for certain what tomorrow will bring.  What I hope for anyone interested in an accounting career is an exciting alternative to public accounting exists, and the alternative is a career in private industry.  History has taught us that companies like Ford, Walmart, and Apple have had a tremendous influence on our lives.  It is safe to say that other companies will have a tremendous influence on our lives, an influence that management accounting can affect, an effect beginning with people in higher education who can build a management accounting foundation.