PACE Academic IG

Introduction

In an article titled "Why Not a Degree in Management Accounting?” I proposed a management accounting degree program in management accounting.  Two articles followed the initial article.  The first article described a financial accounting course, and the second article described a managerial accounting course.  Both articles were written to provide a foundation for the degree program.  This article is the first in a series of articles describing how to build on the foundation.

Expansion

Tradition

In an accounting degree program, it is the tradition to have students study intermediate accounting after financial accounting and managerial accounting.  Intermediate accounting is financial accounting at a higher level.  The intermediate accounting textbooks are organized in a manner similar to financial accounting textbooks..  The chapters in intermediate accounting textbooks go deeper into topics covered in financial accounting textbooks, and chapters not covered in financial accounting are covered in intermediate accounting.  The expansion of topics is the reason why intermediate accounting is typically studied in two parts, in fact, as an undergraduate, I took three parts of intermediate accounting.

As a student and lecturer, I have found the purpose of intermediate accounting as a path to public accounting.  The path provides students with a strengthened understanding of topics covered in financial accounting and prepares students for a required course in an undergraduate accounting program, auditing.  Because of the intent to develop a management accounting program, I propose that the purpose of an intermediate accounting course be modified to prepare an aspiring management accountant for employment in private industry.  What I propose is in two parts, character and measurement.  Each part will be described next.

Character

“Accounting can offer you a lot of insight into the character of management.”

Warren Buffett

In teaching financial accounting, I tell students that the most important qualification for an accountant is integrity.  For a management accountant, integrity is extremely important.  If a management accountant cannot be trusted, the management accountant will be unable to help management make the most appropriate decision, especially in situations where the management accountant’s expertise is most needed.

Building on the management accounting foundation requires the aspiring management accountant to project good character by focusing on the issues that can have negative effects on a company’s financial health.  The issues that should not ignored include

·       Uncollectible accounts receivable

·       Obsolete inventory

·       Impaired long-term assets

·       Unrecorded liabilities

Another issue that provides insight into the character of management is the accounting methods used for various assets.  For accounts receivable, the use of the percentage of sales method, the percentage of receivables method, or both methods provides insight into the intent of a company’s management to reasonably indicate the amount of monies to be collected from customers for sales on credit.  For inventory, the choice of FIFO, LIFO, or average cost provides insight into the approach for valuing inventory on the balance sheet and reporting cost of goods sold on the income statement.  For fixed assets, the use of straight-line depreciation, units-of-activity depreciation, or accelerated depreciation provides insight into how management sees the productivity of assets like equipment over their useful lives.  Going deeper into this issue provides the aspiring management accountant with opportunities to create meaningful relationships between the management accountant’s employer and its stakeholders.

Measurement

When building a management accounting foundation, financial accounting begins by describing the financial statements and their purposes.  The course uses the financial statements as an example of measurement, e.g., net income and total assets.  In many financial accounting textbooks, sections of several chapters provide ratios to measure the performance of accounts receivable, inventory, and long-term assets.  Some textbooks I have used dedicate one chapter solely dedicated to ratios.  As the management accounting foundation is being built upon, measurement must become more involved.

The greater involvement begins with the effects on ratios from transactions.  The aspiring management accountant must be able to understand the effect on ratios from transactions to help management make the most appropriate decisions.  Here are some examples.

· The relaxing or tightening of credit terms on accounts receivable turnover and average collection period ratios

· The addition of new products on inventory turnover and average age of inventory ratios

· The sale of facilities and or equipment on fixed asset turnover ratios

· Increasing the amount of time to paying suppliers on accounts payable turnover and average payment period ratios.

· The issuance of bonds and or stocks on debt to asset, debt to equity, and return on equity ratios.

I purposely mentioned the return on equity ratio last because of my support of the DuPont System in measuring the return on equity.  For those not familiar with the system, the system uses margin, turnover, and leverage to calculate return on equity.  Margin is net income divided by net sales, turnover is net sales divided by average total assets, and leverage is average total assets divided by average total stockholders’ equity.  My support is because of an ability to breakdown each element – margin, turnover, and leverage – into smaller parts.  This ability provides an aspiring management accountant with analytical skills necessary for further education in the management accounting program as well as preparation for rewarding employment opportunities.

Margin can be broken down into operating margin ratios and gross margin ratios.  From this breakdown, management can be assisted in making more appropriate decisions that affect product creation, distribution, promotion, and or support.  Turnover can be broken down into current asset turnover and long-term asset turnover ratios.  From this breakdown, management can be assisted in making more appropriate decisions that affect cash flows, customer relationships, and expansion.  Leverage can be broken down into current and long-term ratios to assist management in decisions that affect supplier relationships as well as short-term and long-term financing.

Conclusion

Accounting programs have developed intermediate accounting courses to develop expertise in financial statements.  The expertise is most certainly appropriate for the aspiring management accountant, but the course can put greater emphasis on opportunities in public accounting.  Those who advocate for management accounting can reshape the intermediate level to put a more specific emphasis on management accounting.  What I provide in this article is not a finish but a start to this emphasis.  The emphasis, however, must be on strength by building on the management accounting foundation.