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How to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John A. Tracy

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18
PROFIT ANALYSIS FOR
BUSINESS MANAGERS
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140 Profi t analysis for business managers
Unless you happened to start reading this book with this chapter,
you know that the previous chapters focus on the external fi nan-
cial statements reported by businesses. As you probably know,
accounting involves more than preparing a company s external
nancial statements, although this is certainly one of its main
functions.
Every business must install an accounting system , which
includes forms, procedures, records, reports, computer hardware
and software, and personnel, to keep the day - to - day operations
of a business running smoothly and to prevent delays and stop-
pages. Every accounting system needs strong internal controls to
deter and detect errors and potential fraud. Fraud and various
other types of dishonesty can plague any business.
Perhaps I needn t remind you, but many different tax returns
have to be fi led on time by every business for income taxes,
property taxes, sales taxes, and payroll taxes. Accountants
are in charge of tax compliance in a business. Accountants are
the tax experts because tax laws are written in the language of
accounting.
Designing accounting systems, complying with tax laws, and
preparing external fi nancial reports are three bedrock account-
ing functions of every business. And the accounting staff in a
business has another very important function providing infor-
mation to its managers for their decision making, planning, and
control. This fourth function of accounting is called management
accounting or managerial accounting (which I prefer).
Managerial accounting is an internal function, which is carried
out inside a business to help its managers make sound decisions,
develop plans and budgets, and exercise control. In short, the
purpose of managerial accounting is to help managers be good
managers. Managerial accounting, more than anything else,
involves providing useful information to managers and helping
them use this information in the most effective manner.
The design of internal accounting reports to managers is very
dependent on the nature of the business and how the business is
organized. Suppose a business is divided into sales territories, for
example; accounting reports are needed for each sales territory.
Each sales territory may be divided into major product lines; so,
the accounting reports separate each product line in each terri-
tory. In short, management accounting follows the organizational
structure of a business.
External fi nancial statements are designed for the outside,
nonmanagement investors and lenders of the business. The
external accounting reports of a business do not contain all
the fi nancial information its managers need. Managers should
understand their company s external fi nancial statements like the
backs of their hands. But they need additional accounting reports
that provide more information, much of which is confi dential
and is not released outside the confi nes of the business.
Accountants present a great deal more information about
expenses in internal income statements (profi t reports) to man-
agers. Managers need this detailed information for controlling
First, a Word about Managerial Accounting
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