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«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

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The aim of critical management accounting is to promote a greater level of self-awareness in management accountants and so develop an improved form of management accounting that is more insightful as to its consequences (Roslender, 1995). Readers should also be aware of the concern expressed by Power (1991), who decried traditional accounting education and ‘the institutionalization of a form of discourse in which critical and reflective practices are regarded as ‘‘waffle’’ ’ (p. 350).

An advantage in understanding interpretive and critical alternatives to the rational economic one is what Covaleski et al. (1996) called ‘paradigmatic pluralism... alternative ways of understanding the multiple roles played by management accounting in organizations and society’ (p. 24). The full text of the Covaleski et al.

paper is included as one of the readings in this book.

References Allaire, Y. and Firsirotu, M. E. (1984). Theories of organizational culture. Organization Studies, 5(3), 193–226.

Boland, J. R. J. and Pondy, L. R. (1983). Accounting in organizations: A union of natural and rational perspectives. Accounting, Organizations and Society, 8(2/3), 223–34.

Bourne, M., Mills, J., Wilcox, M., Neely, A. and Platts, K. (2000). Designing, implementing and updating performance measurement systems. International Journal of Operations and Production Management, 20(7), 754–71.

Broadbent, J. and Laughlin, R. (1997). Developing empirical research: An example informed by a Habermasian approach. Accounting, Auditing and Accountability Journal, 10(5), 622–48.

Burrell, G. and Morgan, G. (1979). Sociological Paradigms and Organizational Analysis. London:


Child, J. (1972). Organizational structure, environment and performance: The role of strategic choice. Sociology, 6, 1–22.

Chua, W. F. (1986). Radical developments in accounting thought. Accounting Review, LXI(4), 601–32.

Chua, W. F. (1988). Interpretive sociology and management accounting research – A critical review. Accounting, Auditing and Accountability Journal, 1(2), 59–79.

Cooper, D. J., Hayes, D. and Wolf, F. (1981). Accounting in organized anarchies: Understanding and designing accounting systems in ambiguous situations. Accounting, Organizations and Society, 6(3), 175–91.

Covaleski, M. A., Dirsmith, M. W. and Samuel, S. (1996). Managerial accounting research:

The contributions of organizational and sociological theories. Journal of Management Accounting Research, 8, 1–35.

Deal, T. E. and Kennedy, A. A. (1982). Corporate Cultures. Reading, MA: Addison-Wesley.

Emmanuel, C., Otley, D. and Merchant, K. (1990). Accounting for Management Control. (2nd edn). London: Chapman & Hall.

Giddens, A. (1976). New Rules of Sociological Method: A Positive Critique of Interpretative Sociologies. London: Hutchinson.

Handy, C. (1978). Understanding Organizations. Harmondsworth: Penguin.

Hofstede, G. (1981). Management control of public and not-for-profit activities. Accounting, Organizations and Society, 6(3), 193–211.

Hopper, T. and Powell, A. (1985). Making sense of research into the organizational and social aspects of management accounting: A review of its underlying assumptions.

Journal of Management Studies, 22(5), 429–65.


Hopper, T., Otley, D. and Scapens, B. (2001). British management accounting research:

Whence and whither: Opinions and recollections. British Accounting Review (33), 263–91.

Hopper, T., Storey, J. and Willmott, H. (1987). Accounting for accounting: Towards the development of a dialectical view. Accounting, Organizations and Society, 12(5), 437–56.

Hopwood, A. G. (1983). On trying to study accounting in the contexts in which it operates.

Accounting, Organizations and Society, 8(2/3), 287–305.

Hopwood, A. G. (1987). The archaeology of accounting systems. Accounting, Organizations and Society, 12(3), 207–34.

Langfield-Smith, K. (1995). Organizational culture and control. In A. J. Berry, J. Broadbent and D. Otley (eds), Management Control: Theories, Issues and Practices, London: Macmillan.

Laughlin, R. (1999). Critical accounting: Nature, progress and prognosis. Accounting, Auditing and Accountability Journal, 12(1), 73–8.

Macintosh, N. B. (1994). Management Accounting and Control Systems: An Organizational and Behavioral Approach. Chichester: John Wiley & Sons.

March, J. G. and Olsen, J. P. (1976). Ambiguity and Choice in Organizations. Bergen: Universitetsforiagen.

Markus, M. L. and Pfeffer, J. (1983). Power and the design and implementation of accounting and control systems. Accounting, Organizations and Society, 8(2/3), 205–18.

Miller, P. and O’Leary, T. (1987). Accounting and the construction of the governable person.

Accounting, Organizations and Society, 12(3), 235–65.

Morgan, G. (1986). Images of Organization. Newbury Park, CA: Sage Publications.

Neimark, M. and Tinker, T. (1986). The social construction of management control systems.

Accounting, Organizations and Society, 11(4/5), 369–95.

Otley, D. T. and Berry, A. J. (1980). Control, organization and accounting. Accounting, Organizations and Society, 5(2), 231–44.

Otley, D. T., Berry, A. J. and Broadbent, J. (1995). Research in management control: An overview of its development. British Journal of Management, 6, Special Issue, S31–S44.

Ouchi, W. G. (1977). The relationship between organizational structure and organizational control. Administrative Science Quarterly, 22, 95–113.

Ouchi, W. G. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 25(9), 833–48.

Perrow, C. (1991). A society of organizations. Theory and Society, 20(6), 725–62.

Pfeffer, J. (1992). Managing with Power: Politics and Influence in Organizations. Boston, MA:

Harvard Business School Press.

Power, M. K. (1991). Educating accountants: Towards a critical ethnography. Accounting, Organizations and Society, 16(4), 333–53.

Preston, A. (1995). Budgeting, creativity and culture. In D. Ashton, T. Hopper and R. W.

Scapens (eds), Issues in Management Accounting (2nd edn), London: Prentice Hall.

Roslender, R. (1995). Critical management accounting. In D. Ashton, T. Hopper and R. W.

Scapens (eds), Issues in Management Accounting (2nd edn), London: Prentice Hall.

Schein, E. H. (1988/1968). Organizational socialization and the profession of management.

Sloan Management Review, Fall, 53–65.

Scott, W. R. (1998). Organizations: Rational, Natural, and Open Systems. (4th edn). Upper Saddle River, NJ: Prentice Hall International, Inc.

Smircich, L. (1983). Concepts of culture and organizational analysis. Administrative Science Quarterly, 28, 339–58.

Thompson, J. (1967). Organizations in Action: Social Science Bases of Administrative Theory.

New York, NY: McGraw-Hill.

Waggoner, D. B., Neely, A. D. and Kennerley, M. P. (1999). The forces that shape organizational performance measurement systems: an interdisciplinary review. International Journal of Production Economics, 60–91, 53–60.

Constructing Financial Statementsand the Framework of Accounting

This chapter introduces each of the principal financial statements, beginning with the Profit and Loss account and Balance Sheet. It begins with an overview of the regulations governing financial statements and describes the matching principle, which emphasizes prepayments, accruals and provisions such as depreciation. The chapter then describes the Cash Flow statement and the management of working capital. It concludes with an introduction to agency theory.

Financial accounting

Accounting provides an account – an explanation or report in financial terms – about the transactions of an organization. Accounting enables managers to satisfy the stakeholders in the organization (owners, government, financiers, suppliers, customers, employees etc.) that they have acted in the best interests of stakeholders rather than themselves.

These explanations are provided to stakeholders through financial statements or reports, often referred to as the company’s ‘accounts’. The main financial reports are the Profit and Loss account, the Balance Sheet and the Cash Flow statement.

The first two of these were introduced briefly in Chapter 3.

The presentation of financial reports must comply with Schedule 4 to the Companies Act, 1985, which prescribes the form and content of accounts. Section 226 of the Act requires the financial reports to represent a ‘true and fair view’ of the state of affairs of the company and its profits. The Companies Act requires directors to state whether the accounts have been prepared in accordance with accounting standards and to explain any significant departures from those standards. For companies listed on the Stock Exchange, there are additional rules contained in the Listing Requirements, commonly known as the Yellow Book, which requires the disclosure of additional information.

There is a legal requirement for the financial statements of companies (other than very small ones) to be audited. Auditors are professionally qualified accountants who have to conduct an audit – an independent examination of the financial statements – and form an opinion as to whether the financial statements form a true and fair view and have been prepared in accordance with the Companies Act.


Although the requirement for a true and fair view is subjective and has never been tested at law, it takes precedence over accounting standards.

Accounting standards are principles to which accounting reports should conform. They are aimed at:

ž achieving comparability between companies, through reducing the variety of accounting practice;

ž providing full disclosure of material (i.e. significant) factors through the judgements made by the preparers of those financial reports; and ž ensuring that the information provided is meaningful for the users of financial reports.

However, a criticism of the standards is that they are set by the preparers (professional accountants) rather than the users (shareholders and financiers) of financial reports.

Financial Reporting Standards (FRSs) are issued by the Accounting Standards Board (ASB) and Statements of Standard Accounting Practice (SSAPs) were issued by the Accounting Standards Committee, which preceded the ASB. FRSs and SSAPs govern many aspects of the presentation of financial statements and the disclosure of information (for a detailed coverage, see Blake, 1997). Examples of

commonly applied standards include:

SSAP9 Stocks SSAP13 Research and Development SSAP21 Leases FRS10 Goodwill FRS12 Provisions FRS15 Fixed Assets and Depreciation A Financial Reporting Review Panel has the power to seek revision of a company’s accounts where those accounts do not comply with the standards and if necessary to seek a court order to ensure compliance.

Interestingly, the US equivalent of the true and fair view is for financial statements to be presented fairly and in accordance with Generally Accepted Accounting Principles (or GAAP). There is a move towards the harmonization of accounting standards between countries through the work of the International Accounting Standards Board (IASB). This has been a consequence of the globalization of capital markets, with the consequent need for accounting rules that can be understood by international investors. The dominance of multinational corporations and the desire of companies to be listed on several stock exchanges have led to the need to rationalize different reporting practices in different countries.

In Europe, all listed companies of member states of the European Union have to comply with IASB standards by 2005.


Reporting profitability

–  –  –

However, business profitability is determined by the matching principle – matching income earned with the expenses incurred in earning that income. Income is the value of sales of goods or services produced by the business. Expenses are all the costs incurred in buying, making or providing those goods or services and all the marketing and selling, production, logistics, human resource, IT, financing, administration and management costs involved in operating the business.

The profit (or loss) of a business for a financial period is reported in a Profit and Loss account. This will typically appear as in Table 6.1.

The turnover is the business income or sales of goods and services. The cost of

sales is either:

ž the cost of providing a service; or ž the cost of buying goods sold by a retailer; or ž the cost of raw materials and production costs for a product manufacturer.

However, not all the goods bought by a retailer or used in production will have been sold in the same period as the sales are made. The matching principle requires that the business adjusts for increases or decreases in inventory – the stock of goods bought or produced for resale but not yet sold. Therefore, the cost of sales in the accounts is more properly described as the cost of goods sold, not the cost of goods produced. Because the production and sale of services are simultaneous, the cost of services produced always equals the cost of services sold (there is no such thing as an inventory of services). The treatment of inventory is covered in more detail in Chapter 11. The distinction between cost of sales and expenses leads to two types of profit being reported: gross profit and operating profit.

Gross profit is the difference between the selling price and the purchase (or production) cost of the goods or services sold. Using a simple example, a retailer selling baked beans may buy each tin for 5p and sell it for 9p. The gross profit is 4p per tin.

gross profit = sales − cost of sales

–  –  –

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