Which of the following is true regarding the comparison of managerial to financial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a future focus.
c. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is
timeliness.
d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while
financial accounting must follow them.
The correct answer and explanation is :
Correct Answer: d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.
Explanation:
Managerial and financial accounting serve different purposes within an organization, and this distinction influences the rules, format, and focus of each type of accounting.
Managerial accounting is primarily concerned with providing information to internal users — such as managers and employees — to assist in decision-making, planning, and controlling operations. Because it is used internally, managerial accounting is not required to adhere to external standards like Generally Accepted Accounting Principles (GAAP). This flexibility allows managerial accountants to present data in the most useful way for internal decision-making, using projections, estimates, and various formats depending on the managerial need. For example, a manager might require a forecasted income statement or a cost-benefit analysis, which wouldn’t conform to GAAP standards but would still be extremely valuable for internal planning.
Financial accounting, in contrast, is focused on providing financial information to external users — such as investors, creditors, and regulatory agencies. Because these stakeholders rely on consistent and comparable financial information, financial accounting must follow GAAP (or International Financial Reporting Standards in some countries). This ensures that financial statements — including the balance sheet, income statement, and cash flow statement — are prepared using consistent methods and assumptions, making them reliable and understandable to external parties.
Now, regarding the other options:
- a. Managerial accounting is often less precise than financial accounting because it may rely on estimates or projections.
- b. Financial accounting is backward-looking (past performance), whereas managerial accounting often looks to the future (forecasts, budgets).
- c. Managerial accounting emphasizes relevance (not timeliness), while financial accounting emphasizes reliability and compliance with standards.
Therefore, option (d) correctly highlights a fundamental difference: only financial accounting must follow GAAP.