Why go into this argument?

In our High Impact Online Program Financial Decision Making for Managers, you’re going to see concepts from both the disciplines of Accounting and Corporate Finance. Shouldn’t you want to keep straight what comes from what? While in a traditional business school setting, finance and accounting get taught in separate subjects, they both play vital roles in understanding how companies make decisions and continue operating.

Accounting

Investopedia, one of the best sources for information related to accounting and finance, defines accounting as “…the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies and tax collection entities.”

Did we mention that there are many types of accounting?

But don’t worry, here’s how to break it down.

Financial Accounting: For people outside the company

Financial Accounting, according to our friends at Investopedia “…is the process of recording, summarizing and reporting the myriad of transactions resulting from business operations over a period of time.” Financial Accounting concepts covered in Financial Decision Making for Managers include balance sheets, cash flow statements, and income statements.

As the headline explicitly mentions, the purpose of financial accounting is for people outside the company. And the rules of this accounting depends on the requirements where the business operates, better known as the regulatory and reporting requirements. This is especially important for public companies, which are companies listed on the stock market. Every country has its requirements for how public companies need to report this information. Using standards keeps the info the same for all parties (whether it be creditors, regulators, tax authorities in a respective country and, of course, the investors buying stocks on the open exchange) that need to look at that information.

In the United States, public companies must report using a system called GAAP (Generally Accepted Accounting Principles), while international public countries use IFRS (International Financial Reporting Standards). While you won’t carefully examine the difference between these standards in the course, this could account for differences you might see in how Apple reports its numbers compared to Mercadona. This is because Spanish public corporations are required to use IFRS standards while US public companies must file with the US Securities and Exchange Commission (SEC) using GAAP standards, while a new set of GAAP standards will come into effect at the beginning of 2018.  

The last difference to look at is between accrual accounting and cash accounting. While cash accounting only reports transactions when real cash gets exchanged, accrual accounting has the accountants record a transaction when it happens, and both parties recognize that revenue comes in (even if it means that the cash won’t come until much later). People can choose to use just one, or even a combination of the other.

Managerial Accounting

This type of accounting “…is the process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization’s goals.” You may sometimes hear this discipline also be called cost accounting. In this area of accounting, your focus is squarely on using “…information relating to the costs of products or services purchased by the company.” Budgets are also instrumental in cost accounting because management accounting prepares performance reports to highlight deviations between real results and the previously developed budgets. Some of the other factors examined in this discipline include the prices set for goods and services, forecasting, constraint analysis, and marginal analysis.

Finance

First things first, there are three categories of finance that typically get mentioned: public finance, personal finance, and corporate finance. For Embedding Finance in Everyday Decision Making, we want to focus on corporate finance.

Corporate Finance

As the name implies, corporate finance is all about the financial activities related to running a company. What does this mean? According to our friends at Investopedia, “[c]orporate finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies.”

What’s part of this umbrella?

First, you have capital investments, which are critical. Deciding which capital investments your company will make happens “[t]hrough capital budgeting, a company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.”

Then there’s also capital financing. To make capital investments, you need funding. There are two ways to make it happen: debt or equity. That, in fact, is the spirit of capital financing. “Capital financing is a balancing act in terms of deciding on the relative amounts or weights between debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, capital financing must provide the capital needed to implement capital investments.”

The other feature of corporate finance is the idea of short-term liquidity, with the underlying objective being that you have enough of it to keep operating. What does this mean? Investopedia states that “[s]hort-term financial management concerns exclusively current assets and current liabilities, or working capital and operating cash flows. A company must be able to meet all its current liability obligations when due.”

What are corporate finance concepts covered in Embedding Finance in Everyday Decision Making?

They include WACC (weighted average cost of capital), net present value, and CAPM (the Capital Asset Pricing Model).

The moral of the story?

To make the right decisions, you must use both accounting and corporate finance concepts to meet your operating goals while remaining financially sound.

How can I join in on the action?

If you’re eager for more things finance, click here to download your copy of our informational brochure. If you’re already set to embed financial knowledge with us, go ahead and get started on your application right now.