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Start a business: Create annual budget

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You are thinking of starting your own business. You have some very innovative ideas about a new kind of manufactured product, but you are not sure if your business and financial savvy is adequate to launch your business alone. You know that successful start-ups require not only great innovative ideas but also a keen business sense and an understanding of the numbers.

You think that your idea is financially feasible but need another set of accounting eyes. Therefore, you hired a chief financial officer (CFO) to assist you. She has the basic financial managerial skills needed to finance the business itself and develop banking relationships, but she has only rudimentary skills in profit planning, cost accounting, budgeting, and variance analysis.

Over the coming weeks, you and the CFO will be able to answer the following critical questions:
Can this new business be a financial success?
How sensitive will the profits be to business volume and other variables in the business (some which you can control and some that are not controllable)?
How should the financial statements be prepared?
What kind of internal accounting system should be set up?

Because your newly hired CFO is accustomed to primarily a financial management role, you want to make sure she understands how managerial accounting differs from cost accounting. Write an e-mail to her that includes the following:
At least 4 critical differences between financial accounting and managerial accounting.

Because she will be responsible for the annual budget, explain to her each of the following:
The importance of an annual budget;
The process used to create the annual budget.

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Solution Preview

Dear CFO,

There are many differences between a financial and managerial accountant but here are some critical differences:

1. The managerial accountant uses and shares a much wider data set. That is, the financial accountant prepares and communicates the financial statements according to a particular reporting framework (GAAP or IFRS for example). The managerial accountant collects and analyzes more than just the transaction dollar amounts summarized and reported as financial statements. The managerial accountant studies activity such as pounds used or units produced to give ...

Solution Summary

Your discussion is 336 words and indicates 4 major differences and two paragraphs about budgeting.

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c. Discuss the role of the budget as an analytic tool that can be used to evaluate organizational performance.

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g. Describe how the budget can be used in the performance accountability and reward process.

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