Financial Accounting Information as an aid to Management Decision Making

Financial Accounting Information as an aid to Management Decision Making

Financial Accounting: Financial accounting is concerned with the recording of transactions for a business enterprise or other economic units and the periodic preparation of various reports from such records. Financial accounting then can be said to be a systematic gathering, identifying, summarizing and reporting of business transactions in monetary terms such that it provides information which permits informed judgment by the users of such information.

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Information: These can be said to be facts needed or received by a person, or group of persons which is or will be useful to them.

Management: Management can be defined as the rational selection of courses of action to optimize the inter-relationship of a material and money for the survival and growth of the organization. It can also be regarded as the process of getting things done through people.

Decision-Making: Decision making can be defined as identifying alternatives, evaluating such alternatives and choosing from such alternatives. Decision making can be viewed as the very fabric of which organized activity is made.

INTRODUCTION

The attainment of this objective necessarily requires both the identification as well as the disclosure of an adequate amount of information considered relevant by the users.

Financial accounting information therefore, is the information derived from the financial accounting report. The essence of this information is for management and other users to make decisions. Therefore, the accuracy of decision making depends on the effective and efficient design of management information system.

The accounting concerned prepares the financial accounting information in such a way that will enable users to derive maximum information for their use.

Decision making itself can be described as the art or science of choosing among possible managerial actions. The art or science of decision making enable management of a business to choose from among a range of already analyzed and evaluated alternative.

Two classes of decision makers can be identified in respect of the use of financial accounting information. These are the external users and the internal users. Management represents and the internal users include creditors, shareholders, government agencies, trade unions e.t.c. Managers are the major users of financial accounting information need this information to plan.

The impact of financial accounting information on the management of any business cannot be overlooked, though the extent of such.

STATEMENT OF THE PROBLEM

Managers of certain businesses do not have sound accounting systems to enable them monitor operating expenses and revenues. They do not need the warnings communicated by financial accounting information. This ignorance or lack of financial accounting information, may lead to the non-effective and inefficient accomplishment of the firm’s objectives.

It is only through accounting information that managers and external users get a picture of the organization as a total entity. Managers who fail to realize this do not appreciate an accountants analysis in respect of financial accounting information generated. This may lead to poor decisions being taken and it may affect the profitability and performance of the organization.

Some organizations, due to low financial layout or lack of adequate planning or ignorance may not employ expert hands needed and this causes the effect and importance of financial accounting information on decisions taken not to be noticed or gained by the organization.

The researchers in this study will seek to show the information management can derive from financial accounting and their usefulness for decision making in business.

OBJECTIVE OF THE STUDY

The objectives of study are as follows:

  1. To ascertain of there is any relationship between effective use of financial accounting information and the decisions made in an organization.
  2. To ascertain whether company performance is related to efficient and effective use of financial accounting information.
  3. To determine factors that may constrain or promote the effective use of financial accounting information.
  4. To make recommendations which may enhance the employment of information provided by accounting system.

Impact may not be the same for every business. This study will seek to inquire into how monetary and financial information arranged in a professional accounting manner will influence managerial decision.

SIGNIFICANCE OF THE STUDY

This work would be of immense benefit to the following groups.

  1. Financial analysts.
  2. Economic researchers and students
  3. Investors and shareholders
  4. Creditors
  5. Labour unions and the general public.

The major contributions of this work are:

  1. To the management of companies as a tool for evaluating their performance and knowing whether they really take note of financial accounting information.
  2. To further examination of the use of financial accounting as an information system.
  3. To other researchers or research scholars who may wish to carryout further research on the subject matter or other related topics.
  4. It will provide insight on how business organizations rely on financial accounting information for decision making.

SCOPES AND LIMITATIONS OF STUDY

This work tends to cover the use of financial accounting information indecision making since it will be voluminous to research into financial accounting information alone.

Such decision making shall be to enhance profitability of the firm.

REVIEW OF RELATED LITERATURE

Black Homer A, et al pointed out in their work that accounting information should aid decision making. They stated that accounting information system must provide timely, relevant and reliable information to aid decision making at all levels of management in addition to meeting the needs of the outsiders.

Black Homer, A., et al are correct in what they pointed out. A good accounting information system should always provide timely, relevant, quantifiable, verifiable, unbiased and reliable information which should help the management of a business oragnisation in decision making and also help the external users in making economic or financial decisions.

According to them, there are two categories of users of accounting information.

They are

  1. The Internal users
  2. The External users

The Internal users which is the management of a business enterprise and the external users which are as follows: the shareholder or owners, creditors, investors, customer, employees and trade unions, government and credit reporting agencies.

Charles T. Horngreen and George foster in their book stated the accounting system is the major quantitative information system in almost every organization. It should provide information for the three broad purposes.

  1. Internal reporting to managers for use in planning and controlling routine operations:
  2. Internal reporting to managers, for use in making non-routine decisions and in formulating major plans and policies and
  3. External reporting to stockholders, government and other outside parties, for use in investors decisions, income tax collections and a variety of other applications. Both management and external parties share an interest in all three important purposes, but emphasis differs.

The above postulations of Charles T. Horngreen and George foster are alright because accounting could be classified according to the type of information produced. There is the financial accounting which includes the income statement or trading, profit and loss account, the balance sheet and sources and application of fund statement. The financial accounting supplies the information needed by the external users.

The income statement or trading, profit and loss account reports the results of business activities by showing the revenue, expenses and net profit or loss of a business entity at the end of the financial year. The balance sheet show the assets liabilities and owners equity of a business entity at the end of the financial year. The sources and application fund statement shows where the funds were got and how they were utilized.

In summary, it shows the inflow and outflow of funds. The external users use the above financial statements in making economic decisions and forming judgment. Also there are management accounting and cost accounting which supply information mostly used by the management of a business organization.

THE EXTERNAL USERS OF ACCOUNTING INFORMATION

Walter B. Meigs and Robert F, Meigs wrote in their book that, the basic purpose of financial statements is to assist decision makers in evaluating the financial strength, profitability and future prospects of a business entity.

This view of the two authors is acceptable. A good financial statement  of a business enterprise should enable the users to determine the profitability, viability and future prospect of the business entity.

SHARE HOLDERS/OWNERS

Alan Pizzey in his book Pin-pointed out that, the shareholders and potential shareholders are another important group of users of accounting information. This group includes the investing public at large and the stock brokers and commentators who advise them. The shareholders should be informed of the manner in which management has used their funds which have been invested in the business. They are interested in the profitability and safety of their investment, which helps them to appraise the efficiency of the management. This is simply a matter of reporting past events.

However, both shareholders and potential shareholders are also interested in the future performance of the business and use past-figures as a guide to the future if they have a vote on proposals or decide whether to disinvest. This view is commendable because the shareholders are the owners of the business. They should know how the firm is progressing and as a result of this, they are given periodic reports of the progress of the business. Which includes the financial statement including the balance sheet and trading, profit and loss account.

By studying the income statements and the balance sheets, the shareholders can evaluate the financial strength, profitability and future prospects of the firm. After studying the past and present financial statements and the shareholders find out that the firm is not making enough profit as might be obtained from alternative investments, they can take economic decision. The economic decision can be to sell or terminate the business and invest else where.

CREDITORS

The creditors interest in financial statements was pointed out by professor pandey where he wrote, creditors supply financial resources to the firm. They are interested in the continuing profitability performance of the firm, so that they may regularly receive interest and repayments of the principal sum.

They need accounting information to evaluate the firm’s performance and to determine the degree of risk to which they are exposed. What professor Pandey said is correct because the creditors also make use of the financial statements. The information extracted from the financial statements enables the creditors and potential creditors such as the bankers, bondholders and suppliers of goods and services in making decision whether to extend credit at all and the amount to extend. Thus, from the past and present financial statements of a business enterprise, the creditors and potential creditors will ascertain whether the business enterprise is a good risk with respect to the repayment of the principal and interest.

INVESTORS

According to Paul E. Fertiget et al, investors are interested in the future earnings of a business enterprise and the financial statements permit investors to appraise the performance of the firm’s management. Truly, the investors and potential investors are also interested in the financial strength, profitability and performance of a business enterprise.

They are very much interested in the income, dividend and rate of growth of the firm. After studying the past and present income statements and the balance sheets of some firms, the investors and potential investors will form judgment and take economic decision by investing in the firms that are performing well. Sometimes, they employ the services of a financial analyst to help them evaluate the firms which are profitable.

CUSTOMERS

Barry E. Cushing stated that credit customers require periodic information concerning the status of their accounts including amount owned, the discount available and the date payment is due. These routine information requirements are met by the accounting.

This paper is of the same opinion. At the end of every financial year, customers like the corporate and other big companies evaluate and judge the ability of their suppliers to continue to produce the required products or services in sufficient quantity of good quality and at reasonable prices. The customers use the financial statement from the suppliers to evaluate, judge and make decisions whether to continue to patronize the present suppliers or search for new ones. Customers like the companies and corporations will like to have steady and consistent source of supply in order not to have their operations and activities paralysed.

Small scale business organizations usually supply the raw materials needed by these big companies and corporations. Conse21uently, this underscores the need for the small scale business organizations to be preparing their financial statements so that these companies will be able to take the above mentioned business decisions.

EMPLOYEES AND TRADE UNIONS

Black Homer A, et al said that employees have important take in the finance of their companies. That they seek assurance of steady employment by a financially sound employer, and that they frequently participate in company bonus, profit sharing and pension plans.

This paper agrees with what Black Homer, A. et al said. The financial statement of a business entity provides the information needed by the employees to decide whether to bargain for a salary increase, bonuses, fringe benefits and other working conditions. The information extracted from the financial statements enables the trade unions to judge the ability of the employer to pay them any proposed salary increase or fringe benefits. Infact, the financial statements are used extensively by the trade unions in drawing conclusions and in making decisions with respect to the employer’s ability to meet the demands of the employees.

This also pin-points the need to the small business oragnisations to be preparing their financial statements because these statements are needed by their employees.

GOVERNMENT

Advancing has own views Alan pizzey observed that, government agencies also use accounting information, either where collecting statistical information to reveal trends within the economy as a whole, or, in the case of the inland revenue, as assess the profit on which the company’s tax liability is to be computer.

Truly, government agencies use the financial statements of business firms to arrive at the tax the firms are to pay. Every company and business organization is expected to submit to the tax offices their financial statement at the end of every financial statement at the end of every financial year. In addition, to financial statements, they are also to fill tax forms and return the forms to the tax offices, from the financial statements and tax returns, the tax office will evaluate the business enterprise and make appropriate decisions concerning the amount of tax each of these companies will pay.

In Nigeria, after examining the financial statements of some corporations, the federal Government or state Government can approve increase in the price of their service or products. The small business organizations in line with the above stipulations should endeavour to produce their financial statements regularly at the end of every financial year so as to enable the government agencies utilize the financial statements.

Other external users are:

Credit reporting agencies which use the information from financial statement to advise their client (the creditors) whether or not to extend credit to a company, students and research workers who are studying the financial statements connected with the various problems they are investigating.

THE INTERNAL USERS OF ACCOUNTING INFORMATION THE MANAGEMENT…………………………………….

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

                 “FINANCIAL ACCOUNTING INFORMATION AS AN AID TO MANAGEMENT DECISION MAKING

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Financial Accounting Information as an aid to Management Decision Making

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Comments

  1. Edward Gonzo says:

    What are the research questions/

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