Financial Accounting Information as an Aid to Management Decision-Making
OBJECTIVE OF THE STUDY
The objectives of study are as follows:
- To ascertain of there is any relationship between effective use of financial accounting information and the decisions made in an organization.
- To ascertain whether company performance is related to efficient and effective use of financial accounting information.
- To determine factors that may constrain or promote the effective use of financial accounting information.
- 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.
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.
- The Internal users
- 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.
- Internal reporting to managers for use in planning and controlling routine operations:
- Internal reporting to managers, for use in making non-routine decisions and in formulating major plans and policies and
- 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 USER 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.
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.
RESEARCH DESIGN AND METHODOLOGY SOURCE
I this chapter, the researchers intend to highlight the sources of data, the sample size and the method of investigation.
SOURCES OF DATA
At this National Diploma Level, students are expected to make use of secondary data. Therefore, data from secondary sources were mostly used.
SECONDARY SOURCES OF DATA
These were drawn from already existing literature and related books on the subject matter of the study. Secondary data constituted a stepping stone for the researchers in this work.
Essential information was collected from
- State Central Library, Enugu.
- National Library, Enugu
- Institute of Management and Technology Library, Enugu
- University of Nigeria, Enugu Campus Library.
LOCATION OF DATA
On collection of all the pertinent data, the researchers extracted facts relevant to the study. These data were arranged organized according to the requirements of the study.
The summarized analysed and interpreted data served as a basis for the researchers findings, conclusions and recommendation.
In this chapter, a summary of findings have been made.
SUMMARY OF FINDINGS
The research finding are based on the information derived from the literature review and also from the results of the Ratio Analysis.
Careful study of the analysis carried out in respect of ratio analysis, shows that financial ratios calculated have different objectives which they try to satisfy and careful study of these ratios gives one an idea of the financial status of an organization or business entity and whether there is an improvement or decline in its liquidity efficiency, leverage and profitability positions.
The ratio analysis also helps management to know when the company is performing poorly or well. The liquidity and leverage ratios help to indicate whether a company is in its danger period or in its good periods.
Also, from the literature review, management does not use financial accounting information as the only means of decision making. It can be referred to as one of the guides or tools for management in making or taking decisions.
RECOMMENDATIONS AND CONCLUSION
The analysis of the research, the researchers think it is only necessary to recommend solutions to areas which are deficient in organizations.
Business organization as well as production or manufacturing companies, use different raw materials for their operations. The method of costing of the materials used should consistent and simple. The organization should choose methods that most clearly reflect their periodic income. Thus in an inflationary economy like ours, “the market price” method should be used rather than first-in-first out (FIFO) last-In-first-out (L.I.F.O) or weighted Average method.
The effect of financial accounting on the management of a business is significant and therefore.
- Management should aim at profit optimization in order to keep the business going and also to have a reasonable return on investment of stock holders
- Management should assess the performance of each unit of its business in the light of budgeted plans so that performance will be improved.
- Management should accept constructive criticisms from the external users of financial accounting information in order to correct any mistake in the past.
- Management should do everything within the limit of legal provisions to reduce the amount of tax which the business has to pay to the government. Management should try to avoid taxation instead of evading it.
Other users of financial accounting information should know their decision making have effect on the management.
- External users of accounting information should know that financial statement are prepared certain assumptions and for a wide range users. Therefore, complete reliance on this information will give them a distorted and unbalanced judgment. External users should not expect to maximize profit but they are expected to optimize it.
- The poor performance of management at anytime should not be totally blamed on the inability of the management to perform well but should be checked to find out whether there are certain external forces which contribute to this.
Qualified personnel should be employed by employers or managers to oversee designated acee uniting positions and where they cannot employ qualified staff due to increased cost of operation the managers could embark on training of available staff on courses in accounting so as to aquanaut them with the necessary knowledge which they are lacking and which they need for efficient and effective performance.
Accountants of organization should be encouraged to make thorough analysis of financial statements in order to establish the strength and weakness of the company periodically.
Finally, all hands should be on desk for the success of any business, no matter how small or big. External users of financial accounting information, instead of taking rash decisions against a business, should advise the management on what to do. Management on the other should keep a strict eye on the performance of each department as well as each subordinate.
Accounting information is found to be indispensable to organsation. Timely, relevant, concise and clear accounting information enables management at all level to take planning and control decisions concerning current and future operations various relevant literatures on accounting information were surveyed and their usefulness in decision making stated.
It is the researches belief that this study has achieved its pre-determined objectives by carefully identifying the various way by which the financial accounting information can be used in decision making.
Recommendation have been made with the hope that if implemented, they will help in efficient management.
Finally, the various analytical tools employed were to help the outsiders as well as management of the company understand the effects of financial accounting information and that where there is good analysis and interpretation, it will lead to sound decisions being made and the positive impact on business organization cannot be over emphasized.
- ANTHONY, R.N. AND REECE, J.S. MANAGEMENT Accounting principle,s Homewood, Richard D. Iropn. Inc. 1975
- BIEERMAN, H. JR. AND DRESIN, A.R: Financial Accounting: An Introduction, Ed.2, New York, Mac Millian Publishing Co, Ince. 1972.
- BLACK, HOMER A. CHAMPION, J.E, AND MILLER
- U. Accounting in Business decision New Jersey prentice-Hail, Inc, Englewood cliffs, Ed.3,1973.
- HORNGREED, C.I. Cost Accounting: A Manager .Emphasis, New Jersey prentice Hall Inc, Ed.2, 1978.