Assessment of effectiveness of accounting information as a tool for management decision

25

Assessment of effectiveness of accounting information as a tool for management decision

CHAPTER ONE

INTRODUCTION

BACKGROUND OF STUDY

Accounting is fundamentally a measurement and communication process used to report on the activity of profit and non-profit seeking organizations. In other words, it is concerned with the discipline of summarizing, recording, analysing and interpreting economic events and other financial activities. This process is performed by accountants who furnish management with the relevant information needed for effective and efficient decision making as to contribute to the quest for means of surmounting industrial, commercial, governmental and academic problems inherent in a dynamic and volatile socio-economic and political setting. The chambers 20th century dictionary defines information as “intelligence given-knowledge”. This is because reliable information is necessary before a sound decision involving the allocation of scarce resource (land, labour and capital) can be made, that is why accounting profession is dynamic and there is always the need for an accountant to continually update his/her knowledge of accounting portfolio. Accounting information is valuable because it can be used to predict the financial consequences of each alternative course of action. An organization needs quantitative information to function or make decision. Management uses the best available information system to

 

provide management information which is used primarily to accomplish three broad purposes;

  • To provide financial statement to the interest of external users,

 

  • To plan the organization activities and operations in both short and long run, and
  • To control the result of its

 

The American Accounting Association (1966) also defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”. Another definition, which is widely accepted, is by the American Institute of Certified Public Accountants (1970) defined accounting as “the art of recording, classifying and summarizing an event which is in part at least of a financial character and interpreting the result thereof”.

The above definition place emphasis on the use of accounting information for evaluating the results of the past and present activities and making decisions concerning future actions. The information is primarily financial and generally stated in monetary terms. It is the process by which the profitability and solvency of an organization can be measured and also periodic information needed as a basis for making business decision and appropriate control that will enable the management to guide the organisation on a profitable and solvent

 

course. The accounting information is prepared and presented in form of financial statement in accordance with the accounting standard issued by the Nigerian Accounting Standard Board Act (2003) which are the means of conveying to management and interested outsiders a concise picture of the profitability and financial position of the business. The form of preparing and presenting accounting information includes the following; the profit and loss account, balance sheet, income statement etc.

Hence, accounting is divided into three (3), namely;

 

  • Financial accounting

 

  • Cost accounting, and

 

  • Management accounting

 

According to Leopold (1982), he said that, financial accounting “is concerned with providing information on the financial activities of the organization for the benefit of both internal and external users”. It is also the classification, recording of monetary transaction of an entity in accordance with establish concepts, principles, accounting standard and legal requirement and  presentation of a view of those translations during and at the end of an accounting period.

 

While cost accounting on the other hand produce information about cost that are incurred by organization in running the organization so as to achieve the objectives on which it is set up.

Finally, Calvin (1982), stated that management accounting “is concerned with providing information to management for the purpose of planning or provision of information needed at all levels”. Management and creditors use these reports internally.

Stamford (1978) stated that accounting information has played a role as “a tool for management decision making” because it function as “a historical record of contractual obligations between the outsiders with the end product in form of financial statements to report the financial status of an organization at a point in time”.

However, the relevance of accounting information to effective management decision making in many organisation is still not appreciated but with the test to be conducted in this research, the degree of accounting information as a “tool for management decision making” shall be clearly understood.

STATEMENT OF PROBLEM

Management who takes wrong decision always end up not achieving their set goals and objectives. Many managers who think that they can operate successfully without the use of information provided by their accountants, leads to economic failure such as liquidation of many banks. So, effective decision or management decision cannot be taken by managers if the information provided by their accountants is not properly adhered to. Accounting information answer questions such as;

  • Arethedisclosuresof accounting information accurate and reliable?
  • Is accounting information prepared with General Accepted Accounting Principle (GAAP)?
  • Does accounting information as a tool for decision making satisfy the management?

AIMS AND OBJECTIVES

 

The purpose of this study is on Assessment of effectiveness of accounting information as a tool for management decision.

The subsidiary objectives of this study are;

  • The basic issues of how the accounting information systems are used to perform the generally recognised financial and management function in First Bank Nigeria Limited, Abdullahi Fodio Road Branch,
  • To carefully look at the need for accounting information for management decision-making.
  • To make suggestions as to the usefulness of accounting information to the users in
  • The research seeks to know the extent to which the management of the organisation under review have used the accounting

SIGNIFICANCE OF STUDY

 

The study is aimed at establishing whether there is any correlation between the accounting information provided by the account department (accountants) and the decision made thereof by the users of the information, most importantly management of First Bank of Nigeria LimitedAbdullahi Fodio Road Branch, Sokoto.

These groups will benefit from the research namely;

 

  • The organization under study
  • Business Managers
  • Future researchers, and
  • The researcher

THE ORGANISATION UNDER STUDY

The management of the organisation (Bank) will use the research where applicable as a tool for formulating policies for the firm as a standard of

 

evaluating accounting information and control of their accounts department through financial decision.

  • BUSINESS MANAGERS

 

The work will also go a long way to educate managers on the relevance of a sound accounting information in decision-making process of their organisation and subsequently on its growth.

  • FUTURE RESEARCHERS

 

The work will serve as a source of secondary data to future researchers who intend to carry out further research work on “accounting information as a tool for management decision making” or any related topic. It will also help students in the accounting department to have in-depth knowledge of the practical application of accounting information.

  • THE RESEARCHER PERSONALLY

 

The research will enable us imbibe thorough knowledge of the uses of accounting information as a tool for management decision making. It will also give foresight on the applicability of accounting information on the Management of the Bank.

 

  • RESEARCH HYPOTHESIS

 

Abubakar (2004) said, “Hypothesis is a theoretical conceptualization or guess about how the researcher thinks the result should look like or as statement that was usually linked to the theory being treated and it was tested in a testable form to predict the relationship between two variables”.

For the purpose of this study, the following hypothesis was available for testing;

 

Ho – There is no statistically significant difference in the respondent size  among those who accept that accounting information are not tools for management decision making.

H1 – There is a statistically significant difference in the respondent size among those who accept that accounting information are tools for management decision making.

SCOPE OF STUDY

 

The research work will cover certain aspect of accounting systems operational in First Bank of Nigeria Plc (as a case study of Abdullahi Fodio Road Branch, Sokoto and types of reports prepared for decision making. The relationship that exist between accounting information and management decision making will be examined and some related literatures in the field of the study will be reviewed and incorporated.

 

The study will also be limited to the importance of each branch of accounting and the type of information they prepare, usefulness of each of the information prepared by individual segment of the branches of accounting, examples financial accounting section, management accounting section and cost accounting section.

  • LIMITATION

 

The project is limited by many factors which posed as snags or obstacles to the smooth compilation of the work. It is important that users of the work note the limitations in the course of carrying out the work. The significant problems faced include the following;

ECONOMIC TREND

 

The global economic meltdown, which apparently affected the Nigerian economy ate deep into the Banking sector of the economy destroying the shares value of all financial institutions in the Country and resulted in poor performance. This has a psychological impact on the respondents.

FINANCE

 

The economic turndown coupled with inflation has increasingly raised the cost of materials. This led to the devaluation of Naira affecting every aspect of the Nigerian economy. The impact of this on the study is enormous limiting visits to the respondents and qualitative materials for carrying the study.

 

TIME

 

Time is another limiting factor which acted as a snag to the completion of the project, though lengthy period was given for the submission of the work but considering the academic pressure coupled with the writing of the project made things not too really easy for the research.

NON-DISCLOSURE

 

There are some vital as well as important information which the Bank refused to disclose for security reasons. Incomplete and lack of availability of records, which was considered to be very useful, were referred to as confidential.

However, time and financial constraints are the most impactful limitation to the study. Finally, despite all limitations and constraints, the research contained the necessary relevant resource material and to- date data obtained, analysed and provided in the work.

  • TERMINOLOGY

 

Accounting

 

This is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

Information

 

This is a complete set of processed data that has a meaning.

 

Accounting information

 

These are processed data used by an organization to make financial decision.

 

Financial Accounting

 

It is the process of collecting, classifying, recording, summarizing and communicating data in respect of event, which can be expressed in terms of money for the purpose of making decisions.

Accountant

 

This is a professional whose job is to prepare and keep the books of account of an organization.

Management Accounting

 

This is a process of allocating resources by planning, organizing, controlling and directing for the purpose of producing desired output.

Management

 

This means a group of decision makers or managers in an organization who see to the smooth running of the affairs of the business.

Assets

 

These are the economic resources of the business that can usefully be expressed in monetary terms. Assets may be in form of land, building and equipment which have readily identifiable physical features.

Liabilities

______________________________________