THE EFFECT OF HISTORICAL COST ACCOUNTING ON THE REPORTED PROFIT OF A COMPANY AN EVALUATION OF CURRENT COST ACCOUNTING AS AN ALTERNATIVE REPORTING METHOD

CHAPTER ONE

INTRODUCTION

  • BACKGROUND TO THE STUDY:

 

Working capital refers to the organisation’s investment in short term assets and it is important to the financial health of businesses of all sizes (Padachi, 2006). This importance is hinged on many reasons, first, the amounts invested in working capital are often so high in proportion to the total assets employed and it is vital that these amounts are used in an efficient way. Second, the management of working capital directly affects the liquidity and profitability of the corporate organization and consequently its net worth. Working capital management therefore, aims at maintaining a balance between liquidity and profitability while conducting the day-to-day operations of a business concern (Smith, 1980).

Working capital is of utmost importance in any organization. Management of working capital is one of the most important functions of corporate management.  Every organisation whether profit oriented or not, irrespective of its size and nature of business, needs requisite amount of working capital to be maintained at any point in time. The capital to keep an entity moving on day-to-day operation of the business is working capital. The efficient working capital management is the most crucial factor ensuring survival, liquidity, solvency and profitability of the concerned business organisation (Jose, Lancaster and Stevens,1996). An organisation needs sufficient cash to carry out purchase of raw materials, payment of day-to-day operational expenses including salaries, wages, repairs and maintenance expenses and others. Funds to meet these expenses are collectively known as working capital.

In simplicity, working capital refers to that portion of total fund, which finances the day-today working expenses during the operating cycle of a business. Working capital is necessary in the day to day running of the business and this includes inventories, debtors, short term marketable securities, cash at bank, cash on hand, short term loans and advances, payment of advance tax and all current assets and current liabilities. A business organisation should determine the exact requirement of working capital and maintain the same evenly throughout the operating cycle. It is worth mentioning that a firm should have neither excess nor inadequate working capital as both phenomena of over capitalisation and under capitalisation of working capital generates adverse effects on the profitability and liquidity of the concerned companies. The effective working capital necessitates careful handling of current assets as to ensure liquidity and solvency of the business (Harris, 2005).

 

The ultimate objective of any firm is to maximize the profit (Deloof, 2003). However, preserving liquidity of the company to a minimal level is also an important objective for organisational survival (Smith, 1980). Thus, the problem is that increasing profits at the cost of liquidity can bring serious problems to the company. Therefore, there must be a trade off between these two objectives of the company (Eljelly, 2004). The debtors collection period should be reduced while the creditors payment period should be increased. One objective should not be at the cost of the other because both have their importance for corporate survival. If organisations do not care about profit, they cannot survive for a longer period. On the other hand, if they do not care about liquidity, they may face the problem of insolvency or bankruptcy which may finally lead to liquidation. Thus, to achieve the above corporate objectives, there is need for proper consideration of working capital management and ultimately its effect on corporate profitability (Egbide, Enyi and Uremadu, 2012). Hence, this study examines working capital management and corporate profitability, analysis of Nigerian firms.

 

1.2       STATEMENT OF RESEARCH PROBLEM

One of the serious problems faced by a good number of companies is poor working capital management (Smith, 1980). A large number of business failures in the past had been blamed on the inability of financial managers to plan and control the working capital of their respective organizations (Egbide et al, 2012). These reported inadequacies among financial managers are still manifesting today in many organizations in the form of high bad debts, high inventory cost, etc. which adversely affect their operating performance. Also, increasing of profits at the cost of liquidity might cause serious trouble to the firm and this might lead to financial insolvency. Moreover, insufficient liquidity might damage the firm’s goodwill, deteriorate firm’s credit standings and might lead to forced liquidation of company’s assets (Charterjee, 2012). In view of the above problems, this study will consider working capital management and corporate profitability, analysis of Nigerian firms.

 

 

 

  • OBJECTIVES OF THE STUDY

The main objective of the study is

  • To assess the impact of working capital management on corporate profitability in Nigerian companies.

The specific objectives are,

  • To examine the impact of working capital management on liquidity in Nigerian companies.
  • To establish the effects of liquidity on corporate profitability of firms in Nigeria.
  • To ascertain a relationship between corporate profitability and debt of firms in Nigeria.

 

  • RESEARCH QUESTIONS

 

  • To what extent does working capital management affect corporate profitability?
  • To what extent does working capital management affect liquidity of business organizations?
  • What is the relationship between liquidity and corporate profitability?
  • How is profitability related to debt?

 

  • HYPOTHESES OF THE STUDY

To solve the problems stated above, the following hypotheses were formulated:

(H1)   Efficient management of working capital has a positive

impact on corporate profitability.

(H2)   Liquidity is affected by poor management of working

capital in corporate organisations.

(H3)  There is a relationship between liquidity and corporate

profitability.

(H4)   Efficient management of debt by organization has a

positive effect on corporate profitability.

 

 

  • SIGNIFICANCE OF THE STUDY

This study will be of relevance to;

  1. Corporate Organizations and their Management:

To corporate organizations in general, it will expose the relationship existing between our relevant variables (Inventory Conversion Period, Debtors Collection Period, Creditors Payment Period, Cash Conversion Cycle, Current Ratio, Quick Ratio, Debt Ratio and Fixed Assets on Total Assets) which will be of interest to them in their respective organizations.

 

Specifically, to the different companies under study, it will expose to a large extent the goings-on in the different companies with regard to our relevant variables (Inventory Conversion Period, Debtors Collection Period, Creditors Payment Period, Cash Conversion Cycle, Current Ratio, Quick Ratio, Debt Ratio and Fixed Assets on Total Assets). The results of this study would provide organizational managers better insights on how to create efficient working capital management that have the ability to maximize organizational value. As a result, it will build up confidence in investors to invest in that firm.

  1. Academic Significance:

In the academic arena, this study will prove to be significant in the        following ways:

It will serve as a secondary source of data and also contribute to the enrichment of literature on the issue through provision of additional insights.

It will expand the knowledge on the relationship between working capital management and other variables (Inventory Conversion Period, Debtors Collection Period Creditors Payment Period, Cash Conversion Cycle, Current Ratio, Quick Ratio, Debt Ratio and Fixed Assets on Total Assets) apart from profitability.

 

1.7 SCOPE AND DELIMITATIONS OF THE STUDY

This study covered issues bordering on the impact of working capital management and corporate profitability of the Nigerian companies for a six year period of 2007 to 2012. The choice of the years is due to data availability, and the need to expand on the length of time adopted by previous researchers on the same topic. It also covered areas such as effects of working capital on liquidity, relationship between liquidity and profitability, relationship between profitability and debt, causes of corporate failures and dangers of inadequate and excessive working capital. Return on Assets (R.O.A.) is to be adopted as a measure of profitability.

On the other hand, the delimitation of the study is that this study did not cover issues bordering on other forms of financing such   as   long term debt financing in organizations.

 

1.7 OPERATIONAL DEFINITION OF TERMS

The importance of definition of terms is to ensure that essential terms in the research are not lost through mis-interpretation.

Working Capital = The amount of cash and cash convertibles within a short period of time or all current assets that includes cash and cash equivalent

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IMPACT OF INTERNET COMMUNICATION TECHNOLOGY (ICT) ON THE ACCOUNTING PROFESSION IN NIGERIA. A STUDY OF THE INSTITUTION OF CHARTERED ACCOUNTANTS OF NIGERIA (ICAN

CHAPTER ONE

INTRODUCTION

 

 

1.1 BACKGROUND OF STUDY

Accounting is the process of identifying, classifying and recording, and presentation of financial economic activities of an entity with the aim of facilitating decision making by the users of the information Fidelis (2013). This process is usually done manually with the use of separate ledgers to record financial transactions. It involves the use of paper, books and pen to record and prepare financial statements and manual calculations. This task is tedious and time consuming and can therefore lead to several human errors. This occurrence might be minimal in small entities such as sole proprietorship. Kwanchukwu (2004). However, in big entities such as a public limited liability company, these errors can occur more often without possibility of being detected which can affect the entity on the long run.

There is no doubt that the manual system of accounting is cheaper than the automated accounting system which is one of the reasons why small businesses still use it. But as a business grows, there is the need for a shift from manual accounting system of financial transactions to automated processes i.e. Information and Communication Technology especially in today’s generation where most transactions are performed with the use of electronic gadgets such as Computers, Computer software and the internet Onaolapo et al. (2012). The Accountant only needs to enter the transactions into the software which simply performs computations and presentation thereby relieving the accountant of such task. Any company with large size seeking to be efficient and effective in it financial operations would need to adopt an automated system of accounting. For a company to attain efficiency and effectiveness, it would require capacity to process accurate and timely information, hence, the need for Information and Communication Technology.

Information and Communication Technology (ICT) is often used as an extended synonym for information technology (IT), but is a more specific term that stresses the role of unified communications and the integration of telecommunications (telephones lines and wireless signals), computers as well as necessary enterprise software, middleware, storage, and audio-visual systems, which enables users to access, store, transmit and manipulate information. ICT is an umbrella term that includes any communication device or application, encompassing; radio, television, cellular phones, computer and network hardware and software. Jordan (1999)

Information technology has been around for a long time as long as people have been around because there were always ways of communicating through technology available at a point in time. There are four (4) main ages that divide up the history of information technology These ages include; pre-mechanical, mechanical, electromechanical and electronic only the latest age i.e. electronic and some of the electromechanical age really affects us today. Yusuf, M.O. (2005).

In the recent past, before the inception of ICT, accountants of an organization were using a socially acceptable behavioral method of reporting accounting and economic reports, carried out during accounting year ends Kwanchukwu (2004). Accounts prepared include statement of account, statement of financial position, cash book, and statement of cash flow. The ICT, on accounting practice in Nigeria has become a subject of fundamental importance and concerns to all business enterprise and is gradually becoming a prerequisite for local and international competitiveness. It is obvious that the way accountants plan and take decision on what and how to provide their service in the accounting profession has been affected immensely by Information and Communication Technology (ICT). This has continued to change the manner in which accounting practice and their corporate relationships are organized worldwide and the variety of innovative device available to improve and facilitate the speed and quality service delivery. A major ICT has been made on accounting is the ability of companies to develop and use computerized system to track and record financial transactions properly and accurately. The recording of business transaction manually on ledgers, papers, spread sheets etc has been translated and computerized for quick and easy presentation of individual financial transaction and give report on it. (Granlund & Mouritsen, 2003).Shanker(2008)ascertains that the use of ICT in many organization has assisted in reducing transactional cost, overcome the constraints of distance and have cut across geographic boundaries thereby assisting to improve coordination of activities within organizational boundaries. It is very clear that, the computerized accounting system have improved the functionality of accounting departments by increasing the timeliness of accounting information and report preparation of statement of cash flow, market shares report and departmental profit & loss are now more accessible with computerized system.

Computerized accounting systems have internal check and balance measure to ensure that all transactions and accounts are properly balanced before the financial statement is finally prepared. It also will not allow journal entries to be out of balance when posting, ensuring that individual transactions are properly recorded.

Since the inception of information and communication technology (ICT), accountants can now process large amount of financial information and process it quickly through computerized accounting system. Quicker processing time for individual transactions has also lessened the amount of time needed to choose out each accounting period. Transactions that would have taken an accountant months or years to prepare are done quickly and faster and thereby cutting high cost that would have resulted in preparing the reports (Pricewaterhousecoopers, June 2008).This study therefore seeks to examine the impact of Information and Communication Technology in Nigeria a study of The Institute of Chartered Accountants of Nigeria (ICAN)  . This study focused on the overall performance of accounting  and how the adoption of Information and Communication Technology impacts on their daily operations.

1.2 STATEMENT OF PROBLEM

Accountant’s worth is now reflected in higher order critical-thinking skills, such as designing, business processes, developing e-business, model in providing independent assurance and integrating strategic knowledge. Hence, most companies have derived a way of recording and reporting transactions. ICAN are expected to take advantage of  ICT to automate existing processes for conducting business in new and innovative ways. Growth within management accounting and information system is becoming prominent with the advent of ICT. Enterprise Resource Planning(ERP)system, Software and ancillary equipment such as Automated Teller Machine(ATM), Debitcards, Electronic commerce, Computer hardware, Database, Internet, Intranet, Telecommunication, Oracle, Peachtress, Accounting software and Statistical Package of Social Sciences etc. are related products emanating from ICT. Ogbu (2011)

This study seeks to evaluate the degree of ICT adoption by ICAN in the preparation and presentation of financial reported accounts. To what extent are ICAN members literate with the use of ICT? How relevant is ICT to ICAN?

1.3 OBJECTIVES OF STUDY

The main objective of the study is to examine Impact Of Internet Communication Technology (ICT) A Study Of  ICAN ,Nigeria

The specific objectives of the study are to:

Assess the impact of ICT on financial transaction report of  ICAN

Examine the effect of ICT implementation on the financial performance of ICAN

Evaluate the challenges associated with integration of  ICT in accounting profession.

Analyze the importance of ICT in training requirement of an accountant.

1.4 RESEARCH QUESTIONS

For the purpose of this study, the following questions have been put forth in line with the of research objectives;

To what extent has ICT impacted on the transaction report of ICAN?

What are the challenges associated with adoption of ICT in ICAN?

How has ICT improve the financial performance of  ICAN?

What are the importance of ICT in training requirement of accountants?

1.5 RESEARCH HYPOTHESES

The following null hypotheses are formulated to  guide the study:

Hypothesis One:

H0; ICT has no significant impact on transaction report of ICAN

Hypothesis Two:

H0; ICT has no significant impact on improved financial performance of ICAN

Hypothesis Three:

H0; There are no challenges associated with integration of ICT into accounting profession in ICAN

Hypothesis Four:

H0; ICT has no importance in training requirement of accountant

1.6 SIGNIFICANCE OF THE STUDY

The efficiency of accounting practice and the factors that affect the use of ICT covers a wide aspect; ranging from the profession, statutory and a host of several other factors but this work is restricted to cover the impact within accounting practice and profession. The level of ICT investment by companies obtained will help our result to focuses  on financial statement.

This study also serves as a guide for further research work in the impact of ICT on business and finance. Findings from the study will also prove useful to students in the field of accounting.

1.7 SCOPE OF THE STUDY

The scope of this study is to evaluate the impact of ICT on accounting profession in Nigeria. The research work adopts ICAN as a study area.

1.8 ORGANIZATION OF THE STUDY.

CHAPTER ONE; This chapter comprises of the background of the study, statement of the problem, objectives of the study, research questions, research hypothesis, significance of the study, scope of the study, organization of the study and definition of terms.

CHAPTER TWO; critically review related literature, conceptual clarification and theoretical framework relevant to the research study.

 

CHAPTER THREE; Examined the research methodology. It presents the research design, the population, the sample size, the nature and source of data, the method of data collection, the techniques of data analysis, the decision rule and the summary.

 

CHAPTER FOUR; Discussed data analysis which includes; data presentation, test of hypothesis and the results of findings.

CHAPTER FIVE; this chapter gives the summary of findings and conclusion from the research work. Recommendations, limitations of the study and suggestion for further research are also presented.

 

1.9 DEFINITION OF TERMS

a.Information and Communication Technology(ICT):This to the automated means of originating, processing, storing and communicating information and includes recording device, communication system, computer system( including hardware and software component and data)and other electronic devices(AIC PA 2006a, AU319.02).

 

b.Accounting information system (AIS): Is a system of collection, storage and processing of financial and accounting data that is used by decision makers.

 

c.Enterprise Resource Planning (ERP): Is an integrated information system that serves all departments within an enterprise.

 

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