ASSESSING THE EFFECTS OF ACCOUNTING INFORMATION ON MANAGEMENT DECISIONS

CHAPTER ONE

INTRODUCTION

• Background of the Study

Accounting is fundamentally a measurement and communication process used to report on the operations and performance of organizations. In other words, it is concerned with the discipline of summarizing, recording, analyzing 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 Financial Accounting Standard Board (FASB) defines information as the backbone of any business that is capable of making a difference in a decision by helping decision makers to form predictions about outcomes of past, present and future events (it has a predictive value) and also to correct or confirm prior expectations (it has a feedback value.) 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 decisions. For any organization of any type, be it small, medium or large, service or manufacturing, to survive in this dynamic and global world, there is need for proper management of information.

Therefore, information is the backbone of any business. However, there is need for information to be well process, and the means to process information is through an integrated set of component called an information system. Thus, information system is the combination of different component to perform a specific function and basically it can be sourced from both internal and external.

According to Elvisa and Erkan (2015), the most important part of management information system is the one that is concern with data processing, known as Accounting Information System (AIS). AIS involved identifying, recording, analyzing, summarizing and communication of economic information to its end user for decision making.

Management uses the best available information system to provide management information which is used primarily to accomplish three broad purposes; i) To provide financial statement to the interest of external users; ii) To plan the organizational activities and operations in both short and Long run for strategic operations, and iii) To control the result of its operations.

The American Accounting Association (1966) also defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments 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 organization 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 four (4), namely; i) Financial accounting, ii) Cost accounting, iii) Management accounting and iv) Environmental or Sustainability accounting

According to Leopold (1982), 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 organization is still not appreciated but with the test to be conducted in this research, the degree of accounting information on management decisions” shall be clearly understood.

• Problem Statement