CHAPTER ONE
INTRODUCTION
1.1.
BACKGROUND
TO THE STUDY
In recent
years the advancement in accounting transaction system modules all over the
world has made business organisations to exert resources in this area if they
are to compete favourably among their local and foreign counterparts. Gone were
the days when business organisations were simply required to make profit,
survive and provide a fair return to investors’ on their interest. The modern
business organisations find itself in the atmosphere of global uncertainties,
cut throat competition locally and internationally and unprecedented change in
the economy. Hence, a great demand is often placed on the managers of these
organisations to make pragmatic and informed decisions if the organisation is
to move forward as the success or otherwise of any organisation is often a
function of the sum of the decisions taken in the past. However, the quality of
decisions taken by managers rests upon the substance and accuracy of financial
accounting information’s provided by information systems available to them.
In today’s
world,Financial accounting provides the rules and structure for the conveyance
of financial information about businesses (and other organizations). At any
point in time, some businesses are poised to prosper while others teeter on the
verge of failure. Many people are seriously interested in evaluating the degree
of success achieved by a particular organization as well as its prospects for
the future. While a few basic procedures or methods have changed, the purpose
of financial accounting remains the same. Business owners often use accounting
to measure the financial performance of their companies and make business
decisions.
The American
Institute of Certified Public Accountants
has defined the Financial Accounting as "the art of recording,
classifying and summarising in as significant manner and in terms of money
transactions and events which in part, at least of a financial character, and
interpreting the results thereof". American Accounting Association defines
accounting as "the process of identifying, measuring, and communicating
economic information to permit informed judgements and decisions by users of
the information.
It is
noteworthy to say here that financial Accounting derives its source from
accounting transaction data and information. Financial Accounting produces
results which enhances decision making in the organisation. Hence, it can
safely be concluded that Financial Accounting is not an end in itself but a
means to an end .i.e. decision making to improve corporate performance, and also
produces detailed and comprehensible accounting information which are
invaluable basis for decision making.
Financial
accounting provides data that these individuals need and wants, moreover many
possible benefits can be gained from acquiring a strong knowledge of financial
accounting and the means by which information is communicated about an
organization. Around the world, millions of individuals make critical judgments
each day about the businesses and other organizations they encounter.
Developing the ability to analyze financial information and then using that
knowledge to arrive at sound decisions can be critically important.
Financial
Accounting is a service activity. It uses words and symbols to communicate
financial information useful for decision making. The terminology and symbols
used have developed from the earliest known accounting records. As a
profession, accounting has evolved in response to society’s need for economic
information to help people make economic decisions. It is often called the ‘language of business’.
To be effective, the recipient must understand the message that the sender
intends to convey. You must learn the meaning of the words and symbols used by
accountants. Many people with little knowledge of accounting must interpret
accounting data.
Financial
Accounting is regarded as part and parcel of today’s life which is necessary to
understand the accurate financial situation of the organization and used as the
basis of making any decisions. Since strategic decisions have long-term effect
on the business and therefore it is important to analyze accounting information
for making strategic decisions, it helps managers understanding their tasks
more clearly and reducing uncertainty before making their decisions (Chong,
1996). Accounting is sometimes referred to as a means to an end, with the
ending being the decision that is helped by the availability of accounting
information (Arneld and Hope, 1990), it also aids decision making and providing
information relevant to the decision and to the decision maker, more reason why
it effective and efficient financial utilization plays a central role in
management decision making process.
Individuals
who attain a proper level of knowledge of financial accounting can utilize this
information to make decisions based on the organization’s perceived financial health and
outlook. Such decisions might include assessing employment potential, lending
money, granting credit, and buying or selling ownership shares. However, financial
accounting does not address issues that are purely of an internal nature, such
as whether an organization should buy or lease equipment or the level of pay raises. Information to guide
such internal decisions is generated according to managerial accounting rules
and procedures that are introduced in other books and courses. Despite not
being directed toward the inner workings of an organization, employees are
interested in financial accounting because it helps them assess the future financial prospects of their
employer.
Financial
accounting refers to the conveyance of information about an organization as a
whole and is most frequently directed to assisting outside decision makers, it
is also designed to portray the overall financial condition and prospects of an
organization. Every employee should be quite interested in assessing that
financial information to judge future organisational prospects.
Finally the
ultimate purpose of this research study is to provide various users of
financial accounting information with a rich understanding of the uses,
benefits, and importance of financial accounting so they can evaluate available
information and then make good choices for management decisions.
1.2.
STATEMENT OF
PROBLEM
The major
purpose of the use of financial accounting information is to minimize risk,
failure and uncertainties and also stay ahead of competitors. Notwithstanding
the immense benefit of use of accounting information, it is generally
acknowledged that most unqualified accountants generate inaccurate information
and so result in failure of organizations to achieve desired goal. There are
cases of managers refusing the use of accounting information because of their inability
to interpret such data, thereby making the organization to remain at “status
quo ante”. These problems largely contribute to the failure of the use of
accounting information in business with the result that inaccurate decisions
are made to the detriment of the organization.
Managers
of certain businesses do not have sound accounting systems to enable them
monitor operating expenses and revenues. They do not need the warings
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.
Furthermore,
Inspite of the fact that convention of objectivity is respected in accounting
but to record certain events estimates have to be made which requires personal
judgement. It is very difficult to expect accuracy in future estimates and
objectivity suffers. For example, in order to determine the amount of
depreciation to be charged every year for the use of fixed asset it is required
to estimate (a) future life of the asset, and (b) scrap value of the asset.
Thus in accounting we do not determine but measure the income.
Most profit making organizations in Nigeria are however,
often encountered with accounting and financial management challenges. Poor
record keeping, inefficient use of accounting information to support their
financial decision-making and the low quality and reliability of financial data
are part of the main problems in financial management concerns of these
companies.
(Adeboye 2005) While proper accounting is a useful system
for making sound economic decisions, The misuse, untimely, poor record keeping,
and inaccuracy of accounting information also causes most firm’s to implement and make poor financial decisions,
these short comings might be the cause of difficulties to succeed and to raise
fund or borrow money during the later stage. In the worst case, might face with
the failure and perhaps bankruptcy in the end.
Finally, Based on the fact that the
financial accounting is one of the social sciences which aim to serve various
needs of the private and public business facilities, it is affected by the
changes of the general economic, social, legal and political and political
conditions prevailing in each country or certain environment at each period.
The accounting information is resulted by certain requirements which change due
to various environmental factors within the economic, social, legal and
political environments in which the accountancy works.
1.3.
OBJECTIVES
OF THE STUDY
As a central
objective, this study seeks to evaluate the use of Financial Accounting as
tools for management in decisions making in an organization. But more
specifically, it attempts to achieve the following:
i.
Find the causes of failure
in the attainment of organization objective, resulting from lack of adequate
utilization of accounting information.
ii.
Explain what accounting information is necessary, who are the
users and the various ways each of these users utilize the information and the
benefits derivable from them.
iii.
Highlight the effects of managerial neglect of accounting
information on the achievement of the organizational goal.
iv.
To
ascertain the extent to which Accounting is being used as a financial tool for
measuring financial performance of organisation.
v.
Analyze the relationship between financial
accounting, accounting information and management decision making.
vi.
Determine the effectiveness of Accounting Department of the
organization in decision making of management of organisations.