ACCOUNTING INFORMATION AND DECISION MAKING
(A CASE STUDY OF G. CAPPA PLC GARRIKI ABUJA
TABLE OF CONTENTS
1.1 Historical background and business of the company
1.2 Statement of problem
1.3 The problems and its background
1.4 Purpose of study
1.5 Statement of hypothesis
1.6 Significance of the study
1.7 Scope and limitations
1.8 Definition of terms
2.0 REVIEW OF RELATED LITERATURE AND STUDIES
2.1 WHAT ACCOUNTING INFORMATION IS ALL ABOUT
2.2 THE NEED FOR ACCOUNTING INFORMATION
2.3 SOURCES AND NATURE OF ACCOUNTING INFORMATION
2.4 IMPORTANCE AND FUNCTIONS OF ACCOUNTING INFORMATION
2.5 USES OF ACCOUNTING INFORMATION
2.6 RELEVANT INFORMATION AND DECISION MAKING
2.7 DECISION RULES VIZ PROCEDURES FOR COMPANIES INVESTMENT APPRAISAL ESPECIALLY INVESTMENT CRITERIA.
3.0 RESEARCH METHODOLOGY
3.1 SOURCES OF DATA USED
3.2 SURVEY INSTRUMENT
3.3 DATA ANALYSIS TECHNIQUE
4.1 DATA PRESENTATION AND ANALYSIS
4.2 TESTING OF HYPOTHESIS
5.0 FINDING, RECOMMENDATION AND CONCLUSION
5.1 SUMMARY OF FINDINGS
5.2 CONCLUSION/DISCUSSION OF FINDINGS
APPENDIX II……………….. QUESTIONNAIRE
Accounting information and decision making, the two inseparable twins. For through understanding of the subject matter, the topic of this thesis has to be split into two parts for easy classification and understanding.
Accounting according ,to AKPA (America Institute of certificated Public Accountings) which was advanced in1961, is the act of recording, classifying and summarizing in a systematic manner and in terms of money transaction and events which are in parts at least of a financial character and interpreting the result thereof;
The purpose of accounting may be stated as the provision of potentially useful INFORMA00TION FOR DECISION MAKING capable of enhancing social welfare. INFORMATION is a fact told, heard, or discovered . These information discuss therein are financial in nature which assist managers to make better decision based on the environment one find himself eg G. CAPPA PLC. Physical, human and financial resources that are presently available to the firm. These decision are enable extent by the quality of the firms long and short term decisions such as capital investment which involves purchaser of new plant and machinery for construction activities.
Accountings frequently refers to a business organization as an accounting entity is any business organization, such as hardware store or food store, which exist as an economic unit.
For accounting purpose employees, customers, and other business. This separate existence of the b business organization is known as the BUSINESS ENTITIY CONCEPT. This, in the according records of the entity, the activities of each business should be kept carefully for other future business uses.
Types of business where accounting information are used are: -
A single proprietorship is a business owned by an individual and often managed by that came individual. Single proprietors include physicians, lawyers, electricians and other people who are in business for themselves. Many small service type business and retail establishments are single proprietorships. There are no legal formalities limited in organizing such business and usually only limited investment is required to begin operations.
In single proprietorship the owner is held solely responsible for all debts of the business. For accounting purposes, however, the business is a separate entity. Thus, the financial activities of the public are kept separate example, the owner’s personal house or car payment should not be entered in the financial records of the business.
A partnership is a business owned by two or more persons associated as partners. The business is often managed by those same persons. Many small retail establishments and professional practices such as dentists, physicians , attorneys and many CPN films are organized as partnerships.
Partnerships are created by a verbal or written agreement. A written agreement is preferred; it provides a permanent records of the terms of the partnership. included in the partnership agreement are terms such as the initial investment of each partner, the duties of each partners, the means of dividing profit or loss between the partners each year and the settlement to be made upon the death or withdrawal of a partner. Each partner may be held liable for the debt of the partnership and for the actions of each partner within the scope of business. However as with the single proprietorship , for accounting purpose the partnership is a separate business entity.
A corporation is a business that may be owned by a few persons or by thousands of persons and is incorporated under the laws 1 of the 50 stated. Almost all-large businesses are corporation and many small businesses are incorporated.
The corporation is unique in that it is a legal business entity. The owners of the corporation are called shareholders. They buy share of stock, which are units of ownership in the corporation. If the corporation fails, the owners would loss only the amount they paid for their stock. The personal assets of the owners are protected from the creditors of the corporation.
FINANCIAL STATEMENTS OF BUSINESS ORGANISATION
Business entities may have many objectives and goals (for example, one of the objectives in owing a physical fitness center may be to get in shape oneself) . however, the two primary objective of every business are solvency and profitability. Solvency is ability to pay debt as they become due. Profitability is desire to generate income. Unless a business can produce satisfactory income and pay its debts as they become due, other objectives a business may have will never be realized simply because the business will not survive.
The financial statement that reflect a company’s solvency is the balance sheet; the financial statement reflects the company’s profitability is the income statement.
The income statement, sometimes called an earning statement, reports the profitability of a business organization for a stated period of time. In accounting, profitability is insured for a period of time, such as a month a year, by comparing the revenue generated with the expenses incurred to produce these revenues. Revenues are the inflows of assets(such as cash) resulting from the sales of products or the rendering of services to customers. Expenses are the cost incurs to produce revenue. Expenses are measured by the assets surrendered or consumed in servicing customers. If the revenues of a period exceed the expenses of the same period, net income results. Net income is often referred to as the earning the company. If expenses exceed revenues, the business has a net6 loss, and it has operated unprofitably.
Balance sheet sometimes called the statement of financial position lists the company’s assts and liabilities and owner’s equity as of a specific moment in time. A balance sheet is like a still photography; it captures the financial position of a company at a particular point in time.
MANAGEMENT DECISION MAKING:
Management is not a homogeneous entity. Within a business there will be senior, middle and junior managers, each contributing to the overall objectives of the firm. The main distinction between the levels of management relates to their influence upon the various decision – making processes. It is possible to identify three levels of decision-making with an organization strategic, tactical and operational
These are concerned with controlling the relationship between the business and its environment in order to device overall objectives for the whole firm. These overall objectives framed in general terms provides a structure within which other decision can be taken. Although the need to take or to amend a strategic decision can be perceived at any level with the organization such decision tend to be taken by the board of directors acting upon the device of senior manager’s.
These decisions, having resources implication are often referred to as “Policies” and cost associated with these decision are termed “ Policy cost”. Thus, a policy decision to lease premises rather than to buy, gives rise to Policy Cost in term of rent paid. Where a decision is taken to purchase the premises, the depreciation of the building would be the policy cost .
These are concerned with how the overall objectives are to be met, and they are a function of management control; they ensure that the necessary input are acquired, and that they are used ina way most likely to achieve the firm’s objectives. Broadly, this area of decision making is that of middle management.
In-so far as managerial policies need filling out and controlling this tends to be referred to as administration. The term management is reserved for the establishment of policies and the framing of strategies. In reality, executives carrying out their normal duties will alternate between administering and managing.
These have to do with specific tasks. Managements job here is to ensure that the task are carried out effectively and efficiently in accordance with the tactical decisions already taken.
Each of these levels of decision-making reqires information but each will require different information. Because strategic decision-making operates with long-term time horizon, it is accompanied by a high degree of uncertainty. These decisions tend therefore to be based upon informed judgment and experience. The information on relative levels and tends in real costs and prices, volumes, market share cash flow, and demands made generally upon the firms total resources.
On the other hand, operational decisions take place within a very short time horizon, and such decisions can often be made o the basis of simple calculations. Falling somewhere between the two, that is the level of tactical decisions endeavoring to ensure that the day-to-day operational decisions do in fact provide the firms stated objectives. The type of data collected, the way they are recorded and reported will therefore depend upon the purpose for which the data are required, and the level of management which the data are requires them.
According information services several major roles in organization. It enhances decision making, guides strategy development and evaluates existing strategies, and focuses efforts related to improving organisational performance and to evaluating the contribution and performance of organizational units and members.
One of the most important types of accounting information is cost information. Organisations use information about cost to make important product feature and product mix decisions.
Organisatons also use cost information to develop competitive strategies.
Control refers to the tools an methods that organisations use to keep on track toward achieving their objective. The process of control usually involves setting a performance target, measuring performance, comparing performance against that target, computing the different between measured performance and the target, and taking action, if necessary, in response to the variance.
Although organizations traditionally practiced control in the large, that is overall organisation performance, using financial measures to supplement financial measures. For example, the performance of a manufacturing unit mighty be measured in terms of both cost per unit produced and a number of defects. In reflected an understanding that financial measures of performance are, by their nature.
1. short-run measures of results
2. Neither familiar nor intuitive ways for people to mange operations.
Non-financial measures, such as quality, not only provide an explanation of current sales levels but also potentially a predictor of future sales levels.
DECISION MAKING: Is an important tool in execution of both long and short plans. It is defined as making choice between future uncertain alternatives. This emphasis’s that decision making relates to the future and make choice between alternative in pursuit of an objective. Relevant information for decision making must be expressed in the form of financial or quantitative analysis in order that a rational choice can be made. Decision making is classified into programmed and non-programmed categories and it is my pleasure to state that the case study (G. Cappa Plc) uses programmed decision which are relatively structures with a clearly defined operational areas which are incorporated into a computer such programmed decision include replenishment of decision based on usage and recorded level in an inventory control system. The decision rule is not left out. It includes an expected value maximin rule, maxima rule and minimax regret critrion, but fro the purpose of this study, only the expected value shall be discussed. Expected value makes use of probability of estimated outcome to consider which of the activities should be selected. It is a simple way of bringing some of the effects of uncertainty into appraisal process. From the above statement, it can be viewed that the relationship between accounting information and decision making can be looked at in the following:-
I. RELEVANT COST AND REVENUES: Are those expected future costs and revenues very important to the decision makers. Relevance of cost and revenue lies in the fact that such cost and revenue are indispensable and unavoidable, if a particular decision is to be taken or avoidable ( if dropped) e.g, a heavy machine for carrying equipment was purchase by a G.Cappa Plc. At a cost of N18,000.000 five years ago and is depreciated at 20%. The present cost of the machine is N40,000.000, the machine could be sold now for N12,000.000 in decision making of the company, the cost of N18,000.000 and N40,000.000, are no longer required or needed, it is regarded as sunk-cost. Relevant cost therefore is the price as which it could be sold that is N12,000.000 and it is important in decision making unlike the N40,000.000, which is not relevant.
1.1 HISTORICAL BACKGROUND AND BUSINESS OF THE COMPANY
G.Cappa Plc was incorporated as a private company in October 1252 and was officially listed on the Nigeria stock exchange on 20th May 1979, the company has approximately 2560 shareholders with varied experiences. In its forty-five years of existence, the company has made a great impact on the development of the industry in Nigeria. Notable and familiar landmarks built or construction made by this company include Independence building Abuja, Tafewa Belewa square Abuja, the Nigeria Instituted Internal Affairs Abuja, Victoria Island Lagos Federal Palace suites Hotel, the Atlantic Block of the Ikoyi Hotel, Freeman House, Wesley House and the first bank of Nigeria Limited head office in Marrina, Bookshop house WIDS Complex in Laos and its state branches at Kano, Kaduna,Portharcout, Ibadan, Benin, Madugiri, ilorin, Jos and Abuja, stock exchangr house, customes streets, and the headquarters of the federal ministry of external affairs at Abuja and so many others.
The company has its head office and yard formerly at Lagos Nigeria but presently at Garriki Abuja. It has five branches nation wide at Kaduna, Ibadan, Markudi, Portharcourt and Lagos respectively. Its major business is building construction work.
1.2 STATEMENT OF THE PROBLEM
this study titled “ Accounting information and decision making (a case study of G.Cappa Plc Abuja) is aimed at finding out relevance of accounting as aid to management decision making in a business organization. Other problems to be investigated are:-
1. Uses of accounting information
2. providers of accounting information
3. users of accounting information
4. To recommend the importance of the accounting information in management decision-making given the presence of alternatives and uncertainties that surrounds the business environment.
1.3 THE PROBLEMS AND ITS BACKGROUNDS
accounting is a service activity, it function is to provide qualitative information primarily financial in nature about economic entities that are intended to be useful in economic decision and in making reasonable choices among alternatives courses of action. The management of every business must keep foremost in its thinking about two major objectives or goals. The first goal is to earn a profit while the second is to stay solvent. Other secondary objectives may include the motive for providing job opportunities for people, creating the new and improved products and or services. Sequel to the above desire, business executives are often faced with the problem of how to make decision that will cause them to maximize their business profits given the presence of alternatives and uncertainties that surrounds the environment. Some of the pertinent questions they face often a time are what product should be produced. Others are how to produce and what quantities to be produced?
Others include how do management accountants meet up with the payments of debt especially interest on loan as they fall due? How to settle suppliers etc.
The answer to all these questions through inexhaustibly, here is the use of relevant accounting information is the combination of data (unusually accounting data) into a form that has a particular relevance in the decision making process. Data are facts and figures about event and or business transaction, both post and future. Organizations are set up to achieve definite objectives.
The objectives are achieved by people. To achieve these objectives, information is needed on the organizations available resources and what the people are to do and what is to be done levels in the organization.
Management information is an extensive information that crosses functions. Bound arises and invades every area of the business. The information system should be flexible, reliable, economic, simple and helpful.
Accounting information should be received and by those in need vital decision making. Some of the functions performance by a management accountant are part of the management information system (MIS). (MIS) provides the information management needs to operate a business and make decision. The Mis can be manual, Semi computerized and or fully computerized.
Accounding to K.N Ehaskar and R. Honsden in ‘accounting information system and data process’. Data representing information are the input to the MIS and considered done have no meaning. When suitable processed output data are interpreted to derive information that will increase knowledge is a decision environment.
Ehaskar and Honsden went further to state that there are several reason to believe that in the furture, industry will need more data processing and greater calculating power of computers to produce meaningful accounting information which will serve as tools to management decision making.
Reason proffered for the above personal according to hem are firstly the business environment is becoming increasing complex in terms of such phenomena as inflation, the size of the organizational agency technological development and opportunities, and spread of world trade among others. The modern manager as to consider many/more factors than his precessor of even a generation ago. His demand for accounting information for successful decision making can not be over stressed.
The second reason put by the two is that management science has been developed as a means placed before him. A number of mathematical programming, those techniques have two factors in common Viz: they use every complex and lengthy calculation processes and they provide good answers only when provided with accurate data relevant to the problem.
Generally, management is seen as the process planning organizing, staffing and controlling. The performance of a business depends on well these functions are being carried out. The fundamental process involves making decision, to make a good decision required good information as to the internal and external events that led to the need for a decision to be made, the likely consequence of the alternative decision. Good information can lead to a good decision making which in turn leads to a succefull attainment of organizational goals.
According, one of the ways of explaining who better accounting information can lead to a decision is that good/reverent accounting in decision making and reduce the element of ascertaining in decision making and this implies that the consequences of alternative decision can be accurately predicated. Accounting has been defined as the collection, compilation and systematic recording of business transaction in terms of money, the preparation of financial reports and the use of those reports as a tool of management accounting is an acts of recording, classifying and summarizing in a systematic manner and in terms of money, transactions and events which are part at least of a financial character and interpreting the result thereof. It is not necessary for the decision-maker to be an accountant but he must be at least, at home with accounts, he must know what the accountant is doing and how to make effective use of the information material that the accountant produced in order to accomplish his managerial goals.
1.4 PURPOSE OF STUDY
the major objectives of this research is to bring to light the hither to lateral importance of accounting information to investment decision makers.
Especially now that the business environment in the world is becoming increasingly complex, in terms of such phenomena as inflation, cost of capital, high rate of competition influence of government and technological rapid changes among others. Another purpose is to give a distinction between the provider of accounting information is management accountant and the decision – maker that is the Chief executive or manager so that each will know his or her duty and work towards the achievement of some.
1.5 STATEMENT OF HYPOTHESIS
sequent to the ever increasing complexity in the business organization today and the subsequent demand for relevant accounting information for profitable investment decision making, the project writer will bring this study to a more xx objectives by stating and testing the following hypothesis;
STATEMENT OF HYPOTHESIS
H0- Accounting information is not relevant to management decision making in a business organization.
H1- Accounting information is relevant to management decision making in a business organization.
The case study company shall remain one entity throughout the research period. Problems identified and solution proffered may relate and perhaps be useful to other business organizations.
The management and accounts staffs of G.Cappa Plc are the set for this problem under investigation.
1.6 SIGNIFICANCE OF THE STUDY
it is hoped that the report of this research would be of immense assistance to Chief executives and/or managers of business organizations who are faced now with the tasks of making investment decision for the profitability of their business entitles in the presence of alternatives and uncertainties that surrounds the business environment.
Management accounts who are the Chief providers of accounting information in a business setting would equally find this piece of work interesting and helpful as it will enlighten them on the need to provide only relevant accounting information to management so that the latter’s decision making will be reliably made and consequences of a unscrupulous decision making would be avoided.
Equally, outside groups like the bank & creditors just to mention a few would find this project work as a guide on the need upon which their investment decision about client companies would be made.
Finally, researchers on this area of study will definitely find this work as a good reservoir for reference purposes.
1.8 DEFINITIONS OF TERMS
accounting information system- Is a sub-set of the managerial information system in which the financial data derives from recorded transaction are collected, processed and reported.
Accounting Ration – Is a relationship that can be used in measuring the rating or financial position of a form e.g the relationship, of a company’s earning to the firm’s market price for its stock.
Analysis of performance – Is a managers assessment of hoe well the organization’s member, subsystem and goals interact to function as a unit.
Budgeting – Is the process of determining and assigning the resources required to reach objectives. It involves making a protected estimate of a furture revenue and expenditure of an organization.
Company – Is an association of people for the purpose of carrying on a business activity.
Objectives of a company – Is a company’s main purpose of existing. It is a major internal factor that affects the tasks of the personnel manager.
Costs – Is the value given up by an entity in order to receive goods or services or is the value obtain the items in eh volume needed, shipped to the desired locations. All expenses are costs but not all costs are expenses.
Decision – making – Is the process of resolving different options into one authority the decision becomes a policy of the organization.
Formal decision rules – Rules the focuses upon certain elements in decision making that are common to all decisions and provides means to enable a decision marker to better analyze a complex situation that numerous alternatives and possible outcomes.
Information – Is an individual or a group of individuals responsible for studying, analyzing, formulating decisions and initiating appropriate action for the benefit of an organization.
Planning – Is an organizational activity that requires establishments of a predetermined course of action beginning with a statement of goals.
Planning function – Involves all managerial activities that lead to the definitions of goals and to determination of appropriate means to achieve those goals.
Profits – The monies remaining after a business has paid all its bills.
Profitability – A firm’s ability to earn a profit and its potential for furture earnings.
Profit and loss statement – Is the summary listing a firm’s total revenue and expenses within a specific time period. It is synonymous with income and expenditure statement for non-profit making organization (charitable organization)
H0 – Null hypothesis is a negative assumption.
H1 – Phenomenon that require further verification through empirical summary and analysis when accepted, it is a positive assumption.
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