Accounting Information for Internal and External Users

At a glance, accounting can appear extremely complicated and confusing. The untrained eye may struggle to grasp the entire nature of accounting and see it merely as an incompressible mass of numbers. However accounting is much more for a company or an economic entity.

As intimated by the title, this thesis proposes the inclusion of information on flexibility as a means of enhancing the accounting information system of business organization. However the inclusion of such information would be incomplete with out prior discussion of the purpose of accounting and its product, accounting information as well as whom the users of accounting information are.

I hereby strongly belief that the significance of accounting information cannot be fully appreciated, without first examining all the different individuals who are actually making use of the accounting information. . 11 Theoretical Framework. Before the nature of accounting can be addressed, the field of study must first be delineated. This entails an identification of the area of interest and the borders of discipline in relation to neighboring disciplines.

Thus a successful definition of accounting should clearly delineate the boundaries of the discipline at a point in time, give a precise statement of its essential nature, and be flexible so that innovation and growth in the discipline can be accommodated.

A number of definitions of accounting have been given in this project, each of which attempts to demarcate its field of study. According to the AICPA (American Institute of Certified Public Accountants) accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting results thereof.

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While accounting may have started as being an art, it is doubtful whether this view is still generally held. The increased use of scientific methods in accounting has changed the discipline to an applied science. (Matterssich 1984)According to Matterssich accounting is a science because of its methodology and applied because of its global orientation. He suggests that it may be regarded as an induced science as it tends to solve problems from which are general propositions induced.

More recently the American Association of Accountants (AAA) defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of accounting information. This definition gives a broad perspective even though critics see it as too general. A more comprehensive definition is provided by Asari, Bell, Klamer and Lawrence (1997) and it states that accounting consists of the four key ideas below, ?It is by nature a measurement process: Its scope includes financial and operational information: ?Its purpose is to assist the organization in reaching its strategic objectives: ?Its attributes are to enhance the understanding of the measures phenomena and provide information for decision making, and therefore encourages actions and supports and creates shared values and mind sets. The construct of flexibility does not appear in any of the definitions of accounting because the definitions were developed during stable periods.

The environment however has changed, uncertainty has increased and predictability has declined. In view of the fact that flexibility is a function of uncertainty, greater value will be attached to flexibility in organizations as uncertainty escalates. It is therefore appropriate to include the construct of flexibility in the definition of accounting. From a functionalist perspective, accounting is viewed not as an end to itself, but rather as a commodity or language that is useful in decision making.

This implies as mentioned before that the existence of accounting is dependent on its usefulness to society, and in a narrower context its usefulness to the users of accounting information. These users of accounting information can be divided into two broad categories, namely internal and external users. Internal users can be defined as those who are internally directly involved with the accounting information and they are, management and employees who require information for strategic, operational and administrative decisions.

This type of information is communicated in management reports and is the domain of management accounting. External users are does individuals or group of individuals who are not directly involved with the accounting information but require the information for various reasons. External users include investors, lenders, suppliers, customers, government and the general public. This information is usually communicated by means of annual and special purpose financial reports and is the domain of financial accounting.

The accounting information as earlier mentioned refer to all business reports prepared in compliance with laid down principles and standards and expressed in monetary terms to cater for the need of users. Main examples of these are the financial reports of a business which include mainly, Balance Sheet, Profit and Loss, Cash Flow Statement, Fund flow statement or statement of movement in equities. A balance sheet by definition is a financial document prepared by management which shows all the assets (resources) of a business as well as the liabilities (obligations) and capital of the business.

It shows the overall financial position of the business entity. A profit and loss statement also known as Income statement is an accounting document that shows the summary of all trading activities within a specific period of time. It states all the sales that have been made and deducts the purchases or costs of goods sold to come up with the gross profits, and when operational expenses are deducted from the gross profits, net profit is gotten, which can either be retained or distributed to shareholders.

Cash flow statements show the sources of cash inflow and outflow for a business entity, this creates a real picture of the actual cash situation a business entity, if cash is going out more than it is coming in, it implies a negative cash situation, meanwhile if more cash is moving in than it is going out, there is a positive cash movement. This chapter has clearly brought out, the purpose of the project, and explained all the basic terminology to be used in the course of the thesis. BODY Chapter 2. 1 THE NATURE OF ACCOUNTING

This chapter explains in detail all the branches of accounting, the purpose of accounting information, the characteristic of decision useful information and the users of accounting information and their information needs. There are four main branches of accounting, namely financial accounting, management accounting, cost accounting and computerized accounting. The apparently divergent needs of internal and external users of accounting information have resulted in the development of sub disciplines within the discipline of accounting, as mentioned above..

Financial accounting is mainly concerned with the financial state of affairs and the financial results of a business entity. It includes preparation of financial statements showing results of operation and financial state of affairs. Financial accounting enables management to exercise full control over the property and assets of the firm and also prepare returns and statement for taxation purposes. It mainly comprises of the profit and loss statement and the balance sheet. Management accounting has erupted as a result of changing trends in business.

Normally accounts were prepared just to prepare a true and fair view of the state of affairs, but now the focus has also being to solve managerial problems and plan for the future of every business, this is the major role of management accounting. Management accounting is the application of accounting and statistical techniques with the specific purpose of providing and interpreting information designed to assist the management in its function of promoting maximum efficiency and in envisaging, formulating and coordinating future plans and subsequently in measuring their execution.

Hence management accounting makes data available to management for decision making in a scientific manner. Cost accounting is that branch of accounting that has to do with, classifying, recording, and appropriate allocation of expenditure in determining costs of products and services in a presentation of suitably arranged data for the guidance of management. It basically dwells on finding out the costs of jobs, product, and services of unit of output, as required. It deals with cost of production and distribution. Costing enables the management to know the cost of producing and selling products and also the costs components.

Another important branch of accounting is computerized accounting. The rise of this branch of accounting is a result of tremendous improvements in technology, growth and expansion of business entities which has consequently called for an increase in the volume of business transactions. With the invention of computers and the development of computerized accounting, collected data is fed into the computer as input so that processing of data may be made and the desired results are produced in the form of reports and documents known as output.

Hence computerized accounting makes use of computer software’s that can manipulate process data and give the output to the user in no time enabling for faster and accurate reporting. All the branches of accounting mentioned above have the main goal of serving the needs of both internal and external users. The need of internal and external users regarding information produced in an economic entity differs essentially in the following six areas. •Access, •Frequency, •Detail, •Timing, •Required Expertise and understanding, •Response,

The internal users have unlimited and direct access to information in the organization. Information is available to management on demand to support strategic, tactical and operational decisions. In contrast, the external users of financial information have limited and indirect access to information and is usually reliant on the information contained in the financial reports and reported to the press. The frequency with which accounting information is obtained varies between internal and external users. Management can request information on a regular basis, be it monthly, weekly or daily.

External users have to rely on the annual and interim financial reports and other sources of information such as press releases, which are available on a less frequent basis. Management and employees have access to the level of detail of information they require, where as external users receive aggregated information contained in financial statements and have virtually no access to detailed information which is not prescribed by legislation or accounting standards In addition internal users can access information directly and are supplied on a timely basis with most up to date information.

In contrast, external users are supplied with dated and historical information supplied in interim reports and financial reports, often with limited information value. Because it is obtained timeously, the information provided to internal users has more predictive value than that which external users receive. The responses of internal and external users to accounting information are different, internal users use the information to run the organization or make strategic, operational and administrative decisions. External users use the information for a broad spectrum of responses such as whether to invest, supply materials or advance funding.

Their values, culture and beliefs influence the response of users. It is therefore not surprising that management and financial accounting developed in different directions. The aim of the former is to meet the dynamic information needs of management and employees of an entity in rapidly changing and business environment. The later on the other hand, concentrates on identifying the needs of a diverse group of users, protecting their interest through legislation and accounting statements, extending and improving the quality of minimum disclosure requirements in financial reports.

The divergent development of management accounting and financial accounting has resulted in effectively two information systems within organizations The independent development of financial and management accounting has widened the gap between information needed by management and the information reported to the other users and is inefficient and costly in a competitive environment. As already mentioned already, the effective use of technology can be used to develop one flexible information system in an enterprise that meets the different needs of both internal and external users.

The quality of information requires that transactions and events be measured and reported in a consistent manner to enable the users compare the results of the company from year to year or with the results of different companies. Acting as a pervasive constraint to the provision of information, is the cost versus benefit assessment. The constraint implies that the cost of providing information should not be exceeded by the benefits derived by the users. Although costs can usually be quantified, the measurement of the benefits of information is on the whole problematic.

To assess this constraint, continuous feedback is required on the effectiveness and efficiency of a system. This assumes that the accounting information systems are viewed as open systems. Materiality forms the threshold for the recognition of information. Only material information is included in the financial statements. Materiality is however not only limited to size but also to nature of underlying transactions or events and the impact that such information may have on the decision of users. The need and qualities of users do not remain static but evolve over time .

Therefore, the decision useful qualities should change over time, through feedback, in response to the evolving expectation of users. Gouws (1997) suggest that feedback on the effectiveness of communication through financial statements should be encouraged over time as this will improve the quality off information and its decision usefulness. Other qualities of accounting usefulness are proposed in the accounting literature. The Solomon’s report (1989) refers to feasibility that is the need to require only information that is feasible to provide.

However, the concept of feasibility is only meaningful if considered together with the cost versus benefit constraint. Completeness is another quality of decision useful information. In other words reported information should provide a full picture of the economic activities of the organization These qualities of decision useful information are not absolutes. In practice it may be necessary to weigh up the importance of conflicting qualities as the gain in one in one quality, such as relevance, may result in the decline in another, such as reliability .

This highlights a problem inherent to the use of qualitative measures, namely that the measures may not be implied consistently, different weights may be attributed to qualities by different people and relative importance of different qualities may change over time. Unfortunately the balancing of conflicting qualities of information and the interpretation of the importance of individual qualities are not usually apparent from financial reports. Nevertheless these qualities are very useful in assessing what constitutes decision useful information. THE PURPOSE OF ACCOUNTING INFORMATION

The product of accounting is accounting information. Accounting information is used in deciding between courses of action and results in informed decision making. It serves to reduce the uncertainty inherent in the business environment where decisions are made about the future. It further reduces entropy based on the assumption that chaos exists where there is no information. Littlejohn (1989) views information as a measure of uncertainty or entropy in a situation. This implies that the greater the uncertainty, the more accounting information are required.

The role of the accountant in producing accounting information is to observe ,screen and recognize events and transactions, to measure and process them and to compile corporate reports with accounting information that are communicated to users. These are then interpreted, decoded and used by management and other user groups. The main requirement for such corporate reports is that they should be useful to users. The provision of information that is useful for decision-making process is currently recognized as the main purpose of accounting information.

This holds for theoretical frameworks on financial reporting as well as accounting literature. A number of international reports have been published since the early 1970’s to determine, among others, the purpose of accounting information and the content of financial statements. These reports focused on the need of external users, and identified decisions usefulness as the main aim of accounting information In the Trueblood report(AICPA,1971), one of the definitive reports on corporate reporting which was published in the united states of America. 2 objectives of financial statements were identified including the following. To provide information for making economic decisions: To serve users who rely on financial statements as their principal source of information. To provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash flows To supply information for judging management’s ability to utilize resources effectively in meeting goals To provide factual and interpretative information for disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction or estimation.

To provide information on activities affecting society, Although not mentioned explicitly, the construct of flexibility is implied in several of these objectives. For example, the third objective refers to the amount, timing and uncertainty of cash flows. Information on flexibility is useful in predicting the amount and timing of future cash flows and removes some of the uncertainty in that it provides information on the alternatives that management are likely to select.

Similarly, the information on flexibility is helpful in achieving the fifth stated objective, namely of providing information on matters which are subject to interpretation, evaluation, prediction, information on flexibility assists users in identifying likely outcomes for the enterprise and therefore add interpretative, predictive and estimative value. In Canada, the stamp report (CICA, 1980) on corporate reporting identified four major objectives of financial reporting: ?To provide useful information to all the potential users of such information in a form and time that is relevant to their needs. To provide information to minimize uncertainty about the validity of information and to enable the user to make his or her own assessment of risks associated with the enterprise: ?To develop the standards governing financial reporting which allow ample scope for innovation and evolution as improvements become feasible ?To be directed towards the needs of users who are capable of comprehending a complete set of financial statements. The construct of flexibility may also contribute towards the attainment of the objectives stated in the stamp report.

Information on flexibility reduces uncertainty and also the risk associated with enterprises ,as set out in the second stated objective. The introduction of flexibility into accounting should result in a less rigid approach being adopted in the development of accounting standards, which is the third stated objective. Where as all these reports concentrated on the objective of financial reporting to external users, the institute of chartered accountants of Scotland considered the information needs of both management and external users.

The conclusions made in the report are that an efficient market requires the communication of useful information from management to investors, that financial reports should reflect economic reality and that the information needed by investors is the same in kind as that needed by management. Thus the finding is that one accounting system can serve the needs of both internal and external users In nut shell decision usefulness as the main objective of accounting information cannot remain static, however will evolve and change over time. It will be influenced by political, social, economic and technological changes in the environment.

Changes in the environment may influence not only the future and objectives of accounting information but also the need of its users. This therefore requires the accounting information system to be flexible so that it can adapt to the changing demands of its users. Decision usefulness is favored in accounting reports and theoretical frameworks on financial reporting, however it is not the only purpose of the accounting discipline. At present there is no comprehensive theory of accounting, and therefore no generally agreed on purpose for accounting, making the discipline to be viewed as a multiple paradigm science.

The disclosure requirements are related to the positioning of the enterprise and its ability to adapt to changes in the environment. In other words, it concerns the flexibility of the enterprise. This statement recognizes the importance of providing information on the flexibility to users and as such the farsightedness of this research. THE NEEDS OF USERS Before the needs of users can be considered, it is necessary to identify the users of business information, as different users utilize business information to satisfy different needs. The two main users of accounting information are the internal and external users. INTERNAL USERS

The internal users constitute the following groups of individuals. MANAGEMENT The management is concerned mainly with the operations of the company, so as to deduce the profitability of the company, and main focus on maximizing the wealth of the shareholders. This information can be obtained through evaluation and analysis of financial documents such as the profit and loss statement, the balance sheet and cash flow statement. From proper analysis of all these, management can make decisions regarding productivity, growth and expansion, managerial adjustments, new modes of competition, sources of finance and market standing. EMPLOYEES

All employees of a company are directly involved with the accounting information of the company, They want to know how profitable the company is doing so as to improve on their efforts, make demands for bonuses and salary increments as well as promotions, appointments and training and development. EXTERNAL USERS INVESTORS Both existing and potential investors have a major concern with the financial statements of the company. The existing investors are mainly concerned with the profitability of the company as well as its financial standings so as to make sure they get the right and appropriate dividends from their funds invested.

High profitability would imply high amount of dividends by preference shareholders, and high Earnings Per Share for ordinary shareholders. Potential investors look out for companies which are doing well in terms of profitability so as to ensure that they are not going to invest their funds in the wrong company or undertaking a risky venture. Hence accounting information becomes very vital to them.. LENDERS AND FINANCIAL INSTITUTIONS Information on creditworthiness of the company of the company and its ability to repair loans can be viewed from its accounting information.

The profit and loss shows the profitability of the company, meanwhile a balance sheet shows the financial position of the company as well as all the assets and liabilities. From the profit and loss the profitability of the company can be known, a company which is profitable is very likely to pay its debts. From the balance sheet the financial leverage of the company can be known. A company with a high debt equity ratio is on a dangerous footing as such would likely not be able to obtain loans from external sources such as financial institutions SUPPLIERS AND CREDITORS

Suppliers and creditors are deeply concerned about the financial position of their buyers or customers. From the accounting information suppliers would know the creditworthiness of their customers and would know whether or not to sell them goods on credit, or to setup a credit limit for each customer. This is to ensure that credits granted can be repaid and most importantly on due dates. CUSTOMERS Customers would like to know whether the company would exist for the foreseeable future and thus the continued supply of products, parts and after sale services.

They also want to know that the company is not exploiting them by making exorbitant profits. GOVERNMENT AND REGULATORS Information on the allocation of resources and the compliance to regulations can be viewed through accounting information, the preparation of financial statements with respect to the laid down rules and principles. In addition the government is also concerned with the accounting information of business entities for tax reasons, so as to assess the taxes payable by various companies. COMPETITORS

From accounting information, companies with in same industry can evaluate the success of each other, through their financial results and earnings per share. Competitors require the information mainly for strategic purposes, such as how to gain greater share of the market, eliminate competition, etc PUBLIC From accounting information, the contribution of various entities to the society can be known. HYPOTHESIS From all the research from both primary and secondary sources it is very clear that accounting is vital for the success of any organization be it profit or non profit seeking and that accounting information is highly needed by the users.

However the definition of accounting remains very broad and the needs of the users are so varied that the process of accounting and the needs of the various users can not all be met. CRITICISM A serious shortcoming of the reports on financial information as well as the conceptual frameworks is that they are largely based on what is perceived to be decision useful information. Until recently the needs of especially financial users had not been surveyed on a large scale. Users also require operating data in order to understand the nature of the business and its performance relative to competitors.

Operating data may be stated in terms of products, number of employees, innovation, effects of unusual or non recurring transaction etc. External users require the perspectives of management on the future, in particular on the opportunities and risk that arise from changes in the environment of the organization RECOMMENDATIONS The survey by AICPA identified five broad categories of business information which are required by users: Financial and Non financial data, •Management analysis of financial and non financial data •Forward looking Information, •Information about management and shareholders, Background of the company Such information assists the users to assess the ability of management to steer the company successful through uncertain times and their stewardship of resources, as well as the equitable distribution of created wealth. CONCLUSION The thesis has explained the whole nature of accounting and its product, accounting information was also deeply covered. Accounting is used as a generic term to include management, cost, financial and computerized accounting. The main purpose of accounting is to provide information that is useful for decision making.

In considering what is decision useful information two aspects are considered. Firstly the qualities inherent to decision useful information and secondly the groups of users of accounting information were identified together with their particular needs. The thesis clearly states that the needs are not static but rather dynamic; changing constantly in response to a changing environment hence accounting information should be flexible. The purpose of this thesis is to propose the inclusion of information on flexibility into the accounting information system.

By labeling the construct of flexibility it becomes visible, so that awareness of its benefits can be created. BIBLIOGRAPHY Accounting and financial management,Prof K. S Puttapa Advanced Accounting,volume 1 and 2, R. L Gupta & M Radhaswamy. Cost Accounting S P Iyenger THE PURPOSE OF ACCOUNTING INFORMATION. The product of accounting is accounting information. Accounting information is used in deciding between courses of action and results in informed decision making. It serves to reduce the uncertainty inherent in the business environment where decisions are made about the future.

It further reduces entropy based on the assumption that chaos exists where there is no information. Littlejohn (1989) views information as a measure of uncertainty or entropy in a situation. This implies that the greater the uncertainty, the more accounting information are required. The role of the accountant in producing accounting information is to observe ,screen and recognize events and transactions, to measure and process them and to compile corporate reports with accounting information that are communicated to users. These are then interpreted, decoded and used by management and other user groups.

The main requirement for such corporate reports is that they should be useful to users. The provision of information that is useful for decision-making process is currently recognized as the main purpose of accounting information. This holds for theoretical frameworks on financial reporting as well as accounting literature. A number of international reports have been published since the early 1970’s to determine, among others, the purpose of accounting information and the content of financial statements. These reports focused on the need of external users, and identified decisions usefulness as the main aim of accounting information

In the Trueblood report(AICPA,1971), one of the definitive reports on corporate reporting which was published in the united states of America. 12 objectives of financial statements were identified including the following. To provide information for making economic decisions: To serve users who rely on financial statements as their principal source of information. To provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash flows To supply information for judging management’s ability to utilize resources effectively in meeting goals

To provide factual and interpretative information for disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction or estimation. To provide information on activities affecting society. Although not mentioned explicitly, the construct of flexibility is implied in several of these objectives. For example, the third objective refers to the amount,timing and uncertainty of cash flows. Information on flexibility is useful in predicting the amount and timing of future cash flows and removes some of the uncertainty in that it provides information on the alternatives that management are likely to select.

Similarly, the information on flexibility is helpful in achieving the fifth stated objective, namely of providing information on matters which are subject to interpretation, evaluation, prediction, information on flexibility assists users in identifying likely outcomes for the enterprise and therefore add interpretative, predictive and estimative value. In Canada, the stamp report (CICA, 1980) on corporate reporting identified four major objectives of financial reporting: To provide useful information to all the potential users of such information in a form and time that is relevant to their needs.

To provide information to minimize uncertainty about the validity of information and to enable the user to make his or her own assessment of risks associated with the enterprise: To develop the standards governing financial reporting which allow ample scope for innovation and evolution as improvements become feasible To be directed towards the needs of users who are capable of comprehending a complete set of financial statements. The construct of flexibility may also contribute towards the attainment of the objectives stated in the stamp report.

Information on flexibility reduces uncertainty and also the risk associated with enterprises ,as set out in the second stated objective. The introduction of flexibility into accounting should result in a less rigid approach being adopted in the development of accounting standards, which is the third stated objective. Where as all these reports concentrated on the objective of financial reporting to external users, the institute of chartered accountants of Scotland considered the information needs of both management and external users.

The conclusions made in the report are that an efficient market requires the communication of useful information from management to investors, that financial reports should reflect economic reality and that the information needed by investors is the same in kind as that needed by management. Thus the finding is that one accounting system can serve the needs of both internal and external users In a nut shell decision usefulness as the main objective of accounting information cannot remain static, however will evolve and change over time. It will be influenced by political, social, economic and technological changes in the environment.

Changes in the environment may influence not only the future and objectives of accounting information but also the need of its users. This therefore requires the accounting information system to be flexible so that it can adapt to the changing demands of its users. Decision usefulness is favored in accounting reports and theoretical frameworks on financial reporting, however it is not the only purpose of the accounting discipline. At present there is no comprehensive theory of accounting, and therefore no generally agreed on purpose for accounting, making the discipline to be viewed as a multiple paradigm science.

The disclosure requirements are related to the positioning of the enterprise and its ability to adapt to changes in the environment. In other words, it concerns the flexibility of the enterprise. This statement recognizes the importance of providing information on the flexibility to users and as such the farsightedness of this research. CHARACTERISTICS OF DECISION USEFUL INFORMATION. The purpose of this thesis is to introduce information on flexibility into the accounting information system, which meets the objective of being useful in decision making.

In order to assess whether information is decision useful, a number of qualitative characteristics are identified from the accounting literature. These qualitative characteristics should be. The information should stand the test of time. The information should be pervasive, implying it should apply to all accounting entities. The information should be implementable. Susceptible to objective verification. In their conceptual framework, the Financial Accounting Standard Board (FASB-1980a) distinguished between two categories of qualities namely user-specific and decision-specific.

User specific qualities refer to the aspects such as understandability and decision useful qualities and on the ability of users, for example their knowledge of accounting and willingness to study information. These qualities of users determine the level of complexity of information that should be reported. Decision specific qualities concern the qualities required of information such as reliability, timeliness, relevance and completeness. Reliability refers to the ability of the information to be relied upon or trusted . This assures that information is reasonably free from error and bias. The information is verifiable and aithfully represents what it purports to represent. In order to achieve a faithful representation, information should be maintain an agreement between the measure and description and the phenomenon which it purports to represent Relevance dwells on the capacity of information to influence the decision-making process of users. It enables the users to make predictions about the future and to confirm or revise previous estimates. In order for information to be relevant, it should be made available to the users before it loses its capacity to influence decisions, in order word it should be provided on a timely basis. A MINOR PROJECT ON ACCOUNTING AND ACCOUNTING INFORMATION FOR, INTERNAL AND EXTERNAL USERS PRESENTED BY Mr. EMMANUEL FONGEH IN PARTIAL FULFILLMENT OF AN EXECUTIVE MASTERS DEGREE IN BUSINESS ADMINISTRATION. CHAPTER 1 1. 1 INTRODUCTION. At a glance, accounting can appear extremely complicated and confusing. The untrained eye may struggle to grasp the entire nature of accounting and see it merely as an incompressible mass of numbers. However accounting is much more for a company or an economic entity. As intimated by the title, this thesis proposes the inclusion of information n flexibility as a means of enhancing the accounting information system of business organization. However the inclusion of such information would be incomplete with out prior discussion of the purpose of accounting and its product, accounting information as well as whom the users of accounting information are. I hereby strongly belief that the significance of accounting information cannot be fully appreciated, without first examining all the different individuals who are actually making use of the accounting information. . 11 Theoretical Framework. Before the nature of accounting can be addressed, the field of study must first be delineated. This entails an identification of the area of interest and the borders of discipline in relation to neighboring disciplines. Thus a successful definition of accounting should clearly delineate the boundaries of the discipline at a point in time, give a precise statement of its essential nature, and be flexible so that innovation and growth in the discipline can be accommodated.

A number of definitions of accounting have been given in this project, each of which attempts to demarcate its field of study. According to the AICPA (American Institute of Certified Public Accountants) accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting results thereof.

While accounting may have started as being an art, it is doubtful whether this view is still generally held. The increased use of scientific methods in accounting has changed the discipline to an applied science. (Matterssich 1984)According to Matterssich accounting is a science because of its methodology and applied because of its global orientation. He suggests that it may be regarded as an induced science as it tends to solve problems from which are general propositions induced.

More recently the American Association of Accountants (AAA) defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of accounting information. This definition gives a broad perspective even though critics see it as too general. A more comprehensive definition is provided by Asari, Bell, Klamer and Lawrence (1997) and it states that accounting consists of the four key ideas below, ?It is by nature a measurement process: Its scope includes financial and operational information: ?Its purpose is to assist the organization in reaching its strategic objectives: ?Its attributes are to enhance the understanding of the measures phenomena and provide information for decision making, and therefore encourages actions and supports and creates shared values and mind sets. The construct of flexibility does not appear in any of the definitions of accounting because the definitions were developed during stable periods.

The environment however has changed, uncertainty has increased and predictability has declined. In view of the fact that flexibility is a function of uncertainty, greater value will be attached to flexibility in organizations as uncertainty escalates. It is therefore appropriate to include the construct of flexibility in the definition of accounting. From a functionalist perspective, accounting is viewed not as an end to itself, but rather as a commodity or language that is useful in decision making.

This implies as mentioned before that the existence of accounting is dependent on its usefulness to society, and in a narrower context its usefulness to the users of accounting information. These users of accounting information can be divided into two broad categories, namely internal and external users. Internal users can be defined as those who are internally directly involved with the accounting information and they are, management and employees who require information for strategic, operational and administrative decisions.

This type of information is communicated in management reports and is the domain of management accounting. External users are does individuals or group of individuals who are not directly involved with the accounting information but require the information for various reasons. External users include investors, lenders, suppliers, customers, government and the general public. This information is usually communicated by means of annual and special purpose financial reports and is the domain of financial accounting.

The accounting information as earlier mentioned refer to all business reports prepared in compliance with laid down principles and standards and expressed in monetary terms to cater for the need of users. Main examples of these are the financial reports of a business which include mainly, Balance Sheet, Profit and Loss, Cash Flow Statement, Fund flow statement or statement of movement in equities. A balance sheet by definition is a financial document prepared by management which shows all the assets (resources) of a business as well as the liabilities (obligations) and capital of the business.

It shows the overall financial position of the business entity. A profit and loss statement also known as Income statement is an accounting document that shows the summary of all trading activities within a specific period of time. It states all the sales that have been made and deducts the purchases or costs of goods sold to come up with the gross profits, and when operational expenses are deducted from the gross profits, net profit is gotten, which can either be retained or distributed to shareholders.

Cash flow statements show the sources of cash inflow and outflow for a business entity, this creates a real picture of the actual cash situation a business entity, if cash is going out more than it is coming in, it implies a negative cash situation, meanwhile if more cash is moving in than it is going out, there is a positive cash movement. This chapter has clearly brought out, the purpose of the project, and explained all the basic terminology to be used in the course of the thesis. BODY Chapter 2. 1 THE NATURE OF ACCOUNTING

This chapter explains in detail all the branches of accounting, the purpose of accounting information, the characteristic of decision useful information and the users of accounting information and their information needs. There are four main branches of accounting, namely financial accounting, management accounting, cost accounting and computerized accounting. The apparently divergent needs of internal and external users of accounting information have resulted in the development of sub disciplines within the discipline of accounting, as mentioned above..

Financial accounting is mainly concerned with the financial state of affairs and the financial results of a business entity. It includes preparation of financial statements showing results of operation and financial state of affairs. Financial accounting enables management to exercise full control over the property and assets of the firm and also prepare returns and statement for taxation purposes. It mainly comprises of the profit and loss statement and the balance sheet. Management accounting has erupted as a result of changing trends in business.

Normally accounts were prepared just to prepare a true and fair view of the state of affairs, but now the focus has also being to solve managerial problems and plan for the future of every business, this is the major role of management accounting. Management accounting is the application of accounting and statistical techniques with the specific purpose of providing and interpreting information designed to assist the management in its function of promoting maximum efficiency and in envisaging, formulating and coordinating future plans and subsequently in measuring their execution.

Hence management accounting makes data available to management for decision making in a scientific manner. Cost accounting is that branch of accounting that has to do with, classifying, recording, and appropriate allocation of expenditure in determining costs of products and services in a presentation of suitably arranged data for the guidance of management. It basically dwells on finding out the costs of jobs, product, and services of unit of output, as required. It deals with cost of production and distribution. Costing enables the management to know the cost of producing and selling products and also the costs components.

Another important branch of accounting is computerized accounting. The rise of this branch of accounting is a result of tremendous improvements in technology, growth and expansion of business entities which has consequently called for an increase in the volume of business transactions. With the invention of computers and the development of computerized accounting, collected data is fed into the computer as input so that processing of data may be made and the desired results are produced in the form of reports and documents known as output.

Hence computerized accounting makes use of computer software’s that can manipulate process data and give the output to the user in no time enabling for faster and accurate reporting. All the branches of accounting mentioned above have the main goal of serving the needs of both internal and external users. The need of internal and external users regarding information produced in an economic entity differs essentially in the following six areas. •Access, •Frequency, •Detail, •Timing, •Required Expertise and understanding, •Response,

The internal users have unlimited and direct access to information in the organization. Information is available to management on demand to support strategic, tactical and operational decisions. In contrast, the external users of financial information have limited and indirect access to information and is usually reliant on the information contained in the financial reports and reported to the press. The frequency with which accounting information is obtained varies between internal and external users. Management can request information on a regular basis, be it monthly, weekly or daily.

External users have to rely on the annual and interim financial reports and other sources of information such as press releases, which are available on a less frequent basis. Management and employees have access to the level of detail of information they require, where as external users receive aggregated information contained in financial statements and have virtually no access to detailed information which is not prescribed by legislation or accounting standards In addition internal users can access information directly and are supplied on a timely basis with most up to date information.

In contrast, external users are supplied with dated and historical information supplied in interim reports and financial reports, often with limited information value. Because it is obtained timeously, the information provided to internal users has more predictive value than that which external users receive. The responses of internal and external users to accounting information are different, internal users use the information to run the organization or make strategic, operational and administrative decisions. External users use the information for a broad spectrum of responses such as whether to invest, supply materials or advance funding.

Their values, culture and beliefs influence the response of users. It is therefore not surprising that management and financial accounting developed in different directions. The aim of the former is to meet the dynamic information needs of management and employees of an entity in rapidly changing and business environment. The later on the other hand, concentrates on identifying the needs of a diverse group of users, protecting their interest through legislation and accounting statements, extending and improving the quality of minimum disclosure requirements in financial reports.

The divergent development of management accounting and financial accounting has resulted in effectively two information systems within organizations The independent development of financial and management accounting has widened the gap between information needed by management and the information reported to the other users and is inefficient and costly in a competitive environment. As already mentioned already, the effective use of technology can be used to develop one flexible information system in an enterprise that meets the different needs of both internal and external users.

The quality of information requires that transactions and events be measured and reported in a consistent manner to enable the users compare the results of the company from year to year or with the results of different companies. Acting as a pervasive constraint to the provision of information, is the cost versus benefit assessment. The constraint implies that the cost of providing information should not be exceeded by the benefits derived by the users. Although costs can usually be quantified, the measurement of the benefits of information is on the whole problematic.

To assess this constraint, continuous feedback is required on the effectiveness and efficiency of a system. This assumes that the accounting information systems are viewed as open systems. Materiality forms the threshold for the recognition of information. Only material information is included in the financial statements. Materiality is however not only limited to size but also to nature of underlying transactions or events and the impact that such information may have on the decision of users. The need and qualities of users do not remain static but evolve over time .

Therefore, the decision useful qualities should change over time, through feedback, in response to the evolving expectation of users. Gouws (1997) suggest that feedback on the effectiveness of communication through financial statements should be encouraged over time as this will improve the quality off information and its decision usefulness. Other qualities of accounting usefulness are proposed in the accounting literature. The Solomon’s report (1989) refers to feasibility that is the need to require only information that is feasible to provide.

However, the concept of feasibility is only meaningful if considered together with the cost versus benefit constraint. Completeness is another quality of decision useful information. In other words reported information should provide a full picture of the economic activities of the organization These qualities of decision useful information are not absolutes. In practice it may be necessary to weigh up the importance of conflicting qualities as the gain in one in one quality, such as relevance, may result in the decline in another, such as reliability .

This highlights a problem inherent to the use of qualitative measures, namely that the measures may not be implied consistently, different weights may be attributed to qualities by different people and relative importance of different qualities may change over time. Unfortunately the balancing of conflicting qualities of information and the interpretation of the importance of individual qualities are not usually apparent from financial reports. Nevertheless these qualities are very useful in assessing what constitutes decision useful information. THE PURPOSE OF ACCOUNTING INFORMATION

The product of accounting is accounting information. Accounting information is used in deciding between courses of action and results in informed decision making. It serves to reduce the uncertainty inherent in the business environment where decisions are made about the future. It further reduces entropy based on the assumption that chaos exists where there is no information. Littlejohn (1989) views information as a measure of uncertainty or entropy in a situation. This implies that the greater the uncertainty, the more accounting information are required.

The role of the accountant in producing accounting information is to observe ,screen and recognize events and transactions, to measure and process them and to compile corporate reports with accounting information that are communicated to users. These are then interpreted, decoded and used by management and other user groups. The main requirement for such corporate reports is that they should be useful to users. The provision of information that is useful for decision-making process is currently recognized as the main purpose of accounting information.

This holds for theoretical frameworks on financial reporting as well as accounting literature. A number of international reports have been published since the early 1970’s to determine, among others, the purpose of accounting information and the content of financial statements. These reports focused on the need of external users, and identified decisions usefulness as the main aim of accounting information In the Trueblood report(AICPA,1971), one of the definitive reports on corporate reporting which was published in the united states of America. 2 objectives of financial statements were identified including the following. To provide information for making economic decisions: To serve users who rely on financial statements as their principal source of information. To provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash flows To supply information for judging management’s ability to utilize resources effectively in meeting goals To provide factual and interpretative information for disclosing underlying ssumptions on matters subject to interpretation, evaluation, prediction or estimation. To provide information on activities affecting society, Although not mentioned explicitly, the construct of flexibility is implied in several of these objectives. For example, the third objective refers to the amount, timing and uncertainty of cash flows. Information on flexibility is useful in predicting the amount and timing of future cash flows and removes some of the uncertainty in that it provides information on the alternatives that management are likely to select.

Similarly, the information on flexibility is helpful in achieving the fifth stated objective, namely of providing information on matters which are subject to interpretation, evaluation, prediction, information on flexibility assists users in identifying likely outcomes for the enterprise and therefore add interpretative, predictive and estimative value. In Canada, the stamp report (CICA, 1980) on corporate reporting identified four major objectives of financial reporting: ?To provide useful information to all the potential users of such information in a form and time that is relevant to their needs. To provide information to minimize uncertainty about the validity of information and to enable the user to make his or her own assessment of risks associated with the enterprise: ?To develop the standards governing financial reporting which allow ample scope for innovation and evolution as improvements become feasible ?To be directed towards the needs of users who are capable of comprehending a complete set of financial statements. The construct of flexibility may also contribute towards the attainment of the objectives stated in the stamp report.

Information on flexibility reduces uncertainty and also the risk associated with enterprises ,as set out in the second stated objective. The introduction of flexibility into accounting should result in a less rigid approach being adopted in the development of accounting standards, which is the third stated objective. Where as all these reports concentrated on the objective of financial reporting to external users, the institute of chartered accountants of Scotland considered the information needs of both management and external users.

The conclusions made in the report are that an efficient market requires the communication of useful information from management to investors, that financial reports should reflect economic reality and that the information needed by investors is the same in kind as that needed by management. Thus the finding is that one accounting system can serve the needs of both internal and external users In nut shell decision usefulness as the main objective of accounting information cannot remain static, however will evolve and change over time. It will be influenced by political, social, economic and technological changes in the environment.

Changes in the environment may influence not only the future and objectives of accounting information but also the need of its users. This therefore requires the accounting information system to be flexible so that it can adapt to the changing demands of its users. Decision usefulness is favored in accounting reports and theoretical frameworks on financial reporting, however it is not the only purpose of the accounting discipline. At present there is no comprehensive theory of accounting, and therefore no generally agreed on purpose for accounting, making the discipline to be viewed as a multiple paradigm science.

The disclosure requirements are related to the positioning of the enterprise and its ability to adapt to changes in the environment. In other words, it concerns the flexibility of the enterprise. This statement recognizes the importance of providing information on the flexibility to users and as such the farsightedness of this research. THE NEEDS OF USERS Before the needs of users can be considered, it is necessary to identify the users of business information, as different users utilize business information to satisfy different needs. The two main users of accounting information are the internal and external users. INTERNAL USERS

The internal users constitute the following groups of individuals. MANAGEMENT The management is concerned mainly with the operations of the company, so as to deduce the profitability of the company, and main focus on maximizing the wealth of the shareholders. This information can be obtained through evaluation and analysis of financial documents such as the profit and loss statement, the balance sheet and cash flow statement. From proper analysis of all these, management can make decisions regarding productivity, growth and expansion, managerial adjustments, new modes of competition, sources of finance and market standing. EMPLOYEES

All employees of a company are directly involved with the accounting information of the company, They want to know how profitable the company is doing so as to improve on their efforts, make demands for bonuses and salary increments as well as promotions, appointments and training and development. EXTERNAL USERS INVESTORS Both existing and potential investors have a major concern with the financial statements of the company. The existing investors are mainly concerned with the profitability of the company as well as its financial standings so as to make sure they get the right and appropriate dividends from their funds invested.

High profitability would imply high amount of dividends by preference shareholders, and high Earnings Per Share for ordinary shareholders. Potential investors look out for companies which are doing well in terms of profitability so as to ensure that they are not going to invest their funds in the wrong company or undertaking a risky venture. Hence accounting information becomes very vital to them.. LENDERS AND FINANCIAL INSTITUTIONS Information on creditworthiness of the company of the company and its ability to repair loans can be viewed from its accounting information.

The profit and loss shows the profitability of the company, meanwhile a balance sheet shows the financial position of the company as well as all the assets and liabilities. From the profit and loss the profitability of the company can be known, a company which is profitable is very likely to pay its debts. From the balance sheet the financial leverage of the company can be known. A company with a high debt equity ratio is on a dangerous footing as such would likely not be able to obtain loans from external sources such as financial institutions SUPPLIERS AND CREDITORS

Suppliers and creditors are deeply concerned about the financial position of their buyers or customers. From the accounting information suppliers would know the creditworthiness of their customers and would know whether or not to sell them goods on credit, or to setup a credit limit for each customer. This is to ensure that credits granted can be repaid and most importantly on due dates. CUSTOMERS Customers would like to know whether the company would exist for the foreseeable future and thus the continued supply of products, parts and after sale services.

They also want to know that the company is not exploiting them by making exorbitant profits. GOVERNMENT AND REGULATORS Information on the allocation of resources and the compliance to regulations can be viewed through accounting information, the preparation of financial statements with respect to the laid down rules and principles. In addition the government is also concerned with the accounting information of business entities for tax reasons, so as to assess the taxes payable by various companies. COMPETITORS

From accounting information, companies with in same industry can evaluate the success of each other, through their financial results and earnings per share. Competitors require the information mainly for strategic purposes, such as how to gain greater share of the market, eliminate competition, etc PUBLIC From accounting information, the contribution of various entities to the society can be known. HYPOTHESIS From all the research from both primary and secondary sources it is very clear that accounting is vital for the success of any organization be it profit or non profit seeking and that accounting information is highly needed by the users.

However the definition of accounting remains very broad and the needs of the users are so varied that the process of accounting and the needs of the various users can not all be met. CRITICISM A serious shortcoming of the reports on financial information as well as the conceptual frameworks is that they are largely based on what is perceived to be decision useful information. Until recently the needs of especially financial users had not been surveyed on a large scale. Users also require operating data in order to understand the nature of the business and its performance relative to competitors.

Operating data may be stated in terms of products, number of employees, innovation, effects of unusual or non recurring transaction etc. External users require the perspectives of management on the future, in particular on the opportunities and risk that arise from changes in the environment of the organization RECOMMENDATIONS The survey by AICPA identified five broad categories of business information which are required by users: Financial and Non financial data, •Management analysis of financial and non financial data •Forward looking Information, •Information about management and shareholders, Background of the company Such information assists the users to assess the ability of management to steer the company successful through uncertain times and their stewardship of resources, as well as the equitable distribution of created wealth. CONCLUSION The thesis has explained the whole nature of accounting and its product, accounting information was also deeply covered. Accounting is used as a generic term to include management, cost, financial and computerized accounting. The main purpose of accounting is to provide information that is useful for decision making.

In considering what is decision useful information two aspects are considered. Firstly the qualities inherent to decision useful information and secondly the groups of users of accounting information were identified together with their particular needs. The thesis clearly states that the needs are not static but rather dynamic; changing constantly in response to a changing environment hence accounting information should be flexible. The purpose of this thesis is to propose the inclusion of information on flexibility into the accounting information system.

By labeling the construct of flexibility it becomes visible, so that awareness of its benefits can be created. BIBLIOGRAPHY Accounting and financial management,Prof K. S Puttapa Advanced Accounting,volume 1 and 2, R. L Gupta & M Radhaswamy. Cost Accounting S P Iyenger THE PURPOSE OF ACCOUNTING INFORMATION. The product of accounting is accounting information. Accounting information is used in deciding between courses of action and results in informed decision making. It serves to reduce the uncertainty inherent in the business environment where decisions are made about the future.

It further reduces entropy based on the assumption that chaos exists where there is no information. Littlejohn (1989) views information as a measure of uncertainty or entropy in a situation. This implies that the greater the uncertainty, the more accounting information are required. The role of the accountant in producing accounting information is to observe ,screen and recognize events and transactions, to measure and process them and to compile corporate reports with accounting information that are communicated to users.

These are then interpreted, decoded and used by management and other user groups. The main requirement for such corporate reports is that they should be useful to users. The provision of information that is useful for decision-making process is currently recognized as the main purpose of accounting information. This holds for theoretical frameworks on financial reporting as well as accounting literature. A number of international reports have been published since the early 1970’s to determine, among others, the purpose of accounting information and the content of financial statements.

These reports focused on the need of external users, and identified decisions usefulness as the main aim of accounting information In the Trueblood report(AICPA,1971), one of the definitive reports on corporate reporting which was published in the united states of America. 12 objectives of financial statements were identified including the following. To provide information for making economic decisions: To serve users who rely on financial statements as their principal source of information. To provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash flows

To supply information for judging management’s ability to utilize resources effectively in meeting goals To provide factual and interpretative information for disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction or estimation. To provide information on activities affecting society. Although not mentioned explicitly, the construct of flexibility is implied in several of these objectives. For example, the third objective refers to the amount,timing and uncertainty of cash flows.

Information on flexibility is useful in predicting the amount and timing of future cash flows and removes some of the uncertainty in that it provides information on the alternatives that management are likely to select. Similarly, the information on flexibility is helpful in achieving the fifth stated objective, namely of providing information on matters which are subject to interpretation, evaluation, prediction, information on flexibility assists users in identifying likely outcomes for the enterprise and therefore add interpretative, predictive and estimative value.

In Canada, the stamp report (CICA, 1980) on corporate reporting identified four major objectives of financial reporting: To provide useful information to all the potential users of such information in a form and time that is relevant to their needs. To provide information to minimize uncertainty about the validity of information and to enable the user to make his or her own assessment of risks associated with the enterprise: To develop the standards governing financial reporting which allow ample scope for innovation and evolution as improvements become feasible

To be directed towards the needs of users who are capable of comprehending a complete set of financial statements. The construct of flexibility may also contribute towards the attainment of the objectives stated in the stamp report. Information on flexibility reduces uncertainty and also the risk associated with enterprises ,as set out in the second stated objective. The introduction of flexibility into accounting should result in a less rigid approach being adopted in the development of accounting standards, which is the third stated objective.

Where as all these reports concentrated on the objective of financial reporting to external users, the institute of chartered accountants of Scotland considered the information needs of both management and external users. The conclusions made in the report are that an efficient market requires the communication of useful information from management to investors, that financial reports should reflect economic reality and that the information needed by investors is the same in kind as that needed by management. Thus the finding is that one accounting system can serve the eeds of both internal and external users In a nut shell decision usefulness as the main objective of accounting information cannot remain static, however will evolve and change over time. It will be influenced by political, social, economic and technological changes in the environment. Changes in the environment may influence not only the future and objectives of accounting information but also the need of its users. This therefore requires the accounting information system to be flexible so that it can adapt to the changing demands of its users.

Decision usefulness is favored in accounting reports and theoretical frameworks on financial reporting, however it is not the only purpose of the accounting discipline. At present there is no comprehensive theory of accounting, and therefore no generally agreed on purpose for accounting, making the discipline to be viewed as a multiple paradigm science. The disclosure requirements are related to the positioning of the enterprise and its ability to adapt to changes in the environment. In other words, it concerns the flexibility of the enterprise.

This statement recognizes the importance of providing information on the flexibility to users and as such the farsightedness of this research. CHARACTERISTICS OF DECISION USEFUL INFORMATION. The purpose of this thesis is to introduce information on flexibility into the accounting information system, which meets the objective of being useful in decision making. In order to assess whether information is decision useful, a number of qualitative characteristics are identified from the accounting literature. These qualitative characteristics should be. The information should stand the test of time.

The information should be pervasive, implying it should apply to all accounting entities. The information should be implementable. Susceptible to objective verification. In their conceptual framework, the Financial Accounting Standard Board (FASB-1980a) distinguished between two categories of qualities namely user-specific and decision-specific. User specific qualities refer to the aspects such as understandability and decision useful qualities and on the ability of users, for example their knowledge of accounting and willingness to study information.

These qualities of users determine the level of complexity of information that should be reported. Decision specific qualities concern the qualities required of information such as reliability, timeliness, relevance and completeness. Reliability refers to the ability of the information to be relied upon or trusted . This assures that information is reasonably free from error and bias. The information is verifiable and faithfully represents what it purports to represent.

In order to achieve a faithful representation, information should be maintain an agreement between the measure and description and the phenomenon which it purports to represent Relevance dwells on the capacity of information to influence the decision-making process of users. It enables the users to make predictions about the future and to confirm or revise previous estimates. In order for information to be relevant, it should be made available to the users before it loses its capacity to influence decisions, in order word it should be provided on a timely basis. .