The importance of accounting relatively to decision making

The importance of accounting in society plays a major role in making decisions as the

information provided from accounting department allows managers to conduct a higher quality

in making decisions. Accounting information helps managers to understand company’s

positioning at one point in time. Especially with the current financial crisis as managers needs to

have an extensive information to be able to plan and develop strategies that can adapt the

economic situation which we live in for its survival. Accountants have the ability to influence

management decision with their information provided to the organization by using qualitative

and quantitive techniques. Accounting is beyond scorekeeping and financial reports as the

information provided has to have a context of quality by evaluating and analyzing organization

data and performance. Accountant role after implementing the scorekeeping function is also to

embrace the opportunities and problems that senior managers need to pay attention, and clarify

the best decision available that helps the organization to reach their primary goal.

Historically, business owners were mostly interested in measuring the price of outputs relatively

to the cost of inputs. However, in recent years, accounting has been a controversy for academic

who are seeking to develop an efficient management system. The controversy was on whether

accounting management is relevant to the decision-making, and is accounting management

practices realistic enough to be reliable? Especially in time with new innovations and technology.

Gary M. Entwistle and Fred phillips (2003, PP 81) argue that one of the flaws facing

accounting is the framework of collecting information which is free from error and bias, got

accounting into be less reliable as accounting has not yet been able to measure intangible assets.

Such as brands, patents, and investment in human capital are extremely difficult to evaluate

because measuring these unphysical assets can be bias. Apple, a technological manufacturing

company ranked as the most valuable brand in the world, is valued roughly $241.2B in 2019

( Forbes, 2020). Apple’s brand value is growing dramatically because of the consistency of their

development and the uniqueness of their product. As a result, Apple has gained investors and

costumers trust and loyalty that considered to be an intangible asset. In addition, Apple intend to

invest over $16 billion on research and development in 2019( CNBC, 2019). As this investment

considered to be an expense to the company in accounting perspective. However, some critics

believe that R&D is a future economic benefit that should be included to the balance sheet as I

quote from Robert S. Kaplan and Johnson (1987, PP 22) explains that “The financial system

treats many cash outlays as expense of the period in which they are made even though these

outlays will benefit future period.” These critics appeared because the quick dramatic changes in

behavior from the old traditional manufacturing to the new modern manufacturing economy

resulted a gap between real world valuation and accounting quantitive practice which has raised

the debate between whether accounting is practical or not.

Furthermore, Critics refer to accounting management information as basic, broad, and takes time

until managers can be able to act based on the information. Kaplan and Johnson (1987, p. 22)

states that “management accounting is produced too late, too aggregated, and too distorted to be

relevant for managers’ planning and control decision.” Traditionally, Accountant uses simple

cost system that is not helpful for management to evaluate each product line performance.

Traditional costing system sums up all the actives instead of allocating the actual expense which

makes managers job much harder to improve each product line and eliminate any extra expenses

by reason of its simplicity. Therefore, Accounting needed a new method of allocating costs that

can clear managers vision on the actual expense for each line which was the Activity based

costing developed by Cooper and Kaplan. ABC system revolutionized accounting management

into be more effective tool for decision-making. ABC system provide management with the

extensive data that guid management to pay attention on the resources consumed by each product

line. It is more accurate and reliable than simple costing system. The benefits of using ABC

system draws managers attention to any neglected aspects in the organization as it enhance

managers quality of making-decision.

A second method improves decision making is cost of quality. Cost of quality helps to

assure better quality performance in every activity. It helps to improve productivity as well as

reduction in waste. organizations use COQ to increase their competitive advantage. COQ

provides managers an analyzed data which is relevant to the decision-making of developing

process.

On the other hand , the information provided from the accounting department is incomplete

as the information context is required to have a full picture before making decision. The

importance of knowing and understanding the challenges faces an organization is crucial to have

an effective decisions making, as simple relevant cost system is incomplete and inconsistent with

the organization’s strategic goals ( Blocher, 2009). A real world example is the firm that I work

for, have a temporary limited production due to some maintenance as the company faces a high

demand over firm’s capacity of production. The firm has two product line activity bag Cement

and bulk cement as bag cement has 15% over cost than bulk cement because of the packing

process, electricity and material cost ( paper bag ). Because of the high demand, the company

needs to reduce one of the product sales. Obviously, bulk cement is much profitable using

accounting quantitive perspective. In contrast, the sales department states that the market share

of bag cement is stable and growth steadily, as decreasing company’s sales for bag cement might

result a bad reputation for the company which will result difficulty in rebuilding business

reputation and regaining our market share. Although, bulk sales is much profitable and generate

less cost, bulk sales fluctuate from week to another which also depends on credit sales. Our bulk

costumers can understand our temporary issue as we have been their suppliers ages ago. The

accounting department and sales department are still discussing on the temporary issue as well as

the financial department who is concerned in the cash flow matter. This issue shows the

importance of qualitative and quantitive perspective to have a complete ground in making better

management decision.

conclusion

Quality-Access to Success, Vol.17, S2 May 2016

48

IMPORTANCE, ROLE AND QUALITATIVE CHARACTERISTICS OF

ACCOUNTING INFORMATION IN THE DECISION MAKING

PROCESS

Delia Beatrice OPREAN¹, Lucia PODOABĂ²

¹Associate professor, PhD, Faculty of Economic Sciences, Department of Management-

Finance-Accounting, "Bogdan Vodă"University of Cluj-Napoca, Cluj-Napoca, România,

e-mail: [email protected]

²Associate professor, PhD, Faculty of Economics and Business Administration, "Babeș

Bolyai" University of Cluj-Napoca, Cluj-Napoca, România,

e-mail: [email protected]

Abstract: In this paper, our goal is to study the importance, role and qualitative characteristics

of accounting information in the decision making process in each company. This process is

supported by the accountancy. Because the quality of the managerial process had an important

role in human community activities in general, in enterprises development in particular, we

believe that there is a relationship between accounting and decision process. In order to take

decisions by the management and to achieve the objectives of the companies it is necessary to

know exactly the economic and financial evolution of enterprises, this thing being possible

through the accounting information. An accounting information system is important for

preparing quality accounting information for the users, whatever their type is. The information

regarding the financial situation and the companies performances define their qualitative

characteristics and helping the users in taking decisions.

Key words: accounting information, accounting system, management process, decision making

process, quality

JEL Classification: M41, M40, J59, M49, L15

1. Introduction

The most important resource of information in actual society in generally, in economics in

particular, is the accounting, which can support the decision making process and management

activity. Accounting information are vital in communication on national, european and international

levels for the efficiency of local or/and global market. In order to make investments, to integrate on

the global market of services and goods, each enterprise must have access and understand the

financial information of partners, included in their financial statements. The managers ability in

understanding and applying the modern management principles, methods and techniques is a vital

condition for companies to obtain the higher quality of their decisions, which will help in the future

business market. The most representative function of management is decision – making. This process

represents a social, deliberately and rational act of a person or of a group of person which settled the

objectives and directions of theirs actions in order to use human, material and financial resources in

a real context of the firm’s economic life. So, decision – making function formulated information

system which provides the objectives contained in corporate governance strategy and operational

management decisions. A great and important role for business decision making process and

management has the accounting information. The best quality accounting information urgently

requires the best organization of its system.

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Quality-Access to Success, Vol.17, S2 May 2016

49

As the American Institute of Certified Public Accountants (AICPA) established in 1996

„accounting actually is information system and we be more precise, accounting is the practice of

general theories of information in the field of effective economic activities and consists of a major

part of the information which is presented in a quantitative form”. The accounting information defines

the ranking position of each firm at one point in time, the evolution or involution of their economic

activities and provides for managers and stakeholders an overview of accounting entities.

In order to understand the role and the importance of accounting information in the decisions

process we present in our paper a literature review which emphasizes the specialists and their

problems regarding this item.

2. Literature review

In the context of the current financial crisis which generated an economic recession,

companies should pay more attention to the accounting information and explore all the possibilities

to assure their survival and economic stability on the business market. According to Bodnar &

Hopwood (2013) the accounting information system is a collection of used human and equipment

resources, converted in information, which can be communicated to managers. In order to help the

managers and the accountants, Scorte et. all (2009) develop a study. Through their paper, these

specialists presenting the role of accounting in financial and economic crisis in general, the

importance of accounting services in particular. The same conclusion is emphasized by Baba (2009),

in her paper. This specialist believes that, in the processes of planning, coordination and development

of the management policies of the economic entities, the role of the accounting services is well to be

considered, regardless of the factors that influence them. In the process of organization of each

company's accounting, were identified a series of factors which are responsible for the quality of the

accounting process and for the efficiency of the accountant's activity. Regardless of direct or indirect

action of these factors, accounting provides efficiently information. This is the reason why, Vătășoiu

et all (2010) show the importance of accounting information in making management decisions and

investments. All accounting information are collected by accounting information system (AIS). The

main objective of an accounting information system (AIS) is the recording of events that have an

economic impact upon organizations and to internal and external stakeholders. Salehi et all (2010)

develop a study to show that although AIS is very useful to Iranian corporation, it is a gap between

what AIS is and what should be.

Regarding to AIS, O’Brien & Marakas (2012) believes that accounting information system

is an integration of human and material resources, which helps to obtain better information. On the

other hand, Gwangwava et all (2012) investigated factors that influence non adoption of

computerized accounting information system by small to medium enterprises. Furthermore, Dinca et

all (2012) emphasized that accounting information provided by accounting accounts serve in the

development of company's diagnostic and in the process of establishing the entity’s tax obligations.

Though, Petroianu (2012) shows on her paper that the accountancy represents an important support

of organization management, providing information meant to reasonably support the decision made.

But, Toth (2012) present the actual role of accounting information systems through software

packages and modern system of management.

The use of the accounting information system’s impact on the quality of financial statements

is demonstrated in the Abdallah’s study (2013), which recommends to focus on the development of

the devices used in the Income Tax and sales department.

An accounting information system has a great importance for preparing quality accounting

information for users. This is the reason why Saċer & Olouiċ (2013) elaborate the paper through

which it is analyzed the perception of the quality of accounting information systems by accountants

in medium and large companies in Croatia. Bukenya (2014) discovered that relevance, reliability,

understandability, accuracy and timeliness were true measures of the quality of accounting

information through factor analysis.

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Quality-Access to Success, Vol.17, S2 May 2016

50

The role of the accounting research in economic development is explained by Okab et all

(2014). Through their study, they demonstrated that the accounting information plays a positive role

in the integrity of these decisions as well as the success of the development plans. Timely

implementation of the plans depends on strategic decisions taken by managers. These types of

decisions are based on analysis of accounting information. That’s why, Ullah et all (2014) developed

a significant relationship between accounting information and strategic decisions. On the other hand,

Rapina (2014) determine the influence of organizational factors (management commitment,

organizational culture and organizational structure) to the quality of the accounting information

system and its implications on the quality of accounting information. Chiriac (2014) develop a

qualitative approach, by a theoretical point of view, regarding the importance of accounting

information in decisional process.

Qualitative characteristics of financial/accounting information are important in the context of

the choice and change of accounting policies by firms. Nobes & Stadler (2014) made the first

empirical study that uses publicly available data to provide direct evidence about the role of the

qualitative characteristics (QCs) of financial information in managements’ accounting decisions. The

accounting is done according to the current legislation.

Caraiman (2015) shows in his paper that the accounting information and accounting rules are

heavily influenced by the political system. Thus, in countries where accounting is connected to

taxation are satisfied with priority to the interests of the state and its institutions, and in countries

where he managed accounts tax disconnection are serviced with priority to the interests of investors.

Accounting information system is a system that collects, records, stores and processes data to produce

information for decision makers (Romney & Steinbart, 2015). Some specialists – such as Fitriati &

Mulyani (2015) – demonstrated through their study that organizational commitment and culture have

positive and significant affect on accounting information success. Furthermore, the success of

accounting information system is related to accounting information quality. The same authors

explained (in 2015) the influence of leadership style on accounting information systems success and

accounting information quality.

Another specialist, Yenni (2015) shows in her study that the success of AIS application

cannot be separated from the effectiveness of existing organizational structure in the organization.

Likewise, Susanto (2015) believe that the quality of accounting information is influenced by the

quality of accounting information systems.

Alamin et all (2015) investigates the factors (perceived technology fit, effort expectancy,

facilitating conditions, self-efficacy and coercive pressure) that influence accounting information

systems (AIS) adoption among accountants. Also, Iskandar (2015) demonstrated through his study

that the quality of accounting information systems can be improved through management

commitment and user competence.

3. Decision making process

A decision is a selection made from many possibilities in order to stimulate different actions.

The decisions adopted by the manager in the company compose the decision-making system. Always

the decision system is preserved by the information system. This decision making process requires a

study of information limited or unlimited, depending on the intended purpose. Those decisions

through which the company is surviving are named strategic decisions. These types of decisions

involve a total analysis of the firm and its environment in order to reduce all the risks. So, in this case,

the decision – making process is very long, using all different techniques and performing studies. The

strategic decisions promote the realization of fundamental objectives included into strategies, plans,

medium or long term programmers. A logical sequence of strategic decisions is represented by the

tactical decisions. These type of decisions ask limited information, but permit the achievement of

derivate objectives incorporated into annual and semestrial programs. On the other hand, the most

numerous decisions are operational one, which requiring a very small number of information. So, for

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Quality-Access to Success, Vol.17, S2 May 2016

51

operational decisions, the manager needs information regarding the operations developed in the

company, but for tactical decision the manager need to know the evolution of business market in

order to decide the financial actions day by day. Whatever the type of decision, a good decision

making count on the quality of external or/and internal information available to the firm, but on the

base of each rational human action exist the cycle information – decision – action. So, if the objective

of this activity is define by the administering of the evolution of economic or social system, these it

will become a directed system where the manager and the board of directors will designed the

management system. The responsible for decision process at strategically and operational level is the

manager, which has at his disposal many information. So, using these information, the manager use

the available resources and take actions in order to obtain the most positive results from economic

point of view. This results are reflected in the financial statements, where the economic events are

registered by accounting system. This is the reason why the accounting information system is closely

connected to decision making process. In order to understand this connection is better to emphasize

some aspects regarding the concept of accounting information system.

4. Theoretical aspects regarding accounting information system

Accounting information system is a tool used by the management's company in order to

provide value which generates a competitive advantages for the company. Thus, accounting

information in a company is classified into financial accounting information (designed by the

summarized financial statements, is intended for external users such as: investors, employers,

creditors, government or general public) and management accounting information (designed for

internal users named management and includes information on unit cost of products, cost behaviour

related to profitability of the product). So, financial accounting information are presented in the

financial statements, which have the same qualitative characteristics (understandability, relevance,

reliability and comparability). Instead, the managerial accounting information are presented in

Scoreboard/Dashboard of income and expenses. In order to serve to the company's needs, the

accounting information must be delivered in time. This is the reason why the best organisation of

accounting information system is very important. Usefulness of accounting information system is

determined by the following reasons:

 to establish the business ability to generate cash, all the sources and uses of the cash;

 to define the business capability to pay back its debts from the relationship with the

state, to employees, banks;

 to pursue financial results on an evolution line in order to resolve all the profitability

and liquidity issues;

 to obtain financial ratios from the accounting statements, that can indicate the

financial and economic stability of the business;

 to search for the details of certain business transactions with national or foreign

partners, as outlined in the disclosures that accompany the statements.

So, there are many possibilities of using accounting information inside of economic entity (as we see

in the figure below – Figure no.1).

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Quality-Access to Success, Vol.17, S2 May 2016

52

Figure1: Possibilities of using accounting information inside of economic entity

(Source: http://connection.ebscohost.com/c/articles/97635611/importance-accounting-information-

decisional-process and http://steconomiceuoradea.ro/anale/volume/2014/n1/063.pdf)

Because the accounting information system offers the necessary’s data for the users (internal

or external parties), is better to emphasizes the interactions between them in the decision – making

process (as we see in the figure below – Figure no2).

Figure 2: Interactions between accounting information system (AIS) and internal and

external parties

(Source: http://www.downloadslide.com/2015/12/slides-accounting-information-systems_97.html)

The accounting information system is a subpart of the information system of the enterprise

and within it is a subpart of the information system of the management. So, the task of the accounting

information system is to meet the data demands of the management information system, in order to

provide information to the managers of the enterprise. The accounting information system is in close

http://connection.ebscohost.com/c/articles/97635611/importance-accounting-information-decisional-process

http://connection.ebscohost.com/c/articles/97635611/importance-accounting-information-decisional-process

http://steconomiceuoradea.ro/anale/volume/2014/n1/063.pdf

http://www.downloadslide.com/2015/12/slides-accounting-information-systems_97.html

Quality-Access to Success, Vol.17, S2 May 2016

53

connection with the management information department the accounting and administration

department, the inner control and the information technology team. This system is revealed in the

figure below (Figure no3).

Figure 3: Information system of the enterprise

(Source: http://webcache.googleusercontent.com/search?q=cache: 8fIFH6Lx7UcJ:tmp.gtk.uni-

miskolc.hu/volumes/2012/01/TMP_2012_01_13_Toth

_Zsuzsanna.pdf+&cd=1&hl=en&ct=clnk&gl=ro)

So, the information works within the enterprise and includes two related sub-systems: a data-

processing sub-system (responsible for acquiring, storing, processing and forwarding information

needed for all operations) and a decision making subsystem. The last subsystem is conducted by the

manager, but always the accountant must be "the right hand" or "the brain" which delivered the most

important information at the right place and at the proper time. So, accounting has the decisive role

in processing and supplying information for managers. In order to be useful to the users, accounting

information should have the following characteristics (http://www.accountingtools.com/

questions-and-answers/what-are-the-characteristics-of-useful-accounting-informatio.html):

prepared objectively, consistency of recordation and presentation, in support of decisions, matches

reader knowledge, reliability and completeness of information. Also, there are four qualitative

characteristics of accounting information that serve as the foundation for decision (http://

simplestudies.com/what-are-the-qualities-of-accounting-information.html) in a company:

 relevance (makes a difference in a decision making process because the accounting information is predictive, it provides feedback and it is timely) is related to the

concept of materiality;

 timeliness (requires both recording the financial transaction in the appropriate accounting period and generating accounting reports as soon as all data are posted so

that issues with business operations are discovered before the problem grows);

 reliability (accounting information is faithfully presented because is verifiable, it is factual and complete and it is neutral);

 comparability (accounting information allows comparison between or among different entities, that’s why the companies are required to disclose their accounting

methods/policies);

 consistency is related to comparability, when the entity uses the same accounting principles and methods from one accounting period to the next.

http://webcache.googleusercontent.com/search?q=cache:%208fIFH6Lx7UcJ:tmp.gtk.uni-miskolc.hu/volumes/2012/01/TMP_2012_01_13_Toth%20_Zsuzsanna.pdf+&cd=1&hl=en&ct=clnk&gl=ro

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