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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

As a manager of an organisation, there is a great responsibility for decision making. The question lies in how a manager can utilise accounting information to make better decisions. Managerial accounting is a common practice within an organisation where accounting information is identified, measured, analysed, interpreted and communicated to relevant parties to pursue a goal.

Accounting information can be analysed in different ways and be used for different purposes. It’s important to identify the type of decision that needs to be made to ensure that the correct accounting information is gathered and analysed for the best decision making.

For instance, an organisation that wants to attract investors will depend mostly on cash flow statements and cash flow forecasts, the income statement and a balance sheet, whereas an organisation that needs to apply for a loan will rather look into certain ratios such as debt to equity and debt to service coverage ratios.

Managerial accounting is mostly used in scenarios where quick decisions need to be made to help managers optimise business operations. Accounting information is used by managers to plan, evaluate the company performance and manage risks. Budgeting is a great part of an organisation and financial reporting can help a manager to set a realistic budget and identify the need for funding. To measure the company’s performance certain ratios can be used such as the liquidity ratio which measures the company’s ability to generate cash to meet the short-term financial commitments, efficiency ratio that mostly relates to the inventory turnover and the profitability ratio can be used to measure the return on assets and net profit margins.

The first step to making an informed decision is to have information that is reliable and up to date, thereafter the accounting information can be utilised in different ways to ultimately form a report that would help management to make better decisions.

Shareholders wealth which is called the end point of planning (koontz. 1980:189). In the pursuit of these objectives, certain persons occupy positions of authority, and are charged with the responsibility or functions of planning, organizing, directing and controlling human and material resources and channeling such towards the actualization of the objectives. Business firms are established to achieve specific objectives. This may be to maximize profit or its These persons are the managers. In its simplest definition, a manager is any person who gets things done through the efforts of others. (ulayi, 2007:21).

In a typical organizational structure, there are three categories of managers. These are the top, medium and front line managers. The first group makes strategic decisions by monitoring the external and internal environment of the firm, forecast operation, at the same time make long range plan. The medium level managers make tactical and intermediate plans on how to achieve plans made by the top management while the front line managers are controllers of operations and implementations. They interact with the workers and understand their problems better. They also understand better the job problems and are also referred to as foremen and supervisors who perform the day-to-day supervisory functions and make adhoc plans to reach objectives at minimal cost (Okorie, 1993:62).

Today’s complexity of business operations claims a leading authority in accounting, has placed users of information about firms in

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