CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Listed companies use financial statements as one of the major medium of communication with their stakeholders. Therefore, stock market regulators and accounting standards setters try to improve the quality of financial statements in order to increase the transparency level in financial reporting. (Vishnani 2008). Accounting plays a significant role within the concept of generating and communicating wealth of the companies. Financial statements still remain the most important source of externally possible information on companies Financial information is essential in making sound investment decisions and it will reduce the informational irregularity problem between the firm’s managers and the investors. (Hossain 2004). Though the investors use non financial information in order to make investment decisions, still conventional investors give more weight to financial information. According to the survey done by the Bosten College (2007), 62% of respondents favour financial information and only 38% favour the use of non financial information for investment decisions.
Until approximately 42 years ago no arguments were encounter on relevance of Accounting Information. (Dung 2010). But, recent empirical studies explored that Accounting Information in published financial statements lost their relevance over the period of time. (Ball and Brown, 2009). An understanding of the accounting information is that it covers information that is used to prepare financial statements which report the results and financial position of a business to the decision makers. (Dung 2010). Owners and management use this information to judge about the results of business operations and make decision about their management. External users like creditors, suppliers, tax authorities also use accounting information for their decision making, i.e. judging whether the business will be able to return loans, pay for goods sold, whether taxes are paid correctly, etc. To be useful and used accounting information must be compliant with fundamental accounting assumptions and conventions.
Accounting information has to be: · Fair (correct) – present fairly and correctly results of operations and financial position of the business · Consistent – presentation and classification of items in the financial statements must be the same from one accounting period to the next · Prudent – accounting for certain items requires making judgments, these must be made with prudence to ensure assets or income are not overstated, liabilities or expenses are not understated · Material – material items must be disclosed separately, immaterial items can be aggregated into groups · Relevant – accounting information must be useful assisting users in their decision making process · Reliable – free from material mistakes and errors · Complete – presented without omission of material information · Comparable – providing ability to compare information through time and with other entities · Understandable – users without specific accounting knowledge must understand the accounting information To ensure the above characteristics each business must have people, accounting procedures, software to process information and control system to control all the process. All these means are called accounting information system. Every organization needs accounting information for the proper management of the organizational activities and decision making process. To be able to fully access and examine the relevance of accounting information in the management of organizations.
1.2 STATEMENT OF PROBLEM
The following are that statement of problems for this study: 1. Providing a solution to the problems that exist between accounting information and decision making process. 2. There is the problem of the dependence of investor’s decision making on accounting information. Without confidence in the existing accounting information of a particular organization, it will negatively affect investor’s decision making. 3. There is also the problem of determining how relevant are accounting information to the bank, investors or the government.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study are as follows: 1. To assess the relationship between accounting information and decision making 2. To examine the relevance of accounting Information on Investors decisions. 3. How it is relevant to the bank, investors and the government.