the role of financial statement in decision making

Topics: Financial statements, Decision making, International Financial Reporting Standards Pages: 37 (9082 words) Published: November 7, 2013
INSTITUTE OF ACCOUNTANCY ARUSHA

RESEARCH REPORT
ON
THE ROLE OF FINANCIAL REPORTS IN DECISION MAKING

A CASE STUDY OF; THE MINISTRY OF INFRASTRUCTURES DEVELOPMENT

BY: MANS’S SON
ADA III 2006/2007

SUPERVISOR:
MR G. PETERSON
A RESEARCH REPORT TO BE SUBMITTED TO THE INSTITUTE OF ACCOUNTANCY ARUSHA AS A PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE AWARD OF ADVANCED DIPLOMA IN ACCOUNTANCY (ADA)

CHAPTER ONE
1.1 INTRODUCTION AND BACKGROUND OF THE PROBLEM

The primary responsibility of the management is to make decision by using adequate accounting data obtained from proper financial reports. The globalization of business and the capital markets is pushing the world from behind, demanding better accounting systems and frameworks so as to come up with financial reports which are timely, relevant, accurate, comparable and understandable so as to facilitate decision making processes.

Nevertheless many companies and organizations all over the world are experiencing difficulties in decision making processes resulting from inappropriate accounting records/ reports. Nobes C, et al (2002). postulated that to some extent financial reports may be prepared in such a way that may not meet the needs of the users This problem is explained worldwide; external environment culture, legal system, taxation and inflation may influence it.

Cole (2000) postulated that in most continental Europe, Asia and Africa, the traditional scarcity of ‘outsiders’ shareholders has meant that external financial reporting has been largely invented for the purpose of protecting creditors or controllers of economy. This has not encouraged the development of flexibility, judgment, fairness or experimentation. However, it does not lead to more careful accounting. This is because creditors are interested in whether, in worst case; they are likely to get their money back, whereas shareholders may be interested in an unbiased estimate of future prospects. Practically it has been done in continental Africa to give wrong financial information for tax evasion, fraudulent practice and complexity data. These entire scenarios do mislead financial decision making processes.

According to Adolf et al (1978), preparing financial reports useful in decision-making is the difficult task to many if not all of the commercial, industrial and Government organizations in Tanzania. This has caused the failure to deliver productive decisions due to lack of sufficient records to base decisions. Adolf and others pointed out that the commercial and industrial parastatal compositions of Tanzania and fiscal affairs of the Tanzania Government have been characterized too often by mismanagement, lack of controls and accountability, operating losses and irresponsibility, insufficiently trained and unsophisticated management, lack of adequate accounting and statistical data upon which to base decisions.

Non-profit organizations such as government and charities typically present statements which exhibit their resources and the way those resources are distributed or held. Stewardship and responsibility are the focus for these statements. The ministry of infrastructure development is among Tanzanian important ministries, thus it needs financial reporting suited for disclosing useful information to different users within and outside the organization.

The study therefore examined and assessed how the ministry of infrastructure development made use of financial reports in decision making.

1.2 STATEMENT OF THE PROBLEM

Financial reports are very crucial items in financial decision making. According to Adolf et al (1978) it has been a common story that many organizations in Tanzania are operating under poor financial performance. The source of this problem can either be the poor planning and poor decisions of the management about the operations of the organization, but managers may not be the direct causers of the poor financial performance of an...

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