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CHAPTER TWO REVIEW OF RELATED LITERATURE 2.1

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 CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Introduction
This Chapter details a critical analysis of previous researches; published and unpublished
materials on the role of accounting information system in managerial decision making.
The chapter opens by extensively reviewing theoretical literature which is then followed
by empirical literature review with reference to studies done on the same topic from
various parts of the world.

2.2 Theoretical Literature Review

Littleton (2013) argues that the central purpose of accounting is to make possible the
periodic marching of cost efforts and revenues accomplishments. This involves fixed
point of accounting theory, and a bench mark that afford a fixed point of reference for
accounting sessions. Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transaction and events, which are in part at
least of a financial character, and interpreting the result thereof (ALCPA, 1961). In the
same way, Benjamin (2008) reiterates that the primary function of accounting is to
accumulate communication information essential to understanding the activities of an
enterprise, whether large or small, corporate or non-corporate, private or public. Such
information System is aimed at smoothing the running of an organisation and eventually
maximizing profits. (Anderson & Caldwale, 2011) suggest that accounting is an
information system for measuring, processing and communicating information that is
useful in making economic decisions. Needles (2004) points out that opinion that
accounting information System is essential to decision system because it provides
qualitative information for three functions: planning, control and evaluation. Simon
(2009) in his study used the first part of the statement as a measure of control for
management and the second part for evaluating the effectiveness of the accounting
information via continuous monitoring. Accounting information is said to be effective
when it serves widely the requirements of the system users. Consequently, the
effectiveness of accounting information has long been a subject of many rese
(Chenhall, Kim, and Mia 2008).
Accounting information System is usually categorized into two groups: information that
influences decision making and mainly for the purpose of controlling the organisation;
and information that facilitate decision making process and mostly used for coordination
within an organisation (Kren, 2002). In this regard, Hubber (2007) argues that integration
of accounting information leads to coordination in organisations, which in turn, increases
the quality of the decisions. Some researchs in accounting show that the effectiveness of
accounting information system depends upon the quality of the output of the information
system that can satisfy the users' needs. The financial statements should therefore be
prepared according to Generally Acceptance Principles. Another study by Wehrich and
Koontz (2001) observed that in daily conduct of the company activities, the company
depends much on the financial reports to determine the extent to which actual
performance agrees with budget. This is an evidence of a crucial contribution of financial
information in assisting decision makers to give optimal decisions.
Pizzey (2009) holds that Balance sheet as an important component of financial reporting,
shows the financial position of a business at a particular moment in time and sets the
assets of the business against the liabilities or sources from which funds have raised to
finance those assets. Njau (2006) argues that a company with positive cash inflows over
outflows is financially strong because it will probably be able to meet its future obligation
to repay and have enough spare funds to be flexible in its choice of future activities. The
relationship between cash flow and solvency has given significant information about
financial performance.

2.3 Empirical Literature Review

Harson and Kernut D. (2005) argue that accounting is a service activity; reports which
are used in describing the activities and financial states of many different kinds of
economic activities. According to Glantier and Underdown (2002), accounting is moving
away from its traditional procedure base, encompassing record keeping and such related
work as the preparation of budget and final accounts, towards the adoption of a role,
which emphasizes its social importance.
Regarding the drive for accounting, Littleton (2003) observed that the central purpose of
accounting is to make possible the periodic marching of cost efforts and revenues
accomplishments. This concept involves fixed point of accounting theory, and a bench
mark that afford a fixed point of reference for accounting sessions. Accounting is the art
of recording, classifying and summarizing in a significant manner and in terms of money,
transaction and events, which are in part at least of a financial character, and interpreting
the result thereof (ALCPA, 1961).
Benjamin (2008) reports that the primary function of accounting is to accumulate
communication information essential to understanding the activities of an enterprise,
whether large or small, corporate or non-corporate, private or public. Anderson, and
Caldwale (2001), suggest that accounting is an information system for measuring,
processing and communicating information that is useful in making economic decision.
Needles Jr (2001) opines that accounting information is essential to decision system
because it provides qualitative information for three functions: planning, controlling and
evaluating.

Jarrett (2003) reveals that an effective administrative control system is necessary to

provide managers with information concerning functions and activities. That information
is then used in the managerial decision-making process. The element of organization
under investigation is the accounting information system, hence, a relationship does exist
between accounting information system, financial accounting, and auditing in the
organization's context. To evaluate an administrative control system these following steps
need to be considered: identify potential control areas, define system objectives,
document the system and evaluate the system.

2.3.1 Performance Effects of Accounting Information System in Managerial Decision

making
The need for information system is basic for concrete and explicit management decision
to ensure the success and survival of an organization. This follows without saying that
since the aim of any business organization is "profitability", accounting information is
indispensable to achieving this goal. It is pertinent to look at the importance of good
accounting information as it relates to maximizing the profitability target of an
organization. However, a business manager can assess the business's performance using
accounting information system. Costs, prices, sales volume, profits, and return on
investment are all accounting measurements (Williams, 2008). In the same way, ratio
analysis is one of the best tools of business performance assessment.
According to Jackson (2004), each ratio provides a certain kind of information when
assessing a company. Ratio analysis involves methods of calculating and interpreting
financial ratios to analyze and monitor the firm's performance (Gitman & Zutter, 2012).
The four categories of ratios to be covered are:
Liquidity ratios which measure firm's ability to meet its current obligations
i. (Gibson, 2011). According to White (2003), liquidity analysis measures the
adequacy of firm's cash resources to meet its near-term cash obligations.
ii. Leverage ratios which measures the extent of firm's financing debt relative to
equity and its ability to cover interest and other fixed charges (Fraser &
Ormiston, 2001). According to (White et al. 2003), long-term debt and
solvency analysis examines the firm's capital structure, including the mix of
its financing sources and the ability of the firm to satisfy its longer-term debt
and investment obligations.
iii. Activities ratios are used to measure the speed with which various account
receivables are converted into sales or cash-inflows or outflows. In that sense,
activity ratios measure how efficiently a firm operates along a variety of
dimensions such as inventory management, disbursements, and collections
(Gitman & Zutter, 2012). According to (White et al. 2003), activity analysis
evaluates revenue and output generated by the firm's assets.
iv. Profitability ratios measure the earning ability of a firm (Gibson, 2011).
According to (White et al. 2003), profitability analysis measures the income
of the firm relative to its revenues and invested capital.

A decision is a reasoned choice among alternatives (Turban and Aronson, 2001).

According to Jones and George (2011), dccision making is the process by which
managers respond to opportunities and threats that confront them by analyzing options
and making determinations about specific organizational goals and courses of action.
Thus, it can be said that business decision is a reasoned choice among alternatives as a
response to opportunities and threats that confront organisation management by analyzing
options and making determinations about business goals and courses of action. According
to Romney and Steinbart (2012), businesses engage in a variety of activities. Each
activity requires different types of decisions and each decision requires different types of
information. Business decision is closely related to what activities will be accomplished
as well as what information is needed for the accomplishment. (Romney & Steinbart,
2012) state that there is variation in the degree of structure used to make decisions:
1) Structured Decisions are repetitive, routine, and understood well enough that they can
be delegated to lower-level employees.
2) Semi Structured Decisions are characterized by incomplete decisions and the need for
subjective assessments and judgments to supplement formal data analysis.
3) Unstructured Decisions are non-recurring and non-routine decisions.

2.3.2 Concept of Accounting Information System

Warren et al. (2005) defines accounting as information system that produces reports to
the interested parties about economic activities and company's condition. The primary
objective of accounting is to provide information that is useful for decision making
purposes. It means that accounting is an information providing activity. Warren et al.
(2005) also states that the objective of accounting is simply to produce information used
by managers to run company's operation. Accounting also gives information to various
stakeholders about economic performance and company's condition. According to
(Considine et al. 2010), the role of accounting is to gather data about a business's
activities, provide a means for data's storage and processing, and then convert the data
into useful information. An accounting system consists of the personnel, procedures,
technology, and records used by an organization (1) to develop accounting information
and (2) to communicate this information to decision makers (Williams, Haka, Bettner, &
Carcello, 2008).
The types of accounting information required depend on the types of business decision
made by the management. It means that the role of accounting information is to assist
managers in making business decisions. Fiorelli, Zifaro (2008) in Handayani (2011),
classifies accounting information into three different types according to the benefits for
the users:
1) Statutory Accounting Information is the information that can be prepared in
accordance with existing regulations.
2) Budgetary Information is the accounting information presented in the form of budget
that is useful for internal planning, assessment, and decision making.
3) Additional Accounting Information is other accounting information prepared by the
company in order to increase the effectiveness of decision

2.3.3 Nature of Accounting Information system

Accounting Information has progressed through the centuries alongside civilization from
exchange of goods (Trade-by-barter) using symbols and cowries into record keeping
methods, as we have today's people in all civilization maintaining various types of
records of business activities. The oldest known is the day tablets records of the payment
of wages in Babylonia around 3600BC. There are numerous evident of record keeping
and system of accounting control in ancient Egypt and in the Greek city states. The
earliest known English records were compiled at the direction of William the conqueror
in eleventh century to ascertain the financial resources of the Kingdom, (Fess and
Niswonger). Accounting information include account, balance sheet, cost accounting
system, fund book-keeping which dates back to the middle ages with its known
description of the system which was published in Italy in 1494 by Pacioli a Franciscan
Mark Fess and Niswonger. It should be noted that the earlier known use of a complete
double entry book-keeping was Geneva Kin in the year 1840; double entry is the system
that requires entries to be made in the books of a business to give effect to both suspects
of the transactions. The principal book of this system is the ledger. The advantage of
double entry can be stated as follows:
1) It provides a complete record of every transaction, from both its personal and
impersonal aspect.
2) It provides an arithmetical check on the records since the total of the debit entries must
equal their total of the credit entries.
3) From the personal accounts the amounts owing to and by each person with whom the
business deals can at any time be ascertained?
4) The balance of the nominal accounts can be collected together in a profits and loss
accounts, which discloses the results of the operation that is the profit and loss for given
period.
5) By means of a balance sheet in which the balance of accounts representing capital,
assets and liabilities are set out, the financial position of the business at any given
moment can be ascertained.
6) With a reliable system of internal organization, it reduces the risk and facilitates the
detection of errors and frauds.

2.3.4 Source of Accounting Information

The sources of accounting information are internal although there may be several
departments that furnish the information depending on the types of the business. In most
cases, the accounts department is central. Accountants are the major suppliers of
accounting information. They provide management with the needed information used in
conducting the affairs of the business.

2.3.5 Importance of Accounting Information.

As already noted, accounting information is indispensable in the management activities
of any organization. It provides quantitative information about economic entities. The
information is primarily financial in nature and intended to be useful in making economic
decisions (Harson, 2009).
Accounting information is needed not only by management in directing the affairs of the
co-operation but also by shareholders, who require periodic financial statement in order
to appraise management performance. It is needed by government for efficient
distribution and use of the nation's resources thus; it plays an important role in all
economic and social systems. It helps in checking irregularities and misappropriations as
well. Accounting information is the livewire of any organization without which it is
likely to remain static or in worse cases die.

2.3.6 The Nature & the use of Accounting Information in Business Organization.
Business organization can be classified into small and large firms. In the part of small
firms a specialist institution is set up to provide a financial support for it ,and the public
will lack the enthusiasm for the purchasing securities from the small firm whose shares
are not quoted on the stock exchange.
Accounting information provides management with the needed information for use in
concluding the affairs of the business and reporting to the owners. Five ingredients of
accounting system, according to Black et al are:
a) Basic business documents or forms such as cheque and invoice.
b) Journals in which the effect of transaction on assets and equities are analyzed in terms
of debit and credit.
2.3.7 Preparation of Financial Statement
As noted earlier, financial statements are an important part of the business operation.
They let business owners know where they stand in areas such as assets, liabilities,
income and cash flows, as well as how well they have done during a just complicated
fiscal year. Preparing general purpose financial statements; including the balance sheet,
income statement, statement of retained earnings, and statement of cash flows; is crucial
because it represents the purpose of financial accounting.
It should be noted that financial reports which lack some information normally has led to
organizations' failure. Hence, this has been one of the primary problems encountered by
many business organizations and many business failures have been directly attributed to
poor planning and reporting.

2.3.10 Main Objectives of Financial Statements

IASI (2003) committee in its standard on the presentation of the financial
report/statements (1997) conclude that, "The objective of financial reports/statements is
to provide information about the financial position, performance and cash flow of an
enterprise that is useful to a wide range of users in making economic decision". Investors
are now relying on the financial analyst's reports than on company's financial statements.
This deterioration has largely been attributed by lack of clear objectives on financial
statements.

2.3.12 Management Responsibility and the Demand for Auditing

Primary responsibility for the information in the financial statements lies with
management, as represented by the highest officer of the company and its highest
financial officer. Companies take three important steps to assure investors that the
company's records are accurate:
 They should develop and maintain a system of internal controls over both the
records and the assets of the company.
 They should hire outside independent auditors to attest to the fairness of the
statement presentations, and
 They should form a committee of the board of directors to oversee the integrity of
these two safeguards.

CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
The research methodology, which presents the techniques and procedures used in this
study sets out by considering the design, population, sample size and sampling methods.
In this chapter the research questions as well as the analytical tools employed in the
analysis and interpretation of data obtained from this study are also detailed.
3.2 Research Design
Research design is mainly concerned with providing a plan study that permits accurate
assessment of cause and effect relationship between independent and dependent variable.
Asika (2006) defines research design as the process of structuring investigation aimed at
identifying variables and their relationship to one another.
The study adopted survey design where a quantitative technique was applied. The choice
of this design enabled the researcher to study deeply through different aspects of the
phenomenon under investigations. Quantitative approach was used by the researcher
because it focuses on gathering primary numerical data used in generalizing or explaining
a particular phenomenon. The approach is more reliable and objective; also can use
statistic methods to generate findings.

3.3 Data collection Methods

According to Bryman and Brell (2007), questionnaire is a tool or an instrument used to
collect data. The researcher collected primary data using standardized questionnaire
which was adapted from Nawaz (2012). However the tool was modified to fit in this
study. The objective of using questionnaire for data collection was to provide a sense of
confidence and trust to the participant. This was a method where by a researcher prepared
series of question for the respondents to answer. The questionnaire was drafted from the
research hypotheses and questions, and was distributed to the staff, upper level managers
In Arusha and lower level managers of TPRI. The questionnaire was designed in two
sections A and B. In section A the respondents were required to provide information
regarding their demographic characteristics while section B was meant for respondents to
provide information on the basis of research questions. Population and Sampling
Procedure

3.3.2 Sample design and determination of sample size

The sample size was determined from the total staff strength using the Yaro Yamane
formula for selection of a sample from the definite population. The Yaro Yamane
formula is stated thus:

n= N
1+N (e)²

Where;
n is the sample size
N is the finite population
e is the level of significance (Or limit of tolerable error)

3.4 Data Analysis, Presentation and Interpretation Plan

This section dealt with the process of analyzing the data collected through the field. In the
first place, the data was edited to ensure consistency, and completeness. The researcher

employed the computer software SPSS for analysis and presentation of data through
descriptive statistics. Descriptive statistics such as mean score frequency were calculated
with the help of SPSS. This statistical package was useful because of its simplicity and
ability to draw graphs and tables for the data collected.
 3.5 Validity
Validity can be defined as the ability of an instrument to measure what it is designed to
measure (Asıka, 2006). Validity is the extent to which the measurement to be used will
be adequately reflect the real meaning of the concept under the study, so the validity of
questions in the questionnaire was to determine if they met the objective of the study. The
questionnaire was distributed to the population sample so as to get required data and the
researcher invited a third party to give more clarification or judgement conceming the
questionnaire provided to the respondents.

3.6 Reliability
Reliability refers to the consistency of measurement. The questionnaire was adopted from
Newzland in assessing Impact of Accounting Information system on Decision-making to
small businesses in Newzland (Nawaz, 2012). The questionnaire was tested and its
reliability shown in the Reliability Statistics table was 0.844 whereby the result showed
that small businesses in Newzland were using accounting information system in decision
making. The questionnaire was administered subject to minor changes.

3.7 Ethical Consideration

The researcher made effort to get permission from the University authorities before
distributing questionnaires to, the respondents. The researcher also sought permission
from Public institution in Arusha before consulting the respondents. Thereafter, the
researcher wrote an introduction letter to the respondents informing them that the
researcher was carrying out research for academic purpose and ensured confidentiality
and protection of the rights of all participants by giving guarantee that the information
provided would be for academic purpose only. Likewise, participants' details such as
names and position were not to be disclosed on the face of the questionnaire. Ethical
consideration based on the principle of voluntarily participation of the respondents and
nobody was forced to participate in the study. Finally, the researcher complied with
necessary ethical principles of research in the social sciences.

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