Relevant Accounting in Decision Making

Accounting, which is also known as accountancy is a “language of business”. It provides financial information about one’s business to the internal and external users such as managers, investors, creditors and etc. Users need information to help in planning, decision-making, evaluating and controlling their business or investment. The information is generally in the form of financial statement where they can show where the money is spent, helps to assess performance over a period and helps to identity problems and opportunities.

Users also use the financial information to make resource allocation decisions between and within companies, organizations and public agencies. Accounting involves the process of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account. Sub-classification of accounting consists of financial accounting and reporting, management accounting, auditing and taxation. Decision making is the process of choosing between alternative courses of action using cognitive processes.

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Accounting systems can aid our decision making by providing information relevant to the decision and to the decision makers. They can aid us in allocating environmental resources. In order to design an effective accounting system for this problem, the process of decision making must be understand. Accounting systems also provide a check for the validity of that information through the process of auditing and accountability. In this report, we are going to relate Air Asia Berhad with the discussion we have selected.

We are using the annual report of 2007 and 2008 to make a comparison related with the topic. Content Accounting will be only relevant in decision making when the information provided relates to the past, as well as important for future decision making. Financial documents that are created according to Generally Accepted Accounting Principles (GAAP) to ensure that the information is accurate, reliable, relevant, comparability, timely and complete to give users the best possible picture of the company. It also indicates how to report economic events.

The process of achieving the goal of maximizing profits for business become less efficient if its lack of financial information throughout the whole process. The Financial Statements The information contains in financial statement works as communications medium provides information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. It also meant that it is crucial in establishing the future potential of the entity. Financial information is generated by the accounting process which is used by many diverse parties.

Financial information is used by both internal and external users to assist them in decision making. Internal users are those users within an organization who need financial information to decide how to plan and control daily operations as well as long-term basis. For example, Air Asia’s managers require financial information to make decision for planning purpose which includes setting prices, costs and competitive position. They need to consider adding new flight destinations or routes to the services it provides.

The managers predict the estimate the costs of operating the new flight destinations by evaluating the cost data from the past records of costs. Air Asia’s management’s interest is in determining the financial strengths and weaknesses of the business so that performance may be improved. While, business owners use it primarily in evaluating the return they are receiving on their investment. Employees need to evaluate the organization’s financial ability to meet wage demands, which eventually make a decision whether loyal to the organization or work with other better prospect organizations.

Other than that, financial information is needed by external users in decision making process in order to show the public whether the organization is healthy, stable and practicing appropriate accounting procedures. Potential investors and their advisors use financial information to analyze the current and future profitability of Air Asia, while creditors use financial information to determine a firm’s financial capacity to meet its obligations when they become due. Customers are concerned with a firm’s continuing ability to supply their needs.

The four components of financial statements are income statement, owner’s equity statement, balance sheet, and cash flow statement. Income statement, also called profit and loss statement, is the company’s financial statement that summarizes a company’s revenues and expenses which resulting net income or net loss, and provides a picture of the financial performance for a specific period of time. For example, Air Asia’s managers and investors need financial statement to assess whether Air Asia made or lost money during the period being reported.

Owner’s equity statement, also called shareholders’ equity, shows the changes in owner’s equity during a specific period of time. It lists the owner equity balance at the beginning of the period, addition and subtractions to the balance, and the ending balance. Balance sheet or statement of financial position reports the assets, liabilities, and owner’s equity at a specific date, such as the end of a particular financial year. It describe as a snapshot of a company’s financial condition.

For example, assets, liabilities and shareholders’ equity give Air Asia investors an idea as to what Air Asia owns and owes, as well as the amount invested by the shareholders. Cash flow statement or statement of cash flow summarizes information about the cash inflows and outflow for a specific period of time. It includes operation, investment, financing activities and how their impacts on the cash position during the reporting period. For example, Air Asia’s accounting personnel need to know whether the organization will be able to cover payroll and other immediate expenses.

As well as, Air Asia’s potential lenders or creditors also want a clear picture of Air Asia’s ability to repay. Besides that, potential employees or contractors of Air Asia need to know whether the company will be able to afford compensation. The main purpose of the accountant is to identify and record all activities that impact the organization financially, which eventually needed for sound economic decision making. For this purpose the financial statements generally follows a standardized structure.

The financial statements are a record of the activities but do not provide an evaluation of the data. Despite the important role of the financial statements, they do not provide an evaluation of the accounting results. In order to be able to use the information contained in the various financial statements for financial decision-making, a number of measurements and evaluations needs to be made to the numbers. Only then will the information be useful as a tool for decision-making. The Purpose of Measurement and Evaluation

It is important to determine what purpose the results of the measurement of the program will have from the outset. The evaluation of the mentoring relationship should take place. There are several purposes why we need to conduct measurements and making evaluation. For example, we want to know the reasons why there no excess funds available, demonstrate to management that the investment is having an effect on particular business goals in the organization, whether the reporting entity financially sound, would it be possible to make further loans or is available cash generating be sufficient to provide in the anticipated demand.

The format and type of information obtained during this process will depend on the intended users of the information, such as credit analysts in banks, investment institutions, management and etc. In order to determine whether Air Asia Berhad has made decisions in operating the company for the past, it is required to make some measurement and evaluation on the financial statement for the past years.

The purpose of the conducting measurements and making evaluation is to provide answers to questions such as are the reporting entity financially sound, would it be possible to make further loans and will available cash generating be sufficient to provide in the anticipated demand.  Are the reporting entity financially sound? A reporting entity concept determines the boundaries and composition of a reporting entity. As shown in the annual report of 2007 (appendix), the entity report is a consolidation report.

From the income statement, the rofit after taxation for the year 2006 increased from RM212,052,000 to RM 425,700,000. As for the balance sheet, it is stated that there is an increased from RM1,661,881,000 (year 2006) to RM2,099,217,000 (year 2007). The net assets per share attributable to ordinary equity holders of the Company has also gone up from RM0. 70 to RM 0. 89 for the year 2006 to 2007 respectively. Even though there is a decrease in cash and cash equivalents at end of financial year 2006 to 2007, it doesn’t affect the profitability of the company. Hence, it can be concluded that the reporting entity for Air Asia Berhad is financially sound.

Would it be possible to make further loans? Yes, Air Asia Berhad will be possible to make further loans. As shown in the balance sheet at 31st December 2007 (Appendix), Air Asia had borrow the amount of RM2,554,585,000 ( compared with 2006 RM1,052,636,000). Besides, the presentation slide of borrowing and Gearing statistic of Air Asia Berhad shown there is significant growth in net debt from RM787 millions (2006) to RM1,959 millions (2007).

Will available cash generating to be sufficient to provide in the anticipated demand? The cash generating would not be sufficient to provide in the anticipated demand, it is because the cash that generated by Air Asia Berhad is too low to rent aircrafts and aircraft purchases. From the fleet plan for 2008, the statistic shown that there will be increases in total aircraft including Airbus A320 and Boeing 737-300. Air Asia Berhad increased their loan from year 2006 to 2007 in order to increase their rental and purchases of aircrafts. Cash generated by Air Asia Berhad may not sufficient to provide in the anticipated demand, but it may sufficient for other uses in Air Asia Berhad.

The conducting measurements and the making of evaluation process basically consists of the rearranging of the information in order to obtain information in a format that can be used to appraise the performance, activities, financial health, stability and growth potential. In order to conduct a proper evaluation and interpretation of financial statement, four important steps needs to be followed. First, conduct a superficial analysis of the financial statements in order to obtain an initial feeling for the areas that needs special attention.

Second, conduct an evaluation of the flow of funds in order to establish the ability of the entity to generate cash as well as the needs for funds. Third, conduct a ratio analysis in relation to called profitability, risk and growth. Forth, analyze non-financial information. Conclusion After all, every company needs to base on their pass financial report to make decision. Without past financial report, a company will lost their direction because they do not know their financial position and this may lead them to failure. Financial report not just information about the pass but it’s also a useful tool for a company to make decision.

Investing should never be based on emotion. While you might be tempted to invest in a company because you like its products or because you’ve just read a favourable article about it in a magazine or newspaper, you should make sure you’ve done your research before spending your hard earned cash. Think of the financial statement as a kind of scorecard that helps you determine which company is the one you should invest in. So ask yourself a few questions whether the statements really help answer them.

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Relevant Accounting in Decision Making. (2018, Jun 05). Retrieved from