Financial information and management decisions: impact of accounting policy on financial indicators of the firm
Abstract
To be useful for decision-making accounting information needs to be of high quality. This article examines how tax accounting rules may impact the accuracy and reliability of the information contained in financial statements. The simulation model reveals that significant distortions occur in accounting information due to the choice of depreciation period and methods. Using as benchmark ratios calculated applying accounting policy recommended in Business Accounting Standards a significant divergence between ratios has been found. This finding implies that ratios calculated using accounting rules allowable for Corporate Income Tax calculation can provide misleading information and lead to unsound financial management decisions.
Keyword : accounting, financial indicators, depreciation, long-term assets, management decisions, financial statements
How to Cite
Černius, G., & Birškytė, L. (2020). Financial information and management decisions: impact of accounting policy on financial indicators of the firm. Business: Theory and Practice, 21(1), 48-57. https://doi.org/10.3846/btp.2020.9959
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Kim S (2011) Accounting quality, corporate acquisition, and financing decisions. Working paper. The University of North Carolina at Chapel Hill https://www. faculty.haas.berkeley.edu/mops
Libby R (1979) The impact of uncertainty reporting on the loan decision. Journal of Accounting Research (17): 35–57. https://doi.org/10.2307/2490608
March JG (1987) Ambiguity and accounting: The elusive link between information and decision making. Accounting, Organizations and Society 12 (2): 153–168. https://doi.org/10.1016/0361-3682(87)90004-3
Morais AI (2019) Are changes in international accounting standards making them more complex? Accounting Forum, 1–29. https://doi.org/10.1080/01559982.2019.1573781
McNichols MF, Stubben S (2012) The effect of target-firm accounting quality on valuation in acquisitions. Working Paper No. 81. Rock Center for Corporate Governance at Stanford University. https://doi.org/10.2139/ssrn.1623458
Otley D, Fakiolas A (2000) Reliance on accounting performance measures: dead end or a new beginning? Accounting, Organizations and Society 25 (4): 497–510. https://doi.org/10.1016/S0361-3682(98)00007-5
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Penalva F, Wagenhofer A (2019) Conservatism in debt contracting: theory and empirical evidence. Accounting and Business Research, 1–29. https://doi.org/10.1080/00014788.2019.1609899
Preston A (1986) Interactions and arrangements in the process of informing. Accounting, Organizations and Society 11 (6): 521–535. https://doi.org/10.1016/0361-3682(86)90034-6
Ramalingegowda S, Wang C-S, Yu Y (2013) The role of financial reporting quality in mitigating the constraining effect of dividend policy on investment decisions. The Accounting Review 88 (3): 1007–1039. https://doi.org/10.2308/accr-50387
Socea A-D (2012) Managerial decision-making and financial accounting information. Procedia – Social and Behavioral Sciences 58: 47–55. https://doi.org/10.1016/j.sbspro.2012.09.977
The Republic of Lithuania Law on Corporate Income Tax (2001) Valstybes Zinios [Official Gazette] No. 110-3992, Pub. L. No.0IX-675 (20-12-2001).
Wells MC (1979) Facts and expectations in decision-making. Working paper no.1, (par. 2.9). University of Sydney, Sydney.
Yoo Y, Lim J, Chang J (2013) Financial reporting quality and acquisition profitability: evidence from Korea. The Journal of Applied Business Research 29 (6): 1737–1750. https://doi.org/10.19030/jabr.v29i6.8211
Zikmund WG, Babin BJ, Carr JC, Griffin M (2013) Business research methods (9 ed). Mason, OH: Cengate Learning.
Beaulieu PR (1994) Commercial lenders’ use of accounting information in interaction with source credibility. Contemporary Accounting Research 10 (2): 557–585. https://doi.org/10.1111/j.1911-3846.1994.tb00406.x
Berry AJ, Faulkner S, Hughes M, Jarvis R (1993) Financial information, the banker and the small business. The British Accounting Review 25 (2): 131–150. https://doi.org/10.1006/bare.1993.1013
Bharath ST, Sunder J, Sunder SV (2008) Accounting quality and debt contracting. The Accounting Review 83 (1): 1–28. https://doi.org/10.2308/accr.2008.83.1.1
Biddle G, Gilles H, Verdi R (2009) How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics 48 (2–3): 112–131. https://doi.org/10.1016/j.jacceco.2009.09.001
Biddle GC, Gilles H (2006) Accounting quality and firmlevel capital investment. The Accounting Review 81 (5): 963–982. https://doi.org/10.2308/accr.2006.81.5.963
Business Accounting Standard no. 12. Long-term tangible assets (2015) Authority of audit, accounting, property valuation and insolvency management http://www.avnt.lt/veiklos-sritys/apskaita/verslo-apskaitos-standartai/priimti-standartai/
Cernius G, Birskyte L, Balkevicius A (2016) Influence of rules for computing corporate income tax on the accuracy of financial statements of Lithuanian companies. Scientific Annals of Economics and Business 63 (1): 65–81. https://doi.org/10.1515/saeb-2016-0105
Chang Y (2017) Impact of enterprise investment efficiency on the quality of financial https://www.researchgate.net/publication/318681424
Chen D, Liu M, Ma T, Martin X (2017) Accounting quality and trade credit. Accounting Horizons 31 (3): 69–83. https://doi.org/10.2308/acch-51711
Chen F, Hope O-K, Li Q, Wang X (2011) Financial reporting quality and investment efficiency of private firms in emerging markets. The Accounting Review 86 (4): 1255–1288. https://doi.org/10.2308/accr-10040
Chen JZ, Lim CY, Lobo GJ (2016) Does the relation between information quality and capital structure vary with cross-country institutional differences? Journal of International Accounting Research 15 (3): 131–156. https://doi.org/10.2308/jiar-51606
Danos P, Holt DL, Imhoff EA (1989) The use of accounting information in bank lending decisions. Accounting, Organizations and Society 14 (3): 235–246. https://doi.org/10.1016/0361-3682(89)90025-1
Duru A, Hasan I, Song L, Zhao Y (2018) Bank accounting regulations, enforcement mechanisms, and financial statement informativeness: cross-country evidence. Accounting and Business Research, 1–36. https://doi.org/10.1080/00014788.2017.1415801
Hall M (2010) Accounting information and managerial work. Accounting, Organizations and Society 35 (3). https://doi.org/10.1016/j.aos.2009.09.003
Hartmann FGH (2000) The appropriateness of RAPM: toward the further development of theory. Accounting, Organizations and Society 25 (4): 451–482. https://doi.org/10.1016/S0361-3682(98)00036-1
Healy P, Palepu K (2001) Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 (1-3): 405–440. https://doi.org/10.1016/S0165-4101(01)00018-0
IASplus. (2010). Conceptual framework for financial reporting 2010 https://www.iasplus.com/en/standards/other/framework
IFRS Foundation (2018) The Conceptual Framework http://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
Ishaque M (2019) Cognitive approach to understand the impact of conflict of interests on accounting professionals’ decision-making behaviour. Accounting Forum, 1-35. https://doi.org/10.1080/01559982.2019.1583303
Jensen MC, Meckling WH (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 (4): 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Jørgensen B, Messner M (2010) Accounting and strategizing: A case study from new product development. Accounting, Organizations and Society 35 (2): 184–204. https://doi.org/10.1016/j.aos.2009.04.001
Kamela-Sowińska A (2015) Accounting integration issues of EU member states. Equilibrium. Quarterly Journal of Economics and Economic Policy 10 (2). https://doi.org/10.12775/EQUIL.2015.021
Kamela-Sowińska A (2015) Accounting integration issues of EU member states. Equilibrium. Quarterly Journal of Economics and Economic Policy 10 (2). https://doi.org/10.12775/EQUIL.2015.021
Kent State University Libraries (2018) SPSS tutorials: Paired samples t-test https://libguides.library.kent.edu/SPSS
Kim S (2011) Accounting quality, corporate acquisition, and financing decisions. Working paper. The University of North Carolina at Chapel Hill https://www. faculty.haas.berkeley.edu/mops
Libby R (1979) The impact of uncertainty reporting on the loan decision. Journal of Accounting Research (17): 35–57. https://doi.org/10.2307/2490608
March JG (1987) Ambiguity and accounting: The elusive link between information and decision making. Accounting, Organizations and Society 12 (2): 153–168. https://doi.org/10.1016/0361-3682(87)90004-3
Morais AI (2019) Are changes in international accounting standards making them more complex? Accounting Forum, 1–29. https://doi.org/10.1080/01559982.2019.1573781
McNichols MF, Stubben S (2012) The effect of target-firm accounting quality on valuation in acquisitions. Working Paper No. 81. Rock Center for Corporate Governance at Stanford University. https://doi.org/10.2139/ssrn.1623458
Otley D, Fakiolas A (2000) Reliance on accounting performance measures: dead end or a new beginning? Accounting, Organizations and Society 25 (4): 497–510. https://doi.org/10.1016/S0361-3682(98)00007-5
Paseková M, Kramná E, Svitáková B, Dolejšová M (2019) Relationship between legislation and accounting errors from the point of view of business representatives in the Czech Republic. Oeconomia Copernicana 10 (1). https://doi.org/10.24136/oc.2019.010
Penalva F, Wagenhofer A (2019) Conservatism in debt contracting: theory and empirical evidence. Accounting and Business Research, 1–29. https://doi.org/10.1080/00014788.2019.1609899
Preston A (1986) Interactions and arrangements in the process of informing. Accounting, Organizations and Society 11 (6): 521–535. https://doi.org/10.1016/0361-3682(86)90034-6
Ramalingegowda S, Wang C-S, Yu Y (2013) The role of financial reporting quality in mitigating the constraining effect of dividend policy on investment decisions. The Accounting Review 88 (3): 1007–1039. https://doi.org/10.2308/accr-50387
Socea A-D (2012) Managerial decision-making and financial accounting information. Procedia – Social and Behavioral Sciences 58: 47–55. https://doi.org/10.1016/j.sbspro.2012.09.977
The Republic of Lithuania Law on Corporate Income Tax (2001) Valstybes Zinios [Official Gazette] No. 110-3992, Pub. L. No.0IX-675 (20-12-2001).
Wells MC (1979) Facts and expectations in decision-making. Working paper no.1, (par. 2.9). University of Sydney, Sydney.
Yoo Y, Lim J, Chang J (2013) Financial reporting quality and acquisition profitability: evidence from Korea. The Journal of Applied Business Research 29 (6): 1737–1750. https://doi.org/10.19030/jabr.v29i6.8211
Zikmund WG, Babin BJ, Carr JC, Griffin M (2013) Business research methods (9 ed). Mason, OH: Cengate Learning.