Question

Discuss why using financial accounting information for managerial decision-making may lead to distorted decisions. (Specific examples need to be provided with 3 aspects)

Answer 1

There are different causes because of which using financial accounting information for managerial decision making may lead to distorted decision. Out of a lot main three with example provided below.

Financial accounting information based on historical costs : Accounts are prepared on the basis of historical costs ( i.e original cost) and such figures given in financial statements don't show the effects of changes in the price level .The assets remain undervalued in many cases particularly for land, building etc. The outcome of this practice is the balance sheet values of assets are not helpful in estimation of true financial position of the business . If directly without any modifications such information blindly consider for managerial decision then such decisions will never be accurate.

Financial accounting data are unsuitable for forecasting : Financial accounts are only a record of past events. Continuous changes take place in the demand ,policies adopted by the firm, the position of competition etc. As such,the management analysis and decision making based on past events supported by financial accounting records may not be of much use for forecasting. Rather blindly following financial accounting records will mislead or provide false information during managerial decision making.

Omission of qualitative informations : Financial accounting only records information which can be expressed in terms of money. Qualitative aspects of business units are completely omitted from the books as these are not expressed in terms of money . Thus changes in management ,reputation of the business ,cordial management labour relation ,firms ability to develop new product ,efficiency of management ,customer satisfaction which are very vital during taking managerial decision, are totally ignored from being recorded because these all are qualitative in nature. So only with quantitative facts and factual if managerial decisions are taken without no qualitative support ,then such decisions may lead false claims and may failed in fast charging business world.