Question

Discuss why using financial accounting information for managerial decision-making may lead to distorted decisions (please use specific examples to illustrate your points and limit your answer to 600 words or less)

Answer 1

first and foremost limitation of the financial accounting is it does not consider the time value of money. Which is a most important aspect of finance because a rupee today is more desirable for any person then and a rupee in future and financial decision always takes consideration of time value of money while the financial accounting assume time value of money as a constant that means at 10000 rupees you received today or 10000 rupees you received after one year later both are equal.

For example you wants to invest 10 lakh rupees in a certain project you have to borrow the same amount by issuing a debt of 10%. And over the years you receive the cash flows as under in year one you receive 300000 in year two you receive 2 lakh in year 3 you receive 500000 and in year four you receive another 2 lakh. According to financial accounting you will earn 12 lakh rupees in this project. That means you will gain 200000 rupees by investment in this project but what about the time value of money which is ignored by the financial accounting. here debenture holders will charge 10% interest on it, that means they will claim their amount for the time they have invested. So it will lead to wrong decision making.

Another major limitation of the financial accounting is it does not consider the non financial things like efficiency of the manager and employees. Financial accounting only consider the things which can be shown in monetary terms that means it will totally ignore the experience gained by the employees of the organisation according to many prestigious best organisations the employees of the organisation is biggest asset. but financial accounting does not consider the efficiency of the employee or the efficiency of the management of the organisation so it is ignoring biggest asset of the organisation. That is why it may lead to wrong decision making in long run so this is was the limitation of financial accounting.

I I hope my efforts will be fruitful to you...☺️