Capital Budgeting Problems: A Solution through Accounting Techniques - Assignment Example

Running head: Capital Budgeting Problems: A solution through Accounting techniques Capital Budgeting Problems: A solution through Accounting techniques [Writer's Name] [Institution's Name] In order to keep on delivering profits the business must keep on investing in different projects in order to improve their organizational capabilities. These investments improve the capabilities of the business to respond to the customer demands, the external contacts of business reduces the risks attached to the products, internal integration improve the productivity of organization continuous experimenting not only improve the value creation but also enhance the image of the organization in business. These investments are very important for the businesses to survive it is necessary to measure the cost, inventory, space and quality savings measured by traditional capital budgeting systems. Most of the traditional accounting techniques measure the future flow of income by undertaking an investment which is not easy to calculate since the stream of income is expected to increase in future and the managers are cannot decide to assign the right value to the future benefit. Rather than that it is easier to the investment. This is due to the difficulty the future organization face in calculating the future benefits; most organizations normally do not undertake new investments. These judgements can be undertaken if the assets are quantifiable. The benefits attached to the intangibles can only be judged by the educated senior executive of the organizations and investments in such projects can be made on the basis of the beliefs of the organizations heads. The investments in these projects should be formally budgeted on the other hand it is strongly recommended to undertake periodic reviews of the outcomes and benefits attached to these projects. With investment in value delivering projects it is also important to invest in organizational skills and system since they affect the value. Activity Based costing system is used to achieve the organisation's objectives by supporting decision-makers inside the enterprise. Internal decision-makers are employed by the enterprise. These internal decision-makers create and use internal accounting information in order to undertake cost cutting and enhance the business profits (Meigs, Williams, Haka & Bettner, 1999). The development of effective management accounting systems although has played an important part in dealing with the problems discussed above but also it has given rise to the problems of downsizing and cost cutting. There are several factors, which were identified to have influence on the structure of these systems. These include differentiation degree of integration (internal & external) and the configuration of the organisations. Some researchers reveal contextual relationship between the above mentioned factors the management accounting system and information systems. (Daft and Mac intosh 1978; Khandwaila, 1972) Although many theories have been put forward in order to find out the efficient allocation of resources of the organizations but each of them has different drawbacks attached to them. Open theories: Open theories address all the social, psychological and structural factors. According to the open theories organisations are the organisms which take inputs from the environment and give outputs. Open systems undertake the analysis of all the different disciplines and levels. The open theories address all the aspects such as political social and technological extending its scope from other theories, which are confined only at studying the economic consequences. Cybernetics: covers the techniques applications. The cybernetics theories contend goal oriented behaviour and emphasise the change of role of individuals according to the situation. The main drawback of the theory is that it doesn't provide a universal solution and fails to provide specified guidelines for the individuals about their behaviour in different scenarios. (Aney, 1980) Social systems theory: The social system theories emphasise the role of regulation in order to achieve equilibrium in the unitary and management approach. According to the traditional management accounting the basic objective of the organisations is profit maximisation, this in turn increase the welfare of society and the individuals belonging to the organisation. The main drawback of the social system theories is that they do not address the issue of power and conflict. These unitary theories are effective in the case of a single organisation but in case of pluralism the accounting goals settled by these theories are not applicable. While finding the solution of the problems the role of the social and cultural factors cannot be neglected as studied by Laing (1967, p.53). Most of the theories make assumptions which are far from reality and hence these theories can not be applied to find the practical solution of the problems in designing appropriate and effective accounting systems which can eke the managers to make accurate estimates and right decisions. There are many gaps in the theoretical perspective and mathematical calculation models used in various accounting systems of different organisations. These organisations fail to co-ordinate the theoretical and quantitative perspectives of their systems. Many theorists believe that the policies and the rules designed are actually dependent upon the occasion of their use. The meaning of information also differs for different individuals. Accounting rules also differ for different people according to their job requirements. The new era of globalise businesses and increased awareness in the stakeholders has given importance to the notion of Corporate Governance. The execution of the notion will have important consequences for investors, companies, and, critically, for the stock and other financial markets. With the increasing globalisation when every country can be seen as an opportunity for the investors the lack of understanding of effective corporate governance can adversely effect the investment intentions of investors. Nowadays corporate governance is seen as the key of attracting investors. Capital flow seems directed towards the companies, which practice fair and transparent ways of governing their organisations. With the changing global business scenario the need of understanding and effective practise of fair and technologically advance corporate governance has also increased. Responsibility of directors who approve the strategic direction of the organisation within a framework of prudent controls and who employ, monitor and reward management. Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company. Transparency of clear information with which meaningful analysis of a company and its actions can be made. The disclosure of financial and operational information and internal processes of management oversight and control enable outsiders to understand the organisation. Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights. According to Meigs et al. (1999) this information meets the needs of users of the information-investors. Creditors, managers, and so on-and support many kinds of financial decision performance evaluation and capital allocation, among others. (P.07) According to Bruns and Waterhouse (1975), Watson (1975) and Gordon and Miller (1976) as cited in (Dent, 153) the inclusion of contingency aspects in the accounting literature and practice is of immense importance. They emphasize the use of an information System in a proper way to undertake the accounting decisions effectively but fail to provide any suggestion regarding the exact formulation technique of a foolproof accounting system. Most of the accounting information systems of the organizations vary in different aspects such as 1) The balance between the financial and non-financial information. 2) The frequency of reporting. 3) The budgetary style. 4) The employees should find it easier to use Information system. Most often, gaps are found in the people's knowledge regarding the use of Accounting Information System in an appropriate way and the simplification level of the Information System, since most information systems are in technical form there are two ways through which these gaps can be covered. 1) By providing training to the people in order to make them easily use the Information System 2) By making the Information System in a user-friendly way in order to make the people find it easier to serve their purpose. Some organisations do the arrangements in order to facilitate their employees for using the Accounting Information System according to their needs, by introducing on job training courses and assistance. Other makes use of Information Systems in a simple manner so that its employees can use it. Audit of Information: By discovering what knowledge is possessed, it is possible to find the most effective method of storage and dissemination. It can then be used as the basis for evaluating the extent to which change needs to be introduced to the organisation." (Liebowitz, et. al 2000, 3)(Daverport, 1997) adds a step forward he states that the real issue is not about identifying management information needs, but making sense of business world. A number of changes are impacting on organisations today including: Increased stakeholder activism; Technological enhancements; Higher levels of personal investment; Globalisation; and Stronger scrutiny of board practices With the technological advancement, the businesses have now started investing in intangible assets such as knowledge and technology. But this has given rise to difficulty. People believe in what they see. The process of interaction of ideas and assets has been revolutionised. Developing trust and understanding with stakeholders is very important in order to turn knowledge in value. In Intangibles: Management, Measurement, and reporting Professor Lev proposes a two-stage solution to help move financial reporting. The process is an important contribution in the direction to improve the process of investing in an innovative project to reporting the information regarding the project to the stakeholders with the help of modern technology. The process is aimed at developing a 'value chain scoreboard' that would give quantitative, standardised and relevant measures for each of the three stages of the value chain. These are: 1. 'The discovery of new products or services or processes', 2. 'The development phase of these discoveries and the establishment of technological feasibility', 3. 'The commercialisation of the new products or services'. Once asset recognition commences ' all the project-related previously expensed R&D should also be recognised as assets' A strict periodic impairment test ' should be applied as a safeguard against overvaluation.' The object of these changes would be to match income and expenditure better in company accounts. With the changing business methods and environment the values playing important part in business has also changed. The label of assets has transformed from tangible to intangible assets. The companies mostly practise the old traditional accounting techniques according to which intangible assets such as knowledge brand etc are not included in the financial statements as assets. Although in today's business scenario it is important for the accounting managers to have complete knowledge of these intangible assets in order to undertake their decisions accordingly. According to the theorists all the tangible and intangible assets need to be continuously evaluated, means used to their fair values and should be reported in order to provide the clear and transparent information. The model gives three dimensions to the information 1) Assets and their configuration represented by company. 2) Information on assets relating to external environment management process and value. 3) Time. The model suggests the businesses should undertake project evaluation while keeping in view their mission, strategy, and business process and risk management. The combination of theories is required to address the problems of long time value delivering process by the companies and the return maximisation on capital. The management theories find the open communication with stakeholders a key issue in order to help them assess the present situation of business and the future performance. The companies should properly communicate about their future business plans. The companies should use different measures and systems in order to make sure the maximisation a project future values. A Company must calculate the weighted average cost of capital. The inclusion of qualitative information regarding the potential of the company and the project can also gain the purpose of value estimation of a project. Management must undertake the evaluation of these indicators used at board level in order to make the outcomes of the future plans and prospects of the company more clear. The gap between the internal and external perception about the potential of the company should also be taken into consideration. It is a reporting template for the businesses, which takes into consideration social, economic and environmental performance of a company. Conclusion: The strategy of a company requires constant updating. With the changing conditions of market and industry it is important for an organisation to keep its Information system in tact with the changing environment. An out dated Information System cannot fulfil the needs of today's global environment. In order to go through the updating process the organisations should carry on an audit to analyse which aspect requires improvement. It also specifies the direction in which the investment should be made. After the direction of investment is designated it is important to analyse the feasibility of investment. A successfully designed accounting information system cannot only provide information but also the help the managers to take decision in the right direction. By undertaking an overview of the theories presented in Hopper and Powell, Kelly and Pratt and Dent it is clear that all of the theories tend to analyse the problems from different perspectives such as economical psychological, social and political point of views, none of the all discussed above can address the problem effectively and provide a successful solution calculating the future benefits attached to an investment specially in intangible assets cannot be calculated quantitatively other forces also act on measuring or reducing the future cash flow of the project. Hence it is strongly suggested that the accounting gurus should work together in order to establish a theory which not only address the problem but also provide solution although it seems impossible to find a solution which will be acceptable by all as indicated by Simon who remarked that the business environment is too complex to be understood in its entirety. Argyirs (1990) pointed out towards the some direction in different manners stating that the information is complex in nature and is often distorted by the individual also for their personal and organisational purposes. Hence this is qualitative issue for which a significant solution cannot be found. But the accounting professionals should keep on trying so that the nearest solution can be achieved. References Davenport, T., (1997). Information ecology, New York, NY: Oxford University Press Lev, Baruch, Intangibles: Management, Measurement, and Reporting (Brookings Institution Press, Washington DC, 2001) Argyris, C., (1990). The dilemma of implementing controls: The case of management accounting. Accounting, Organisations and Society, 15 (6), 503-11. Liebowitz, J, Rubenstein-Montano, B, McCaw, Doug, Buchwalter, Judah, and Browning, C., (2000). The Knowledge Audit. Knowledge and Process Management, 7(1), 3-10 Meigs, F.R., Williams, J. R., Haka, S. F. & Bettner, M. S., (2001). Accounting, Eleventh edition, Irwin McGraw Hill, United States of America, ISBN0-07-289709, pp. 12 Read More