INFLATION, FINANCIAL REPORT AND DECISION MAKING IN BUSINESS ORGANISATIONS IN NIGERIA (A CASE STUDY OF NIGERIA BOTTLING COMPANY PLC)

 INTRODUCTION

            Inflation accounting is not a new concept since nineteenth century, it was observed that there is something lacking for stabilized accounting. Inflation becomes accustomed and widely known to have great impact on various aspect of life activities which includes accounting practices.

             Inflation has been known to cause a number of social, economical and political effects. Some of these effects are inequalities in price of goods and services, social strains, fall in standard of living and investment decreases.

          There is no doubt that some of the business failures in Nigeria during inflation of recent years, have resulted in many constraints due to irrational decisions made based on inflation-distorted financial reports of such companies. Moreover, the inflationary nature of recent past years, federal government budget heralds a general rise in the prices of goods and services. Therefore, it is to avoid future business failures that this research project is embarked upon.

Inflation is a common problem especially for developing and under developing economies. The rate of inflation is generally very high and business organization operating their business under such conditions have to consider the effect of inflation while preparing statement for a true and fair view of the state of affairs.

            The main objective of the paper lies on investigating inflation, financial reporting and decision making as related to the wages, prices, dividends and capital to earn future profits like taxation and investment decision of the business corporation as they relate to reported financial statement during inflation.

            The research is not meant to include research on the nature, causes, rate and the instrument of combating or controlling inflation in Nigeria. And as regards to the organization which is included in the study. Only the profit oriented corporation which was registered and also situated in any branches of Nigerian bottling company (coca-cola) lies the purpose of this research work.

BACKGROUND OF THE STUDY

           This research work is based on the problem of inflation and how it affects companies in their financial report and decision making in business. This study is mostly based to educate managers of Nigerian Bottling Company (coca-cola) on how to maximize profit to make ends meet, in their various branches.

           In the fifties, inflation was not known as a major phenomenon in Nigeria as likely to cause distortion in conventional accounting reports. The financial reports then were prepared without giving consideration to the changes in the value of money. That was when stable monetary unit assumption in accounting was appropriately applied in the preparation of financial reports. But since the 60’s , inflation has become a major problem, having a pervasive effect on our ability to purchase needed goods and services in order to make rational decisions, using the conventional accounting reports.

           There have been evidences that most business failures in the country were as result of irrational business decisions made by managers based on inflationary distorted profits of such business unit. And yet, there are concrete signals that so-called inflationary 2003 federal government budget showed great failure in business.

            This research has foreseen and therefore, considered it necessary to carry out this research to help at least, in reducing the rate of contemporary business corporation in the country, by bringing to the knowledge of company managers and all those involved in the decision making, the distortions that mark the conventional accounting reports during inflation problem, the way and means of processing and displaying accounting inflation, so that things will be able to effectively tackle the inflation of the years to come.

STATEMENT OF THE PROBLEM

         Inflation as many economist and financial experts are aware of the effects of inflation on accounting reports on business organizations. Inflation has clouded ghost sources of profits. The problem is the fact that reverse is almost always stated in current naira; while plant, equipment and inventory whose worth may well be two or three times their original values now that inflation exists.

          Furthermore, the effects of inflation thus hidden from the decision-maker by convention of accounting procedures, makes it difficult for managers to draw appropriate conclusions from financial data. This perhaps leads to the modified failure of contemporary business organizations in Nigeria in recent years, which results as a consequence of inflation on companies. Thus, the first question that to really occur to mind is:

Ø  Does inflation actually cause distortion on conventional reports in business organizations?

Ø  Do companies take financial reports at their face value and ignore effects of changes in money values when making decisions?

Ø  Lastly, would the conventional financial reports adjusted; provide better accounting information for the decision- making in business organization?

OBJECTIVE OF THE STUDY

          The objective of this study is to research on the inflation, financial reports and decision making in business organization in Nigeria. The objectives are as follows:

a)    To find out if adjusted financial reports could be better for decision making, than the conventional financial reports.

b)    To know if companies take financial reports at their face value and ignore the effect of changes in monetary values when making decisions.

c)      To know if investors depend on the credibility of financial expert approval on financial statement in making investment decisions.

 RESEARCH QUESTIONS

          In order to find solution to the research, questions are laid down by the researcher. The questions are as follows:

     I.        Will adjusted financial statement provide better information for decision-making during inflation than conventional financial report?

    II.        Do companies take financial reports at their face value and ignore the effect of changes in monetary value when making decisions?

Do investors depends on the credibility of financial experts approval of financial statement in making investment decisions.

SCOPE OF THE STUDY

          The research was carried out on three businesses, breweries and there are bound to be a limitation in the process of carrying out the research work. These studies carried out by the student, there are financial and time constraints.

          This research is aimed at promoting manager on their effort to reduce the clouding effect of inflation on converting information and knowing the consequence of this failure to companies before time. This research is based on finding the control measures to reduce inflation, which might cause distortion on financial report and decision-making in business corporations.

          Finally, this work makes for accurate accountability of auditor’s report in the company, in order to give accurate and precise information about the work in the company which has already been audited.

LIMITATIONS OF THE STUDY

          During the course of writing this project, the researcher encountered some problems or constraints which have gone a long way to affect the successful execution of this study. Those constraints are enumerated here under;

v   There was lack of finance for running cost and other financial commitment.

v   There was also lack of adequate data and information regarding the system in Nigeria Bottling Company PLC (coca-cola).

v   Transportation also limits this study because transportations were boarded by the researcher which almost frustrated his programme.

 DEFINITION OF TERMS

       The definitions here are meant to give vivid understanding of this study; there are some terms that are relevant to this study, which needs to be defined.    These terms include the following;

·          INFLATION

This is a general rise in the prices of goods and services in an economy.

·          FINANCIAL REPORT

Information provisions in the form of income statement and balance sheet must be vital during inflation.

·          DECISION MAKING

Choosing or selecting from among alternatives by managers of business corporations in Nigeria.

·          BUSINESS CORPORATION

Incorporated entities with profit making as its/their main goal.

·          PEOPLE PROFIT

Fictitious profit on book which results from recording revenue on current basis and cost on historical basis.

THE IMPACT OF INFLATION ON FINANCIAL DECISION MAKING

The economic unit is in need continuosly to providing the accurate information about its environment or its ability to keep up with the current development for the purpose of competition and keep the performance development, an it is also depend on the decisions taken by the economic unit, and because of the importance of the financial decisions as seen in the fist requirements, it emphasis mainly on the accounting and financial information available and accurate characterized by the objectivity and such data is always faced by changing because of the inflation and the associated increase in prices.

INFLATION AND MEDIUM AND LONG TERM FINANCIAL DECISIONS

The first person responsible for the financial and accounting information distortion is the economic unit officer or the shareholders. And any distortion in such information can make volatility and disruption in managing a business organizations in Nigeria, and all that affect the decisions taken in the investment financial operation and allocating the result as well as decisions of the general meeting of the shareholders especially toward the banks and tax authorities. Therefore we distinguish between long term and short decisions, and now we will discuss the impact of inflation on medium and long term decisions.

Inflation and financial planning: Most of economic units perform the programming process before financial planning. Putting long term financial plan is a difficult process, and the difficulty increases relatively according to the term covered by the plan. In light of the price changes, it should be taken into account some principles and financial bases for the continuity the application of the plan accurately and here are some financial plans related to the price changes.

1)         The financial planning for the supply changes: When purchasing the economic unit for primary materials or products or when being imported, it trades in light of inflation and allow the movement of monopoly in light of high prices.

2)         The financial planning for the wages changes: The wages expenses are considered as difficult variable used by the economic unit. The increase in wages increases the demand of a certain goods and services, thus the prices become high, causing inflation wave.

2.4        INFLATION AND SHORT TERM FINANCIAL DECISIONS.

The inflation not only affects the long and medium term financial decisions. But also affects the short term financial decisions, including:

1)         The inventory: The inflation affects the short term financial decisions, as the inventory circle shows a continuous renewal in light of general price changes, and the impact differs according to the term and the turnover of the inventory.

In the case of the rapid turnover of the inventory the result will be the same.

In the case of the rapid turnover the result will decrease and therefore the inflation affects the decisions relate to the inventory.

2)         inflation and treasury: The flows shall be associated with the exploitation circle, but the flows away from the exploitation is affected by the inflation, and in such cases the needs of treasury increase more and more to be more than the resources, and activity are affected also by the inflation resulting in the inflation impact on the inventory then on the treasury.

3)         inflation and loans: In order to enable the economic unit to use optimally the working capital, it shall avoid the bad decisions hindering the unit, especially related to searching for the short term funding, and resorting to banks which are considered as a real danger, and the short term depts., which exceed the exploitation assets making the economic unit not able to solvency.

 DISTORTION OF ACCOUNTING REPORT DURING INFLATION

During inflation period less statement tend to report lower cost and higher profit than would have been the case under “normal conditions”

Admin godschmist while accepting this view went further to identify a number of factors on which distortion in conventional financial reports (balance sheet and income statement) depends on the profit an loss ascertained at the end of the accounting year. Mostly on the following under listed points

1)         The rate and duration of price level changes the more rapid the changes in price level in one direction the greater the distortion.

2)         The financial leverages: The greater the leverage composed of non-linked loans. The lower is the bias.

3)         The method of inventory calculation with the FiFo method of the opposite holds for the bias of inventory value.

4)         The shames of lagged lost (depreciation and material drawn from inventories, assuming FiFo method) in total bias of cost and profit. In other words, the greater the assets intensity (which determine the amount of lagged costs) the more bias is profit.

Jennings (2012) making his own contribution in relation to the distortion of accounting reports during inflation say that. “the defects of historical cost system has been aggravated throughout the 1970’s by the accelerated rate of inflation as a consequence products and services have under coated, thus producing fictitiously high profits which the company has then shared out between its employees as wages, its shareholders as dividends and the taxation authorities as corporation tax”.

Now that we have been exposed to the distortions inherent in financial report due to the impacts as inflation on them. Let us try to examine the way in which inflation can influence accounting statements. This will enable the preparation of the statement and the decision makers to know the key areas or point that are actually affected or distorted by inflation

WAYS IN WHICH INFLATION CAN INFLUENCE ACCOUNTING STATEMENT

Pizzey (2001)expressing his view in connection with the impact of inflation on conventional reported profit and financial positions of a corporation indentifies four major points at which inflation can affect financial statements. These are fixed, monitory items point and capital respectively in the same pattern as he did.

1)         Fixed Assets and Depreciation:

As the value of money falls, fixed assets recorded at historical cost will not reflect the purchasing power of capital invested in them at current prices and depreciation based on historical cast will fill to set aside a large amount enough out of profit to replace that which has been up at current prices.

This depreciation based to the depletion of capital in the corporation of such profit is distributed for instance, if an asset purchased ten years age for N2,000 is depreciated at N200 per year. Although at the end of its tenth year life, the original N20,000 invested in it will have been set aside from profit after ten years of inflation, N2,000 can command less terms of goods and services than the amount 10 years back. Although the capital of the business in balance sheet at historical cost fail to show the shareholders the current value of what the company owns and cause the capital employed figure to be understated

2)         cost of sales:

The second way in which the impact of inflations is fell on accounting statement concerning the measurement of profit when th cost incurred in one period is set against revenue received in a later period. The revenue will be counted a higher price while the cost for example raw will be disclosed. If however, the raw material used up in both the revenue and cost aside of the sum will be expressed in current price term and the true profit will be average. Some of the accountants suggest that the last in first out (LiFo) technique should be adopted in the computation of profit in an inflationary period.

3)         Monetary items:

Certain items in balance sheet termed monetary items such as creditors, debtors and cash are shown in accounting statement in current term so that they appear to be currently stated at a time of inflation, however, if a company hold its assets in a monetary form, that is cash and debtors during a period of inflation, when it eventually turns its monetary assets into tangible assets such as machinery or stock prices will have risen, so it will get less for its money than it had spent on it earlier, thus, to accord a monetary asset is to make a loss during inflation peiood. By thee same token, company which obtains its funds from borrowing will gain during a period of inflation. Since when repaying its creditors overdraft or long term loans, the amount paid out will be equall to the amount borrowed, but some inflation has taken place during the period of the loan, the amount paid out will have less value in terms of goods and services that it was when the loan was made.

4)         Capital Growth:

This is another in which inflation affects accounting statement, this concern itself with the way in which conventional accounting projects the money capital of a business corporation but fails to show that money capital is being recorded in terms of purchasing power during a period of inflation. The original investment by the shareholders in the company is shown by the amount of share capital and the amount of their investment since the inception of the business is represented by ploughing back profits or reserve in the balance sheet. If 500,000 units il N1each ordinary share were raised by a company in the year 2012, it seem wrong to show that amount as the quantity of goods and services which can be commanded by that amount has taken since the year 2012 the capital was raised. At the same time, profits have been ploughed back into the reserve year after year since the inception of the company.

THE IMPACT OF INFLATION ON THE FINACIAL REPORTS

The general frame of the accounting measurement model depends on a group of common assumption and accounting principles which are considered as the base on which the accounting income measurement is done and determining the financial position of the organization, and the principles affected by the inflation but didn’t take its impact into account when preparing the accounting data and information. These assumption are the assumption of the fixed purchasing power of the measurement unit can be ignored.

This assumption excludes the principle of historical cost requiring, recording all information of accounting unit with the actual value at the time of being completed in order to reflect the financial events as done, then expenses related to such assets with the original cost at the time of acquiring. The result of that is that the traditional accounting doesn’t give attention to the problem to changed value of the measurement unit because of the change in price levels. Therefore the application of historical cost principle causes many problems and mistakes in the accounting measurement, as its results do not reflect the financial position as the result of economic unit works.  

 DECISION MAKING PROCESS

Before explaining the term decision making process it has to be clarified what a decision is. A decision is a choice leading to a certain desired objective out of that the next question arises: Who makes a decision?

An individual or multiple participants that are involved in decision-making can be called decision makers individual decisions can be made by a computer or a single person meanwhile the multi-participant decision makers can be divided into unilateral and negotiated decision. In the first one, which is also called team decisions, one of the participants has the power to decide. The others although, can highly influence how the decision will look like. In negotiated decisions the participants share the authority of making a decision. This type distinguishes between group decisions where the participants have nearly equal authorities an discuss their different view points in various meeting and organization decisions. In the latter one the authority of making a decision is unequally shared according to the organizations hierarchy and the coordination between the decision participants is highly structured. The following table should give further information about the various types of decision makers.

SUMMARY OF FINDINGS

        From the interview held with the top and middle managers, the accountants of various departments in Nigeria Bottling Company Plc, Aba. The under enumerated facts were found out by the researcher;

a)    The large branch in the company, (i.e. headquarter) in Lagos, do acknowledge that inflation of 10% and above, as it is now, does affect their performances in terms of profit making. The profit margin is reduced by the increased cost of their input.

b)    This large branch still prepares their financial statement on historical cost basis, but take care of the impact of inflation by adjusting for it in their annual budget. However, others prepare private inflation adjusted financial statements apart from the historical cost based one. This, they claim to do because they recognized that the profit reported on the historical cost basis during inflation is over-stated.

c)     Historical cost accounts are accepted as reliable by 100% of the correspondents in so far as the rate of inflation is below 10%. But about the same 90% of the respondents (mainly from large branch) are suspicious about the reliability of the information in the economy has harsh up to 10% and above, as it is in Nigeria since 2002.

d)    In making dividend payment, some managers (especially from newly established branches) do believe that corporate reports, stated during inflation and therefore, distribute dividend from what they call “profit”, only to changing of the business.

e)    Many companies have been indulging in under-fixing prices of their product, simply by strictly adopting First-In-First-Out stock valuation in period of inflation, which means that the product cost are under-stated and hence, the over-statement of their profits.

f)     Corporate tax is calculated on over-stated profit of branch, since the company’s taxes are computed on historical cost profits. Large branch understand this fact, and are actively in need of establishment of certain laws from the Nigerian government that would provide correction for this unjustifiable over-taxation of their profit.

 CONCLUSION

             Accounting inflation plays a crucial role in the development and existence of corporations in any economy. For this fact to hold, the information provided by accounting, must be that which is current, meaningful and devoid of distortions. But research has revealed that accounting information is not actually devoid of distortions during inflation periods. This has been the general concerns of accountants, managers and all shareholders in the companies all over the world. The researcher believes that the distortion effects of inflation on the information provided to decision makers in the state, has played some part and is likely to play more on the business corporation, in which they are making decision

            The researcher therefore believes that the improvements in this financial information will in-turn, improve the various management decision, which are therefore, necessary for the continuing existence and healthy positions of the company.

As a future area of research, the researcher suggests further study should be done in this area so as to include the external users and which sector of the economy, banking sector, agricultural sector, etc is most effective / affected by this distortionary effect of inflation on the financial reports.