Acounting Information in Performance Measurement
ACCOUNTING PERFORMANCE MEASURES
Discuss the uses of accounting info in performance measurements.
What are the limitations of accounting information?
Accounting provides companies with various pieces of information regarding business operations. Management often reviews this information to determine how well their business is operating. A common use of such information is measuring the performance of various business operations. Financial ratios use the accounting information reported on the financial statements and break it down into leading indicators of performance. These indicators can be compared to other companies in the business environment or an industry standard. This helps managers understand how well their companies operate compared to other established businesses. Accounting information can also be used to evaluate the performance of the managers themselves in particular. This essay will discuss the uses of accounting information in performance measurement of managers and the limitations in using said information. How to overcome the limitations addressed will also be discussed.
Most organisations base their managers evaluations and rewards on accounting based financial measures which come in two forms, residual measures and ratio measures, which are derived from rules defined by accounting standard setters. Residual measures include such accounting profit measures such as net income, operating profit, EBTDA or residual income. Ratio measures consist of such things as ROI, ROE, return on net assets, or risk adjusted return on capital.
Reasons for the use of accounting information in performance measures are due to Accounting based measures being Precise, Objective, Timely, Understandable, & Cost Efficient thus meeting the measurement criteria satisfactorily. As Accounting Profits & Returns can be measured on a timely basis relatively precisely and objectively, it is possible to measure accounting profits in timely short periods with
Discuss the uses of accounting info in performance measurements.
What are the limitations of accounting information?
Accounting provides companies with various pieces of information regarding business operations. Management often reviews this information to determine how well their business is operating. A common use of such information is measuring the performance of various business operations. Financial ratios use the accounting information reported on the financial statements and break it down into leading indicators of performance. These indicators can be compared to other companies in the business environment or an industry standard. This helps managers understand how well their companies operate compared to other established businesses. Accounting information can also be used to evaluate the performance of the managers themselves in particular. This essay will discuss the uses of accounting information in performance measurement of managers and the limitations in using said information. How to overcome the limitations addressed will also be discussed.
Most organisations base their managers evaluations and rewards on accounting based financial measures which come in two forms, residual measures and ratio measures, which are derived from rules defined by accounting standard setters. Residual measures include such accounting profit measures such as net income, operating profit, EBTDA or residual income. Ratio measures consist of such things as ROI, ROE, return on net assets, or risk adjusted return on capital.
Reasons for the use of accounting information in performance measures are due to Accounting based measures being Precise, Objective, Timely, Understandable, & Cost Efficient thus meeting the measurement criteria satisfactorily. As Accounting Profits & Returns can be measured on a timely basis relatively precisely and objectively, it is possible to measure accounting profits in timely short periods with