CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter presents a review of literature on the
concepts under study. The chapter begins with a conceptual framework section
2.2, theories of management accounting; 2.3, reviews empirical studies 2.4 where a number of studies done on financial
management practices together with their findings and their contribution to the
present study is made. This is followed by a conclusion of the literature
review section.
2.2 Conceptual Framework
2.2.1 Financial Management Practices
For
the purpose of this section, financial management practices are defined and
demarcated as the practices performed by the accounting officer in the areas of
fixed asset management, accounting information systems, working capital
management, financial reporting analysis and capital structure management (Bull, 2010).
2.2.2 Fixed Asset Management (FAM)
For
the purpose of this research work, the
focus is on movable assets since the study is on manufacturing companies; the
acquisition of capital assets can most certainly exert an effect on an
organization’s competitive advantage over the long term. Capital equipment is
characterized by large expenditure and non-recurring expenditure. Purchasing
capital equipment usually requires a relatively large capital outlay, which may
sometimes amount to millions and which may have particular financial
implications. Buying capital equipment can therefore be regarded as an
investment which is financed from long-term, rather than from working, capital.
It is important to consider not only the
purchase price of capital equipment, but also the total cost of ownership (Seal, 2006).
Capital
equipment is usually purchased at irregular intervals. It is used up gradually
in the production process, rather than as a part of the end product. Owing to
the relatively long lifespan of equipment, it could take several years before
it needs to be replaced and, at the time of replacement, old equipment could
prove to be technologically obsolete. If the correct purchasing decision is
made, capital equipment generates profits for the organization. Incorrect
decisions may have disastrous consequences for the enterprise, since it will
not be able to sell capital equipment over the short term. For the above
reason, top management should consider the acquisition of capital equipment,
with care (Seal,
2006).
2.2.3 Accounting Information Systems (AIS)
Malamo,
(2009) states
that the AIS is a system of records usually computer-based, which combines
accounting principles and concepts with the benefits of an information system
and which is used to analyze and record business transactions for the purpose
of preparing financial statements and providing accounting data to its users.
AIS assists in the analysis of accounting information provided by the financial
statements. Lambart,
& Sponem, (2005) purport that the biggest
advantage of computer-based accounting information systems is that they
automate and streamline reporting. Reporting is a major tool for organizations
to accurately see summarized, timely information used for decision-making and
financial management practices.
2.2.4 Financial Reporting Analysis (FRA)
As pertains to Financial Reporting Analysis (FRA),
recording and organizing the accounting information systems will not meet
objectives unless reports from systems are analyzed and used for making
managerial decisions. Financial statements usually provide the information
required for planning and decision making. Information from financial
statements can also be used as part of the evaluation, planning and decision
making by making historical comparisons (Karamanuo, & Vafeas, 2005).