The Role And Importance Of Economic Information Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

In today's highly competitive economic environment, business are challenged to explore innovative and dynamic commercial opportunites. It has become imperative that business organisation adopt and implement stringent business practices in an effort to cope with an almost volatile environment that currently, one that is posed to become even more uncertain in the foreseeable future. The recent downward pressure on micro and macro economies has caused significant ripples in domestic and internal market.

Changes in the economic environment can have an effect on business organisations. These can impact both the demand and supply side. Is is imperative that managers monitor the external environment. According to (Gillespie, 2010) changes in the income of a country, the value of the currency, the prices of resources, the degree of competition in the market, the level of employment and the cost of borrowing can determine whether a business succeeds or fails. Managers must be able to interpret and analyse the econmonic data and evaluate its impact on the business operation.

The Gross Domestic Product (GDP) is the total of the production of goods and services, An increase GDP means the economy Is growing and there is a high level of business activity whilst a decease shows contraction. This information is critical to business managers in developing their strategic organisation. provide organisations indicator used to measure the country economic performance provides information on the state of the economy, whether Government policy - regulations and taxes

Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers' plans remain the same (Parkin et al, 2005). that  when price increases the quantity demanded decreases, and when price decreases the quantity demanded increases. According to (Green, 2012) Analysis of elasticity of demand helps management to take decisions on pricing of products. Price elasticity of demand affects a business's ability to increase the price of a product. Elastic goods are more sensitive to increases in price, while inelastic goods are less sensitive. Assuming that there are no costs in producing the product, businesses would simply increase the price of a product until demand falls.


In today's highly competitive economic environment, businesses are challenged to explore innovative and dynamic commercial opportunites. It has, therefore, become imperative that entities adopt and implement new technologies cope with an almost volatile environment.

While Information Technology (IT) has impacted every aspect of organisations business functions and processes, it is the management process that exploit it that creates the competitive advantage. Managers can deploy IT to change business processes, products and services. IT has made it necessary for organisations to increase its Return on Investment (ROI), maintain or increase their market share and maximise their competitive advantage. Laudon and Laudon (2006) argued that manager and organizations invest in information technology and information systems because they provides real economic value to the business and serve different levels in the organization. However, Carr (2003) argues that Information Technology impact on corporate strategy has diminished. He suggested that the basis for competitive advantage is scarcity and since IT has become a universal resource and it is no longer of strategic value.

A classic example where organization use IT to support the business strategy to become low-cost producers, achieve increase new efficiencies Porter (1985) argued that leverage information technology on the organisation value chain most effectively enhances it competitive position. He identified the value chain as a system of independent activities that add value to its product and services. Therefore organisations can apply information technology to these specific business processes that add value to its products and services. made of primary and services. For example, Petrotrin use of internet technologies across its business process to increase efficiency and reduce cost.

Porter (1985) suggested that information systems technology plays a critical role in scheduling, controlling, optimizing, measuring and coordinating business activities. He suggested that technological change is a very import influence on competitive advantage because new opportunities are created for competition. Porter identified three generic competitive strategies that organizations can pursue.

Cost reduction in goods and services can be positively impacted by the deployment of information technology effectively they it can improve efficiency and reducing overall cost. According Porter and Millar ( 1996) the use of information technology and the internet can have significant impact on reducing cost of obtaining, processing and transmitting information. It can also reduce the cost of market , advertising and business operations. For example, Petrotrin managers recognizing the need to invest in modern technology in order to make the organization more efficient by automating several business processes to reduce operating cost. Petrotrin had a number of standalone applications such as Payroll, Invoicing Processing and Materials Management which were independent of each other which resulted in data duplication, data inconsistency, exorbitant training cost and high maintenance cost.

Petrotrin implemented SAP ERP (Enterprise Resource Planning) software, and developed in-house a Well Information System. ERP systems are commercial software applications packages that facilitate the integration of transactions data and business processes throughout an organization (Marcus el al, 2000, p245-265). At the operational level, the SAP application modules are used for support Financial Accounting, Order Processing, Inventory Control, and procurement business functions. The Well information System (WIS) is an integrated database used for storing oil and gas production data. The WIS information is used at the operational and management level, whereas, the SAP software is used at all three levels i.e. operational, management and strategic level. Middle managers utilize the SAP software to perform several tasks such as monitoring monthly budgets, inventory level and usage patterns. They can drill down data and perform simulation and what-if analysis. At strategic level, senior managers use the Reporting Portfolios for company wide information such as corporate sales, financial information and trend forecasting.

The implementation and maintenance of ERP applications poses a number of challenges and risks to organizations. (Kuldeep and Hillegersberg 2000) identified technical complexity, problems migrating between versions, slow to respond to environmental changes, mismatch between organizational requirements and ERP package. Petrotrin had to change its business processes and procedures to fit the SAP ERP software. Petrotrin has to rely heavily on the


In a highly competitive globalize business environment, many organisations are required to be agile in to quickly respond to changing environment. This requires business manager to have quick access to have timely, accurate information to make informed decisions. This highlights the importance of quality and usefulness of the financial information. McLaney and Atrill (2005) argued that relevance, reliability , comparability and understandability are key characteristics for financial information to be useful for for managers to make good decisions.

Accounting is the process of recording, summarizing, and analysing financial transactions which satisfy the needs of diverse set of users . Organisation provides financial information in the form of balance sheets sheet which reports on a its financial position at a point in time, the income statement reports on a company's performance over a period of time and lists amounts for revenues and expenses and the cash flows report on performance over a period of time (Easton et al , 2010).

Some researchers has criticize the usefulness of the financial information in the decision making process. Boyle (2009) argued that the usefulness of financial information is impeded because the financial information produced are backward looking, that is the information is based on past events. He also argued that financial statements are based on assumptions of an efficient market and the information represent a snapshot, which represents a point in time.the financial as plays a significant role in organisations for managers, investors and creditors. Collier (2002) also suggested that financial information produced represent a given year which may not coincide with the business cycle which has greater weight when making business decisions. Despite the these views, the availability financial information such as cash flows , budgets and profit and loss is critical to the decision making process in business organisations.

Cash flows reveals the movement of cash, that is the cash inflow and outflow on a monthly basis, over a period and the effect of these movements on the cash position of the organisation. This is particularly important since cash is the lifeblood of any organisation and business managers can assess the ability of the organisation to survive or make decision on business opportunities as they arise ( McLaney and Atrill ,2005) . For example, in the Petroleum Company of Trinidad and Tobago the cash flow statement (provides an insight into incomes generated by each exploration field based on oil production. The managers can see with field is generating the maximum revenue and can decide on which field to concentrate on to generate the highest return (Petrotrin, 2011).

Similarly budgeting gives a guideline on expenses and revenues, it is a policy statement on how the organisation operates and what plans are important. It also provides information on the amount of debt and what strain the debt is placing on the organisation health. Managers can ascertain whether the organisation is paying more in debt than they are making in revenue. In addition, the information can also help pinpoint where the organisation might have problems reaching its objectives. Moreover, budgetary information also highlights the organisation strengths and the area of operations in which the organisation has a competitive advantage (MTD Training, 2010).


The success on any business organisation depend partly on manager having access to strategic information systems to provide accurate, timely and relevant, real time information to make critical business decisions. According to (London and London, 2006) the use of information systems has reduced the information uncertainty and has improved the quality of decision making At the strategic level in organisation, Petrotrin's managers are focus on developing strategic plans to reduce operating expense, improve operational efficiency and increase market share (LN&E, 2011).

For example, at Petrotrin's exploration and production of crude oil and natural gas is a core aspect of its operation. Managers are responsible for planning exploration projects, budgeting for equipment, personnel and purchasing services. Managing these processes requires managers to have access to economic , financial information and a supporting information systems for make informed decisions. Before making investment decisions Petrotrin managers need to Government fiscal policy. They to ascertain wether the corporation tax would increase.

Economic data such as the rate of inflation, foreign exchange rate, the price of labour and material, world supply ,demand and comsumption for oil and gas in United States and China is useful in Petrotrin's managers decision making process. According to the US Energy Information Association (EIA) "EIA currently projects annual increases in consumption in China of around 0.4 million bbl/d in both 2012 and 2013. On the supply side, oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected" . This is important information for input in Petrotrin's Exploration and Production business strategy is to increase oil and gas production through Joint ventures and to reduce operation cost.

Secondly, at the tactical level managers are more focus on medium term planning and monitoring the organisation performance through mechanism such as budget and control systems through SAP Enterprise Wide Information Systems providing management reports on capital expendure, recurring and operating expenses, budgeting, costing and cash flow reports, Monthly oil production report and Allocation reports.

This allow manager to spot problems very early and make the required decisions. Oil and gas exploration is very costly venture which requires a high capital outlay. Therefore manager need access to financial data such as budgets and cash flow. For example, budget data shows managers the actual expenditure, budgeted expenditure, variance for the Land, East Coast and North Coast exploration fields for capital expenditure, salaries and wages, contract, utilities.

Petrotrin managers and decision makers would be able to access business information such as oil and gas productions data in real time. This would be of significant business advantage as that these integrated applications will facilitate astute decisions making and by extension increased operational efficiency. Managers will have access to a fully integrated corporate database. They can use business intelligence tools, perform queries for example what-if analyses on well production data and generate production graphs and reports Holsapple and Sena (2005). The availability of this decision support capability provides managers with the tools to make more informed business decisions.

al, P.e., 2005. Economics 6th ed. Pearson Education.

Boyle, P., 2009. Limitation of Accounting models and their impact on decisions. IEA/ Financial Reporting Council Conference.

Carr, N., 2003. IT Doesn't Matter. Havard Business Review.

Collier, P.M., 2003. Accounting for Managers: Interpreting Accounting for decision making. John Wiley and Sons Ltd.

Eeaston, P.D.e.a., 2010. Financial Accounting for MBAs. Cambridge.

Gillespie, A., 2010. Business Economics. Oxford University Press: New York.

Green, J., 2012. Use of Elasticity of Demand in Business Management Problems. [Online] Available at: [Accessed 01 September 2012].

J., M., 2009. [Online] Available at: [Accessed 30 June 2012].

Kieso, D.E.W.J.J.&.W.T.D., 2005. Intermediate Accounting. Wiley Publisher.

Laudon, K.C.L.J., 2006. Management Information Systems. New Jersey: Pearson Education Inc.

LN&E, 2011. Petrotrin 3 year Business Plans. Santa Flora: Petrotrin.

Padoe, I., 2012. The importance of Financial information for the future of your business. [Online] Available at: [Accessed 02 July 2012].

Petrotrin , 2011), 2011. Exploration and Production: Annual Technical Meeting. Santa Flora: Petrotrin.

Porter, P.E.a.M.V.E., 1985. How Information Gives You Competitive Advantage. Havard Business Review.

Training, M., 2010. Managing Budgets. Ventus Publishing.