Description
ABSTRACT
Accounting ratio is the most important factor used by management, creditors, investors and other users of financial statement in carrying ant most business decision. It uses an application in making business decision remain inevitable.
This study has, therefore been divided into five chapters, the first chapter briefly introduced the topic by looking at the definition of accounting ratio, it contains the statement of the problem, the objective of the study and the limitation of the study.;
The second chapter which contains the profile of Nigeria Breweries Plc. Deals with the review of related literature on the topic. Chapter three deals with the method of carrying out the research methodology. Chapter four appraises the analysis and interpretation of data collected from respondents.
Finally chapter five includes, summary recommendations and conclusion. Any errors either by emission or commission are entirely unintentional and deeply regretted.
TABLE OF CONTENTS
Title page ii
Approval page iii
Dedication iv
Acknowledgement v
Abstract vii
Table of Content ix
Proposal xii
CHAPTER ONE
- Background of Study 1
- Statement of Problems 4
- Objectives of the Study 5
- Research Questions 6
- Significant of the Study 8
- Formulation of Hypothesis 9
- Scopes and limitation 10
- Definition of terms 11
Reference 13
CHAPTER TWO
2.0 Literature Review 14
2.1 Profile of Nigeria Breweries Plc 16
2.2 Standard of comparism 19
2.3 Ration as predication of Business
failure an empirical Approach 25
2.4 classification of accounting rations 26
2.5 Type of rations 28
2.6 Signification of ration 45
2.7 Limitations of accounting rations 47
2.8 Inflation and Accounting rations 50
2.9 Criteria for accounting rations 52
Reference 57
CHAPTER THREE
Research design and methodology 59
3.1 Sources of Data
- Interview Questions (Collection
Instrument Method) 60
- Determination of Sample Size 62
- Method of Investigations 63
- Statistical method used for data analysis 63
CHAPTER FOUR
Data Presentation and Analysis 64
4.1 An over – view 64
4.2 Distribution of Response 65
4.3 Testing of Hypothesis 80
CHAPTER FIVE
Summary, Conclusion and Recommendation 89
5.1 Summary 89
5.2 Conclusion 90
5.3 Recommendations 92
Bibliography 96
Appendix
PROPOSAL
Accounting ratio is the most important factor used by management, creditor investors and other users of financial statement in carrying most business decisions. It uses an application in making most business decision remain inevitable.
The research study will be divided into five chapters, the first chapter briefly introduced the topic by looking at the definition of accounting ratio, its contains the statement of problems, the objectives of the study and the limitation of the study.
The second chapter, contains the profile of Nigeria Breweries Plc. Deals with the review of related literature on the topic. Chapter three deals with the method of carrying out the research methodology. Chapter four appraises the analysis and interpretation of data collected from respondents.
Finally chapter five includes summary recommendations and conclusion. Any error either by omission or commission is entirely unintentional and deeply regretted.
CHAPTER ONE
- BACKGROUND OF STUDY
Omuya: defined “Accounting as a language of business. It is used in the business world to describe the transaction entered into by all kinds of organization shows that Accounting centers on transforming raw data into information that would be used to many users. It takes care of the financial communication of the entry as it supplies the financial information in a way and, form so desired by the users.
In a similar case, Millichamp (1992) defined “Accounting as the art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events which are in part at least of a financial statements provide necessary information to users of financial statement. These users include owners, (shareholders) managers, suppliers, customers, government employees etc.
The users of these statements are expected to read, interpret and analyze them objectives of financial statements are not accomplished when many users of the statement cannot understand them, let alone interpreting and analyzing them.
The information the users attempt to gain from financial statement are:
- The ability of the business to pay its way and survive in the long run.
- The quality of management and the rightness of decision made.
- Information that guide the future
Regrettably, the inability of users of these financial statements to comprehend, interpret and analyze them and still has always contributed to harmful business and investment decision, by the users of these statements. As a result of these wrong business decisions, many users of these statements have been render poor, where as others are afraid and show indifference to investment and business opportunities. Cases are abound where these financial statement users, individual and corporate, have lost millions of Naira merely because of wrong business decisions.
Admittedly, faulty business decisions do not only affect management and investor. It is also affect the entire economic growth and development. Indeed, these problems of wrong investments and business decisions therefore prompted this research work and topic. Reason behind the topic is the discovery that many victims of wro9ng business decision are people and firms who do use analytical tool otherwise known as Ratio Analysis in their decision making process.
“Ratios are simply, mathematical expression of relationship of one figure to another which may come from the same statement or from different statement.” (HMAN EDWARD 1968). Accounting ratios, by their very nature, serve as indicator of the performance of a company both past and present.
According to Mill Champ (1992). “Ratio analysis is used to assess performance and liquidity and to forecast the future is analytical technique use making business decision in the center of this research work.
1.2 STATEMENT OF THE PROBLEM
Currently, many users of financial statements are not yet equipped, analytically to make good business decisions, notwithstanding companies and workshops on the been made to enlighten and Educate financial statements users that their future business predictions are based on accounting ratios, which use historical data.
However, these efforts have not made any meaningful change because the number of wrong decision makers is on the increase sometimes this attributed to total disregard of ratio analysis by financial statements users. Perhaps, ratio analysis their tendency of becoming victims of inadequate business decisions.
Against this background, these situation become puzzling and have constituted research problems.
1.3 OBJECTIVE OF THE STUDY
The objective of this research to assist in identifying and disclosing the extent to which accounting ratios help in decision making in business. The writer has in mind that the research will help to strengthen the weakness faced the companies in use accounting ratios in the business decision and at the same time find solutions to the following problems.
- How accounting ratios confuse their tendency of becoming victims of inadequate business decisions.
- The ignorance of importance of accounting ratio is responsible for detective business decisions by the users of financial statements.
- The negligence and disregard of ratio analysis responsible for wrong business decisions by users of financial statements.
1.4 RESEARCH QUESTIONS
The questions this research work is seeking the answers are the following:
- Do accounting ratios confuse financial off becoming victims of inadequate business decisions?
- Is ignorance of importance of accounting ratio responsible for defective business decisions by users of financial statement?
- Are negligence and disregard of ratio analysis responsible for wrong business decision by users of financial statement?
- Do financial statement contain differences and trouble that misdirect their users?
- Do users of these statements require more enlightenment campaigns and workshops to enable them comprehend their importance?
- To what extent do accounting ratios used for financial analysis and business decision?
1.5 SIGNIFICANCE OF THE STUDY
Many scholars have written about the important of financial analysis to business world. Others have also written ratio analysis as a test to firm solvency.
However, no attempt has been made that wrong process. This, of course, is where this research work is different from the other writings.
Additionally, ratio enables prospective leaders to decide whether to provide assistance to a evaluate results and to use them as guide in controlling the firms. With the help of accounting ratios, creditors, are well positioned to know whether their firms are able to pay their debts as the fall due.
Stock holders know the performance of their firm, while inventor are ably equipped to predict the financial future of a particular firm before going into investment. The study also serves as a source of data for future research on this topic and related topics.
1.6 FORMULATION OF HYPOTHESIS
The researcher wishes to test four hypothesis in this research work.
HYPOTHESES 1
Ho: Accounting ratio is not useful in making business decisions.
Hi: Accounting ratio is useful in making business decisions.
HYPOTHESES 2
Ho: Accounting ratios accelerates business decision making process.
Hi: Accounting ratios accelerates business decisions making process.
HYPOTHESES 3
Ho: Management do not appraise their efficiency and effectiveness in using resources with the aid of accounting ratios.
Hi: Management do appraise efficiency and effectiveness in using resources with the aid of accounting ratio.
HYPOTHESES 1
Ho: Negligence of accounting ratio does not result to risky and illogical business decision.
Hi: Negligence of accounting ratio results to risky and illogical business decisions.
1.7 SCOPES AND LIMITATION OF THE STUDY
The researcher concentrated on accounting ratios in a manufacturing company. This study will examine the classification of five accounting ratio liquidity ratio, profitability ratio, activity ratio, leverage ratio and debt to equity ratio. However there are some other ratio which will not be mentioned.
Computation and analysis of these ratio research was subjected to some constraints. These constraints includes:
- Time: The researcher moves from place to place and time was not on his side to reach all the information he requires.
- Finance: Being a students, the researcher did not have the require cash outlay for data collection and stationery procurement.
- Insufficient information: Some officials believe that their financial documents and information is not for external use.
1.8 DEFINITION OF TERMS
- Ratio: The quotient of two mathematical expression.
- Shareholders: owners of firm
- Financial statements: This include balance sheet, profit and loss statements, statement of sources and application and five years financial summary.
- Accounting period: A period of 12 months usually starting from 1st January to 31st December for many firms.
- Analysis: Separation into two parts and interpretation of figures.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY
Accounting ratio is a powerful tool of financial analysis. In financial analysis, ratios are used as a meter – stick for evaluating the financial position and performance of a firm. A ratio helps the analysis to make qualitative judgment about the firms’ financial position and performances.
For example current ratio indicates a qualitative relationship between current asset and current liabilities. This relationship is an index, which permits a qualitative judgement to be made about the firm’s ability to meet its current obligations.
Accounting ratio helps management to appraise the efficiency and effectiveness in using resources to achieve corporate objective of the organization. through the use of accounting ratios as a tool of analysis, annual reports, the strength, and weakness of a company are revealed. It goes future to the weakness or strength as the case may be. The computation of profit to sales ratio for two or more years reveals the trends over the years in question but there is any determination or improvement, through the use of some secondary ratios. Then in this case, the ratio of the each elements of cost of goods sold to sales is computed to see any sharp increase in the element for the inadvertences in the profitability ratio of the two years. We can therefore, pinpoint where there was saving or efficiency or where loses were made. This will immediately enable the management to effect control as necessary, this accounting ratio is an important tool for business decision.
5.2 CONCLUSION
It is important to note that the case study on accounting ratios in Nigerian Breweries Plc has revealed the following points:
- That accounting ratio is a useful tool of performance analysis, in that it shows at glance the real financial position of a company in detail and gets the management informed to their past performances consequently, enabling them to take corrective action in predicting the future operations of the company.
- That ratio, though are tools of financial analysis, their reliability is unlikely to be limited due to some factors which have been mentioned tin the earlier chapters.
- That ratio, when ignored, constitutes risk to business decision – making process.
- Ratios enable prospective investors to make decision whether or not to proceed with their investment in a particular company.
- Prospective lender can reach a conclusion of either to proceed with or stop their financial assistance to a company.
- Computed accounting ratios accelerate business decision making because they are dear, direct and can be seen at a glance.
- The use of ratios shows how he resources of a firm have been gainfully employed to generate profits a corporate “objective of any organization”.
- Existing shareholders are informed through accounting ratios (Earning per share and dividend) on the enterprise to earn a satisfactory rate of return on their investment.
5.3 RECOMMENDATIONS
After a through and exhaustive research on accounting ratios and its uses, the researcher’s are contained in subsequent paragraphs.
In the use of accounting ratios in business decisions, reports which are the primary data in computing that ratios should be adjusted as appropriate to bring the statements to the same basis for effective comparison. The treatment of extra – ordinary item should given consideration in arriving at the profit figure to be used for computing ratios.
The profit should be true profit that is the real operating profit of the company. Any extra – ordinary gains should be dedicated from income and any extra – ordinary loss should be excluded from the operating expenses.
The researcher recommends that in relating to capital employed. The capital employed figure should exclude current liabilities, that is the net capital employed is appropriate because current liabilities are short-term credits to the company and within the short-test period. Therefore, it is advisable to make provision for this in arriving at the figure of capital employed to be used for decision making purpose.
For the purpose of using accounting ratios, for inter-firm comparism, the researcher advice that the annual reports of the companies should be adjusted to the same wage to eradicate the effects and impacts of different accounting policies of the companies (in the same industry), because any material difference in those policies will make the comparism to be deceptive, misleading unreasonable and ineffective.
The use of acid test or (quick) ratio should be preferred to current ratio in determining the liquidity position of an enterprises. The acid test ratio of the relationship between near cash assets and current liabilities into quality and condition of investors thereby making provisions for obsolescence and wastage of inventories.
In view of the conclusion and recommendation made above on the topics. Uses of accounting ratios in business decisions the researcher strongly recommends that accounting ratio should be used in making most business decision because it out-scores the other tools of financial analysis in the sense that ratio are derivation of historical information which are fundamental to the business. The revenants of accounting ratios are used to predict the future performance of the company.
Ratios also show the future trend of the company’s financial performance through ratios compared form the projected financial statement.
Finally, ratio should be used by users of financial statement to ensure acceleration in decision – making, risk free decision and effectiveness and efficiency in using resources. It should also be for management control by comparing periodic ratio such as weekly, monthly, quarterly, etc. To reveal the strength and weakness within the period and enables actions to be taken by management on the areas of weakness.
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