USE OF ACCOUNTING RATIO IN BUSINESS DECISIONS
ABSTRACT
Accounting ratio is the most important factor used by management, creditors, investors and other users of financial statement in carrying out most business decisions. It uses an application in making most business decisions 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 problems, the objective of the study and the limitation of the study.The second chapter, which contains the profile of Nigerian 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 included the summary, recommendations and conclusion. Any errors either by omission or commission are entirely unintentional and deeply regretted.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Omuya (1990) 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. An analysis of the above definition shows that Accounting centres on transforming data into information that would be useful 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, transactions and events which are in part at least 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 interpret and analyze them.
The information the users attempt to gain from financial statement are:
(i) The ability of the business to pay its way and survive in the long run.
(ii) The quality of management and the rightness of decision made.
(iii) Information that guide the future.
Regrettably, the inability of users of these financial statements to comprehend, interpret and analyze the 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 rendered poor, whereas others are afraid and show indifference to investment and business opportunities. Cases abound where these financial statements 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 investors, it also affects 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 wrong business decisions are people and firms who do use analytical tool otherwise known as Ration 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 (Atman Edward 1968). Accounting ratios, by their very nature serve as indicator of the performance of a company both past and present.According to Millichamp (1992) “Ratio Analysis is used to assess performance and liquidity and to forecast the future by extra piloting trend” thus ratio analysis is analytical technique used in making business decisions in the centre of this research work.
1.2 STATEMENT OF THE PROBLEMS
Currently, many users of financial statements are not yet equipped, analytically to make good business decisions, notwithstanding companies and workshops on the benefit of accounting ratios. Efforts have been made to enlighten and educate financial statement users that their future business predictions are based on accounting ratios, which use historical data. However, these efforts have not made any meaningful charge because the number of wrong decision makers is on the increase. Some times this attributed to total disregard of ratio analysis by financial statements users. Perhaps, ratio analysis itself confuses them more and increases their tendency of becoming victims of inadequate business decisions. Against this background, these situations become puzzling and have constituted research problems.
1.3 OBJECTIVES OF THE STUDY
The objective of this research is 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 by the companies in their business decisions and at the same time find solutions to the following problems.
(1) How accounting ratios confuse financial statement users and increase their tendency of becoming victims of inadequate business decisions.
(2) The ignorance of importance of accounting ratio is responsible for detective business decisions by users of financial statements.
(3) The negligence and disregard of ratio analysis responsible for wrong business decision by users of financial statement.
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