User Of Accounting Ration Business Decision
(A Case Study Of Nigeria Breweries Plc)
Accounting ratios serve as crucial tools for businesses in making informed decisions by providing insights into various financial aspects. These ratios, derived from financial statements, such as balance sheets and income statements, offer a comprehensive understanding of a company’s financial health, performance, and efficiency. By analyzing liquidity ratios, such as the current ratio or quick ratio, businesses can assess their ability to meet short-term obligations, aiding in strategic cash flow management. Profitability ratios, including return on investment (ROI) and gross profit margin, help evaluate the effectiveness of operations and identify areas for improvement. Additionally, leverage ratios, like debt-to-equity ratio, assist in gauging the extent of financial leverage and associated risks. Furthermore, activity ratios, such as inventory turnover and accounts receivable turnover, offer insights into operational efficiency and asset utilization. By leveraging these accounting ratios, businesses can make data-driven decisions regarding resource allocation, investment opportunities, and overall financial strategies, ultimately enhancing performance and competitiveness in the market.
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.
Title Page
Approval Page
Dedication
Acknowledgement
Abstract
Table Of Content
Proposal
Chapter One
1.1 Background Of Study
1.2 Statement Of Problems
1.3 Objectives Of The Study
1.4 Research Questions
1.5 Significant Of The Study
1.6 Formulation Of Hypothesis
1.7 Scopes And Limitation
1.8 Definition Of Terms
Reference
Chapter Two
2.0 Literature Review
2.1 Profile Of Nigeria Breweries Plc
2.2 Standard Of Comparism
2.3 Ration As Predication Of Business Failure An Empirical Approach
2.4 Classification Of Accounting Rations
2.5 Type Of Rations
2.6 Signification Of Ration
2.7 Limitations Of Accounting Rations
2.8 Inflation And Accounting Rations
2.9 Criteria For Accounting Rations
Reference
Chapter Three
3.0 Research Design And Methodology
3.1 Sources Of Data
3.2 Interview Questions (Collection Instrument Method)
3.3 Determination Of Sample Size
3.4 Method Of Investigations
3.5 Statistical Method Used For Data Analysis
Chapter Four
4.0 Data Presentation And Analysis
4.1 An Over – View
4.2 Distribution Of Response
4.3 Testing Of Hypothesis
Chapter Five
5.0 Summary, Conclusion And Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendations
Bibliography
Appendix
- 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
a. 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.
User Of Accounting Ration Business Decision:
Accounting ratios are crucial tools used by businesses to make informed decisions. These ratios provide insights into various aspects of a company’s financial health, performance, and efficiency. Here’s how businesses utilize accounting ratios in their decision-making process:
- Financial Performance Evaluation: Accounting ratios help businesses assess their financial performance over a specific period. By analyzing profitability ratios such as return on investment (ROI) or net profit margin, companies can gauge their ability to generate profits from their operations. This evaluation aids in identifying areas of strength and weakness, enabling management to take corrective actions or capitalize on successful strategies.
- Liquidity Assessment: Liquidity ratios like the current ratio and quick ratio assist businesses in evaluating their ability to meet short-term financial obligations. Maintaining an adequate level of liquidity is crucial for sustaining operations, covering expenses, and seizing growth opportunities. By monitoring liquidity ratios, companies can ensure they have sufficient cash and liquid assets to manage their day-to-day operations and unforeseen expenses.
- Debt Management: Debt ratios such as debt-to-equity ratio and interest coverage ratio help businesses assess their debt levels and repayment capabilities. Effective debt management is essential for maintaining financial stability and avoiding excessive financial risk. By analyzing these ratios, companies can determine their leverage position and make informed decisions regarding debt financing, refinancing, or debt reduction strategies.
- Asset Utilization: Efficiency ratios such as asset turnover ratio and inventory turnover ratio measure how effectively a company utilizes its assets to generate revenue. Businesses can use these ratios to identify inefficiencies in asset utilization and optimize resource allocation. Improving asset turnover can lead to increased profitability and competitiveness in the market.
- Investment Analysis: Accounting ratios play a crucial role in investment analysis and decision-making. Investors and stakeholders rely on financial ratios to assess the financial health and performance of a company before making investment decisions. By analyzing key ratios, such as price-to-earnings (P/E) ratio and earnings per share (EPS), investors can evaluate the valuation and growth potential of a company’s stock.
- Budgeting and Forecasting: Accounting ratios serve as valuable tools for budgeting and financial forecasting. By analyzing historical financial data and trends, businesses can project future performance and develop realistic budgets and financial plans. Ratios provide quantitative insights into various aspects of financial management, enabling companies to set achievable goals and objectives.
Overall, accounting ratios are indispensable tools for businesses across industries, providing valuable insights into financial performance, risk management, and strategic decision-making. By leveraging these ratios effectively, companies can enhance their competitiveness, profitability, and long-term sustainability.