Use Of Accounting Ratio In Business Decision

1. 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:

1. The ability of the business to pay its way and survive in the long run.
2. The quality of management and the rightness of decision made.
3. 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.

1. How accounting ratios confuse their tendency of becoming victims of inadequate business decisions.
2. The ignorance of importance of accounting ratio is responsible for detective business decisions by the users of financial statements.
3. 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:

1. Do accounting ratios confuse financial off becoming victims of inadequate business decisions?
2. Is ignorance of importance of accounting ratio responsible for defective business decisions by users of financial statement?
3. Are negligence and disregard of ratio analysis responsible for wrong business decision by users of financial statement?
4. Do financial statement contain differences and trouble that misdirect their users?
5. Do users of these statements require more enlightenment campaigns and workshops to enable them comprehend their importance?
6. 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:

1. Time:  The researcher moves from place to place and time was not on his side to reach all the information he requires.
2. Finance:  Being a students, the researcher did not have the require cash outlay for data collection and stationery procurement.
3. 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.

1. Shareholders: owners of firm
2. Financial statements:  This  include balance sheet, profit and loss statements, statement of sources and application and five years financial summary.
3. Accounting period:  A period of 12 months usually starting from 1st January to 31st December for many firms.
4. Analysis:  Separation into two parts and interpretation of figures.