A STUDY ON THE ROLE OF ACCOUNTING RATIO ANALYSIS ON BUSINESS DECISIONS IN NIGERIA
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FIRST PART
INTRODUCTION
1.1 Background of the Research
According to Igben (1999:423), an accounting or financial ratio is a proportion, fraction, or percentage that expresses the relationship between one item in a set of financial statements and another item. Accounting ratios are the most powerful of all financial statement analysis and interpretation tools. Therefore, ratio analysis is extracting number statistics (or items) from financial accounts and constructing ratios with them to improve the quality of judgments and conclusions (Lasher, 1997:66). MCShane et al. (2000:336) defined decision-making as “the deliberate process of choosing between one or more alternatives in order to move toward a preferred state of affairs.” Consequently, business decisions can be described as decisions concerning the allocation and/or utilization of corporate resources to fulfill business objectives. Decision-making requires data. Bittel et al. (1984:340) noted, “Managers want knowledge because they must make judgments. “Information utilization is a crucial aspect of decision-making.” Ratio analysis is surprisingly one of the most powerful means of presenting decision-making information. Yes, company decisions such as make vs. buy, invest vs. divest, expand vs. contract, capital-organization vs. reconstruction, etc. cannot be made effectively in the absence of financial statistics. They provide insight into the financial strengths and weaknesses of a company and suggest areas that require additional research. Financial accounts give useful information for making business decisions. However, it should be recognized that financial statements are not a goal in themselves; rather, they serve a purpose. Thus, the use of financial statements in decision-making is not always straightforward due to the problem of the condensed nature of the information contained in financial statements; they must be analyzed and interpreted using financial ratios in order for management and stakeholders to comprehend them and make well-informed business decisions. Consequently, the purpose of this research article is to demonstrate how ratio analysis assists managers, shareholders, investors, creditors, and other stakeholders in making educated judgements and decisions on the previous performance, current state, and future potential of a business.
Financial ratios are useful indicators of a company’s financial situation and performance. They are the most effective financial statement analysis and interpretation tools available. Financial ratios are useful for analyzing trends and comparing a company’s financial performance to that of other companies. In certain instances, ratio analysis can be utilized to forecast future trends. However, determining the right standard against which a company’s ratios can be measured is frequently a tough task for financial analysts (Igben, 2009). To address this issue, a company’s financial ratios can be compared to those of other companies in the same industry. Chen and Shimerda (1981) and Igben (2009) conducted empirical research demonstrating the utility of financial ratios for measuring the performance and financial situations of a corporation over time. Chen and Shimerda (1980) grasped the usefulness of accounting ratios when they stated that financially challenged firms can be distinguished from non-failed firms in the years preceding the filing of bankruptcy with an accuracy of more than 90 percent by analyzing financial ratios. Financial ratios are financial analysis tools. Typically, financial ratio review is conducted using the firm’s own financial data. Nevertheless, financial ratios can be categorized based on the information they provide. Liquidity Ratio, Asset Turnover Ratio, Financial Leverage Ratio, Profitability Ratio, and Dividend Policy Ratios are often used ratios. The profitability ratio, which is the primary ratio for examination in this study as a measure of performance, can assist in assessing the varying levels of profit generation success of the organizations. The purpose of the study is to measure the financial performance of commercial banks using financial or accounting ratios, and to examine the impact of liquidity, credit risk, capital, operating expenses, and bank size on their financial performance using accounting ratios.
1.2 Description of the Problem
The financial sector consists of a series of financial activities whose primary objective is profit maximization; over the years, the means and manner of measuring this financial performance have remained an issue of concern; the variables to use in the measurement of this performance are relevant to growth and stability; therefore, the issue is identifying the variables to use in financial performance measurement and determining how well these variables can measure the performance in the financial sector in general. The extent to which each of these variables and indicators measure performance over time is a matter of concern and a factor to be evaluated; therefore, the purpose of this study is to examine the extent and effectiveness with which these variables measure performance in the banking sector.
1.3 Objective of the Research
The study’s primary objective is to determine the impact of accounting ratio analysis on business decisions in Nigeria. Specifically, the study aims to:
Utilizing financial or accounting ratios, evaluate the financial performance of commercial banks.
Examine utilizing accounting ratios the impact of liquidity, credit risk, capital, operating expenses, and bank size on their financial performance.
Determine if financial ratios aid in deciphering the mass of truth concealed in financial statements.
1.4 Investigative Questions
1. Do financial or accounting ratios improve the financial performance of commercial banks?
2. Using accounting measures, what impact do liquidity, credit risk, capital, operating expenditures, and bank size have on the financial performance of banks?
3. Do financial ratios aid in revealing the vast majority of truth concealed in financial statements?
1.5 Importance of the Research
The study will aid the management of banks and other businesses in understanding how ratio analysis can increase their financial statement comprehension and business decision making.
Students in tertiary institutions and other researchers will find the research findings and supporting reference materials to be of great use in doing additional research in the topic area.
When the research’s suggestions are implemented, it is intended that the findings would facilitate optimal business decisions.
When making economic and business decisions, the study will urge businesspeople, investors, managers, and government officials to value quantitative tools such as financial ratios.
1.6 Scope of the Research
The focus of the study is accounting ratios as a management decision-making tool, with specific reference to first bank Plc.
1.7 Limitation of the Study
Throughout the course of studies, financing the general research effort will be a struggle. However, it is anticipated that these limitations will be overcome by maximizing the use of available resources and devoting additional time to research. Therefore, it is strongly expected that despite these constraints, their impact on this research report will be small, allowing the study to achieve its purpose and significance.
1.8 Explanation of Terms
Ratio is both the quotient of a mathematical statement and the connection between two or more items.
Ratio Analysis is the systematic use of ratios to analyse financial statements in order to determine the firm’s strengths and weaknesses, as well as its past performance and current financial status. Ratio refers to the quantitative or numeric connection between two variables.
Accounting is the process of recording, summarizing, analyzing, and interpreting financial (money-related) activities in order to enable individuals and organizations to make educated decisions.
Business is the activity of a business or organization founded to profitably offer goods and services to satisfy human needs.
Decisions pertaining to the allocation and/or utilization of corporate resources for the production, purchase, sale, or provision of goods or services at a profit.
A STUDY ON THE ROLE OF ACCOUNTING RATIO ANALYSIS ON BUSINESS DECISIONS IN NIGERIA
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