ACCOUNTING RATIO APPLICATIONS IN BUSINESS DECISIONS
Management, creditors, investors, and other consumers of financial statements rely on accounting ratios the most when making the vast majority of business decisions. It employs an application to ensure that the majority of business decisions are inevitable. This study has therefore been divided into five parts; the first chapter provides a quick introduction to the issue by examining the definition of accounting ratio; it also includes the explanation of difficulties, the purpose of the study, and the study’s limitations. The second chapter, which comprises the profile of Nigerian Breweries PLC, is devoted to a literature assessment on the subject. The third chapter discusses the procedure for doing the research technique. The fourth chapter evaluates the analysis and interpretation of respondent-collected data. The fifth chapter concluded with a summary, recommendations, and conclusion. Any errors, whether by omission or commission, are wholly unintended and are profoundly regretted.
1.1 CONTEXT OF THE STUDY
“Accounting is the language of business” is how Omuya (1990) described accounting. Accounting is used in the business world to represent the transactions entered into by all types of organizations. An examination of the preceding definition reveals that accounting focuses on changing data into information that is relevant to a large number of consumers. It handles the financial communication of the entry by providing the financial data in the format and manner chosen by the users.
In a similar context, Millichamp (1992) defined accounting as “the art of recording, classifying, and summarizing in terms of money, transactions and occurrences that are at least partially financial statement.” Owners, (shareholders), managers, suppliers, customers, government officials, etc. are examples of these users. Users are expected to read, evaluate, and analyze these assertions. Many consumers’ inability to evaluate and analyze financial statements, let alone comprehend them, thwarts the financial statement’s intended purpose.
Users want the following information from financial statements:
I The enterprise’s capacity to pay its expenses and endure over time.
(ii) The effectiveness of management and the correctness of decisions.
(iii) Information that serves as a roadmap for the future.
Unfortunately, the incapacity of users of these financial statements to comprehend, evaluate, and analyze the and still has always contributed to the users’ poor business and investment decisions. Many users of these comments have been impoverished as a result of these poor business judgments, while others are fearful and indifferent to investment and business chances. Numerous instances exist in which individual and corporate users of financial statements have lost millions of Naira due to poor business decisions.
Undoubtedly, poor company decisions impact not just management and investors, but also economic growth and development as a whole.
In fact, these issues of poor investments and corporate decisions inspired this research and topic. The theme was inspired by the observation that many victims of poor business judgments are individuals and organizations that use analytical tools, also known as Ration Analysis, in their decision-making processes.
“Ratios are essentially mathematical expressions of the relationship between two figures, which may be derived from the same or different statements” (Atman Edward 1968). By definition, accounting ratios serve as an indicator of a company’s past and present performance.
According to Millichamp (1992), “Ratio Analysis is used to assess performance and liquidity and to forecast the future by extra-piloting trend.” Therefore, ratio analysis is the analytical technique used to make business decisions at the heart of this study.
1.2 DESCRIPTION OF THE CHALLENGES
Despite organizations and workshops on the use of accounting ratios, many readers of financial statements currently lack the analytical skills necessary to make sound business judgments. Efforts have been made to enlighten and educate readers of financial statements on the fact that their predictions for the future of the firm are based on accounting ratios that utilize previous data.
However, these initiatives have not shown significant results because the number of poor decision makers is increasing. This is sometimes attributable to the complete disregard of ratio analysis by users of financial statements. Perhaps ratio analysis itself adds to their confusion and enhances their propensity to make poor business decisions.
In light of this context, these occurrences are perplexing and have constituted study issues.
1.3 OBJECTIVE OF THE EXAMINATION
This research aims to aid in identifying and exposing the extent to which accounting ratios contribute to company decision making.
The author anticipates that the research will aid in addressing the weaknesses in the business decisions of the organizations and provide answers to the following issues.
(1) How accounting ratios cause confusion among readers of financial statements and increase their propensity to make poor company judgments.
(2) Users of financial statements make erroneous business decisions due to their lack of understanding of the significance of accounting ratios.
(3) Negligence and disrespect for ratio analysis are to blame for erroneous business decisions made by users of financial statements.
1.4 RESEARCH QUESTIONS
This research project seeks to answer the following questions:
(a) Do accounting ratios cause confusion among users of financial statements and enhance their likelihood of making subpar company decisions?
b) Is the inadequacy of business judgments by users of financial statements attributable to a lack of understanding of the significance of accounting ratios?
(c) Are carelessness and contempt for ratio analysis accountable for incorrect business judgments made by users of financial statements?
(d) Do financial statements contain variances and difficulties that mislead users?
e) Do users of these statements need additional education campaigns and workshops to appreciate their significance?
1.5 SIGNIFICANCE OF THE EXAMINATION
However, no effort has been taken to identify a flawed or insufficient commercial decision-making process. Obviously, this research paper differs from these previous works in this respect.
In addition, ratios enable prospective leaders to decide whether to assist in evaluating results and using them as a guide for managing their businesses. Creditors are in a position to determine if a company is capable of paying its obligations as they mature with the aid of accounting ratios. Before investing in a company, investors are able to anticipate its financial future, whereas stockholders know the performance of their company. The study also acts as a data base for future research on this subject and related subjects.
1.6 FORMULATION OF HYPOTHESIS
In this investigation, the researcher aims to examine eight hypotheses.
Accounting ratios are not relevant for corporate decision-making.
Accounting ratios are helpful when making business decisions.
Accounting ratios do not accelerate the decision-making process in businesses.
Accounting ratios speed the decision-making process for businesses.
Accounting ratios are not used by management to evaluate their efficiency and effectiveness in resource utilization.
Using accounting ratios, management does evaluate the efficiency and effectiveness of resource utilization.
Accounting ratio neglect does not result in dangerous and illogical business actions.
Accounting ratio neglect results in dangerous and illogical company actions.
Do you believe that management, investors, and creditors do not employ calculated ratios when making decisions?
Do you believe that management, investors, and creditors utilize calculated ratios when making decisions?
Accounting ratios provide little information regarding unproductive departments.
Accounting ratios provide information regarding inefficient departments.
H0: The organization does not calculate accounting ratios.
The Company calculates the accounting ratios in H1.
H0: Accounting ratios do not aid in identifying a company’s strengths and weaknesses and the contributing factors.
H1: Accounting ratios help determine a company’s strengths and weaknesses, as well as the contributing factors.
1.7 SCOPES AND LIMITATION OF THE STUDY
The researcher focused on manufacturing company accounting ratios. This study will investigate the classification of five accounting ratios: the liquidity ratio, the profitability ratio, the activity ratio, the leverage ratio, and the debt-to-equity ratio. There are, however, more ratios that will be explored in this research but may be mentioned later. The ratios for Nigerian Breweries PLC are restricted.
During the course of this investigation, the researcher was subject to some limitations. These limitations include:
Time was not on the researcher’s side as he or she traveled from location to location in search of all the essential data.
(ii) Finances: As a student, the researcher lacked the necessary funds for data collecting and the purchase of stationary.
Some officials assume that their financial documents and data are not for external use due to a lack of information.
Changes in price level invalidate the analysis, since falling and rising prices lead to drops and increases, respectively.
(v) Ratios at a given point in time are useless unless they are compared to other ratios.
(vi) The ratios are derived from previous (past) financial statements and are therefore poor predictors of future performance.
(vii) Comparing two businesses or a single business over a period of time is difficult due to differences in their circumstances.
Numerous variations in the meanings of terms in the balance sheet and income statement make interpretations challenging.
ACCOUNTING RATIO APPLICATIONS IN BUSINESS DECISIONS