USES OF ACCOUNTING RATIOS IN BUSINESS DECISIONS
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USES OF ACCOUNTING RATIOS IN BUSINESS DECISIONS
ABSTRACT
Management, creditors, investors, and other consumers of financial statements rely on accounting ratios to make the majority of business decisions. It employs an application to ensure that most business decisions remain unavoidable.
As a result, this study has been separated into five chapters. The first chapter briefly introduces the issue by looking at the definition of an accounting ratio; it comprises the explanation of difficulties, the study’s purpose, and its limitations.
The second chapter, which includes a profile of Nigerian Breweries PLC, reviews related literature on the subject.The third chapter discusses the approach for carrying out the research methodology.
Chapter four evaluates the analysis and interpretation of data gathered from respondents.Finally, Chapter 5 contained the overview, recommendations, and conclusion. Any inaccuracies, whether by omission or commission, are completely unintended and deeply regrettable.
Chapter one
INTRODUCTION
1.1 Background of the Study
Omuya (1990) described accounting as “a language of business; it is used in the business world to describe transactions entered into by all types of organisations.”
According to the preceding description, accounting is concerned with translating data into information that can be used by a large number of people. It handles the entry’s financial communication by providing the financial information in the format and manner that the users want.
In a similar example, Millichamp (1992) defined accounting as “the art of recording, classifying, and summarising 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, and so on. Users are expected to read, interpret, and analyse these assertions. Financial statements’ objectives are not met when many users are unable to grasp, let alone evaluate and analyse them.
The users aim to acquire the following information from the financial statements:
(i) The business’s ability to pay its bills and survive in the long run.
(ii) The effectiveness of management and the correctness of decisions taken.
(iii) Information to direct the future.
Unfortunately, users’ failure to read, evaluate, and analyse these financial figures has traditionally contributed to poor business and investment decisions. Many consumers of these comments have been impoverished as a result of these poor business judgements, while others are terrified and display a lack of interest in investing chances.
There are numerous examples of financial statement users, both individual and corporate, losing millions of Naira as a result of poor business judgements.
To be sure, poor business decisions have an impact not only on management and investors, but also on the overall growth and development of the economy.
Indeed, the challenges of poor investments and corporate decisions sparked this research project and topic. The reason for the topic is the observation that many victims of poor business judgements are individuals and businesses that employ an analytical tool known as Ration Analysis in their decision-making process.
“Ratios are simple mathematical expressions of the relationship between one figure and another, which can arise from the same or distinct statements (Atman Edward 1968). Accounting ratios, by definition, serve as indicators of a company’s historical and current performance.
According to Millichamp (1992), “Ratio Analysis is used to assess performance and liquidity and to forecast the future by extra piloting trend”; consequently, ratio analysis is the analytical technique utilised in making business decisions at the heart of this research endeavour.
1.2 Statement of the Problems
Despite companies and workshops on the benefits of accounting ratios, many readers of financial statements are still not analytically equipped to make sound business judgements.
Efforts have been made to inform and educate financial statement consumers that their future company estimates are based on accounting ratios derived from historical data.
However, these initiatives have had no significant impact because the number of incorrect decision makers is on the rise. This is sometimes attributed to users of financial statements who completely neglect ratio analysis. Perhaps ratio analysis confuses them even more, increasing their chances of being victims of poor business judgements.
Against this backdrop, these scenarios become perplexing, resulting in research issues.
1.3 Object of the Study
The goal of this study is to help identify and disclose the extent to which accounting ratios help with corporate decision making.
The writer believes that the research will help to improve the weaknesses that firms encounter in their business decisions while also identifying solutions to the following challenges.
(1) How accounting ratios confound financial statement readers and enhance their chances of making poor business judgements.
(2) Users of financial accounts make poor business decisions due to their lack of understanding of the importance of accounting ratios.
(3) Users of financial statements who are negligent and disregard ratio analysis are responsible for making incorrect company decisions.
1.4 RESEARCH QUESTIONS.
The questions that this study work seeks to solve are as follows:
(a) Do accounting ratios mislead financial statement users and enhance their likelihood of being victims of poor corporate decisions?
(b) Is ignorance of the importance of accounting ratios to blame for poor business decisions made by users of financial statements?
(c) Are negligence and contempt for ratio analysis accountable for incorrect business judgements made by users of financial statements?
(d) Do financial statements contain inconsistencies and errors that mislead their users?
(e) Do users of these statements require additional enlightenment campaigns and seminars to understand their importance?
(f) To what extent are accounting ratios utilised for financial analysis and making company decisions?
1.5 Significance of the Study
Many scholars have written about the importance of financial analysis in the business sector. Others have written on ratio analysis as a test of a firm’s solvency.
However, no attempt has been taken to correct the flawed or inadequate commercial decision-making process. This, of course, distinguishes this study endeavour from the other writings.
Furthermore, ratios allow prospective leaders to determine whether to help analyse results and use them as a guide for running their businesses.
Accounting ratios enable creditors to determine if their enterprises are capable of paying their debts as they become due. Stockholders are aware of their company’s success
whereas investors can forecast a firm’s financial future before making an investment. In addition, the study provides data for future research on this and similar topics.
1.6 Formulation of the Hypothesis
The researcher intends to test eight hypotheses in this research project.
Hypothesis 1.
H0: Accounting ratios are ineffective in making business decisions.
H1: Accounting ratios are useful for making business decisions.
Hypothesis 2.
H0: Accounting ratios do not speed up the decision-making process.
H1: Accounting ratios facilitate company decision-making.
Hypothesis 3
H0: Management does not use accounting ratios to assess its efficiency and effectiveness in resource allocation.
H1: Management evaluates efficiency and effectiveness in resource utilisation using accounting ratios.
Hypothesis 4
H0: Neglecting accounting ratios does not lead to dangerous and incorrect company actions.
H1: Neglecting accounting ratios leads to dangerous and incorrect corporate actions.
Hypothesis 5
H0: Do you believe that management, investors, and creditors do not employ computed ratios in decision making?
H1: Do you believe that management, investors, and creditors employ computed ratios in decision-making?
Hypothesis 6.
H0: Accounting ratios do not reveal information about unproductive departments.
H1: Accounting ratios reveal information regarding unproductive departments.
Hypothesis 7.
H0: The company does not calculate its accounting ratios.
H1: The company calculates the accounting ratios.
Hypothesis 8.
H0: Accounting ratios are ineffective in determining a company’s strengths and weaknesses, as well as the factors that contributed to them.
H1: Accounting ratios help to identify a company’s strengths and weaknesses, as well as the factors that contribute to them.
1.7 Scope and Limitations of the Study
The researcher focused on the accounting ratios in a manufacturing company. This study will look at the classification of five accounting ratios: liquidity, profitability, activity, leverage, and debt-to-equity.
However, there are a few other ratios that will be examined in this research but may be mentioned later. The ratios are confined to Nigerian Breweries PLC.
The researcher faced certain constraints when doing this investigation. These restrictions include:
(i) Time: The researcher moved from place to place, and time was not on his or her side to gather all of the facts she needed.
(ii) Finance: As a student, the researcher did not have the necessary funds for data collecting and stationary procurement.
(iii) Insufficient information: Some officials consider their financial paperwork and information are not for public use.
(iv) Price level changes render the analysis invalid: Prices fall and rise, resulting in drops and rises.
(v) The ratios at a given moment are useless unless they are compared to one another.
(vi) The ratios are calculated using historical (past) financial data and are not reliable indicators of the future.
(vii) Differences in conditions between two firms or one firm over time make comparison difficult.
(viii) The differences in definitions of words in the balance sheet and profit and loss statement make interpretation difficult.
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