TABLE OF CONTENTS
Title Page i
Dedication ii
Certification iii
Acknowledgements iv
Table of Contents v
Abstract vi
CHAPTER ONE
INTRODUCTION
1.1 Background Information 1
1.2 Statement of Problem 2
1.3 Objectives of the Study 5
1.4 Research Question 6
1.5 Significance of the Study 6
1.6 Scope of the Study 7
1.7 Limitation of Study 8
1.8 Definition of Terms used in the Study 9
1.9 Brief Historical Background of O. Jaco Bros.
Ent. (Nig.)
Ltd, Aba, Abia State. 11
Reference 13
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Introduction 15
2.2 Financial Statement
Analysis 15
2.3 Parties Interested in
Financial Statement Analysis 16
2.4 Objectives of Financial
Statement analysis 17
2.5 Sources of Information
for financial
Statement Analysis 18
2.6 Tools and Techniques of
Financial
Statement Analysis 19
2.7 Uses and Objectives of
Ratio Analysis 28
2.8 Types of Ratio Analysis 29
2.8.1
Univariate Ratio Analysis 29
2.8.2
Multivariate Ratio Analysis 62
2.9 Limitations of Ratio Analysis 67
Reference 71
CHAPTER
THREE
RESEARCH METHODOLOGY
3.1 Introduction 72
3.2 Research Design 72
3.3 Data Collection
Technique 72
3.4 Population 73
3.5 Sample Size and
Sampling Technique 74
3.6 Instrument for Data
Collection 75
3.7 Questionnaires
Administration 75
Reference 76
CHAPTER
FOUR
PRESENTATION, ANALYSIS
AND INTERPRETATION OF DATA
4.1 Introduction 77
4.2 Data presentation and
Analysis 77
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 86
5.2 Summary and Discussion of Findings 86
5.3 Recommendations 88
5.4 Conclusion 89
Reference 91
BIBLIOGRAPHY
91
APPENDICES
Appendix 1 Research Questionnaire to the
Management and Staff of O. Jaco
Bros. Ent.
(Nig.) Ltd., Aba.
94
ABSTRACT
Accounting
information provided by means of financial statements- The income statement and
the Balance Sheet are often in summarized form.
Viewed on the surface, the truths about the results and the financial
position of a business hidden in them remain veiled. To be of optimal benefit and as well enable
the users make well – informed decisions, financial statements need to be
analyzed by means of ratios. Therefore,
in order to establish the role of ratio analysis in business decisions, this research
is carried out, using O. Jaco Bros. Ent.
(Nig.) LTD., Aba Abia State as the Case study.
The researcher made use of both primary and secondary sources of data
collection. However, for the former,
questionnaires were administered, whereas for the later, relevant were
received. The data Collected via the
primary data sources were analyzed using simple averages and percentages. After
ratios analysis conducted on the chapter four, mode at 95 level of confidence (5%
level of significance). Finally, it was
established that ratios analysis evils business decision.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND INFORMATION
The two primary objectives of every business are
profitability and solvency.
Profitability is the ability of a business to make profit, while
solvency is the ability of a business to pay debts as they come due. (Hermanson et al, 1992: 824). However, the achievement of these objectives
requires efficient management of resources of the business through planning,
budgeting, forecasting, control, and decision – making. Also, the strengths and weakness of the
business need to be identified and necessary corrective measures applied. Interestingly, accounting provides
information that facilitates these functions.
Basically,
accounting measures and communicates economic information needed for decision
–making. Thus, the American Accounting
Association (in Okezie, 2002:1) defined accounting as “the process of
identifying, measuring and communicating economic information to permit
informed judgments and decisions by the information”. Statement and the Balance Sheet. The Income Statement shows the profitability
or profitability or operational result
of a business, while the balance sheet shows the solvency or financial position
of a business.
Although
profiles are often used as the basis for judging the performance of a business,
such profits must be related to the various items of the financial statements
in order to be meaningful and useful for decision making. Furthermore, owing to
the summarized nature of financial statements, a lot of truths are hidden in
them. Thus, they need to the analyzed and interpreted by means of financial
ratios to enable the users understand the meaning of the absolute amounts shown
in them, and make informed business decisions.
In
this regard, Essien (2006:144) observed:
Financial statements carry lots of financial
Information that are hidden in the figures. The figures in financial statements
become more useful when they are related to each other or to some other
relevant financial data. Therefore, users of financial information go a further
step to establish relationships (or ratios) among selected data in financial
statements.
According to
Igben (1999:423), “Accounting {or financial} ratio is a proportion or fraction
or percentage expressing the relationship between one item in a set financial
statements and another item in the financial statements. Accounting ratios are
the most powerful of all tools used in analyzed and interpreting financial
statements”. Therefore, ratio analysis involves taking stats of number (or
items) out of financial statements and forming ratios with them, to enhance
informed judgments and decisions (Lasher, 1997:66).
MCShane
et al. (2000:336) defined decision-making as “a conscious process of making
choices among one or more alternatives with the interior of moving toward some
desired state of affairs.” Therefore, business decisions can be defined as
choices relating to the allocation and/or use of business resources to achieve
business goals.
Decision-making
calls information. Bittel et al. (1984:340) observed: “Managers want
information because they need to make decisions. The proper use of information
is an important part of decision-making.” Remarkably, one of the effective ways
of providing information needed for decision-making is ratio analysis.
Yes,
business dictions of make or buy, investment or divestment, expansion or
contration, capital-organization and reconstruction, and so on cannot be
properly made without the aid of financial ratios. They give cue to the
financial strengths and weaknesses of a business, and highlight aspects of a business
requiring further investigation.
Therefore,
this research is carried out to show ratio analysis help managers,
shareholders, investors, creditors, and other stakeholders make informed
judgments and decisions about the past performance, present condition, and
futures potential of a business.
1.2 STATEMENT
OF PROBLEM
Financial
information provided in financial statements are useful in business decisions.
However, it must be noted that financial statements are means to an and not an
end in themselves. Thus the use of financial statements in decision-making is
not always easy owing to the following problems:
1. In view of the summarized nature of the
information contained in financial statements, they need to be analyzed and
interpreted by means of financial ratios to enable management and stakeholders
understand them and make well-informed business decisions.
2. Many users of financial statements are not
knowledgeable about accounting ratios and how the ratios can be applied to financial
statements to aid decision-making.
3. Despite the immense benefits of ratio
analysis, there are a lot of weaknesses or limitations associated with its use.
In view of the above stated
problems, this research is embarked upon to identify the proper use of
financial ratios, and the roles ratio analysis plays in business
decisions.
1.3 OBJECTIVES
OF THE STUDY
In
consideration of the problems identified above, the objective of this research
include.
1. To show how ratio analysis facilitates proper
understanding of information contained in financial statements.
2. To
show how ratio analysis aids business decisions.
3. To examine the techniques used in analysis
financial statements.
4. To identify the usefulness of financial
ratios in measuring and predicting the performance and financial position of a
business.
5. To unravel the obstacles to the proper use
of financial ratios in business decisions.
6. To suggest on ways to enhance efficient use
of ratio analysis in decision-making.
1.4 RESEARCH
QUESTIONS
i. Is ratio analysis useful in evaluating and
prediction the performance of a business as well as intensifying areas that
regret improvement?
ii. Do you agree with the fact that ratio
analysis facilitates proper understanding of information contained in financial
statements?
iii. Is ratio analysis useful to management
investors, shareholders and creditors in their business divisions?
iv. Does financial ratio helps to unravel the
mass of truth hidden in financial statements?
v. Are there obstacles that affect the proper
use of ratio analysis in business decisions?
1.5 SIGNIFICANCE
OF THE STUDY
The
significance of this study is that on its completion, the following benefits
will be derived:
1. The study will help management of O. Jaco
Brros. Ent. (Nig.) Ltd, Aba
and others to know how ratio analysis can help them understand the financial
contained in financial statements and enhance their business decisions.
2. The findings of the research and the
supportive reference materials will be of immense help to students in tertiary
institutions and other researchers to investigate further in the area of study.
3. It is hoped that the result of the research
will facilitate optimal business decisions when the recommendations are
complied with.
4. The study will encourage businessmen,
investors, managers, and government authorities to appreciate quantitative
techniques like financial ratios when making economic and business
decisions.
1.6 SCOPE
OF THE STUDY
According
to Akpakpan (2005:7), “scope of the study is the limits or boundary lines of
the study. It is the areas covered by the research or the extent the
researchers would go. Limitations of the study are hindrances or obstacles
witnessed by the researcher in the course of the study. Which could influence
his conclusions.”
In view of the impossibility of covering every
type of financial statement, this study is therefore restricted to the analysis
of the income statement and the Balance Sheet by means of financial ratios.
However, other analytical techniques such as horizontal analysis, vertical
analysis and termed analysis would also be explained and illustrated.
Finally,
although University Ratio Analysis is the core of the study, nevertheless,
multivariate Ratio Analysis would be partly illustrated using Du pont
Equations.
1.7 LIMITATION
OF STUDY
In
the course of this research work, the researcher was faced with some
constraints which plaved a limit he the ability and performance of the
researcher encountered the following constraints among others.
1. Insufficient
Financial: The researcher needed a lot of money to
travel as far as Aba
to collect the necessary data from the firm under syudy. Money was also
required to vist secondary data sources such as the internet, libraries,
professional bodies, and so on.
2. Lack
of Co-Operation: The unco-operative attitudes of many employees of
the firm under study were not encouraging. Some of them were so biased and
prejudiced that did not care to understand the purpose of the research. This
resulted to their failure to provide sufficient information required for proper
completion of the study.
3. Time
Pressure: Time allowed was not enough for through completion
of the research, in consideration of the fact the we were also facing other
academic studies during the semester.
1.8 DEFINITION
OF TERMS USED IN THE STUDY
Accounting: The process of recording, summarizing,
analysis and interpreting financial (money-related) activities to permit
individuals and organizations to make informed judgments and decisions. (Dansby
et al., 2000: 1033).
Balance Sheet: A financial statement containing
assets, liabilities, and owner’s equity or capital at a particular data or at
the end of a particular period, to show the financial position of a
organization. (Akpakpan, 2002:106).
Business: An
activity, enterprise or organization established to provide goods and services
at a profit, in order to satisfy human wants. (Ikon,2004:2).
Business Decision: Choices made
on matters relating to the allocation and/or use of business resources for
making, buying, selling, or supplying goods or services at a profit.
Decision-Making: A mental process by which an individual or
group of individuals gather data and make a choice between two or more alternative
courses action. (Ayandele, 2005:3).
Financial Ratio: A proportion, fraction, or percentage
expressing the relationship between one item ion sett of financial statements
and another item in the same financial statements. (Igben, 1999:423).
Financial Statement: Quantitative information on the economic
activities of an organization prepared to show the result and the financial
position of the entity, often presented in terms of Balance Sheet, Income
Statement, Funds flow statement, and so on.
Income Statement: A
financial statement often referred to as the trading and profit loss account,
matching revenues against expense to show the profitability or operational
results of an enterprise over a period of time, such as a month or year.
(Hermanson et al. 1992:25).
Ratio: A
fractional relationship of one number (or itme) to another. (Dansby et al.
2000:1047).
Ratio Analysis: A systematic review of accounting data by
establishing relationships among various figures on the financial statements
which bring together the results of the activities a business. (Omuya,
1983:430).
Role: The
degree to which somebody or something is involved in a situation or an actively
and the effect that they have on it. (Hornby et al.2000:1021).
1.9 BRIFF
HISTORICAL BACKGROUND OF O. JACO BROS. ENT. (NIG). LTD. ABA STATE
O.
Jaco Bros. Ent. (Nig) Ltd, Aba,
Abia Sate was established in 1982. It started as a sole proprietorship business
owned, runned, and managed by Nze Josephat Okolocha.
The
firm is a trading concern. It specialized in sale, marketing, and distribution
of various kinds of motorcycles, spare parts, and electric generators.
Meanwhile,
in line with outstanding growth witnessed by the firm in the last couple of
years, the organization is now an incorporated private limited liability
company since 1999.
At
present, the company has a total asset base of over N50 million and employs
more than 30 workers. It has 6 branches. 4 in Aba,
1 in port Harcourt, and in
Ekwulobia (Anambra
State).
The
head office located at 59, Jubilee Road,
Aba, Abia State, (which is the center focus of this study), has 4 departments:
the sales and marketing department, the purchasing and supply department, the
Administration and personnel department, and the finance and Accounts
Department.
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