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Accounting Ratios As A Tool For Management Decision Making

ACCOUNTING RATIOS AS A TOOL FOR MANAGEMENT DECISION MAKING

Accounting Ratios

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Omuya (1990) 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. An analysis of the above definition shows that accounting centres on transforming data into information that would be useful 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, transactions and events which are in part at least 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 interpret and analyze them.The information the users attempt to gain from financial statement are; the ability of the business to pay its way and survive in the long run, the quality of management and the rightness of decision made, information that guide the future.The management accounting is considered one of the most important components of the system of the administrative information in the company by providing the economic and financial information and collecting information taken from other systems of information in the company so it looks as accounting for inner affairs that helps the administration in making decisions, planning, controlling and evaluating the performance of the company’s activities , therefore it is not restricted to the known accounting principles but it depends on basis and regulations concerning the content and the shape of the inner reports (Al-Matarna, 2003).

1.2 STATEMENT OF THE PROBLEM

Regrettably, the inability of users of these financial statements to comprehend, interpret and analyze the 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 rendered poor, whereas others are afraid and show indifference to investment and business opportunities. Cases abound where these financial statements users, individual and corporate, have lost millions of naira merely because of wrong business decisions.The manufacturing sector consist of strings of financial activities whose major end is profit making, over the years the means and manner of measuring this financial performance remain issue of concern, the variables to use in the measurement of this performance is germane to growth and stability, the issue therefore is determining the variables to use in financial performance measurement and how well do these variables can measure the performance in the manufacturing sector.

1.3 OBJECTIVES OF THE STUDY

The objectives of this study are to find out the following:i) To find out the impact of accounting ratios in the management decision makingii) To examine whether accounting ratio aid in the effectiveness of an organization.iii) To determine the techniques used in analysis financial statements.iv) To identify the usefulness of accounting ratios in measuring and predicting the performance of Guinness Nigeria Plc.v) The make useful recommendations based on the findings of this study.

1.4 RESEARCH QUESTIONS

The following research questions were formulated to guide this study:i) What are the impacts of accounting ratios in the management decision making?ii) Does accounting ratio aid in the effectiveness of an organization?iii) What are the techniques used in analysis financial statements?iv) Does the usefulness of accounting ratios in measure and predict the performance of Guinness Nigeria Plc?

1.5 RESEARCH HYPOTHESES

Hypothesis 1H0: There is no significant relationship between the impacts of accounting ratios in the management decision making in Guinness Nigeria Plc.H1: There is a significant relationship between the impacts of accounting ratios in the management decision making in Guinness Nigeria Plc.Hypothesis 2H0: There is no significant relationship between accounting ratio and the effectiveness of an organization.H1: There is no significant relationship between accounting ratio and the effectiveness of an organization.

1.6 SIGNIFICANCE OF THE STUDY

The significance of this study is that on its completion, the following benefits will be derived:The study will help management of Guinness Nigeria Plc and others to know how ratio analysis can help them understand the financial contained in financial statements and enhance their business decisions.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.It is hoped that the result of the research will facilitate optimal business decisions when the recommendations are complied with.The study will encourage businessmen, investors, managers, and government authorities to appreciate quantitative techniques like financial ratios when making economic and business decisions.

1.7 SCOPE OF THE STUDY

The study concerns about accounting ratios as a tool for management decision making with a particular reference to Guinness Nigeria Plc.

1.8 LIMITATION OF THE STUDY

In the course of this research work, the researcher was faced with some constraints which plaved a limit him 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 (please write your State) to collect the necessary data from the firm under study. Money was also required to visit secondary data sources such as the internet, libraries, professional bodies, and so on.2. Lack of Co-Operation: The uncooperative 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 thorough completion of the research, in consideration of the fact that we were also facing other academic studies during the semester.

1.9 OPERATIONAL DEFINITION OF TERMS

1 Ratio: A ratio can be defined as the indicated quotient of to mathematical expression and as the relationship between two or more things.2 Ratio Analysis: It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables.3 Accounting: It is the process of recording, summarizing, analysis and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.4 Business: It is an activity of enterprise or organization established to provide goods and services at a profit, in order to satisfy human wants.5 Business Decision: The 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.6 Decision-Making: It is defined as a process by which an individual or group of individuals gather data and make a choice between two or more alternative courses action.7 Financial Ratio: A proportion, fraction, or percentage expressing the relationship between one item ion set of financial statements and another item in the same financial statements.8 Financial Statement: This is 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.9 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.

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