USES OF ACCOUNTING RATIOS IN BUSINESS DECISIONS
ABSTRACT
Accounting ratio is the most important factor used by management, creditors, investors and other users of financial statement in carrying out most business decisions. It uses an application in making most business decisions remain inevitable.This study has, therefore been divided into five chapters; the first chapter briefly introduced the topic by looking at the definition of accounting ratio; it contains the statement of problems, the objective of the study and the limitation of the study.The second chapter, which contains the profile of Nigerian Breweries PLC deals with the review of related literature on the topic.Chapter three deals with the method of carrying out the research methodology.Chapter four appraises the analysis and interpretation of data collected from respondents.Finally, chapter five included the summary, recommendations and conclusion. Any errors either by omission or commission are entirely unintentional and deeply regretted.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In a similar case, Millichamp (1992) defines accounting as “the art of recording, classifying, and summarizing transactions and events that are at least partly financial statements in a material way and in relation to money.” did. These users include owners, (shareholder) managers, suppliers, customers, government officials, etc. Users of these statements are expected to read, interpret and analyze them. A degree cannot achieve its purpose if it is not understood by many users, let alone interpreted and analyzed. The information that the user is trying to collect from the financial statements is:
(i) the company’s ability to find its way and survive in the long term;
(ii) quality of management and accuracy of decisions made;
(iii) information that guides the future;
Unfortunately, the inability of users of these financial statements to understand, interpret and analyze the preparers of these financial statements can result in adverse business and investment decisions by users of these financial statements. has always contributed to As a result of these erroneous business decisions, many users of these statements have become poor and others have become apathetic, fearful of their investment and business opportunities. There are numerous examples of users of these financial statements, individuals and businesses losing millions of naira due to bad business decisions.
Indeed, erroneous business decisions affect not only management and investors, but the growth and development of the economy as a whole.
In fact, it is these bad investment and business decision issues that have inspired this research and this topic. The reason behind this problem is the finding that many of the victims of bad business decisions are individuals and businesses that use analytical tools, also known as ration analysis, in their decision-making process.
“A ratio is a mathematical expression of the relationship between one number and another, and may come from the same or different statements (Atman Edward 1968). Balance sheet ratio, by its nature
1.2 STATEMENT OF THE PROBLEMS
Despite companies and workshops on the use of balance sheet ratios, many balance sheet users today still lack the analytical knowledge to make sound business decisions. Efforts have been made to educate and educate users of financial statements that future business projections are based on accounting ratios using historical data.
However, these efforts have not paid a great price as the number of wrong decision makers is increasing. This may be due to the frequency user’s complete disregard for ratio analysis. Perhaps the ratio analysis itself confuses them even more and increases their propensity to become victims of business decisions. Against this background, these circumstances have become puzzling and have led to research problems.
1.3 OBJECTIVE OF THE STUDY
The purpose of this study is to identify and disclose the extent to which accounting metrics help companies make decisions.
The authors believe that this research will help companies strengthen their weaknesses in business decision-making while finding solutions to the following problems:
(1) how accounting measures confuse users of financial statements and make them more likely to become victims of business decisions;
(2) Ignorance of the meaning of the balance sheet ratio is responsible for the detective’s business determination of the destination of the financial statements. (3) Neglect and neglect of ratio analysis is responsible for erroneous business decisions by users of financial statements.
1.4 RESEARCH QUESTIONS
The questions this study seeks to answer are:
(a) Do accounting metrics confuse balance sheet users and increase their propensity to become victims of poor business decisions?
(b) Does ignorance of the meaning of accounting measures cause erroneous business decisions by users of financial statements?
(c) Do negligence and neglect of metric analysis account for erroneous business decisions made by trading users?
(d) Do the financial statements contain discrepancies or issues that mislead users? (e) Do users of these statements need more educational campaigns or workshops to understand their meaning?
1.5 SIGNIFICANCE OF THE STUDY
Many scholars have written about the importance of financial analysis in the business world. Some have written about ratio analysis as a test of corporate solvency.
However, no attempt was made to make this inaccurate or inappropriate business decision-making process. In this respect, of course, this study differs from these other works.
Additionally, with Ratio, aspiring leaders can choose whether or not to help assess results, and use it as a guide for managing their organization. With the help of balance sheet ratios, creditors can know if the company can repay its debts when they are due. Shareholders know the company’s performance, but investors can predict the future financials of a particular company before making an investment. This study also serves as a data source for future research on this and related topics.
1.6 FORMULATION OF HYPOTHESIS
The researcher hopes to test eight hypotheses in this research paper.
Hypothesis 1
H0:
Accounting ratios are not useful for making business decisions. H1:
Accounting ratios are useful in making business decisions.
Hypothesis 2
H0:
Accounting relationships do not speed up the business decision-making process.
H1:
Balance sheet ratios accelerate the business decision-making process.
Hypothesis 3
H0:
Management does not assess efficiency and effectiveness in handling resources with the help of balance sheet ratios.
H1:
Management uses balance sheet ratios to assess efficiency and effectiveness in using resources. Hypothesis 4
H0:
Ignoring accounting relationships does not lead to dangerous and illogical business decisions.
H1:
Ignoring accounting standards leads to dangerous and illogical business decisions.
Hypothesis 5
H0:
Do you believe that managers, investors and creditors are not using calculated ratios in their decision making?
H1:
Do you expect management, investors and creditors to use the calculated key figures when making decisions?
Hypothesis 6
H0:
Accounting ratios do not provide information about unproductive departments. H1:
Accounting rates provide information about unproductive departments.
Hypothesis 7
H0:
The company does not calculate balance sheet ratios.
H1:
The company calculates the balance sheet ratio.
Hypothesis 8
H0:
Balance sheet ratios do not help reveal a company’s strengths and weaknesses and what contributed to them.
H1:
Balance sheet ratios help reveal a company’s strengths and weaknesses and the factors that contribute to them.
1.7 SCOPES AND LIMITATION OF THE STUDY
The researcher focused on the balance sheet ratios of manufacturing companies. This study examines five balance sheet ratio classifications. Liquidity Ratio, Profitability Ratio, Activity Ratio, Leverage Ratio, Leverage Ratio. However, there are some other ratios discussed in this study, which may be mentioned later.The quota is limited to Nigerian breweries PLC.
Researchers faced several limitations during the course of this study. These limits include:
(i) Time:
Researchers moved from place to place and didn’t have time to get all the information they needed.
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