Financial information provided in
financial statements are useful in business decisions, however, it must be
noted that financial statements are means to an end in themselves.
This study examines the effectiveness of
the application of Ratio analysis to business organizations and the need to
understand and interprete the contents of financial statements.
Various classes of ratios were examined under
literature review. This gives an insight to how ratios can be used to predict
and determine organization’s performance over a period of time. Usefulness of
ratio analysis was discussed and its limitations.
Summary of major findings, conclusion
and recommendations was made based on the information gathered.
The reader will find this work useful in
their day-to-day business activities and its effective application to their
business organizations will assist them in improving on their business
TABLE OF CONTENTS
BACKGROUND OF THE STUDY
STATEMENT OF PROBLEMS
OBJECTIVE OF THE STUDY
SIGNIFICANCE OF THE STUDY
SCOPE AND LIMITATION OF THE STUDY
DEFINITION OF TERMS
2.1 INTRODUCTION TO RATIO ANALYSIS
2.2 USERS OF FINANCIAL RATIO
2.3 USES OF FINANCIAL RATIO
2.4 CLASSIFICATION OF RATIO
2.5 LIMITATION OF RATIOS
2.6 HISTORICAL BACKGROUND OF ACCESS BANK
3.2 RESEARCH DESIGN
3.3 POPULATION OF THE STUDY
3.4 SAMPLING TECHNIQUE
3.5 SOURCES/METHODS OF DATA COLLECTION
3.6 METHOD OF DATA ANALYSIS
AND INTERPRETATION OF DATA
4.2 PRESENTATION OF DATA
4.3 ANALYSIS OF RESPONSES OF THE RESEARCH
4.4 TEST OF HYPOTHESIS
SUMMARY, CONCLUSION AND
5.1 SUMMARY OF MAJOR FINDINGS
OF THE STUDY
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). 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.
Accounting measures and communicates economic information needed for decision
–making. Thus, the American Accounting
Association (in Okezie, 2002) defined Accounting as “the process of
identifying, measuring and communicating economic information to permit
informed judgments and decisions by the information”.
Income Statement shows the profitability or operational result of a business
while the balance sheet shows the solvency or financial position of a business.
profits 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.
this regard, Essien (2006) observed that 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
to Igben (1999), “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 analyzing and interpreting financial
statements”. Therefore, ratio analysis involves taking statistics of number (or
items) out of financial statements and forming ratios with them, to enhance
informed judgments and decisions (Lasher, 1997).
et al (2000) defined decision-making as “a conscious process of making choices
among one or more alternatives with the intention 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
calls for 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.
decisions of make or buy, investment or divestment, expansion or contraction,
capital-organization and reconstruction, and so on cannot be properly made
without the aid of financial ratios. They give clue to the financial strengths
and weaknesses of a business, and highlight aspects of a business requiring
this research is carried out to show how ratio analysis help managers,
shareholders, investors, creditors, and other stakeholders make informed
judgments and decisions about the past performance, present condition, and
future potential of a business.
information provided in financial statements are useful in business decisions, however,
it must be noted that financial statements are means to an end in themselves.
Thus, the use of financial statements in decision making is not always easy
owing to the following problems:
view of the summarized nature of information contained in financial
statements, they need to be analysed and interpreted by means of financial
ratios to enable management and stakeholders understand them and make well
informed business decisions.
users of financial statements are not knowledgeable about accounting
ratios and how the ratios can be applied to financial statements to aid
the immense benefit of ratio analysis, there are a lot of weaknesses or
limitations associated with its use.
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
OBJECTIVE OF THE STUDY
the consideration of the problems identified above, the objective of this research
To show how ratio analysis facilitates
proper understanding of information contained in financial statements
To show how ratio analysis aids business
examine the techniques used in analysis of financial statements.
To identify the usefulness of financial
ratios in measuring and predicting the performance and financial position of a
To unravel the obstacles to the proper
use of financial ratios in business decisions
To suggest ways to enhance efficient use
of ratio analysis in decision making.
1.4 RESEARCH QUESTIONS
i.) Is ratio analysis useful in evaluating
and predicting the performance of a business as well as intensifying areas that
ii) Does Ratio Analysis facilitate proper
understanding of information contained in financial statement?
iii) Is ratio Analysis useful to management,
investors, shareholders and creditors in their business divisions?
iv) Are there obstacles that affect the proper
use of ratio analysis in business decision?
1.5 RESEARCH HYPOTHESIS
In order to draw a reliable inference
about the population based on samples to be collected, the following hypotheses
Ratio analysis cannot be used in decision making in an organization.
Ratio analysis can be used in decision making in an organization
1.6. SIGNIFICANCE OF THE STUDY.
prime position of a bank as the custodian and creator of money, as well as the
financier of business ventures and economic activities has made it imperative
for everybody to ensure its survival.
study is significant for the following reasons:
study will serve as a good instrument for for predicting business failure.
will guide the business analyst in the evaluation of the capital structure and
enhance adequate investment decision and recommendation.
will be a vital instrument for the managers in the industry in the effective
utilization of shareholder equity and debenture stock.
hoped that the result of the research will facilitate optimal business
decisions when the recommendations are complied with.
1.7. SCOPE AND LIMITATION OF THE STUDY.
of Ratio Analysis to Business Organizations could be rather broad, depending on
how the analyst analyses it; but for the purpose of this project work, this
study will be restricted to Access Bank Plc.
1.8. DEFINITION OF TERMS
ACCOUNTING: The process of recording, summarizing, analyzing and interpreting
financial (money-related) activities to permit individuals and organizations to
make informed judgments and decisions.
BALANCE SHEET: A financial statement containing assets, liabilities and owners equity
capital at a particular date or at the end of a particular period to show the
financial position of an organization.
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.
BUSINESS: An activity, enterprise or organization established to provide goods
and services at a profit, in order to satisfy human wants.
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 of action.
FINANCIAL RATIO: A proportion, fraction or
percentage expressing the relationship between one item of financial statements
and another item in the same financial statements.
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
INCOME STATEMENT: A financial statement often
referred to as the trading and profit and 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.
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 of a business.
RATIO: A fractional relationship of one number to another.