THE ROLE OF RATIO ANALYSIS IN BUSINESS DECISIONS

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.

TOPIC: THE ROLE OF RATIO ANALYSIS IN BUSINESS DECISIONS A CASE STUDY OF O. JACO BROS. ENT. (NIG.) LTD., ABA, ABIA

Format: MS Word

Chapters: 1 - 5, Abstract, References, Questionnaire
Delivery: Email

Number of Pages: 95

Price: 3000 NGN

In Stock

Buy Now