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PROJECT TOPIC AND MATERIAL ON Usefulness of Ratio Analysis in Financial Statement and Position of a Business

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  • Name: Usefulness of Ratio Analysis in Financial Statement and Position of a Business
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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.

TABLE OF CONTENTS

Title Page i
Dedication ii
Certification iii
Acknowledgements iv
Table of Contents v
Abstract vi
CHAPTER ONE
INTRODUCTION
1 Background Information 1
2 Statement of Problem 2
3 Objectives of the Study 5
4 Research Question 6
5 Significance of the Study 6
6 Scope of the Study 7
7 Limitation of Study 8
8 Definition of Terms used in the Study 9
9 Brief Historical Background of Gentle Supreme
(Nig.) Ltd, Agbara, Ogun State. 11
CHAPTER TWO
REVIEW OF RELATED LITERATURE
1 Introduction 15
2 Financial Statement Analysis 15
3 Parties Interested in Financial Statement Analysis 16
4Objectives of Financial Statement analysis 17
5 Sources of Information for financial
Statement Analysis 18
6 Tools and Techniques of Financial
Statement Analysis 19
7 Uses and Objectives of Ratio Analysis 28
8 Types of Ratio Analysis 29
9 Limitations of Ratio Analysis
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction 72
2 Research Design 72
3 Data Collection Technique 72
4 Population 73
5 Sample Size and Sampling Technique 74
6 Instrument for Data Collection 75
7 Questionnaires Administration 75
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
1 Introduction 77
2 Data presentation and Analysis 77
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
1 Introduction 86
2 Summary and Discussion of Findings 86
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

CHAPTER ONE

INTRODUCTION
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 analysing 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 predicting 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.

REFERENCE
Akpakpan, Bassey A. (2000). Accounting for Beginners: An
Introduction to Financial Accounting. Part 1. (2005). Guideline
on Project Writing: Introducing Students to Research Through
Practical Approach. Revised ed. Uyo: Abaam Publishing Co.
Ayandele, I. A. (2005) Quantitative Techniques for Managerial
Decision. Uyo: Cle-Print Publishers.
Bittel, Lester R., Ronald S. Burke & Lawrence R. Lafarge. (1984). An
Introduction to Business in Action. 2nd ed. New York: McGraw
Hill Book Company.
Dansby, Robert L., Burton S. Kaliski & Michael D. Lawrence.
(2000). Paradigm College Accounting. 4th ed. St Paul, MN:
Paradigm Publishing Inc.
Essien, enefiok E. (2006) Entrepreneurship: Concept and Practice.
Uyo: Abaam Publishing Co.
Hermanson, Roger H., James Don Edwared & Michael W. Maher.
(1992). Accounting Principles. 5th ed. Boston, MA: Richard D.
Irwin, Inc.
Hornby, A. S., et al.. (2000). Oxford Advanced Learner’s Dictionary.
6th ed. Oxford: Oxford University Press.
Igben, Robert O. (1999). Financial Accounting Made Simple. Lagos
ROI Publishers.
Ikon, Micheal A. (2004). An Introduction to Business in the Nigeria
Environment. Onitsha: Ngotel Publishers.
Inanga, Eno L. (1999). Principles of Accounting 2nd ed. Ibadan:
Heinemann Educational Books Plc.
Lasher, William R. (1997). Practical Financial Management. St Paul,
MN. West Publishing Company.
McShane, Steven L.& MaryAnn Von Glinow (2000). Organizational
Behaviour. Boston: Irwin McGraw Hill.
Nwachukwu, Vitalis O. & Kelechi G.Egbulonu. (2000). Elements of
Statistical Inference. Owerri: Peace Enterprises Ltd.
Okezie, B. N. (2002). Fundamentals of Financial Accounting.
Owerri: BON Publications.
Omuya J. O. (1983). Frank Wood’s Business Accounting. West
Africa ed. Volumes 1&2. London: Longman Group Ltd.

 

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