ACCOUNTING RATION IN MEASURING BUSINESS PERFORMANCE
(A STUDY OF UAC NIGERIA PLC)
ABSTRACT
This study aimed to examining the role of accounting ratio in evaluating the companies’ performance through the use of financial analysis methods in evaluating the performance of UAC Nigeria Plc. The analytical approach, which is based on the analysis of the financial statements for ten years was adopted in this study and the Analysis of the balance sheets, the income statements and Financial Ratios, which were the most recent between 2003-20012, were applied. The analysis of the liquidity ratios clarifies that these companies have the ability to meet its commitment on time, cover its liabilities but it should be known the extent of the company’s preservation of the amount of the current assets especially the cash to face its commitments and the increase of cash in the company may lead to the risk of not utilizing the current assets. And the current assets ratios should be the double of the current liabilities so as the company can meet its commitments on time. More so Market ratios of the companies fluctuated which is considered as a negative indication that leads to a decrease in the number of investors in the company and the opportunities in the company as well. Hence, the companies have to increase their profits so as to increase the share’s profit and so there will be an increase in the return distribution ratios , and this gives a positive image of the three companies to the investors which increase the company’s investments , its profits and its sales. The study concluded by analyzing the financial statements of the companies under study lead to identify and explain the deviations and the undesired extreme results. And through training the employees, it is possible to use other methods to analyze the deviations that help in evaluating the company through identifying the causes for these deviations. I recommended establishing an
independent department for the management accounting in the company to evaluate its performance through analyzing the deviations and treat them and to provide qualified employees; scientifically and practically to do the work of the company.
TABLE OF CONTENTS
Title Page Page
Declaration i
Certification ii
Dedication iii
Acknowledgement iii
Abstract iv
Table of content vii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study…………………………………………………1
1.2 Statement of the Problem……………………………………………..…..2
1.3 Purpose of the Study………………….…………………………..……….3
1.4 Research Questions………..………….……………………………………4
1.5 Statement of Hypotheses…….….………………………………….…..…4
1.6 Significance of Study……………..………………………………………..5
1.7 Scope of the Study……………..………………………………………..…5
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction……………………………………………………………..….6
2.2 Nature of Sales Promotion….…………………………………………..…8
2.3 Steps in Sales Promotion………………………………………………….10
2.4 Sales Promotion Objective…………………………………………………13
2.5 Types of Sales Promotion…………………………………………………17
2.6 Element of Sales Promotion……………………………………………….19
2.7 Factors Encouraging The Use of Sales Promotion……………………….22
2.8 Consumer Behaviour………………………………………………………23
2.9 Factors Affecting Consumers Behaviour………………………………….23
2.10 Consumer Decision Making Process…………………………………….25
2.11 Historical Background of UAC Nigeria Plc……………………………..30
CHAPTER THREE: METHODOLOGY
3.1 Preamble……………………………………………………….…….……..34
3.2 Research Design……………………………………………………………34
3.3 Population of Study…………………………………………………………34
3.4 Sample Size and Sampling Techniques……………………………………35
3.5 Research Instrument………………………………………………………..35
3.6 Data collection Method…………………………………………………….35
3.7 Data Analysis Method ………………………………….……….…………36
3.8 Limitation of the Study…………………………………….…….…………37
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction……………………………………..…………………………….38
4.2 Response Rate ……………………………………..…………………………38
4.3 Test of Hypotheses.…………………………………..……………………….51
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings………………………………..………………………56
5.2 Conclusion …………………………………………………………………..58
5.3 Recommendations …………………………………………………………..58
5.4 Suggestion for Further Studies…………………………………………………59
BIBLIOGRAPHY
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The impact of financial ratios on the performance of a business organization is becoming more apparent to users of financial statement.
Business’s performancecan be monitored with tools called financial ratios which help to interpret financial information about the company. According to Ofoegbu (2003), the more you know about how your business is performing, the easier it will be for you to make informed decisions about how to manage and grow your business.
Accounting ratios are widely used for modeling purposes both by practitioners and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to forecast the future success of companies, while the researchers’ main interest has been to develop models exploiting these ratios.
In the past decade of economic tendency, Nigeria as one of the developing countries in the world has confronted various changes and enlargement. Achievements of Nigeriaindustries deeply affect the economic status of Nigeria. “The movement of foreign exchange has increased rapidly as investors began to be involved more and more in it”(Aborode, 2006).
Meanwhile, investors will want to invest majorlyin good conduct industries because they want to earn revenue in the short time period. However, investors need to analyze the performance of the companies properly before invest.
By doing the accounting ratios analysis, it will help them to understand the performance of any company. The analysis of financial ratios is a study of establishing meaningful relationship between various financial facts and figures given in financial statement. The basic financial statement included balance sheet and income statement which is the indicating device of profitability and financial soundness of business concern. Thus, analysis of accounting ratio is the procedure of establishing and identifying the financial weakness and strengths of the company.
Accounting ratios analysis has been view as a primary technique of the analysis of financial statement from various aspects of business. (Brigham & Houston, 2004) state” Ratio Analysis involves comparisons. A company’s ratios are compared with those of other firms in the same industry, that is, to industry average figures.” Ratio refers to the relationship expressed in mathematical term among a set of numeral and two individual links with each other in logical way. It is based on the assumptions that single figure may not tell any useful information but when expressed relative to another figure, it will definitely give some meaningful information. Since ratio is a mathematical relationship between two or above accounting figures, it can be expressed in as a pure ratio, as a rate of times or as a percentage. The relationship between two and above accounting figures or group is called financial ratio. Financial ratios may be calculated in different ways, using different figures (Gibson and Cassar, 2005). Financial ratios help to outline a large volume of financial data into a concise form so it is easy to interpret and conclude the performance and position of a firm.
Accounting ratios is a useful tool for management to making decision. By using ratio analysis, it helps management to evaluate the firm performance such as financial health, profitability and operational efficiency over a period of time by comparing the present ratios with the past ratios and comparing with other companies also so as to see where the company stands in the industry. In another way, by setting a trend with the help of ratio, management can know whether the firm financial position is improving, falling or constant over the years. Through the direction of the trend of strategic ratio, it is helpful for management in the function of planning, forecasting and controlling.
1.2 Statement of the Problem
While financial ratio is referred to as a basic tool and a general yardstick for evaluating organization’s performance, there are so many factors which basically militate against the usage of financial ratio and hence reduce its potency in the determination of an organization’s actual performance. Some of these factors are:
i. Manipulation of accounting figures in order to suite potential investorsgiving rise to misleading financial report.
ii. Many organizations fail to appreciate the impact of financial ratio analysis on investment decision in such organization
iii. Many organizations disclose information in the financial statements that is inadequate to support good decision making
iv. Many companies do not comply strictly with the principles that govern analysis of financial ratio
All these are factors which may mar the usage of financial ratio in the evaluation of an organization’s performance. Having highlighted the factors and other investors in ensuring and assuring maximum returns from investment decision? How do management and other users go about calculating these ratios with the aim of deriving the most suitable answer that will enable them to make the best investment decision with their limited resources? These are the questions this research shall endeavour to answer.
1.3 Aim and Objectives of the Study
The purpose of the study is to assess the impact of financial ratio on the organization performance with particular emphasis on UAC Nigeria plc. Other objectives of the study include:
i. Examining how accounting figure are handled and haw that affects the financial reports of the three company under review.
ii. Examining how accounting ratios has influenced investment decision in these organizations
iii. To ascertain the profitability trend of the organization given its level of investment and turnover using accounting ratios.
iv. To assess the performance measurement policy of the company under review.
1.4 Relevant Research Questions
i. How is accounting figure handled and how does that affect the financial reports of the company under review?
ii. How has financial ratio influenced investment decision in these organizations?
iii. What is the profitability trend of this organization given their level of investment and turnover using accounting ratios
iv. What is the performance measurement policy of the company under review?
1.5 Statements of hypotheses
For the purpose of this study, the following hypothesis will be tested using spearman’s rank correlation
Hypothesis I:
H0: There is nosignificant relationship between accounting ratioanalysis and measurement of organization’s performance
H1: There is significant relationship between accounting ratio analysis and measurement of organization’s performance
1.6 Significance of the Study
The importance of using the accounting ratios methods in the UAC Nigeria plc is represented by providing the appropriate and accurate information to know the reasons of the deviations and then to evaluate the company’s performance .
This study gives insight into the various ways that financial ratio analysis can help improve organizations performance and how the financial performance of organizations in Nigeria can be properly assessed in order to attract investors. The study will also go a long way in showing the various accounting techniques that managers can adopt in measuring financial performances, and its implications on the financial position of the organizations.
The findings and recommendations of the researcher will help in building a strong and better accounting practices that will help in the assessment of organizations performance in Nigeria, if taken seriously by government and the general public. It may serve as a reference to other researchers who may want to research into the field.
1.7 Scope of the Study
The overall scope of the study is highly restricted to the assessment the financial performances of UAC Nigeria plc for the periods 2003, 2004,
2005, 2006, 2007, 2008, 2009, 2010, 2011 and 2012. These companies were chosen because it is near to the researcher hence gathering of information would be easy. The above periods were also chosen because; the researcher wants to assess the more recent financial performance of the company under study.
1.8 Definition of Terms
Liquidity Ratios: This is measurement of how readily a company can meet its obligations.
Profitability Ratios: This gives an indication of the earnings and
profitability potential of a company.
Asset Management Ratios: This gauge how efficiently a company can
change assets into sales.
Debt Management Ratios: This indicates how debt-leveraged a company is, and how it can manage the debt in terms of assets and operating income.
Dividend/Market Value Ratios: This measure how well a company uses its assets to generate earnings.
Profitability Ratios: This indicates earnings and potential profitability.
Gross Profits/Net Sales: measures the margin on sales the company is achieving. It can be an indication of manufacturing efficiency, or marketing effectiveness.
Net Income/Net Sales: measures the overall profitability of the company, or how much is being brought to the bottom line.
Net Income/Total Assets: indicates how effectively the company is deploying its assets.
Net Income/Owners’ Equity: indicates how well the company is utilizing its equity investment.
Dividends /Stock Price Change/Stock Price Paid: from the investor’s point of view, this calculation of ROI measures the gain (or loss) achieved by placing an investment over time.
Net Income/Number of Shares Outstanding: states a corporation’s profits on a per share basis. It can be helpful in further comparison to the market price of the stock.
Net Sales/Total Assets: measures a company’s ability to use assets to generate sales.
Total Sales/Number of Employees: can provide a measure of productivity, though a high figure can indicate either good personnel management or good equipment.
Current Assets/Current Liabilities: measures the ability of an entity to pay its near-term obligations.
Quick Assets /Current Liabilities: provides a stricter definition of the company’s ability to make payments on current obligations
REFERENCES
Abroad, R. (2006).A Practical Approach to Financial Accounting, Lagos: Master stoke consulting.
Achor, S. (2003). “On the Methodology of constructing a conseptual framework for Financial Accounting,” in Philosophical Perspectives on Accounting: Essays in Honour of Edwa
Adomon, K. and Schmidt, G.(2007).Profit Measurement During Inflation, New York: Arilla Inter Science Publication.
Alexander D. and Britton, A (2007). Financial Reporting, International, London: Thomas Business Press.
Archer, S. (2003). “On the Methodology of Constructing a Conceptual Framework for financial Accounting.” In Philosophical perspectives on Accounting: Essays in Honour of Edward Stamp, eds. M. J. Mumford and K. V. Peasnall. London, UK Routledge, 62 – 122.
Barns W. (2002). Statement of Financial Accounting Concepts 2, Qualitative Characteristics of Accounting Information . Nortwal, CT :FASB.
Beaver, W. H. (2007). “Problems and Paradoxes in reporting future events,” Accounting Horizons, 122 – 134..
Bell, P. W. (2003). “Establishing Guidelines for financial Reporting,” Accounting enquiries, 262 – 306.
Do you need help? Talk to us right now: (+234) 08060082010, 08107932631 (Call/WhatsApp). Email: [email protected].IF YOU CAN'T FIND YOUR TOPIC, CLICK HERE TO HIRE A WRITER»
