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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
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