Accounting Ratio Analysis: A Guide To Effective Assets Management In Business (A Case Study Of Frist Bank Of Nigeria Plc)

Project and Seminar material for Accountancy

Abstract

The aim of this study is to show the impact of ratio analysis on the effective asset management of banking concern. It is also intended to identify the importance of ratio analysis, its limitations and how it can be effectively utilized in asset management of a Nigeria banking firm.

It is the aim of business firms to optimize profit and maximize costs. In the high of this business firms try to channel their efforts towards buying the above aim into reality. Whoever, this aim of profit optimization cannot be achieved in isolation in the essence that business firms try to evaluate their performance with a view of funding their weakness and strengths so as to improve on them.

Consequently, firms the various strategies to evaluate the performance from time to time one these strategies of performance evaluation is ratio analysis. In conclusion, business firms with effective utilization of the ratio analysis in making its assets management policies can high profitability results.

Chapter One

1.0 Introduction

The primary objective of every business entity is the production and distribution of goods and services with the aim of maximizing or earning profit, while profit is not the only goal of business entity, it is an extremely important one and where a decision has to be made between profit and some alternative objectives, profit is normally dominant said by bill (1984 – 360).

There was never in time profitability existing in vacuum. Due to the adoption of effective and efficient mode of operation by most of the firms, this can not be attained in total isolation of an adequate planning an control system. In other words, for a business to declare more profit, there must be adequate planning and control system.

The planning function as one of the management function. According to Horngren (2003 -3) with edition, planning is deciding on organizational goals, profit produce result under various alternative way of achieving those goals and then decide how to attain the desired goals. While control is

1. Deciding on and taking actions that can implement the planning decision and
2. Deciding on performance evaluation and the related feedback that will help future decision making.

Decision making and management are almost synonymous, according to Kontz and Weihrich (1994-1999). Managers at times see decision making as there central job because they must constantly choose what is to be done and when, where and occasionally even how it will be done.

Eventually, it is frequently a problem as to what information to search for and utilize and why the information is necessary, it is frequently decision making purpose an important source of information frequently used for the aim of making decision are records of accounting and their ratio analysis.

Meanwhile, past accounting information have sever limitations for the purpose of assessing company’s progress, it is therefore necessary to test the importance of accounting ratio analysis in business decision making. For the purpose of research, accounting ratio analysis as it relates to assets management in banking concern is particularly involved. Also an important parameter or indicator of efficient asset management is the output derived such as turnover and profits, this research will seek to prove that ratio analysis provides information as regards the relationship between assets and output and there fore as concern its possible use in assets management.

First bank of Nigeria Plc, a renowned bank in Nigeria is observed in this work to test of indeed, ratio analysis is used and can be used as a good guide in formulating effective asset management (policies in a banking concern).

1.1 Background Of The Study

First Bank of Nigeria Plc commenced operation in Nigeria in 19\894 as a branch of Bank of British West Africa. A shipping magnate from Liverpool England by Sir Alfred Jones who founded it. The bank headquarters is in Liverpool. It was incorporated as a private limited liability company in Nigeria in 1969 and in 1970 it was converted as a public company.

The bank’s shares were quoted on the floor of the Lagos stock Exchange now Nigeria Stock exchanges (NSE). The bank formally commenced its banking business in the office of Elder Dumpster and company in Nigeria with a paid up capital of twelve thousand pounds sterling. Since then, the bank has been growing from strength to strength. The bank has the widest branch network in the Nigeria banking industry with a total number of five hundred and thirty six branches as at 2009. (2010 Annual Report).

First Bank of Nigeria plc was among the first bank that met up with requirement of central bank of Nigeria (CBN) recapitalization restructure of N25 billion which its deadline was on December, 2005. it is now being headed by Mr. Stephen Olabisi Olasanya as the managing Director. The bank does provide banking services like acceptance of deposits from the public, offering loans and overdraft to the banking public, acting as financial consultation to their customers etc. improved automated teller machine (ATM) service was produce which the bank offers.

Other like smart card. Western union money transfer, etc. also the use of information communication technology (ICT) in banking transactions has also enhanced its competitive of advantage and conglomerate diversification. The enviable records of the bank, the foremost corporate organization in the banking industry and truly the first is to reason why it was chosen as a case study for this crucial research work.

1.2 Statement Of The Problem

A business entity is always faced with a lot of problem and the objectives of the firm can only be achieved if it recognizes the problem facing it. Concomitant effect of actions of other firms in the same industry is some of the problems faced by a firm that failed to recognize these problems.

Others include those imposed on it by its general environment; those emanating from a business entity responsibility to its shareholder’s which include.

1. Encountering difficulties by a firm in its efforts safeguard the assets entrusted in its care by its owners.
2. Problems of striving to earn enough that will enable divided declaration with obstructing the operation of the firm.

For a firm to plan properly for the future, it must be in a position to evaluate its past and current performances in order to achieve a better result. In order to make proper decision, firm must be in a position to understand its strengths and weaknesses and this can only be ascertain if performance evaluation techniques like ratio analysis etc are applied.

1.3 Objectives Of The Study

Before a research decides to carry out a research on a particular study, something must have motivated him/her in carrying out such a research. It might be that others, who must have dwelt on that study, have not evaluated it to the extent he/she wants. The research will embark on a pilot study to know whether such study can let go or not. In this regard, I intend to carry out this study based on the following objectives.

1. To find out the effect of accounting ratio in management of assets.
2. To find out the relationship that exists between assets growth and turnover growth rate.
3. Whether the management relies on the result of the analysis computed before making their investment decisions.

1.4 Research Question

1. Can ratio analysis serve as a tool for eradicating the difficulties banks encounter while deciding on the best way of safeguarding assets entrusted in them.
2. How can application of ratio analysis technique be used as a measuring tool in terms of performance evaluation to bring out better result.
3. How can it help in promoting high level of profitability in banks that pave way for divided declaration to shareholders?

1.5 Significance Of The Study

The study will highlight the importance of these ratios to the growth and survival of the firm. After reading through lines of the subsequent chapter that follow, the reader will be able to know how to calculate the profitability of the firm for efficiency and effective purposes. The study however will be useful to financial analyst in the evaluation of a business and to compare present ratios with the past ratios so as to give an indication of the direction of change, whether the firms financial performance has improved, deteriorated or remain constant overtime, the researchers for the advancement of knowledge, the government for tax and investment grant purposes and more so in uplifting some business organization that have been failing in handing the computation of these ratios.

1.6 Scope Of The Study

This research work attempts to give an insight into accounting ratio in the banking industry a case study of first bank of Nigeria plc. It discusses the need to use and interpret accounting ratio for management purpose. The project shall critically examine the various classification of accounting ratio as it affect assets management and discuss briefly the different types of ratio under each class of accounting ratio mentioned in the work in a nutshell, for the purpose of this research, ratio analysis is considered only as it affects effective asset management. The research limits its field to the banking sector having first bank of Nigeria plc as the case study.

1.7 Limitations Of The Study

Some problems that constituted limitation to the researcher in this case study are:-

Time Constraint: –

The researcher had no sufficient time to frequent the areas of the study due to compiled academic works facing her. She also has limited in fixing up the facts she collected. Due to aforementioned constraint, the problem of securing data from a large number of years for the computation of industry average will not be computed in the research work.

The research effort to acquired extensive information where necessary for a comprehensive work severely restrained by some factors which include, the belief of the bank officials that statement of accounting ratio are management classified document and as result they are given out a external parties, etc. the study has to be restricted and limited to ratios that affect assets management in the banks due to this constraint.

Financial Constraint:

The research had problems of financing this work, there was a drastic increase in the cost of hiring, transport, printing and blinding of project works. However, the researcher carried out the research and presents if fairly.

1.8 Definition Of Terms

Accounting Periods:

They are time periods that are usually equal to length. An accounting period of one year is then known as accounting year or fiscal year.

Assets:

Anything owned by a firm or individual that has economic benefit or exchange value of past events and from which future economic benefits are expected to flow to the entity. Assets consist of;

Non – Current:

Assets which are fixed assets, intangible assets and long-term investment e.g. land and buildings, furniture an fittings, motor vehicle, goodwill, patent etc.

Current Assets:

These are assets that are of benefit economically within one accounting year e.g stock, debtors, cash in hand and cash at bank etc.

Controlling:

This involves where management establish a standard and correcting deviations to ensure achievement of objectives.

Financial Statement:

A summary of firm’s financial affairs and facts showing the position of profit and loss account, balance sheet etc. of the firm in a given financial year.

Liquidity:

This examines adequacy of funds, the solvency of the firm and the firms ability to pay its obligation (especially current) when due.

Management:

This process of planning, controlling, organizing, directing and co-ordinating of resources (human and material) of the organization in order to achieve the firm’s target or objective.

Planning:

This involves thinking, anticipating and preparation of actions that will be carried out in order to achieve a specific goal or objective.

Profit:

This is excess of selling price over all cost incurred in making the sales.

Ratio:

Is the quotient of two mathematical expressions, there are expressions of logical relationship between certain items in financial statement.

Ratio Analysis:-

Is the separation into parts and interpretation of the ratios calculated for effective decision making.

Liquidity Ratios:

This measures the firm’s ability to meet up its current financial obligations.

Current Ratios:

Is the relationship between current assets and current liabilities.

Quick Ratio:

This establishes a relationship between quick or liquid assts and current liabilities.

Net-Working Capital Ratios:

This is the relationship between net working capital and it net assets.

Asset Management (Efficiency) Ratios:

This ratio measures how efficient or effective the firm is in managing its assets.

Profitability Ratio:

This is shows the combined effects of liquidity, asset management and debt management on operating results.
In other words, profitability is the net result of a large number of policies and decisions.

Profit in relation to sales and Profit in relation to assets.

Turnover:

The total amount realized by a business in a point or the gross earning made by a business.

Chapter Three

3.0 Summary Of Findings, Conclusion And Recommendation

This chapter deals with the summary of all works done

From the beginning of the chapter the end.

3.1 Introduction

In the course of this chapter, the researcher will recommend based on the findings, summary and also draw conclusions.

3.2 Summary Of Findings

1. According ratio is a powerful tool of financial analysis. In financial analysis ratio are used as a measuring stick for evaluating the financial position and assets management policies. For example a current asset indicates a qualitative relationship. Which is an index that permits a qualitative judgment to be made about the firms ability to meet its current obligation.
   Other assets related ratios indicate how the management of a firm has been managing its assets.
2. Through the use of accounting ratios as a tools of analyzing statement the strength and weakness of a company are revealed. It goes further in discovering causes which have contributed to the weakness and strength as the case may be. The computation of ratios for the two or more years reveal the year involved which can be further examined by looking into what exactly had caused the deterioration or improvement through the use of some secondary ratios. We can therefore pin point where efficiency was recorded.
3. With respect to assets, ratios enables the management to effect control as necessary hence accounting ratio is a tool for management control as well effective asset management policies.

3.3 Conclusion

1. The general corporate environment is very complex indicate it beholds the management of banks and firms to employ all available tools to survive in the corporate environment. Ratio analysis has been proved to offer sum useful information and aid to management if it is used with caution.
2. Accounting ratios are useful tools of performance analysis that is show at a glace the real financial position of a company in details and get the management informed of there past performance.
3. Consequently, enabling them to take corrective actions in predicting the future operation of the bank have been tied up in fixed assets and how these resources have been gainfully employed to generate profit. “Corporate objective of any organization” if management of firms take the recommendations that stated below seriously, the corporate objectives may not be difficult to exist after all.

3.4 Recommendation

Generally, the research has pointed to one fact that one fact that ratio analysis in necessary in corporate planning and control in bank and other firms. The following is a few recommendations as to how ratio can be more –effectively used not just assets but other items.

1. Bankers and other firms should set budget or forget ratios and control their operations and input in order to meet those targets. With this action, firms can control their desired performance in a completive economy.
2. Firms should look extremely for standard ratios that be used in planning published ratios from commercial of economic resources could provide such information.
3. Detailed sub-analysis of major items in the account should be made this can enable attention to before used on the unfavorable aspect if performance. this saves management time and efforts. Management by exception”
4. Mathematical analysis such ratios may often be prone to error tree analysis.
5. Economic of developing countries is known to be unstable for banks fluctuating of inflation, interest rates, government financial guidelines etc. may render financial analysis misleading, It is therefore recommended to management to exercise care and caution while making use of ratios from internal and external sources.

In view of the conclusion and recommended for made above on the topic, accounting ratio is strongly recommended for formulating effective assets management policies because it outscore the other tools of financial analysis(e.g. the funds flow statement, income statement etc.) the relations of accounting ratios are used to predict the future performance of any given firm.

Ratios show the future friend of a firm financial performances through ratios computed from the projected financial statement. Ratio should be used for management control by computing period ratios such as weekly, monthly etc. to reveal the strength and weaknesses within the period and enable action to be taken by the management on the areas of weakness as appropriate.

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