Accounting Ratios As A Tool For Management Decision Making

Project and Seminar Material for Accountancy / Accounting

Accounting Ratios As A Tool For Management Decision Making


Abstract


The study, accounting ratios, as a tool for management decision making process (a case study of Guinness Nigeria Plc) is targeted at exploring the various ways which accounting ratio could help the management of enterprises especially manufacturing and processing companies in the formation of polices and making of sound and reliable decisions. In order that this purpose could be established, the researcher formulated various relevant research questions and also two major hypotheses were also formulated. Interview was conducted with the aid of instrument known as questionnaires which were administered to the staff of the said company. The chi-square method was used for testing the hypotheses. The result obtained therefore revealed that accounting ratio is an aid to management decision making. Also, to be clear of every sentiment, relevant literatures complied in authorities in the relevant fields were reviewed. The opinion of authorities were not different, showing that accounting ratio is necessary for fixing selling price, valuation of inventory, inventory control, labour remuneration, waste reduction, capacity utilization, cost control ascertainment of profitability. Thus, the study proves that accounting ratio is a tool for management decision making process.


Chapter One


Introduction

1.1 Background of the Study

Omuya (1990) defined “accounting as a language of business, it is used in the business world to describe the transaction entered into by all kinds of organization. An analysis of the above definition shows that accounting centres on transforming data into information that would be useful to many users. It takes care of the financial communication of the entry as it supplies the financial information in a way and, form so desired by the users.
In a similar case Millichamp (1992) defined accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial statement”.

These users include owners, (shareholders) managers, suppliers, customers, government employees, etc. The users of these statements are expected to read, interpret and analyze them. Objectives of financial statements are not accomplished when many users of the statement cannot understand them, let alone interpret and analyze them.
The information the users attempt to gain from financial statement are; the ability of the business to pay its way and survive in the long run, the quality of management and the rightness of decision made, information that guide the future.

The management accounting is considered one of the most important components of the system of the administrative information in the company by providing the economic and financial information and collecting information taken from other systems of information in the company so it looks as accounting for inner affairs that helps the administration in making decisions, planning, controlling and evaluating the performance of the company’s activities , therefore it is not restricted to the known accounting principles but it depends on basis and regulations concerning the content and the shape of the inner reports (Al-Matarna, 2003).


1.2 Statement of the Problem

Regrettably, the inability of users of these financial statements to comprehend, interpret and analyze the and still has always contributed to harmful business and investment decision by the users of these statements. As a result of these wrong business decisions, many users of these statements have been rendered poor, whereas others are afraid and show indifference to investment and business opportunities. Cases abound where these financial statements users, individual and corporate, have lost millions of naira merely because of wrong business decisions.

The manufacturing sector consist of strings of financial activities whose major end is profit making, over the years the means and manner of measuring this financial performance remain issue of concern, the variables to use in the measurement of this performance is germane to growth and stability, the issue therefore is determining the variables to use in financial performance measurement and how well do these variables can measure the performance in the manufacturing sector.


1.3 Objectives of the Study

The objectives of this study are to find out the following:

  1. To find out the impact of accounting ratios in the management decision making
  2. To examine whether accounting ratio aid in the effectiveness of an organization.
  3. To determine the techniques used in analysis financial statements.
  4. To identify the usefulness of accounting ratios in measuring and predicting the performance of Guinness Nigeria Plc.
  5. The make useful recommendations based on the findings of this study.

1.4 Research Questions

The following research questions were formulated to guide this study:

  1. What are the impacts of accounting ratios in the management decision making?
  2. Does accounting ratio aid in the effectiveness of an organization?
  3. What are the techniques used in analysis financial statements?
  4. Does the usefulness of accounting ratios in measure and predict the performance of Guinness Nigeria Plc?

1.5 Research Hypotheses

Hypothesis 1
  • H0: There is no significant relationship between the impacts of accounting ratios in the management decision making in Guinness Nigeria Plc.
  • H1: There is a significant relationship between the impacts of accounting ratios in the management decision making in Guinness Nigeria Plc.
Hypothesis 2
  • H0: There is no significant relationship between accounting ratio and the effectiveness of an organization.
  • H1: There is no significant relationship between accounting ratio and the effectiveness of an organization.

1.6 Significance of the Study

The significance of this study is that on its completion, the following benefits will be derived:

The study will help management of Guinness Nigeria Plc and others to know how ratio analysis can help them understand the financial contained in financial statements and enhance their business decisions.

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.

It is hoped that the result of the research will facilitate optimal business decisions when the recommendations are complied with.

The study will encourage businessmen, investors, managers, and government authorities to appreciate quantitative techniques like financial ratios when making economic and business decisions.


1.7 Scope of the Study

The study concerns about accounting ratios as a tool for management decision making with a particular reference to Guinness Nigeria Plc.


1.8 Limitation of the Study

In the course of this research work, the researcher was faced with some constraints which plaved a limit him 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 (please write your State) to collect the necessary data from the firm under study. Money was also required to visit secondary data sources such as the internet, libraries, professional bodies, and so on.

2. Lack of Co-Operation:

The uncooperative 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 thorough completion of the research, in consideration of the fact that we were also facing other academic studies during the semester.


1.9 Operational Definition of Terms

1. Ratio:

A ratio can be defined as the indicated quotient of to mathematical expression and as the relationship between two or more things.

2. Ratio Analysis:

It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables.

3. Accounting:

It is the process of recording, summarizing, analysis and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.

4. Business:

It is an activity of enterprise or organization established to provide goods and services at a profit, in order to satisfy human wants.

5. Business Decision:

The 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.

6. Decision-Making:

It is defined as a process by which an individual or group of individuals gather data and make a choice between two or more alternative courses action.

7. Financial Ratio:

A proportion, fraction, or percentage expressing the relationship between one item ion set of financial statements and another item in the same financial statements.

8. Financial Statement:

This is 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.

9. 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.


1.9 Plan of the Study

This research work is divided into five

  • Chapters one elucidates the background to the study, research objectives, hypothesis testing, research question etc.
  • Chapter Two concentrate on review of relevant literature, conceptual review, empirical studies review and theoretical framework.
  • Chapter three Concentrate on introduction of research methodology, research methods, sources of data collection (questionnaire), data analysis, population of study etc.
  • Chapter Four looks at data presentation, analysis and interpretation while
  • Chapter 5, contains introduction, summary, findings, recommendation-based findings and conclusion.

Chapter Five


Summary, Conclusion and Recommendation

5.0 Introduction

This chapter covers the summary of the research topic, conclusion based on the findings of the research and recommendations for further research.


5.1 Summary

Accounting information is aimed at information system that produces reports to the interesting parties about economic activities and company’s condition. The primary objective of accounting is to provide information that is useful for decision making purposes. It means that accounting is an information providing activity. The objective of accounting is simply to produce information used by managers to run company’s operation. Accounting also gives information to the interesting parties about economic performance and company’s condition. Accountings role is to gather data about a business’s activities, provide a means for the data’s storage and processing, and then convert those data into useful information. An accounting system consists of the personnel, procedures, technology, and records used by an organization (1) to develop accounting information and (2) to communicate this information to decision makers. Accounting information is raw data concerning transactions that have been transformed into financial numbers that can be used by economic decision makers. However, accounting information is knowledge or news about a reckoning of financial matters.

Accounting information is central to many different activities within and beyond an organization. Accounting information is essential to business operations. The types of accounting information that a company develops vary with such factors as the size of the organization, whether it is publicly owned, and the information needs of management. The types of accounting information required depend on the types of business decision made by management. It means that the role of accounting information is assist manager in making business decisions. Accounting information is classified in to three different types according to the benefits for the users: 1. Statutory Accounting Information is the information shall be prepared in accordance with existing regulations. 2. Budgetary Information is the accounting information presented in the form of budget that is useful for internal planning, assessment, and decision making. 3. Additional Accounting Information is other accounting information prepared by the company in order to increase the effectiveness of decision making. The study tried to address the problem with the improper use of accounting information by managers and employees which serves as a major shackles hindering the effectiveness of management decision making.

The primary aim of this study is to asses and evaluates the effect of the use of accounting ratio on management decision making of Guinness Nigeria Plc. The method employed in the study is that of survey, and also both primary and secondary sources of data were used. Statistical presentation of data was employed using basically the statistical package for social scientist (SPSS). The test of hypothesis saw that the alternative hypothesis was accepted while rejecting null hypothesis.


5.2 Findings

  1. The study revealed that accounting ratio has significant effect on management decision making at a statistical significant level.
  2. The study also revealed that the manufacturing industry needs informed financial decisions that would enhance overall performance.
  3. The study revealed further that most workers in Guinness Nigeria are single within the age bracket of 21-30. This shows that the industry is highly populated with young brains with vibrant skills.
  4. The study revealed that accounting information obviate the necessity of remembering various transactions in Guinness Nigeria Plc.
  5. Furthermore, it was also revealed that there is a relationship between the perception of employees and accounting information as a result of the fact that employees and their representative are interested in the information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits etc.
  6. The study shows that accounting information depends on the perception of the quality of information by the user.
  7. Besides the result of the study disclosed that there is a significant relationship between time factor and accounting information as supported by the findings of Choe (1998) who posited that accounting information improve efficiency of operation.
  8. Findings of the study revealed that time factor is very important in the case of periodicity concept which defines a specific interval of time for which an entity’s reports are prepared.
  9. Consequent on the above, the findings of the study shows that the timing can be a fiscal year, natural year, quarterly or monthly.
  10. The study also revealed through the result of the last hypotheses that accounting information has effects on company’s performance via profitability, productivity and effectiveness.

5.3 Recommendations

Based on the statement of problem, the objective of the study and the result of the findings, the following recommendations are made.

  1. Companies should consult professional accountants when starting a business to learn about the various laws that affect them also to familiarize themselves with the variety of financial records that they will need to maintain.
  2. Clear-cut definition of long term corporate objective, within which the accounting information system will operate should be provided.
  3. Decision making should be administered in flexible and variable rigid adherences to accounting information, which are clearly appropriated for current conditions. This will cause the whole accounting system to gain credibility and effectiveness.
  4. The company should always keep records of past events in case of future purpose, this can be possible with the use of computer or by fully automating the company’s operation.
  5. A professional accountant should be employed by the company in order to keep valuable information and keep accurate records of the company’s account.
  6. Employees should be encouraged to develop themselves by becoming professionals in their chosen career, this will affect the company to grow positively.
  7. Effective communication and information flow is important for a good accounting system, and organizations should provide communication channels between top and lower levels of management regarding long and short term objectives and the practical problems of implementing those objectives.
  8. Efforts should be made to measure the effects of currently employed accounting concept on management decision making.
  9. Regular meeting with staff should be organized to disseminate information about the company and also elicit feedback that help to improve the company.
  10. Co-ordination from the top management will ensure proper interpretation and implementation of the accounting information in decision making. Therefore, every personnel should know where he/she belongs in the entire organization and also see himself as part of the corporate whole. These individuals must take part in decision making process at least at the functional level.

5.4 Suggestions for Further Research

Further research on the study abounds in this study area like;

  1. Relationship between accounting information management and Organization Effectiveness.
  2. Accounting Information for Business Performance Assessment in Small and Medium Enterprises (SMEs).
  3. The study failed to critically examine the relationship between accounting information and employee’s commitment.
  4. The study was unable to look at the framework for analyzing accounting information in the manufacturing industry, so further study can embark on this.
  5. Further research can also involve a replication of the present study in other industry to know whether the findings of this study can pass the test of generalizability.

5.5 Conclusion

The research study revealed that accounting information performs a crucial role on management decisions and organization performances, which has been shown to be major force in decision making. This is achieved by implementing the best fundamental concepts of accounting suitable for each company. The company used as case study made the researcher to understand that, for any company to be successful, it should endeavor to make use of accounting information because accounting itself is a language of business, and before venturing into any business, one must know the right method to achieve the stated goals and objectives. Also, studies have shown that successful utilization of accounting information requires a fit between three factors. First, a fit must be achieved with dominant view in the organization or perception of the situation. Second, the accounting system must fit when problems are normally solved, i.e. the technology of the organization.

Thirdly, the accounting information must fit with the culture of the organization i.e. the norms and value system that characterizes the organization. Finally, there is also a high level of awareness pertaining the role of accounting information and managerial efficiency. There is also a high level of awareness pertaining the role of accounting information system which is not limited to senior and management staffs alone but also cut across intermediate and junior staffs whose operations are also governed by the accounting information system. It is evident that the accounting information factors looms large among factors, which contribute to the overall corporate efficiency.


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