THE CRITICAL EVALUATION OF THE USES F FINANCIAL RATIONS IN FINANCIAL STATEMENT ANALYSIS
Financial ratios provide managers with insights into the existing strengths and weakness and equally disclose warning indicators of impending failures. Mangers primary objective now is to plan against the flows and improve for the future prospect of the enterprises. There are many aids to intelligent analysis of statement but financial ratio is an important analytical procedure at the mangers disposal in the bid for planning financial ratios are wildly used as a basis for predication especially in the aspects of solvency determination and profitability evaluation. Above all, financial analysts want to assess future earning and dividend paying prospects. If analysts are investigating senior securities they are concerned with the adequacy with which earning cover, interest payment and related annual cash requirement short-term creditors are less interested in long –run earning powers. Their concern is to know the urgent out look of smooth payment and earnings per-share seems to be the single number that get wide attention as a measure of company performance.
TABLE OF CONTENT
1.1 BACKGROUND OF THE STUDY
1.2 BRIEF HISTORY OF AFRIBANK NIG. PLC
1.3 STATEMENT OF THE PROBLEM
1.4 OBJECTIVE OF THE STUDY
1.5 RESEARCH QUESTION
1.6 RESEARCH HYPOTHESIS
1.7 SCOPE OF STUDY
2.0 REVIEW OF RELATED LITERATURE
2.1 DIFFERENT TYPES OF FINANCIAL RATIOS
2.2 LIQUIDITY RATIOS
2.3 LEVERAGE RATIOS
2.4 ACTIVITIES RATIOS
2.6 MOTIVATIONS FOR USING RATION ANALYSIS
2.7 TECHNIQUES AND PROBLEMS IN RATIO ANALYSIS
2.8 SIGNIFICANT OF RATIO ANALYSIS
2.9 BASIC FINANCIAL STATEMENT
2.10 OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
2.11 BRIEF DESCRIPTION OF FINAL ACCOUNT
2.12 DATA PRESENTATION AND ANALYSIS
2.13 QUESTIONNAIRE ADMINISTRATION
2.14 TESTING OF HYPOTHESIS
3.0 FINDINGS, RECOMMENDATION AND CONCLUSION
1.1 BACKGROUND OF THE STUDY
Financial statement is one of the most important documents used by the management of a firm in making decisions. It shows vividly the strengths and weakness of the firm, which in the process helps management to appraise the past performance of the firm and project into the future.
Financial Ratio analysis employs basic financial data taken form the analysis of financial statements (Balance sheet and income statements) which is the primary financial report of mechanism of an entity both internally and externally. An analysis of the financial information communication by the statement should include the computation and interpretation of financial ratios. Although emphasis is focused on outside users such as creditors and owners management is aware that their performance will be reviewed by these external parties and for other reasons. For example, the basic financial statements are used to assess the effectiveness of management in planning and controlling operations as well as for decision making. Management also recognizes that the evaluation of past operations as reveled by the analysis of the basic. Statement represents a good staring point in planning future operations and serves as an important means of assessing past performance and in forecasting and planning future performance. Published financial statement are properly oriented towards the long-term investor, who is mainly interested in long-term earning power.
Short-term ability of their firm to satisfy its obligation as they fall due. The amount of information an analyst seeks depends on the size of the investment he is considering and on his general familiarity with the springboard for their view. He uses financial history to help him obtain dues as to future performance.
Financial statement are usually prepared in line with generally accepted accounting principles (GAAP) and general accepted accounting standard (GAAS) and for one to understand what it contained there in, he must use an objective criteria to evaluate the content. According to I.M. Panndey an accounting figure conveys meaning when it is related to some other relevant information. The relationship between two accounting figures, expressed mathematically is know as a financial ratio. The relationship then becomes the index for a qualitative judgement of the firm’s performance. However, ratios indicate qualitative relationships, which can be used to make qualitative judgement. This is the nature of all financial ratios.
1.2 BRIEF HISTORY OF AFRIBANK NIGERIA PLC
The growth of Afribank can be likened to the proverbial mustered seed from a humbly beginning in 1960 when the first branch was established in Kano. The bank has not only grown to be represented in many towns throughout Nigeria, but has metamorphosed into what is known today as the Afribank group.
The Afribank group is currently made up of six (6) subsidiaries namely:
1. Afribank Nigeria Plc. (which servers as the hold company for the group in addition to anchoring the group’s commercial banks activities
2. Afribank international limited (merchant banker)
3. Afribank insurance Brokers Ltd
4. ANP finance company Ltd, Dublin
5. Afribank Estate company Ltd
6. Afribank Trustees and securities Ltd.
Each of these subsidiaries is registered and operates as an independent company. Afribank Plc, which began operations on January 14th 1960, has grown to become one of the biggest for commercial banks in Nigeria with over 130 branches offering a wide rang of financial services to its numerous customers nation wide. Apart from the traditional accounts ( savings, current and deposit accounts), the bank offers services such as corporate finance, corporate cash management services, loans and advances, agricultural finance, international trade services, correspondent banking, comprehensive advisory services amongst other complimentary services. Afibank’s products are formulated to enhance their customer services delivery. The bank delivers courteous and professional services through highly skilled and experienced professional banker and has retained a great deal of customer loyalty over the years through this quality of services delivery.
1.3 STATEMENT OF THE PROBLEM
The uniformed investor always makes his investment decision based on guesswork, hunches and intuition. These methods are unreliable and misleading most times in decision making. For one to make an objective investment is to be made. Any evaluation of the firm’s operation cannot be complete without a reference to its financial statements, and any investment decision involving a firm may produce negative results if he firm’s operations over the period are not considered.
Since financial statement portray the performance of any entity for a given period of time, this study has set to evaluate a method of analyzing the firm’s financial statement or the benefit of the interested parties. Although other analytical tools will be considered, the primary aim of this research is t critically examine the use of ratio in analysis of financial statement.
1.4 OBJECTIVE OF THE STUDY
The main objectives of the study include the folowing
i. To analyze the difference in terms of efficacy between ratios and other tools for financial statement analysis.
ii. When financial ratios over a period of time are analyse, they give an indication of the direction of change and reflect whether the firm’s financial position has improved, deteriorated or remained constant over time.
iii. To ascertain the efficacy of ratios in financial statement analysis
iv. To ascertain the extent of which ratio analysis are used by firm’s for investment decision ,making.
v. To evaluate the strength and weakness of ratios as a tool for financial statement analysis .
1.5 RESEARCH QUESTIONS
1. Area financial ratios useful in analyzing financial statement?
2. How effective are ratios in financial statement analysis?
3. How are they useful to the management in taking decision in a firm?
1.6 RESEARCH HYPOTHESES
1. Hi : Are financial ratios useful in analyzing financial statement?
Ho: Are financial ratios not useful in analyzing financial statement?
2. Hi: Ratios are effective tools for assessing performance of a firm
Ho: Ratios are effective tools for assessing performance of a firm
3. Hi: Ratio are useful to the management decision taking in a firm.
Ho: Ratios are not useful to he management in decision taking in a firm .
Using financial ratios to analyze the financial statement of Afribank PLc to show the strengths and weaknesses of the said company in terms of liquidity leverage and profitability.
1.7 SCOPE OF THE STUDY
The scope of this study is restricted to the analysis of financial statement of business organizations, since government department and parastatals do not as a rule make public their financial statement and the private sector is the most common area for investment.
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