CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
With the continuous growth of various businesses in Nigeria; the needs for good accounting ratios as a tool to measure financial performance of an organization continue to increase. Most organizations in Nigeria prepare profit and loss account so as to enable them know the net result of their financial activities of the business but for the organization to be able to understand the financial position of their business there must be a need for a balance sheet. The term financial statement is the particular form that contain the profit and loss, the income statement, retained earnings and balanced sheet. According to Gautam (2005) in his research stated that financial statement is also known as financial information; still on that note stated that financial information is that information relating to the financial position of any firm; when they are presented in a concise and capsule form. Apart from profit and loss account and balance sheet, there are some other financial statements which are also prepared for deriving certain conclusions. A proposed current assets and current liabilities of two years can be prepared to provide information on the changes in working capital. Another similar case is in a fund flow statement and cash flow statement can be prepared to predict the future estimate of cash receipt and payment. Financial statement includes the following:
1. Profit and loss Account
2. income statement
3. Balance sheet along with certain schedules and statement.
According to Ezeamama (2010) said he is of the opinion that rational decisions have to be taken to manage modern business very effectively and for this an effective rational decision is to be taken in accordance with the objectives of the firm in concern. Some analytical tools are available and used based on the strengths and weakness of the firms. Thus, the financial strengths and the Weakness of most organizations in Nigeria is mostly visible through its financial statement. These statements are usually expressed in monetary terms and it indicates the profitability and losses of the business through the balance sheet prepared.
According to Remi Aborode (2006), financial statement need to be interpreted to gain a better understanding and analysis; it can then be interpreted by individual items that are contained in the financial statement and the use the ratios computed from items contained in the financial statement which is known as the ratio analysis. The importance of financial statement can be derived from the fact that financial statements should disclose correct information about profitability and financial position of a particular business. The information that is provided in the financial statement should be that which can actually be verified from the relevant and prepared within a reasonable time after the end of accounting period. The information provided by financial statement should also be easily understood by the interested parties. Such as investors, creditors, lender and Bankers, customer’s employees, government and other agencies, the public and stock exchange. It can therefore be seen that financial information is very effective and essentials in making investment decisions in an organization be it private or public. The study will thus use first bank of Nigeria plc as a case study to look at the critical analysis of the use of accounting ratios to measure financial performance of an organization using data from 1998 to the year 2015.
1.2 STATEMENT OF PROBLEM
The manufacturing industry today is an integral part of the Nigeria economy. Most banks have gone through some transitions to its current state. The banking industry over a number of decades now has experienced continuous decline and as a result most of the organizations have closed down due to poor performances and lack of proper financial management. The banking industries have put in so many efforts to improve on their performance. Moreover, the continued growth of an organisation may depend on its ability to generate adequate resources from its day to day operations. Financial performance measurement or assessment is therefore imperative in assessing the growth and progress of a business. Assessing the financial position of a company in a likewise manner requires examination of its past and current performance in order to predict its future prospects. By using financial performance measures, a company’s performance can be linked more closely to shareholder’s value and wealth. Attention can, thus, be directed to ways in which companies can create more value for shareholders. Therefore, this study seeks to adopt a critical analysis of the use of accounting ratios to measure financial performance of an organisation using first bank as a case study.
1.3 AIMS AND OBJECTIVES
The aim of this study is to have a critical analysis of the use of accounting ratios to measure financial performance of organisation from 1998 to 2015; the objectives are stated below:
1. To measure the liquidity position of Unilever Company Limited.
2. To find out the profitability trend of the organization given its level of investment and turnover.
3. To find out the level of gearing and investment ratios of Unilever Company Limited.
4. To assess the performance measurement policy within Unilever Company Limited.
1.4 RESEARCH QUESTION
1. What is the liquidity position of Unilever Company Limited?
2. Given their level of investment turnover, what is the profitability trend of the organization?
3. What is the ratio between the levels of gearing and investment of Unilever Company Limited?
4. What performance measurement policy is adapted Unilever Company Limited as an organisation?
1.5 RESEARCH HYPOTHESES
Hypothesis 1
H0: ROE and ROA does not affect liquidity
H1: ROE and ROA affects liquidity
Hypothesis 2
H0: ROA has no significant effect on liquidity
H1: ROA has significant effect on liquidity
1.6 SIGNIFICANCE OF STUDY
The study will be of immense benefit to first bank of Nigeria plc, other banks and researchers that want to do further research on the use of accounting ratios to measure financial performance of an organization. The study will also show the various accounting techniques that managers can adopt in measuring financial performances, and its implications on the financial position of 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 first bank of Nigeria plc and other banks 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 to use accounting ratios to measure the financial performance of Unilever Company Limited. Unilever Company Limited from the year 1998 to 2015; Unilever Company Limited was chosen because it is get the information on the return on equity, return on assets and liquidity. The above periods were also chosen because; the researcher wants to assess the more recent financial performance of the company under study. With the assessment of the financial performance, the researcher will adopt the concept of accounting ratios as a tools and techniques.
1.8 LIMITATION OF STUDY
1. Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
2. Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.9 DEFINITION OF TERMS
ROA: is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders’ equity. The formula for ROE is: ROE = Net Income/Shareholders’ Equity. ROE is sometimes called “return on net worth.
ROE: is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage.
LIQUIDITY: is simply the availability of liquid assets to a market or company.
REFERENCES
Aarma, A., Vainu, J., Vensel, V., (2004) Bank Performance Analysis: Methodology and Empirical Evidence (Estonian Banking System, 1994-2002) Department of Economics at Tallinn Technical University Tallinn, Estonia
Abiola, I. (2009) ‘An Assessment of Fraud and its Management in Nigeria Commercial Banks’ European Journal of Social Sciences – Volume 10, Number 4 628
ACL (ND.) Fraud Detection Using Data Analytics in the Banking Industry [Online] available from [25 November 2011]
ADB (2011) History [Online] available from [16 November 2011] Amediku, S., (2006) Stress tests of the Ghanaian Banking Sector: A VAR Approach, Working Paper, Bank of Ghana.
Antwi-Asare, T.O., Addison, E.K.Y., (2000) Financial Sector Reforms and Bank Performance in Ghana, Overseas Development Institute, London, England.k,oki
