ACCOUNTING RATIO AS A TOOL FOR MEASUREMENT OF MANAGEMENT EFFICIENCY

CHAPTER ONE

1.1   Background Of The Study

The word accounting is said to be the art of preparing and reporting the performance of a business entity over a specified period of time (usually one year). Through financial statement and reports: the aim of these reports is to communicate to the people concerned with the business organization about the effectiveness of the use of investment in the business and to show how efficient is the management to whom the investment was entrusted accounting to “certers”.

Advanced  accounting by Doughas Garbuilt says that accounting is a disciplined concerned with the recording  analyses and forecasting of income and wealth of business and other entities.

However, before considering accounting it is important to understand management functions and efficiency. Management are typically concerned with all aspects of business operations and how efficient it will be to users.

Meanwhile, the objective behind the preparation of financial statement  by an accountant will not be accomplished or justified if the users of the statement cannot read meanings to the statement so prepared. Financial statement should be prepared so that the users to different categories will be able to interpret the information and data contained in the statement for the purpose of making decisions.

Financial analysis can be done through the following;

The fund flow statement

Straight forward criticism in prose form

Ration analysis

Here is concerned with the use of accounting ratio as a measurement of management efficiency. Ratio are simply mathematical expression of the relationship of one figure to another which may come from the same statement or two different statement or ratios in relation between two amount which shows how many turns one certain the other.

Accounting ratio is also the relationship of different figures in the analysis of financial statement in order to discover the strength, weakness, opportunity and threat of a company and to reveal underlying trends in its activity and discover the course which have contributed to it.

Uses of Accounting Ratio

The management are mainly concerned with result and using the accounts as a guide in controlling the firm. The shareholders are usually concerned firstly weith dividends but use also interested in the amount of profit retained, the possibility of bonus shares and the prospect of growth in value of the firm. To assist management in identifying areas which required immediate attention, hence service as interpreting took of management. To enable prospective purchase of all part of the business to decide whether or not to proceed with investment, in the company to enable prospective leaders to decide whether to provide financial assistance or not. In using accounting ratios, the analysis must be capable of giving interpretation to the ratio computed and understand the implications or material charge in their time.

1.2   Statement of the problem

The importance of financial ratios can never be over-emphasized. An efficient use of financial ratios goes a long way in carrying out this function.

In an under developed economy like ours the need for this ratio is paramount if the economy is expected to be improved upon.

The statement of the problem therefore are;

1. Find out a lot of people in manufacturing sector are neot even aware of financial ratio, its functions and how it can aid the analysis and decision of the economy.
2. Ratio do not have much use if they are not analyseed over years. The ratio at a moment may suffer from temporary changes. This problem can be resolved by analyzing the trend of ratio over years. This is a major problem or set back in the economy. It is obvious that utilization of the financial ratio is at stake and if nothing is done now, it could be gradually be ended.

1.3   Objective Of The Study

1. The study is embarked upon to enable the researcher gain an insight into the use of accounting ratio as a tool for measurement of management efficiency. Decision making that will effect performance of the company are making by the ratio as a tool for measurement of management efficiency will give us opportunity to see the particular ratio being used by the top management in their decision making and how effective are those decision when the actual results of the company for one period are compared with their previous performance and that of company within the same industry.
2. We also intend to look into accounting ratio really serve as a measurement of management efficiency by evaluating the performance of the company using various financial ratios.
3. Finally it is the objective of the study to advice where and when necessary on the use and extent to which accounting ratios can be used for financial analysis as a tool for measuring efficiency.

1.4   Research Questions

1. Does accounting ratio aim to discovering of the strength and weakness of the company and the identification of the company and the identification of the factors that have contributed there?
2. Does accounting ratio provide information for management control?
3. Can financial ratio express in figures by misleading?
4. Does the accounting ratio help the organization in analyzing its financial problem.

1.5   Significance Of The Study

Accounting ratio is the most powerful tool for financial analysis with the help of the tool one can determine the extent to which the firm has its long term solvency by borrowing funds. On can determine the ability to meet it current obligation. One can also determine the efficiency with which the firm is utilizing its various assets in generating safe revenue and also the overall operating efficiency and performance of the firm from time to time management uses ratio analysis to determine the firm financial strength and weakness and accordingly take the action to improve the firm position.

1.6   Scope Of Study (Delimitation)

Although the study has been designed to find out an effective means of measuring management efficiency. There is need to put here that the work will be to examine the capacity of the firm under the study. However this cannot be fractioned due to unreasonable constraint because of the relationship and its unimportant to the study.

1.7   Limitation Of The Study

This project centers on financial ratios. A very thorough research on this study is not very possible in that interviews and questionnaires have to be limited since only little sector of the population utilize the ratio.

Time factor is also another notable factor. Nobody seems to have time to even fill use questionnaire due to pressing engagement. Also, combining this project with my other academic work has been very and at times interviews has been put off due to the work load I have and the time available to do it.

Another important factor also arises during the collection of data. You find out that people are not ready to talk on any issue in which company is involved. They tend to fed that any information given will implicate them in some ways. So most individuals try as much as possible to give a rosy picture of the entire producers even though things do not happen that way.

1.8   Definition Of Terms

Financial statement: This includes balance sheet, profit and loss account and statement of sources and application of funds or other forms of income statement.

Accounting period: Accounting period is a period of one year commencing on 1^st January and ends on 31^st December of the same year. It is usually twelve (12) months.

Ratio: Ratio quotient of two mathematical expressions ratios are prepared regularly and on a constant basis so that trends can be highlighted and the changes investigated.

Analysis: Analysis is the separation into parts and interpretation of figures. Analysis is a practical means of monitoring and improving performance of firms

Shareholders: The shareholders are the owners of the company

Rate of asset turnover: The ratio measures the use of being makes of assets are employed. The ratios given an assessment of past managerial efficiency in deployment of company asset.

Profitability margin: This assess the overall margin on sales which together with rate of asset turnover is a major factor in the return that company receives capital employed.

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