RELEVANCE OF FINANCIAL RATIO ANALYSIS IN THE APPRAISAL OF SMALL SCALE BUSINESS
(A CASE STUDY OF SELECTED SMALL SCALE COMPANY IN EDO STATE)
This research work examined the relevance of financial ratio analysis in the appraisal of small scale business with particular reference to Mr. Biggs fast food in Edo state. The study examined the establishing of the extent to which accounting ratio can be used to interpret accounting records of small scale business, finding and analysing the meaning of financial ratio analysis to the researcher knowledge and understanding of financial statement of the company, to establish the effect of ratio analysis on the users of financial statement and to highlight available ratios for measuring the true state of performance of company. The data were collected from both primary and secondary sources, while primary data was collected by the use of questionnaires; the secondary data were based on readings from textbooks, internet and journals. Data from the response to questionnaire was presented using the statistical tool Chi-square. From the analysis, the findings showed that non challant attitude in the use of financial statement affects small scale business; obsolete use of data affects small scale business and also that lack of competent management affect small scale business. It was however recommended that the retained earnings of the small scale business should be properly invested in order to have more capital for business
1.1BACKGROUND OF STUDY
Financial ratio analysis assumes that there is a relationship between certain aspects of the activities of the firm as revealed in the income statements, Accounting figures reported in the financial statement do not provide Profit and loss account and the balance sheet, which established a pattern of behaviour. The information contained in the financial statement of a company is connected with the financial well being and performance of the reporting entity, organized to enable users of financial statement to draw a conclusion meaningful understanding of the performance of the financial position of a firm, except the figure are analyzed with other relevant information through the use of financial ratio analysis.
Having established the fact that a ratio is useful and reliable in measuring the relationship between two things, this then gives rise to the need to study the relevance of the financial ratio in the appraisal of small scale business.
1.2 STATEMENT OF PROBLEM
The study is beset by a lot of problems which include:
- Problems of non-challant attitude on the use of financial ratio in the interpretation of accounting records of small scale business
- Lack of available ratio for measuring the state performance of a company
- Lack of competent management
- Obsolete use of data.
1.3 OBJECTIVES OF STUDY
The main purpose of this study is to identify and consequently analyze the relevance of financial ratios in the appraisal of small scale companies in Edo state.
In view of the above, the researcher intends to find the following:
– To establish the extent to which accounting ratio can be use to interpret accounting records of small scale business.
- To identify the available ratio for measuring the state of performance of a company.
- To established the effect of ratio analysis on the users of financial statement.
- To ensure current data‟s are use in small scale business.
1.4 RESEARCH QUESTIONS
The study will examine the following questions:
- Dose non-challant attitude in the use of financial statement affects small scale business?
- Is ratio analysis a measure of quality into consideration when measuring the performance of the firm?
- Does obsolete use of data affect small scale business?
- Is ratio analysis a dependable tool of financial analysis?
1.5 RESEARCH HYPOTHESES
Based on the problems and objectives, the following hypotheses are formulated for study.
H0: Non-challant attitude in the use of financial statement does not affect small scale business
H1: Non challant attitude in the use of financial statement affects small scale business.
H0: Obsolete use of data does not affect small scale business H1: Obsolete use of data affects small scale business
Ho: Lack of competent management does not affect small scale business. H1: Lack of competent management affect small scale business.
1.6 SIGNIFICANT OF THE STUDY
This research work will help in determining how the performance of a company can be measured through the use ratio as a tool of financial analysis.
The study will help in reflecting a qualitative relationship between financial statement of a different period and different firms. It will serve as a reference to other researchers with the mind of having in depth insight about ratios and its performance measuring abilities.
1.7 SCOPE OF THE STUDY
This study as the case may be covers the relevance of financial ratio analysis in the appraisal of small scale business with particular reference to Mr. Biggs in Edo state. The study takes a holistic approach in its research to unveil the relevance of financial ratio analysis in the appraisal of small scale businesses.
1.8 LIMITATION OF THE STUDY
The limitations involved in this research work include:
- -Hostility and non cooperation on the part of the respondents.
- -The levels of ignorance on ratios and illiteracy were very high e.g some business officials refused to answer questions as they felt they would be indicated.
- -Also financial implications were soaring high and this imposed certain restrictions
- -Finally, the constraint of time was a limiting factor as all the areas of interest were not covered by the researcher.