EVALUATION OF THE IMPACT OF ACCOUNTING RATIO ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA
1.1 BACKGROUND OF THE STUDY
Accounting information is important for rationalizing the decisions of users of corporate reports in many countries including. Among the most important of the users group are investors and creditors. These users read the content of financial statements and calculate a variety of financial indicators before they make credit and investing decisions, because they believe that financial indicators have predictive power (Al-Ajmi 2008).
Accounting ratios provide useful quantitative information to investors and analyst who want to evaluate the operations of a firm and analyze its position within its industry over time (Al-Ajmi, 2008). Accounting ratios are used for a number of reasons, to value firms (Fama and French, 1998), to differentiate creditworthy companies from others (Altman, 1968), to identify acquisition targets and to indicate the process of organizational turnaround.
Firms such as commercial banks require the use of accounting ratios to assess their performance especially liquidity position (Solomon, 2009) commercial banking is and always have been, the art of borrowing short and lending long. Although the number of services a modern commercial banks offer has increased immensely, risk taking which is a fundamental nature of banking, remains unchanged. It is inherent in maturity transformation which is another fundamental feature of banking. In this process of mobilizing short deposits for loan creation and investment which are usually long term, liquidity risk is incurred. This arises from the obvious inevitable mismatch, therefore adequate liquidity is required to manage the risk in banking, this simply means being able to meet every financial commitment when due, whether it is withdrawing from a current account, maturing euro or interbank deposit of a maturing issue of commercial paper (Solomon, 2009).
It is difficult to assess inter organizational performance from one or two simple numbers. Nevertheless, in practice a number of different ratios are calculated in strategic planning endeavours and, taken as a whole and with some caution, these financial ratios do provide some information about some the relative performance of an organization, a careful analysis of a combination of an organization. In particular, a careful analysis of a combination of these financial ratios help to distinguish between firms especially banks that will eventually fall and those that will continue to survive. Evidence suggests that, as a early as five years before a bank fails, it is possible to detect trouble from the value before a bank fails, it is possible to detect trouble from the value of this financial ratios (Wikipedia, 2010).
Therefore, the usefulness of financial indicators depends large on the integrity of financial statements made available by the bank. A sound and healthy banking industry is relevant for the growth of any economy because banks occupy a strategic position in the financial system of the country. Thus, the importance of financial ratio in evaluating the financial position and performance of the banks cannot be overemphasis.
1.2 STATEMENT OF THE PROBLEM
Although financial accounting statements shows the financial positions of a business at the end of a financial period, but they do not present accurate performance on the level of performance or efficiency of operations of a business at the end of financial period.
Some managers do not employ financial ratios in performance appraisal and in the evaluation of investment decision because of technicalities involved in financial ratio analysis, fear of assessment and in experience. Therefore, they make use of other alternatives instead of using financial ratios.
Because of all these problems, this research seek to empirically investigate to what extent has accounting ratios impacted on the evaluation of corporate performance.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to evaluate the impact of accounting ratio on the performance of money deposit banks in Nigeria. Other specific objectives of this study are as follow:
- To assess the importance and uses of accounting ratio.
- To assess the use of accounting ratio in determining the liquidity position of a firm.
iii. To evaluate the usefulness of accounting ratio in assessing the debt position of a firm.
- to examine the importance of accounting ratio in determining the profitability of a firm.
- To examine the significance of accounting ratio in detecting financial insolvency and in reducing the case of bank distress in Nigeria.
- To examine the problems associated with the use of accounting ratio as an instrument required to assist in decision making.
1.4 RESEARCH QUESTIONS
The following relevant questions have been constructed to guide the study.
- What is the importance and uses of accounting ratio?
- Does the use accounting ratio help to analyse liquidity position of a firm?
iii. Does the use accounting ratio aid in examining the debt position of a firm?
- Does the use of accounting ratio help to assess the profitability of investment?
- What is the significance of accounting ratio in detecting financial insolvency and in reducing the case of bank distress in Nigeria?
- What are the problems associated with the use of accounting ratio as an instrument in decision making?
1.5 RESEARCH HYPOTHESES
The study has formulated the following hypotheses in order to bring about a logical conclusion to the subject matter of study:
H0: Financial ratio is not a good estimator of the liquidity position of a firm
H02: Financial ratio is not a good estimator of the debt position of a firm.
H03: financial ratio is not a good estimator of the profitability of a firm.
1.6 SIGNIFICANCE OF THE STUDY
Basically, this study will expatiate and in greater details, the benefits that can be derived from the application of financial ratio analysis as tool for performance measurement.
It will help to highlight various areas of interest which includes profitability trends and scope for improvement, solvency, ownership and control, financial strength, borrowing potential, gearing and interest cover, dividend cover. It will help the organization in measuring performance in the industry it operates.
It will also help auditors and banks managers identify the ratios to emphasize in assessing their performance.
1.7 SCOPE AND LIMITATIONS OF STUDY
The study attempts to evaluate the importance of accounting ratio analysis in assessing the performance of firms in Nigeria. Thus, inorder to make this work more meaningful, the study will be carried out at First Bank Plc.
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