AN APPRAISAL OF ACCOUNTING RATIO IN MEASURING CORPORATE PERFORMANCE (A CASE STUDY OF TEXACO NIG, ILORIN BRANCH)
TABLE OF CONTENTS
Table of content
1.1 Statement of Problem
1.2Purpose of the Study
1.3 Research Methodology
1.4 Significant of Study
1.5 Definition of Terms
1.6 Limitation, and Scope of Study
1.7 Plan of the Study
2.1 Literature Review
2.2 Uses of Financial Ratio
2.3 Basis of Comparison
2.4 Advantage of Using Ratio
2.5 Classification of Ratio
2.6 The Usefulness of Financial Ratio in Prediction
2.7 Interpretation of Ratio
3.0 Research Methodology
3.1 History of Texaco Nigeria Plc.
3.2 Re-Statement of Research Question
3.3 Formation of Hypothesis
3.4 Study Population
3.5 Data Collection Method
3.6 Description of Research Instrument
3.7 Analytical Procedure
3.8 Statistical Formulations
3.9 Limitation of the Methodology
4.0 Analysis of Data and Presentation of Finding
4.2 Computation and Presentation of Ratio
4.3 Capital Structures
4.4 Market Value Ratio
5.0 Summary, conclusion and recommendation
5.4 Suggestion for further Studies
Accounting essential to all advance civilization which has moved beyond barter or counter trade is a means of each exchanging and has devised some sort of monetary system of payment. Geofficy white led (1994p.89) individuals, corporate bodies and government (Local, State ad Federal) adopt one system of accounting r other which ranges from proper recording of income and expenditure to easy determination of profit or less from their business activities.
According to Geofficy white head (1741p1) accounting is the controlling a business by keeping account book – keeping records measuring on interpreting “accounting ratio” and communicating these result to management and other interested parties.
To American institution of certified public accountant is an art of recording classifying and summarizing significance manner and in term of money transaction event which are input at lead of financial character and interpreting, the result there of from the above definition, it is evident that statistic called “accounting ration” are prepared from the financial statement. Balance sheet and trading profit and loss account.
Financial statement shows the financial position of the firm at a particular time, it show the performance of resources invested and communicates economic measurement to the user of financial information to enable them predict, compared and evaluate the firms earning power its potential. Enable this item to be regarded in their proper perspective vickery B.G.
Accounting ratios are only of the value if they are uses for comprise which reveals conditions and trends and trends that cannot be detracted by inspection of the individual components of ratio and it they are properly interpreted they can also point the way to area where further investigation are reajuired. The use of accounting ratio differs from the view bint of the users.
i. Management:- Ratio are used to evaluate the overall performance of the business, since management concern is to ensure that the while business achieves a satisfactory level of profit in relation to the capital employed.
ii. Shareholder: It enables the shareholder or potential investors to determine the return, then they will obtain their investment and decide whether it worth investing in such business.
iii. Creditors: It enable both the long and short term creditors assess the ability of the firm to pay interest and repay the capital sum on due date.
iv. Government:- Since the government is interested in business profit to asses the tax liabilities and other information such as statistics on employment and wages level. Accountancy into provides information on the health of the business entity which enable the government to take necessary
v. Employees:- Accounting ratio are used by the employee to determine long term stability of the firm to meet their wages demand.
vi. Competitors:- It also enables the competitor to compare and interpret significant features in financial statement.
1.1 PURPOSE OF THE STUDY
The purpose of this study are as follows:
1. To identify different enterprise of accounting ratio and many different ratio within the categories.
2. To determine how ratio analysis can used to present a detailed insight about firm performance such as:-
(i) Measure the firm ability to meet current obligation
(ii) Show the proportion of debt and equity in financing the firms asset.
(iii) Reflect the firm’s efficiency is utilizing its asset
(iv) Measure the overall performance and effectiveness of the firm.
(v) To interpret the result of financial ratios to various users of accounting information.
1.2 STATEMENT OF PROBLEM
According to chairman statement in 2000 annual report and account of Texaco Nigeria Plc. Petroleum Industry in Nigeria has continued to decline due to various level of disrepair of all four refineries in the country. This had a negative impact on the economics growth. The government embarked upon the policy of partial deregulation of the petroleum marketing industry. This led to the increase in the pump price of refined product. The increase in margines initiated by this policy was leveled up by the rise in cost and inflation oil marketing companies were given permission to import refined product to cope with the problem of fuel scarcity.
Despite these general problem above, the use of accounting ratio in measuring corporate performance accordingly to pandey I.M (1979.p1.36) may be limited by
- Difficult in deciding on the proper basis of comparism
- Changing in price the makes the interpretation of ratio invoid.
- The difference in definition of item in the balance sheet profit and loss statement makes the interpretation of ratio difficult.
- The ratios calculated at a point in term are less informative and defective as they suffer from short term changes.
- The ratios are generally calculated from financial statement and this are to indicator of future.
However, those limitations had a serious impact on the use of nation analysis as an instrument for measuring performance.
1.3 RESEARCH METHODOLOGY
The research instrument used together to gathered the information have two division.
i. The primary source of data: Research instruments like personal interview with the finance experts of the fuel station was made use of.
ii. Secondary data: This include the consultation of relevant textbooks journal and published annual reports the fuel station.
1.4 RESEARCH QUESTION
1. The following research questions will be used for this study. What are the different categories of accounting ratio?
2.What are the ratios that measures the firms ability to meet its current obligation?
3. What are the ratios that measure the performance of company management and identify whether company is a worth while investment opportunity.
4. What are the ratios that measure the efficiency of the firm
5. What are the ratio that assets the ways in which a company finance activities?
6. What are the ratio that evaluate the performance of a firm in relation to price of its share dividend and number of share in issue?
1.5 SIGNIFICANCE OF STUDY
The study of great significance and relevance to the society at Large and users of accounting information in particular considering the important roles of “accounting ratio” play in measuring corporate performance.
1) The study will explain the benefit that can be derived from the application of ratio analysis.
2) It helps to high various area of interest which includes profitability trends and control financial strengths, borrowing potential gearing interest cover and dividend cover.
3) It shows the benefit and defect of accounting ratio as do for measuring company performance. This will in turn determines the extend to which reliance can be placed on accounting ratio.
4) It will help the firm evaluating performance over series of accounting period and measure its performance in the industry in operates.
1.6 LIMITATIONS AND SCOPE OF STUDY
This study deals with the application of accounting as a tool for measuring corporate performance. Therefore the study is limited in scope to the accounting of Texaco Nigeria Plc. Over the period of five years (1966 – 2000).
1.7 PLAN OF THE STUDY
The research work will be divided into five chapters. Each chapters contain the following.
Chapter one will contain the introduction of the study purpose of the study, statement of problem, research methodology, research questions, significant of the study, limitation and scope of study and definition of terms.
Chapter two will contain the literature review, users of financial ratio basis of comparison, advantages of suing ratio, classification of ratio the usefulness of financial ratio in prediction ad interpretation of ratio.
Chapter Three will contain the history of Texaco Nigeria Plc, re-statement of research question, formation of hypothesis, study population, data collection method, description of research instrument analytical procedure, statistical formulations and limitation of the methodology.
Chapter Four will contain the analysis of data and presentation of finding, introduction, computation and presentation of ratio figures, capital structures and market value ratio.
Chapter Five will contain summary, conclusion and recommendation and suggestion for further studies.
1.8 DEFINITION OF CONCEPTS TERMS
Analysis separation into paints and the interpretation of figures.
Asset: Economic resources owned by a going concern of business entity.
Balance sheet:- A statement of firm assets liability capital at a specific data usually at the end of account period.
Budget: A comprehensive and co-ordinate plan expressed in financial terms of the activities goals in a give period two.
Capital structure: The inter - relationship between long terms debt preference share capital add net worth: Sometime distinction is made between capital structure and financial structure the latter term include current liabilities.
Common ratio: These are selected ratio that are widely used.
Comparative statement: financial statement for several years that are presented side by side for comparative purpose.
Current liabilities:- Liabilities that are payable within the current accounting year or operating cycle.
Equity:- The net worth of a business consisting of share capital share premium and reserves suratus common equity is that part of the ordinary shareholder total equity will include preference share capital.
Debenture:- A long terms investment that not usually secured on a mortgage or a specific property.
Financial average:- The magnification of returns to common shareholders through the use of debts.
Fixed asset:- These assets whose useful life extend beyond an accounting period.
Liquidity: Ability of the company to need its current financial obligation.
Shareholder: The owner fop the company
Shareholder: The owner of the company
Solvency: Ability of the company to meet its long term obligations.
Ratio Analysis:- Analytical tools designed identify significant relationship between two financial statements..