CHAPTER ONE INTRODUCTION 1.1 BACKGROUND INFORMATION

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating of financial information in order to enhanced informed judgement and economic decision by users of the account. This can be making possible when the financial information is made available to the users. American

Accounting Association (AAA) defined accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the user of information”. Financial information can be derived from the financial statement. The standard practice for businesses is for them to present their financial statements which adhere to regulatory framework and conceptual framework established in order to ensure uniformity of information and presentation across international borders. The financial statements comprise collection of reports about an organisation’s financial result and condition which is presented in a clear and concise manner as it contains useful financial information that is hidden in figures. Its major components are; Statement of Financial Position, Statement of Cash Flow, Statement of in Equity, Statement of Profit or Loss and Other Comprehensive Income and Notes to the Accounts.

Financial ratios are applied on items reported in the financial statements with the intention to derive the effective economic decision for the following reasons:

•      Determining the ability of a business to generate cash, and  the source and uses of the cash;

•      Ascertaining whether a business has the capability to payback its debt;

•      Evaluating the  financial results on a trend line in order to spot any looming profitability issues;

•      Adopting financial ratio that can indicate the condition of  a business; and

•      Investigating the details of certain business transactions, as outlined in the disclosures that accompany the statement;

 The quantitative analysis of financial statement prepared and presented by an entity to drive useful information can be bewildering and intimidating to many users. Business decisions making requires timely and relevant financial information as observed by

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