CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Omuya (1990) defined “Accounting as a language of business, it is used in the business world to describe the transaction entered into by all kinds of organization. An analysis of the above definition shows that Accounting centres on transforming data into information that would be useful to many users.  It takes care of the financial communication of the entry as it supplies the financial information in a way and, form so desired by the users.

In a similar case Millichamp (1992) defined Accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial statement”.  These users include owners, (shareholders) managers, suppliers, customers, government employees, etc.  The users of these statements are expected to read, interpret and analyze them.  Objectives of financial statements are not accomplished when many users of the statement cannot understand them, let alone interpret and analyze them.

The information the users attempt to gain from financial statement are:

(i)     The ability of the business to pay its way and survive in the long run.

(ii)  The quality of management and the rightness of decision made.

(iii)  Information that guide the future.

Regrettably, the inability of users of these financial statements to comprehend, interpret and analyze the and still has always contributed to harmful business and investment decision by the users of these statements.  As a result of these wrong business decisions, many users of these statements have been rendered poor, whereas others are afraid and show indifference to investment and business opportunities.  Cases abound where these financial statements users, individual and corporate, have lost millions of Naira merely because of wrong business decisions.

Admittedly, faulty business decisions do not only affect management and investors, it also affects the entire economic growth and development.

Indeed, these problems of wrong investments and business decisions therefore prompted this research work and topic.   Reason behind the topic is the discovery that many victims of wrong business decisions are people and firms who do use analytical tool otherwise known as Ration Analysis in their decision making process.

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