CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Financial accounting informal ion contained in financial statement of business entities, is the bedrock for the computation of accounting ratios of business concern. This in turns form the: basic for the evaluation of both present and past business (operational) 1) Performances by users of financial information, which are also referred to as the stakeholders. It is worthy of note to ascert that the information contained in financial statement are well organized m such a way that will enable its users to draw reasonable conclusion with respect to the financial position and performance (past, present and future) of the reporting entity. Ratio is one of the financial analytical tools used in assessing quantitative event (past, present and anticipated future financial position. Financial accounting ratios to a proportion of fraction or percentage expressing the relationship between one iii a set of’ financial statement and another items in the same financial statement of the tools used in the analysis and interpretation of financial statement such as the cash flow statement and accounting ratios, the later has been proved to be the most powerful tool.
1.2 STATEMENT OF THE PROBLEM
Although, financial ratios analysis is the most powerful tool used in analyzing (lie financial and operating performances of firms, the technique suffer from some bottle necks which are also inherent in financial statement prepared and presented to the public. A major draw back derived from the fact that facts and figures mostly computed from historical accounts also suffer from same limitations which historical account have. For instance i. Financial ratio analysis drawn from historical information is of little use in assessing the future prospects of a firm.
ii. Financial ratios are quantifiable information like the change in personnel level over-time. iii. Some financial ratios are not universally accepted as uniform parameter far financial analysis, such as the Return on capital employed (ROCE) Closely allied to this is the fact that the figured of financial statement are not adjusted far changes in the price level, thus heady to unhealthy financial evaluation.