CHAPTER ONE

1.1       BACKGROUND OF THE STUDY

Financial information which serves as the basis for financial and decision making is needed for production evaluation and comparison of a firm (Pandy, 1999).

Financial statement are means of carrying or conveying to management and to interested outside a concise picture of the profitability and financial position of business.

They constitute a report of management performance affecting to managerial success or failure and flashing warning signal of impending difficulties.

The financial statement shows the financial position of the business as the time of report and also the operating result by which the company arrived at its time of report and also the operating result by which the company arrived at its position.

They only give some information about financial event. Before users of financial statement can read meaning to the array of data or information contained in it, a thorough analysis and interpretation of the data has be done using certain analysis tools.

The objective of business enterprise in publishing financial statement is to assist decision makers or users in evaluating the financial strength profitability liquidity and future prospect of the business entity. This objective cannot be justified or accomplished if users do not read meaning or understood the financial statement published (Meig and Meigs, 1994)

Financial statement of a firm includes income statement balance sheet, director’s reports auditor’s report, note to the account value-added statement, cash flow statement and five years financial summary (Frank Wood 1996).

There are various users of financial statement of a firm, they include management shareholder, auditors, employees, government etc. and each of them has their own area of interest.

For example, management are interested in profitability growth stability, dividend policy of the company etc. all being mentioned need to be measure using tools or techniques (colwe1996)

The following are various analytical tool techniques:

• Accounting ratio
• Value added statement
• Cash flow statement.

The focus of the research is based on accounting ratio, because it Is the most powerful and company used of all the tools. Accounting ratio is a proportion between one item in a same of financial statement (Igben 1999)

This study classified ratio according to John and Oriot (1996) and Aborode (2005) precisely speaking accounting ratio is the yard stick for evaluating financial position and performance of a firm.

This study aim at the impact of ratio (accounting) analysis as it encompassed the present financial position, future financial capacity analysis and comparative relationship of these to the financial position of the firm.

ACCOUNTING RATIO: shows the relationship of result of the firm’s activities.

The interpretation of the final account and the balance sheet could therefore be carried out using the accounting ratio, so obtained from the activities.

The analysis may for example be a banker considering loan to firm. He is primarily interested in the firm’s near term on liquidity position so he stresses ratio that measure liquidity.

VALUE ADDED STATEMENT (ASSC): in 1975, defined Value Added Statement as the wealth the reporting entity has been able to create by its own end its employee’s effort. The value added statement is the difference between the output and the input of an entity as measured in financial terms, it is the wealth created by an entity through the joint effort of the entity and of its employee using funds provided from eternal services and internally generated.

A Value Added Statement is a report which shows the monetary wealth created by an organization during the period under consideration and how this monetary wealth employee’s government provides of capital and retention for growth and expansion.

CASH FLOW STATEMENT: The cash flow statement provides information about the cash receipts and cash payment on an enterprise over a given period. It indicates the pattern of cash generation from the operation or through new capital raised and how payments are made for taxes, dividends new investment and debt. It is designed to shed light on enterprises.

• STATEMENT OF THE PROBLEM

Financial statement is said to show the type of the company serves as a basis for decision makers in evaluation of the financial strength, profitability and future prospect of a business entity. The users have no been able to the true picture because they can not interpret and understand the financial statement as a result of the technicalities of accounting language.

Even the additional notes to the account to a layman other problems than leads to this study.

• What types of tool is be employed or adopted in comparison of present and past performance and how the tool could be implement to make good comparison.
• Will the analysis of the financial statement be important to the general public and prospective investor?
• What will be the effect of ratio analysis on the future prospect of a banking industry.

• AIMS AND OBJECTIVES STUDY

The main objective of this study is to evaluate the impact of ratio analysis, is measuring corporate performance of an organization. Effort are made to evaluate the following.

• The ability of the form to meet its current obligation the extent to which the firm has used its long-term solver by borrowing funds.
• The efficiency with which the firm is utilizing its asset generating sales revenue end.
• The overall operating efficiency and performance of the firm end.
• To interpret the result to different user for decision.

Other objectives include:

• Identify the needs for performance evaluation of corporate organization.
• To analyze the financial statement of Union Bank PLC using Accounting Ratio.
• To assess the impact of such financial ratio analysis on the present and future performance of Union Bank PLC.
• Measure the strength and weakness opportunity and threats facing the organization in using the result of analysis.
• To give information that will assist existing and potential investor to utilization their judicious from the analysis of the bank financially statement.

• SIGNIFICANCE OF THE STUDY

The banking industry is one of the fastest growing industry in Nigeria economy in the banking sector Union Bank PLC is a major player. The company has realized that it needs to pay particular attention to its financial position and performance.

It is hoped that this study would assist the company to that effect; the study reference to accounting ratio as a measure of financial analysis to other such as value Added Statement, cash flow statement giving it effectiveness preference similar studies.

The significance of this study are:

To management : the management is assisted in putting firm resources in the most effective manner to maximum return on equity investment.

To invest: it enable investor to evaluate financial position of the company and his assist in making optimal investment decision.

To credit: It enable them to assess the firm financial capacity and ability in meeting its financial obligation as at when due.

To employees: It will assist the employees, an organization to know how to go about negotiation for better incentive imported working condition.

To the economy as a whole: It will aid economic growth such at funds appeal out from surplus unit can be efficiently and prudently distributed to the deficit of the economy. This consequently led to growth in investment and productivity in other sector.