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Application of Accounting Ratios in Measuring Solvency of Small Scale Industries in the Manufacturing Sector of Cross River State, Nigeria

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Application of Accounting Ratios in Measuring Solvency of Small Scale Industries in the Manufacturing Sector of Cross River State, Nigeria.

ABSTRACT

This research study is aimed at determining the Accounting ratios applied in measuring solvency of Small Scale Industries in the Manufacturing Sector of Cross River State. This research purpose was motivated by the preponderance of Small Industries failure in Cross River State due to poor business financial conditions.

The design adopted is descriptive survey. The study was guided by seven research questions and seven hypotheses. The instruments used were questionnaire and an interview schedule.

Population for the study comprised 667 respondents made up of 345, 163 and 159 Accounting staff working in Palm Oil, Wood; and Bread Baking Factories, respectively. The entire population was studied. Data collected were analyzed using mean and standard deviation for research questions and ANOVA for hypotheses.

The major findings are as follows: (1) Processes relating to accounting ratios applied by Small Scale Industries are: computing the value of total current assets and current liabilities, conducting analysis of debtors to ascertain doubtful balances, ascertaining equity capital from total capital, determining gross and net profits, computing cost of goods sold; and determining the value of average inventory for the year end.

Accounting ratios and processes not applied are: current ratio, quick ratio, interest coverage ratio, capital employed to net worth ratio, return on capital employed ratio, operating expenses ratio, net assets turnover ratio, current assets turnover ratio.

Comparing ratios of current year to previous year’s ratios obtained by the business organization, comparing ratios of current year to previous year’s ratios with that of similar business(es) in the same industry. These findings have far reaching implications even in education.

Since accounting staff do not apply ratios, it implies that management should engage the staff on training and retraining to upgrade their capacity in handling accounting ratios.

Based on the findings, the following recommendations were made: (a) only qualified and competent accounting staff should be employed in small scale industries, accounting ratios should be applied by management of Small Scale Industries to improve the financial situation and operational efficiency of Small Scale Industries.

Agencies and Ministries in-charge of small scale industries should be committed to the success of the system and at the same time be concerned on the mental development of staff through training and retraining programmes.

TABLE OF CONTENTS

PAGE

Title Page¬†¬†¬†¬†¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† ¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† i

Approval Page¬† ¬† ¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† ii

Certification ¬†–¬† ¬† ¬† ¬† ¬† ¬†iii

Dedication¬†¬†¬†¬† –¬† ¬† ¬†–¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† iv

Acknowledgements –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† v

Table of Contents¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬†vi

List of Figures              ix

List of Tables¬† ¬† ¬† ¬† ¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† x

Abstract¬†¬†¬†¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬†xviii

CHAPTER I: INTRODUCTION

Background of the Study¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† 1

Statement of the Problem ¬†—¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 8

Purpose of the Study¬†¬†¬†¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬†9

Significance of the Study¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 10

Research Questions                 12

Null Hypotheses¬†¬†¬†¬†¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† —¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 12

Delimitation of the Study¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 13

CHAPTER II: REVIEW OF RELATED LITERATURE

Application of Liquidity Ratios in Measuring Short-term solvency of Business  Enterprises         51

Application of Gearing (Stability/Leverage) Ratios in Measuring long-term solvency of Business Enterprises     57

Application of Profitability Ratios Applied in Measuring Performance and effectiveness of Business Enterprises      64

Application of Activity Ratios in Measuring Efficiency with which Business Enterprises utilize assets to generate cash flow    73

Application of Cash Flow Statement in Reporting Cash Flow of Business Enterprises    82

Accounting Records Maintained by Business Enterprises¬†¬†¬†¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 90

Problems Associated with Application of Accounting Ratios in Business Enterprises   99

Manufacturing Industry       104

Review of Related Empirical Studies¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬†110

Summary of Literature Review            117

CHAPTER III: METHODOLOGY

Design of the Study –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 120

Area of the Study¬†¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† 120

Population for the Study¬†¬†¬† –¬† ¬†–¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 121

Instrument for Data Collection            121

Validation of the Instrument¬†¬†¬†¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬† ¬†–¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 123

Reliability of the Instrument             124

Method of Data Collection               124

Method of Data Analysis¬† ¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 124

CHAPTER IV: PRESENTATION AND ANALYSIS OF DATA

Research Question 1              126

Research Question 2                131

Research Question 3            136

Research Question 4                 141

Research Question 5                 146

Research Question 6                 149

Research Question 7                154

Null Hypothesis 1¬†¬†¬† –¬† ¬† ¬† ¬† ¬†160

Null Hypothesis 2¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬†169

Null Hypothesis 3¬†¬†¬† –¬† ¬† ¬† ¬†181

Null Hypothesis 4¬†¬†¬† –¬† ¬† ¬† ¬† ¬†193

Null Hypothesis 5¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 210

Null Hypothesis 6¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬†215

Null Hypothesis 7¬†¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬†225

Findings of the Study¬†¬†¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬†237

Discussion of Findings             251

CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATION

Restatement of the Problem                   271

Summary of the Procedures Used              272

Major Findings of the Study¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† –¬† ¬† ¬† ¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 274

Conclusion¬†¬† –¬† ¬† ¬† ¬†275

Implications of the Study¬†¬†¬† –¬† ¬† ¬† ¬† ¬†276

Recommendations ¬†–¬† ¬† ¬† ¬† ¬† –¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 278

Suggestions for Further Studies¬†¬† –¬† ¬† ¬† ¬† ¬† ¬† 278

References ¬†–¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 279

Appendices –¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† 289

INTRODUCTION

Accounting is a service activity. It is a statement of economic dealings captured in digits and letters according to predetermined book-keeping standard. Garbut in Okechukwu, Eneje and Okafor (2004) defined accounting as a discipline concerned with the recording, analyzing and forecasting of income and wealth of business and other entities.

Ekwere (2005) opined that accounting has as its primary objective, to ascertain economic effects and communication of the economic result to the external decision makers.

Accounting provides a platform for the analysis and interpretation of financial information in a manner that would be useful and meaningful to users of the said information. This is normally achieved using ratios and other accounting tools (Igben, 2004).

Ratios form the bases of financial performance measurement. Aborode (2004) explained that accounting ratio is a proportion or fraction or percentage expressing the relationship between one item in a set of financial statements and another item in the same financial statements.

Agara (2005) noted that ratios are indices derived from expressing the relationship between financial data. In financial statement analysis, a ratio is used as a bench mark for evaluating the financial position and performance of a firm.

To this end, Longe and Kazeem (2006) asserted that accounting ratios are used in the interpretation of financial statement(s) and they provide means by which various items in the final accounts are compared to other items. In accounting, ratios are used to measure performance, efficiency and effectiveness (Aborode, 2004).

REFERENCES

Aborode, R. (2006). A Practical Approach to Advanced Financial Accounting. (2nd ed.). Lagos: EL ‚Äď TODA Ventures Limited.
Adache, A. O. (2005). An Assessment of Accounting Practices Adopted by Small Scale Business Organizations in Benue State. Unpublished M.ED Thesis, Department of Vocational Teacher Education (Business), University of Nigeria, Nsukka Campus.
Adams, R. A. (2002). Public Sector Accounting and Finance. (3rd ed.). Lagos: Corporate Publishers Ventures.
Adenekan, S. (2008). SMEs fail to fly despite series of Policies; Small Scale Industries are yet to make an impact in Nigeria. Reforms and Innovations. 6 – 7.
Adeniyi, A. A. (2002). Simplified Management Accounting. Lagos: EL- TODA Ventures Limited.
Afemikhe, S. S. O. (2003). The Pursuit of Value for Money. Ibadan: Spectrum Books Limited.

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