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CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND INFORMATION

Accountants have a very important role in decision making, especially when related to investments. Reason being, accountants are involved in the explanation of financial statements, preparation of budgets, identification of measurable outcomes, and any other quantifiable information and statements (Rawlinson, D. and B. Tanner, 1989). By providing the necessary quantitative information about the business, including financial statements and other forms of quantitative evidences, accountants show an important role in taking relevant decisions (Gray, 1990, Owen and Bebbington, 1993).

Although many agree about the important role of accountants in decision making, certain studies show a certain lack of involvement by accountants. Even though quantifiable information is important for decision making, accountants are not engaged in it because of the absence of the appropriate techniques. “They are not perceived as having a positive contribution to decision-making, unless the contribution is to legitimize decisions arrived at through a political process” (Bowerman and Hutchinson, 1998).

In this regard, Essien (2006:144) observed: Financial statements carry lots of financial Information that are hidden in the figures. The figures in financial statements become more useful when they are related to each other or to some other relevant financial data. Therefore, users of financial information go a further step to establish relationships (or ratios) among selected data in financial statements.

According to Igben (1999:423), “Accounting information is the most powerful of all tools used in analyzed and interpreting financial statements”. Therefore Accounting can be defined as the process, collecting, summarizing, classifying, and communicating financial information to enable the users makes assessment and decision making.

MCShane et al. (2000) defined decision-making as “a conscious process of making choices among one or more alternatives with the interior of moving toward some desired state of affairs.” Therefore, business decisions can be defined as choices relating to the allocation and/or use of business resources to achieve business goals.

Bittel et al. (1984) observed: “Managers want information because they need to make decisions. The proper use of information is an important part of decision-making.” Remarkably, one of the effective ways of providing information needed for decision-making is ratio analysis.

Yes, business dictions of make or buy, investment or divestment, expansion or contration, capital-organization and reconstruction, and so on cannot be properly made without the aid of financial ratios. They give cue to the financial strengths and weaknesses of a business, and highlight aspects of a business requiring further investigation.

Therefore, this research is carried out to show ratio analysis help managers, shareholders, investors, creditors, and other stakeholders make informed judgments and decisions about the 

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