INTRODUCTION
1 1 Background of the study
This research is about the impact of using accounting ratios
in decision making. Decision making is the most important element in management
activities of all kinds of enterprises; profit oriented, nonprofit oriented and
public institutions. This research is carried out in profit oriented enterprise
where decisions are made based on different aspects among which the use of
accounting ratios should have a great impact.
The use of financial reporting is the main aspect in decision
making. According to (Charles H. GIBSON, 1989: 10), financial reporting is not
the end in its self but it is intended to provide information that is useful in
making business and economic decisions. It is in this regard the researcher was
motivated in finding the extent to which management dealers may depend on
accounting ratios in decision making.
The main objective of this chapter is to introduce the
researcher' s topic and its content include : background of the study,
statement of the problem, objectives of the study, hypothesis, research
questions, significance of the study, scope of the study and organisation of
the study.
As an art, management has been practised since the early
beginning of twentieth century. It had got a great evolution at the time of
industrial revolution which started in England around mideighteenth century.
Prior to this, most of business enterprises were characterised by craftsmanship
rather than mechanisation or technology and faced the problem much simpler than
those faced today's firms in our complex industrial and technological
society.
With reference to this industrial revolution till nowadays;
legal, social and technological environment tend to generate industrial growth
and economical environment development that prompt entrepreneurs to react. At
the same time when these changes taking place, there were basic changes in the
form of management especially in managerial strategies for decision making;
this generates separation of ownership of the business from its management.
In consequences, managers had to look for the means of
discharging their stewardship responsibility; this can be obtained through the
use of accounting ratios.
The use of accounting ratios is a time-tested method of
analyzing a business. Wall Street investment firms, bank loan officers and
knowledgeable business owners all use accounting ratio analysis to learn more
about a company's current financial health as well as its potential (P.
Vernmmen, 2006).
Ratios analysis simplified, summarises, and systematises a
long array of accounting figures. Its main contribution lies in bringing out
the inter-relationship which exists between various segments of business.
Ratios are more of a diagnostic tool that helps to identify problem areas and
opportunities within a company.
1 2 Statement of the problem
The management of enterprise is depending on accounting
information for taking various strategic decisions. Financial statements
provide such information. This information is made useful by analyzing and
interpretation of financial statements with help of financial analysis
techniques among which the common and easy technique to use is financial ratios
also known as accounting ratios. (Prof. Harvey B. Lermack, 2003).
(James C. Van Horne and John M. Wachowicz, 2005: 132) say
«to evaluate the firm's financial condition and performance, the financial
analysis needs to perform checkups on various aspects of a firm's financial
health. A tool frequently used during these checkups is financial
ratios».
Accounting ratios are important tools in the management for
decision making. (R.K. Sharma, Shashi K. Gupta, 2001: 4.4), financial
statements are prepared primarily for decision making, but the information
provided in financial statements is not an end in itself and no meaningful
conclusion can be drawn from these statements alone. Ratio analysis helps in
making decisions from the information provided in these financial statements.
Thus, the proper use of accounting ratios assists management in communicating
information which is pertinent and purposeful for decision makers to ensure the
effectiveness of management in the enterprise.
In modern business environment, which is becoming more
competitive, the survival of firms, be it small or large; depend upon the
strategic decisions made by management. This is however done with the help of
accounting ratios, which is a big challenge to most countries having shortage
of professional accountants as it is the case to our country.
As such, this study is aimed at finding out the impact of
using accounting ratios in assisting rational decision making by Rwandan
business community with more emphasis on the management of AMAZI YA HUYE.
1 3 Research questions
The researcher has been guided by the following research
questions while carrying out his study.
1. Why should managers rely on accounting ratios in decision
making?
2. Of what significance are different types of accounting ratios
to management in decision making?
3. What is the requirement needed to use accounting ratios?
1 4 Objectives of the study
The general objective of this study is to exanimate the impact of
using accounting ratios for decision making. The specific objectives are as
follows:
1. To understand the importance of using accounting ratios as a
pillar to draw conclusions upon which decisions are made;
2. To identify hindrances of using accounting ratios in AMAZI YA
HUYE;
3. To provide suggestion for further improvement.
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