Accounting

THE IMPACT OF ACCOUNTING RATIO ANALYSIS FOR DECISION MAKING IN A MANUFACTURING INDUSTRY. (A CASE STUDY OF P.Z NIG PLC)

PROPOSAL

BACKGROUND

Background of classifying financial ratio/ accounting ratios. There is a long tradition of developing and using financial ratio both in practice and in the literature of financial statements analysis (see Horigan 1968, Barnes 1987 and Laitinen 1988: Ch 22) the question of classifying financial ratio to reduce the redundancy between the countries potential financial ratio has been a subject or much research.

Difference approaches have been applied on the classification of financial ratio.

The first approach could be called a pragmatic or an authoritative approach. In this approach the classification of financial ratio have largely developed from established business practices and personal views of eminent financial analyst. Many standard text books present material from this approach (see e.g. Aho 1981, Barntein 1989, Brealey and Myers 1984: Ch 25, Foster 1986, Fridson and Marocco and Neilimo 1976 and Lev 1974.)

The second approach has been more deductive, in this approach the classification of financial ratio has been based on the technical relationship between the difference financial ratios. The “Do point triangle” from the beginning of the century is a classic in this respect (see Horrigan 1968). The modern papers using this pyramid approach includes Courfis (1978), Laitinen (1983) and Bayldon and Woods and Zapiris (1984).

The third approach has been inductive, empirical classification of financial ratios using statistical techniques, factors analysis in particular. In this approach factors analysis is used to reduce a (large) number of financial ratio into a smaller number of initially exclusive categories covering the various aspect of the firms activities (see e.g. Salami and Datilstedt and Looma and Laakoren 1986) for a brief summary of the objectives of factor analysis. Methodologically, this means reducing a...