The Role of Accounting Ratio Analysis in Business Decision Making

Business research Methodology 1
Business research Methodology
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Business research Methodology 2
Assessment 1: Structured Abstract
This structured abstract, review the study of the responsibility of accounting ratio analysis in
taking business decision, through research studies conducted by Damjibhai, Brown, Ak, and
Daniel,
Summary of the theory and progression in the field
Damjibhai, (2016), stated that ratio analysis was developed long ago. Ratio analysis
was mainly used in analyzing ratio properties. Damjibhai, (2016) further states that ratio
analysis was mainly used in the modern times as tools of analyzing financial statements. In
the 19th century, ratio analysis was also used to represent the financial power of an institution
and make adjustments in the management. The major purposes of financial analysis are
managerial and credit. Damjibhai, (2016) confirms that the main focus in managerial
approach is profitability while in Credit is ability to pay the debts. In most cases, ratio
analysis is used in credit analysis.
Damjibhai, (2016), says that business relationship is portrayed through ratios.
Damjibhai, (2016), also developed a complete model based on the ratios. Although, this
model is not mature it gave others an opportunity to work on this theory. Since ratio analysis
was a big issue several people criticized its concepts.
Damjibhai, (2016), had several concerns about this issue. First, he says that ratios are
bound with time and are always changing thus difficult to interpret. Second, ratios cannot be
used to judge a company’s performance. Third, ratios have an effect on a viewer’s mind and
can easily hide the real position of an organization. Fourth, ratios change regularly and will
affect dependability. To solve the criticism Damjibhai, (2016), created and promoted
successful financial ratios. These ratios were printed and have then been known worldwide to
be the best.

Business research Methodology 3
Damjibhai, (2016), further analyzed a hundred and twenty failed firms by using 13
different ratios. Out of the thirteen, three forecasted the failure of the firms accurately while
others showed some predictive power.
Also, Damjibhai, (2016), made use of eleven ratios to determine if successful firms
had higher ratios than unsuccessful ones. Though this study was not mature, that aspect was
ignored by looking at the contributions the study had on the assessment of how useful the
ratios were. Later on, exchange in commission and security was developed. This helped
expand the flow of the financial statements as well and the number. This also helped enhance
and realize the vitality of the ratio analysis.
In the 19th century, financial information and knowledge rapidly expanded.
Damjibhai, (2016), also made comparisons of related items and then linked assets and
liabilities. Other ratios were also compared. Current ratio was the most important ratio at that
time when compared to other ratios. DuPont analysis was used in analyzing the operational
results. The results were then partitioned into three portions then this was compared to other
companies in order to highlight the problems and the stronger business areas. In many
different enterprises, process of making decisions is the most fundamental in managing all
enterprise operations. These enterprises may be profit-oriented or non-profit oriented. The
research made was for profit-oriented firms where decision making process is based on the
different concepts. Among the concepts in these enterprises is the accounting ratios that
should have a huge effect.
In the decision-making process, financial reporting is the main concept. According to
Damjibhai, (2016), financial reporting is not the main information in a business but it
provides the necessary information in business making processes and economic decisions.
This is why the Damjibhai, (2016), was so much keen in determining the extent to which