Revaluation Accounting and Decision Usefulness of Accounting Ratios

Abstract

This study examined the decision usefulness of ratio analysis based on historical cost valuation of assets as enshrined in end of year financial statements. A good ratio with near perfect interpretation brings about feasible investment decisions, corporate solvency and profitability and a track down effect on economic growth. These well-articulated objectives of ratio analysis had been faulted on several occasions due to the faulty measurement and evaluation tools used by preparers of financial statements in reporting economic events. To address this gap, the researchers looked at revaluation accounting in detail, as a substitute to historical cost accounting, so as to ameliorate some of the limitations associated with ratio analyses based on historical cost data. To achieve the objective of this study, data was collected from primary and secondary sources. The primary source was generated from a well-structured self-administered questionnaire sent to 190 respondents drawn from top Bankers, Stock Brokers and Company Managers in Bayelsa, Rivers and Delta States in Nigeria. 172 usable questionnaires were retrieved and analyzed using Spearman rank order correlation coefficient, Mann-Whitney U test and descriptive statistics. The study revealed that there is a significant relationship between the method of asset valuation and the truthfulness of financial statements and decision usefulness of accounting ratios. On the basis of the statistical results, the researchers concluded that to enhance the decision usefulness of ratio analysis, users of financial reports should adjust financial statements to reflect the current value of assets before using them to compute necessary ratios.

Key words: Revaluation accounting, decision usefulness, financial statements, limitations, ratio analysis.