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An Evaluation of the Financial Performance of Agriculture Development Bank Ghana from 2008-2010 using Accounting Ratios

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An Evaluation of the Financial Performance of Agriculture Development Bank Ghana from 2008-2010 using Accounting Ratios
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    ACCOUNTING TERM PAPER AN EVALUATION OF THE FINANCIAL PERFORMANCE OF AGRICULTURAL DEVELOPMENT BANK GHANA FROM 2008 TO 2010 ANOKYE, AUGUSTINE KWADWO    TABLE OF CONTENTS 1.1 Introduction ............................................................................................................................... 2 1.2 Overview of the Economy ........................................................................................................ 3 1.2.1 Economic Growth .............................................................................................................. 3 1.2.2 Inflation .............................................................................................................................. 3 1.2.3 Interest Rate........................................................................................................................ 4 1.2.4 Exchange Rate .................................................................................................................... 4 1.3 Overview of Industry ................................................................................................................ 5 1.3.1 Liquidity from Capital Injection ........................................................................................ 5 1.3.2 Cheque Clearing Cycle ...................................................................................................... 5 1.3.3 Credit Reference Bureau .................................................................................................... 5 1.3.4 Basel II ............................................................................................................................... 6 1.3.5 Other TrendS ...................................................................................................................... 6 1.3.6 Challenges and the Outlook ............................................................................................... 6 2.1 Corporate Profile of Agricultural Development Bank .............................................................. 8 2.1.1 Corporate Vision of Agricultural Development Bank ....................................................... 8 2.1.2 Corporate Mission of Agricultural Development Bank ..................................................... 8 2.1.3 Corporate Products & Services of Agricultural Development Bank ................................. 8 2.2 The Impressive thing about Agricultural Development Bank .................................................. 9  3.1 Agricultural Development Bank’s Accounting Policies  ......................................................... 10 3.1.1 Reporting Entity ............................................................................................................... 10 3.1.2 Basis of Preparation ......................................................................................................... 10 3.1.3 Significant Accounting Policies ....................................................................................... 11 4.0 Financial Statements Analysis ................................................................................................ 16 4.1 Ratio Analysis ..................................................................................................................... 16  1 4.1.1 Profitability Ratios ........................................................................................................... 16 4.1.2 Activity Ratio ................................................................................................................... 18 4.1.3 Solvency Ratios ................................................................................................................ 19 4.1.4 Liquidity Ratios ................................................................................................................ 20 4.2 Common Size .......................................................................................................................... 22 4.3 Trend Analysis ........................................................................................................................ 24 5.1 Evaluation and Conclusion ..................................................................................................... 26 6.0 Appendix ................................................................................................................................. 27 6.1 Appendix I (Ratio Analysis) ............................................................................................... 27 6.2 Appendix II (Trend Analysis) ............................................................................................. 29 6.3 Appendix III (Common Size) .............................................................................................. 30 7.0 References ............................................................................................................................... 31  2 1.1 INTRODUCTION  Fresh industrial modifications have motivated banks to improve upon their services to gain a greater share of the market in order to raise enough capital for their day-to-day operations. The stability of the country, coupled with a seemingly stable currency, in addition to a high government expenditure with good stock exchange performance all contributed to increased economic activity. The increase in government expenditure enhanced the operating environment for commercial banking activities, more especially, towards expansion of credits to SMEs in the  private sector. The Bank of Ghana continued its inflation target policy leading to a consistent reduction in its policy market rates, although it is somehow difficult in getting the depreciation of Ghana Cedi against other major foreign trading currencies. Competition in the banking landscape has been very keen, with banks’ foreign asset position improving, in the same way significant number of banks are now well capitalized. This has called for major innovations in its products and services. These innovations are meant to attract clients to do more rapid business with banks. The era of banking is now changing from its traditional approach to a more personal approach where clients are given a welcoming which seems to be in the executive suite class. One thing seems to appear lucid, if these product and service innovations do not attract investments, then banks should re-examine their operational framework to find out operational leakages and remedy those loopholes to enhance such operational efficiencies. Agricultural Development Bank among other banks in Ghana, has stood throughout these  periods of changing phases of the Ghanaian banking sector. It is for some of these reasons that this study aims to evaluate the financial performances from 2008-2010 of the Agricultural Development Bank among others to establish how effective the bank has been in its operations.  3 1.2 OVERVIEW OF THE ECONOMY 1.2.1 ECONOMIC GROWTH The steady growth in GDP over the last five years slowed down in 2009. Real GDP growth declined from 7.3% in 2008 to 4.7% in 2009, with the average over the period being 6.1%. The agricultural sector which contributes 34% of the country’s GDP recorded a 6.2% growth in 2009. This growth, which was higher than expected is attributable to very good rainfall patterns during the year and the rise in the world market prices of cocoa by approximately 36% during the year. The services sector, contributing 31.8% of GDP, saw a sharp fall from its 2008 growth rate of 9.3% to about 4.6% in 2009, thus the lowest growth rate in the past five years. These downward trends were as a result of the “Wholesale & Retail Trade, Re staurants & Hotels sub- sector” growing by only 2.0% compared to a target of 7.0% and previous year growth of 7.0%. Growth in the industry sub-sector lagged behind the other two major sectors of the economy. Despite the upward trend of the price of gold from US$821.49 in January 2009 to US$1,126.80 per ounce by December 2009, the sector only achieved a 3.8% growth. The main reason for the reduction in growth in this sector was the contraction of the construction sub-sector by 1% against an expected growth of 8%. 1.2.2 INFLATION The year 2009 started with price inflation rate of 18.4%, however inflationary pressures continued in the first half of the year and the inflation rate peaked at 20.7% in June. The second half of the year saw the inflationary pressure s easing and closing the year’s inflation rate at 15.97%. This was against the yearend inflation target of 14.6%. The increase in inflation in the first half of the year emanated from the rise in world market prices for crude oil. At the
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