EFFECT OF DEPRECIATION ON PROFITABILITY ON FIANCIAL INSTITUTION IN NIGERIA: A COMPARATIVE APPROACH A STUDY OF UBA PLC, ENUGU
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Enugu State
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Effect Of Depreciation On Profitability On Fiancial Institution In Nigeria: A Comparative Approach A Study Of Uba Plc, Enugu

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ABSTRACT

The aim of this study is to appraise the Effect Of Depreciation On Profitability On Fiancial Institution In Nigeria: A Comparative Approach with particular reference to UBA Plc, Enugu . The objectives of this study includes the following: To determine the extent to which depreciation affect income statement reporting of UBA, Enugu. To examine how depreciation affect the earning per share of UBA, Enugu. The data were collected through questionnaire administration. The data collected were presented in tables and analyzed with simple percentages while the hypotheses stated were tested with chi square. The summary of findings made by the researcher includes the following: Depreciation affect income statement reporting of UBA, Enugu to a very great extent. Depreciation positively affect the earning per share of UBA, Enugu. the researcher recommends that Organizations should endeavour to maintain their professional codes of conduct and ethical considerations as it enhances the activities of internal auditor thereby eliminating audit expectation gap. There should be audit education among the stakeholders of diverse organizations. This is to ensure that these stakeholders are enlightened on the happenings in the organizations especially as regards to auditing.

 TABLE OF CONTENT

Title Page-------i

Approval page -------ii

Dedication-------iii

Acknowledgement-------iv

Abstract -------v

Table of Contents-------vi

 

CHAPTER ONE:  INTRODUCTION

Background of the Study-----1

Statement of Problem-----3

Objectives of the Study-----5

Research Questions-----6

Research Hypotheses-----6

Significance of the Study -----8

Scope  of   the Study----9

Limitations of the study-------9

Definition of Terms -----10

References-----11

 

 

 

 

CHAPTER TWO:REVIEW OF RELATED LITERATURE

Concept of depreciation ------12

2.2 Methods of charging depreciation ----16

2.2.1Fixed Instalment or straight line method ---17

2.2.2Diminishing or reducing balance method ---18

2.2.3Unit of production (Usage) method ----  19

2.2.4Sum of the year digit -------  22

2.2.5 Annuity System --------  26

2.2.6 Insurance policy method ------- 26

2.3 Augments for charging depreciation ------ 32

2.4 Effect of depreciation on performance ----- 35 

2.5 Causes of depreciation ------- 39

2.6 Assessment of depreciation ------- 66

References ---------- 47

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY

Research Design------49

Sources of Data------49

3.2.1 Primary Source------49

3.2.2 Secondary source --------49

Population of the Study------50

Determination of Sample Size -----50

Instrumentfor data collection -----51

Sampling Techniques------52

Validation of the instrument ------53

Reliability of the instrument ------54 

Method of Data Analysis-----54

References -------55

CHAPTER FOUR:DATA PRESENTATION AND ANALYSIS 

Data Presentation------56

Testing of Hypotheses------67

 

CHAPTER FIVE 

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

Summary of Findings------79

Conclusion------80

Recommendations------81

Bibliography------82

Appendixes ------84

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Okadigbo (2004:12) defines deprecation accounting as a system of accounting which aims to distribute the cost of other basic value of tangible capital assets less salvage (if any) over the estimate useful life of the unit (which may be a group of asset) in a systematic and rational manner. It is a process of allocation, not of valuation; depreciation for the years is the portion of the total charge under such as system that is allocated to the year.

According to Oloh (2008:79) depreciation is an allocation of the entire cost of depreciable asset to the operating expenses of series of fiscal period. Depreciation is the exhaustion of the effective life of a fixed asset owing to use or obsolesces (Uguru, 2006:9).

It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. Depreciation for income tax purposes is defined by the U.S treasuring Department Bureau of internal Revenue (Bulletin “f”) as a reason allowance for exhaustion wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Companies can use depreciation to manipulate earnings. A company can extend the use of its assets by claiming a longer useful life. When looking at depreciation, it is useful to compare depreciation practices of a company along with its peers. A company's assets may be outdated or in need of repair if it is depreciating assets too slowly. All things being equal, lower depreciation expense means higher net income therefore invalidating annual reports.

Mark-to-market in accounting refers to the valuation of assets based on current market prices rather than book value. A major distortion occurs in depreciation based on an assets book value versus the actual market value of an asset. For example, a company may have fully depreciated its land and buildings even though these assets have significant market values. This is a common occurrence with intangible assets such as logos and trademarks. For accounting purposes, these intangible assets have a finite life; however, in reality these assets can be extremely valuable having an impact on the performance of organizations.

STATEMENT OF THE PROBLEM

The depreciation of assets such as equipment, buildings, furnishing, trucks, etc. causes a corporation's asset amounts, net income, and stockholders' equity to decrease. This occurs through an accounting adjusting entry in which the account Depreciation Expense is debited and the contra asset account Accumulated Depreciation is credited. The amount of the annual depreciation that is reported on the financial statements is an estimate based on the asset's 1) cost, 2) estimated salvage value, and 3) useful life. Depreciation should be thought of as an allocation of the asset's cost to expense (and not as a valuation technique). In other words, the accountant is matching the cost of the asset to the periods in which revenues are generated from the asset. The amount of the annual depreciation reported on the Nigerian income tax return is based on the tax regulations. Since depreciation is a deductible expense for income tax purposes, the corporation's taxable income (and associated tax payments) will be reduced by its tax depreciation expense. (In any one year, the depreciation expense for taxes will likely be different from the amount reported on the financial statements.)

It should be noted that depreciation is viewed as a noncash expense. That is, the corporation's cash balance is not changed by the annual depreciation entry. (Often the corporation's cash is reduced for the asset's entire cost at the time the asset is acquired). 

 

1.3OBJECTIVES OF THE STUDY

The broad objective of this project work is to appraise the Effect Of Depreciation On Profitability On Fiancial Institution In Nigeria: A Comparative Approach with particular reference to UBA Plc, Enugu.

The specific objectives include the following:

To determine the extent to which depreciation affect income statement reporting of UBA, Enugu.

To examine how depreciation affect the earning per share of UBA, Enugu.

To examine the relationship existing between depreciation and return of equity of UBA, Enugu.

To determine the extent to which depreciation affects the return on investment of UBA, Enugu.

 

RESEARCH QUESTIONS

The following research questions are formulated for the purpose of this project work:

To what extent does depreciation affect income statement reporting of UBA, Enugu?

How does depreciation affect the earning per share of UBA, Enugu?

Does a significant relationship exist between depreciation and return of equity of UBA, Enugu?

To what extent does depreciation affects the return on investment of UBA, Enugu?

RESEARCH HYPOTHESES

The following hypotheses are formulated for this project work:

HYPOTHESIS ONE

HO:Depreciation does not affect income statement reporting of UBA, Enugu.

HI:Depreciation affect income statement reporting of UBA, Enugu.

HYPOTHESIS TWO

HO:Depreciation does not affect the earning per share of UBA, Enugu.

HI:Depreciation affects the earning per share of UBA, Enugu.

HYPOTHESIS THREE

HO:A significant relationship does not exist between depreciation and return of equity of UBA, Enugu.

HI:A significant relationship exists between depreciation and return of equity of UBA, Enugu.

HYPOTHESIS FOUR

HO:Depreciation does not affect the return on investment of UBA, Enugu.

HI:Depreciation affects the return on investment of UBA, Enugu.

 

 

SIGNIFICANCE OF THE STUDY

This project work will be of immense significance to the following groups of people:

The management and staff of both UBA, Enugu. It will go to a great extent in enlightening them on the concept of depreciation and how it affects income statement reporting of UBA, Enugu. 

The recommendations from this project work will suggest for other organizations on the best approach to assets depreciation.

Finally students and other researchers will widen their scope from the information contained in this project work.

SCOPE OF THE STUDY

This project study on the effect of depreciation on income statement reporting is focused on a study of UBA, Enugu.

 

1.8LIMITATIONS OF THE STUDY

These limitations were encountered by the researcher in this research project.

FINANCE LIMITATIONS: The researcher lacked enough funds to carry out this research project, thereby leading to a slight delay in the successful completion of this research work.

TIME LIMITATIONS: There was not enough time on the part of the researcher regarding the time needed to attend lectures, do various assignments, prepare for degree examinations and also carryout this research project.

DIFFICULTY IN GATHERING MATERIALS: The researcher had difficulty in gathering the materials which made the process of carrying out this research project a bit difficult.

ATTITUDE OF THE RESPONDENTS: The respondents were not really cooperative to the researcher due to fear of leaking their secret to competitors.

 

1.9DEFINITION OF TERMS

DEPRECIATION: This is the process of accounting for the costs of wear and tear on an asset on a company's financial statements.

ANNUAL REPORT: An annual publication that public corporations must provide to shareholders to describe their operations and financial conditions.

CORPORATE ORGANIZATION: A corporate organization is one, which is governed by a body of people that may be a board of directors or they may be elected politicians as in the case of municipal corporations or local authorities. 

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