THE USEFULNESS OF FINANCIAL STATEMENT IN PERSUASIVE THE PERFORMANCE COMPANIES AND IN GUIDING INVESTMENT DECISIONS

CHAPTER ONE

INTRODUCTION

A financial statement is defined by accounting standard committee (ASC) as a balance sheet, profit and loss accounts, and statement of source and application of unds, notes and other statements, which collectively are intended to give a true and fair view of the financial position and profit or loss.  Several companies incorporate fixed assets valuations into their balance sheets, in which case the depreciation charge in profit and loss is based on revalued amount.  Some companies draw up their financial statements on a current cost basis, but this is rare compared with the use of historical cost or modified historical cost.

A financial statement is part of a company’s annual report, the purpose of which is to communicate information about the company to those who have the right to receive it for instance, the shareholders, in addition to investors, potential investors and other users of financial statements.

It provides an indication of company’s trading performance and gives a snapshot of aspects of its financial position at a particular date.  At a minimum, a financial statement consist is of accounting policy, balance sheet, profit and loss portraying organizations and income and expenditure for non-trading organizations, notes to the account, directors report, sources and application of fund and value added statement.  The analysis of financial statement or an account is therefore the interpretation, amplification and translation of facts and financial statements, the purpose is to draw relevant conclusions, therefore, making of inferences as to business operations, financial positions and future prospects.

The procedure involves.

a.                   analysis of data contained in the financial statement into certain basic component parts.  For instance, in carrying out a profit analysis, the net sales is a very important figure and other data in the account like cost of goods sold, gross profit and cost of production are compared with this cove of the income statements.  Similarly, in balance sheet analysis, the cove components are net assets which are usually compared with ones capital, loan stock and working capital.

b.                  Translation of those data into cheer and simple form.  The translation process may lead to extraction of ratios or percentages that establish relationships between comparable data or even the presentation of graphs and charts.

c.                   Drawing relevant conclusions and making inferences concerning the company’s financial position, stability, profitability and solvency.

d.                  Presentation of information do obtained to management for decision making.  The information is used in the forward process for future controls and policies.  The application of this information will involve the isolation of the factors responsible for the state of affairs which are reveled by the analysis.

The analysis could be horizontal or vertical internal or external horizontal analysis is a comparison of data in financial statements of two or more consecutive accounting periods to detect whether performance has improved or not.  Example, the profit of 1994 of a company could be compared with that of 1995, 1996 with 1997 and after which a trend may arise from the analysis.  This analysis is internal as it concerns financial data of one company alone.  A vertical analysis as external s it concerns financial data of one company and another.  That is, external when a comparative study of data between one company’s financial statement and that of another over a given time.

It is wholly external and involves a comparative analysis of data in financial statements with in a single period.

By reference to a common unit, data in the financial statements can be compared with one another to determine efficiency of current performance for the purpose of the analysis, certain figures in the accounts are expressed as a percentage of another relevant figure.  In carrying out an analysis of accounts, a number of issues must be considered and conclusions formed therefore.

These include.

a.                   profitability of the business operations, particularly in relation to capital employed

b.                  solvency of the company: the ability of the business to pay its creditors, the adequacy of its working capital and the liquidity of its current assets viewed side by side with the current liabilities.

c.                   The business trends:  the analysis of the pattern of business over time to determine whether profit is rising or failing, and the implication for futon performance.

d.                  The financial stability of the company: paying particular attention to company’s financial position, the limits of its borrowing powers, and available resources to financial expansion and volume of earnings.

e.                   The gearing and assessment of adequacy of profits to meet interest payments, individual payments to shareholders and to provide sufficient safety to shareholders investment.

1.1              STATEMENT OF PROBLEM

This research work intends to look into the extent to which investors to carryout, and rely on the results of financial statements analysis before making their investment decisions, and the employment by companies of financial statements analysis in assessing their performance and that of their respective management.

1.2              OBJECTIVES OF STUDY

a.                     To find out whether investors carryout analysis of financial statements before making investment decisions.

b.                     To find out the extent to which investors rely on the result of their analysis in selecting their investment options.

c.                     To highlight the importance of financial statement, to the performance of companies.

d.                    To know the need for the preparation of financial statements by companies.

e.                     To know the extent of usefulness of financial statements to investors.

1.3              SIGNIFICANCE OF STUDY

It is know fact that he who does not know where he is going will never know when he gets there.  Accounting is defined as the process of analysis, interpreting and communicating of financial information to the users of financial statements.  Thus, the statement of affairs has to be interpreted vis-à-vis the financial statement and analyzed to the cove to enable interested parties to understand the business and know what it is up to and to guide management on how to take decisions for the day to day activities of the business.  If the financial statement is not properly analyzed and interpreted, interested parties will be mislead.  This study is therefore intended to provide a guide to interested parties, bankers, creditors and management of the company on how best to present the statement of affairs of the company considered in the study.

1.4              RESEARCH QUESTIONS

i.                    Do investors carryout analysis of financial statements before making investment decisions

ii.                  To what extent to investors verily on financial statements.

iii.                To what is the importance of financial statements to the company’s performance?

iv.                Is there any need for the preparation of financial statements?

v.                  To what extent are financial statements useful to investors?

1.5              FORMULATION OF HYPOTHESIS

(HO) Financial statements do not show the financial state of the company

(H2)2 financial statements show the financial state of company.

(HO)2 financial statements are not tools of management decisions in the company.

(HO)3 financial statements are not document of financial analysis of the company.

(HI)3 financial statements are documents of financial analysis of the company.

(HO)4 it is not through financial statements that outsides and insiders assess the health of the company.

1.6              DEFINITION OF TERMS

i.                       Financial statements:  they are means of communicating to intestate party’s information on the resources, obligations and performances of the reporting entity.

ii.                     S.A.S. Statement of accounting standard states the standard on which financial statements should be prepared.

iii.                   Balance sheet: shows the assets, liabilities and proprietors interest at a point in time.

iv.                   Profit and loss account reports revenues, earrings or turnover and the expenses of an-enterprise for a given accounting period.

v.                     Sources and application of find: provides information on the deviation and utilization of funds during the period covered.

vi.                   Notes on the account: it usually forms an integral part of financial statements and provides detailed or supplementary information in respect of items disclosed in the balance sheet and the profit and loss account.