The Usefulness Of Financial Statements In Assessing Company Performance And Guiding Investment Decisions (A Case Study Of Sunrise Flour Mill Ltd, Enugu)
The use of financial statement in any business organization cannot be over emphasized financial statements are needed by variety of people for different purposes . for instance, the government needs the financial books of a company for taxation purposes, the investors want to know how profitable a company is and also the management of a company will like to know the level of their performance: all these cannot be known without the analysis of financial statements of the company or companies involved.
The research work therefore, studies the usefulness of financial statements in assessing the performance of companies and in guiding investment decisions, in order to provide investors, management, government and others what the company is worth.
Table of Contents
- Title page
- Certification page
- Table of content
- 1.1 Background of the study
- 1.2 Statement of problem
- 1.3 Objective of the study
- 1.4 Research Hypotheses
- 1.5 Significance of the study
- 1.6 Scope and limitation of the study
- 1.7 Definition of terms
- 1.8 Organization of the study
2.0 Literature Review
3.0 Research methodology
- 3.1 sources of data collection
- 3.3 Population of the study
- 3.4 Sampling and sampling distribution
- 3.5 Validation of research instrument
- 3.6 Method of data analysis
Data Presentation and Analysis and Interpretation
- 4.1 Introductions
- 4.2 Data analysis
- 5.1 Introduction
- 5.2 Summary
- 5.3 Conclusion
- 5.4 Recommendation
1.1 Background of the Study
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 funds, 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.
Financial report is a formal and comprehensive statement describing financial activities of a business organisation such as the banks. For such a business entity, financial report is a statement that reports all relevant financial information, presented in a structured manner and in a form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2007a) in (Afolabi, 2013) and also to decision making pertaining to production planning, investment planning, expected returns and performance evaluation. Financial reporting is the process of communicating economic information to the stakeholders, management, shareholders, public, etc. to facilitate informed judgement and decision making. It deals with the presentation of financial and other relevant statements to show the extent to which the objectives of the organisation have been achieved. It is a statement prepared by the directors of an organisation showing how well they have been able to manage the resources entrusted to them by the owners (shareholders) of the business. Financial reports are means through which the strengths and weakness of an organisation can be ascertained at a glance.
Decision making process requires information – financial and non-financial information as well. The most important financial information needed in the process of business decision comes from accounting. Therefore, we can say that accounting is a service function to management. It basically, processes or gathers and studies “raw data” and converts them into suitable information in the process of decision making. The basic characteristics of the accounting are: Gathering, processing and presenting accounting (financial) information; information considering company’s business and those directed towards different interested users. Financial statement are analysed in order to use the information in financial statements to ascertain the profitability and financial soundness of the firm, to Judge the managerial efficiency for inter form comparison of similar nature and to make valuable for costs. Financial statement analysis is critical in making effective stock investment decisions. If investors will not do research for their stock investments, They will essentially engage in glorified gambling. The statement of financial position and statement of comprehensive income, cash flow statement and statement of owners’ equity each offers unique insights. Combined, they can give you a good sense of a company’s overall financial picture.
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.
- 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.
- 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.
- Drawing relevant conclusions and making inferences concerning the company’s financial position, stability, profitability and solvency.
- 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 within 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.
- Profitability of the business operations, particularly in relation to capital employed.
- 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.
- 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.
- 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.
- The gearing and assessment of adequacy of profits to meet interest payments, individual payments to shareholders and to provide sufficient safety to shareholders investment.
1.2 Statement of Problem
This research work intends to look into the extent to which investors to carry out, 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.
1.3 Objectives of Study
- To find out whether investors carryout analysis of financial statements before making investment decisions.
- To highlight the importance of financial statement, to the performance of companies.
- To know the need for the preparation of financial statements by companies.
1.4 Research Hypothesis
- Hi: Investors carryout analysis of financial statements before making investment decisions.
- Ho: Investors do not carry out analysis of financial statements before making investment decisions.
- Hi: It is not through financial statements that outsides and insiders assess the health of the company.
- Ho: It is through financial statements that outsides and insiders assess the health of the company.
1.5 Significance of Study
It is a known 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 useful the financial statement could be in making investment decisions in the company considered in the study.
1.6 Scope and Limitation of the Study
The scope of this study covers the sunrise flour mill ltd enugu. This study is limited only to journalism activities. At this juncture, lets draw attention to SUNRISE FLOUR MILL EMENE, which is one of the Enugu state government established local industries established in 1983 under the defunct administration of Chief Jim Nwobodo. The industry is solely of food processing industries with the following products line, sunrise flour, sunrise semolina, sunrise wheat.
The study is also limited by time and financial resources and as result the research will have to source for more financial resources and use alternative means. Since few similar studies have been done especially in institutions of higher learning, there is limited empirical literature on the new media as a tool for enhancing effective and efficient communication especially in the context of Nigerian students.
1.7 Definition of Terms
For the purpose of the study, the following term/concept are used:
They are means of communicating to intestate party’s information on the resources, obligations and performances of the reporting entity.
Statement of accounting standard states the standard on which financial statements should be prepared.
Shows the assets, liabilities and proprietors interest at a point in time. Profit and loss account reports revenues, earrings or turnover and the expenses of an-enterprise for a given accounting period.
Sources and Application of Find:
Provides information on the deviation and utilization of funds during the period covered.
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.
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study
Summary, Conclusion and Recommendation
It is important to ascertain that the objective of this study was to examine the usefulness of financial statement in persuasive the performance companies and in guiding investment decisions. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of the use of financial statement in guiding investment decisions.
This study aimed at having a critical analysis of the usefulness of financial statement in persuasive the performance companies and in guiding investment decisions. three objectives were raised. These objectives include: To find out whether investors carryout analysis of financial statements before making investment decisions, to highlight the importance of financial statement, to the performance of companies and to know the need for the preparation of financial statements by companies.
5.3 Conclusion and recommendations
In this study we found out that investors carryout analysis of financial statements before making investment decisions and it is through financial statements that outsides and insiders assess the health of the company. Financial statement analysis is critical in making effective stock investment decisions. If investors will not do research for their stock investments, They will essentially engage in glorified gambling. The statement of financial position and statement of comprehensive income, cash flow statement and statement of owners’ equity each offers unique insights. Combined, they can give you a good sense of a company’s overall financial picture.
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.
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