ANALYSIS OF FINANCIAL STATEMENTS AS AN AID TO MEANINGFUL INVESTMENT DECISION MAKING
(A CASE STUDY OF INVESTMENT FIRMS IN ENUGU STATE)
The purpose of this research project was to find out how financial statement analysis service of our aid to meaning decision by investment firms in Enugu state. Financial statement analysis are used by investment firms to make their investment decisions. They are also used by management to make their decisions. Some of the ratio commonly computed by investment firms are profitability ratios, liquidity ratios, market value ratios leverage ratios and ordinary share ratios. This research project was embarked on because most investment firms do not implement meaningful decision that will enhance their meaningful opportunities. Therefore, we made recommendations to both investors and management in investment firms on how best to utilize financial ratios in making meaningful investment decisions.
TABLE OF CONTENTS
Title page i
Table of contents vi
1.0 INTRODUCTION 1
1.1 background of the study 1
1.2 Statement of Research problems 8
1.3 Objective of the study 9
1.4 Hypothesis 10
1.5 Research questions 11
1.6 Significance of the study 12
1.7 Scope of the study 13
1.8 Limitation of the study 13
1.9 Definition of terms 15
2.0 REVIEW OF RELATED LITERATURE 17
2.1 role of financial statement in decision making 17
2.2 The profit and loss Account or income statement23
2.3 Notes to the financial statement 25
2.4 Balance sheet 26
2.5 Statement of source and application of fund 28
2.6 Objectives/usefulness of financial statement 28
2.7 The need for Analysis of financial statement 33
2.8 Ratio analysis 34
2.9 Users of Analysis of Financial statement 36
RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design 39
3.2 Area of the study 39
3.3 Population of the study 39
3.4 Sampling method 40
3.5 Research instrumentation 41
3.6 Validity and reliability of Research instrument 43
3.7 Sources of data 44
3.8 Methods of Investigation
PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA
4.1 Presentation, Interpretation and Analysis of Data 48
4.2 Test of Hypothesis 62
4.3 Questionnaire Analysis 67
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of findings 68
5.2 Conclusion 71
5.3 Recommendation 72
1.1 BACKGROUND OF THE STUDY
Financial statement analysis is a process which examines past and current financial data for the purpose of evaluating performance and estimating future risks and potential. Financial statement analysis is used by investors, creditors, security analysts, bank leading officers, manager, taxing authorities, regulatory agencies, labor unions, customers and many other parties who rely on financial data for making economic decision about a company. Emphasis of this course is placed on the need of investors, especially shareholder and bond holders.
Analysis of financial statements focuses primarily on data provided in external reports plus supplementary information provided by management. The analysis should identify major changes or turning point in trends, amounts, and relationships. Financial statements are merely summaries of detailed financial information. Many different groups are interested in getting inside financial statements, especially investors and creditors. Their objectives are sometimes different but often related. However, the basic tool and techniques of financial statement only can be effectively applied by all of the interested groups.
Financial statement analysis can assist investor and creditor in finding the type of information they require for making decisions relating to their interests in a particular company.
Investment analysts and financial advisor have a major interest in the tools and techniques of financial statement analysis. Such person has the same basic information needs as investors and creditors as it relates to their clients and potential clients. Analysts frequency adjust the financial statements prepared by accountants for items they do not consider significant or for items they consider significant but which do not appear on the statements.
Several factors point toward the importance of “comparability” of financial statement information across firms in financial analysis. According to the Securities and Exchange Commission (SEC) (2000), when investors judge the merits of investments and comparability of investment, efficient allocation of capital is facilitated and investor confidence nurtured. The usefulness of comparable financial statement is under cored in the financial accounting standard board (FASB) accounting concepts statement specially, the FASB (1980, p. 40) states that “investing and lending decision essentially involve evaluations of alternative opportunities and they cannot be made rationally is comparative information is not available” (our emphasis). Financial statement analysis text books almost invariable stress the importance of comparability across financial statements in judging a firm’s performance using financial ratios2. For instance, Stickney and Weil (2006, p 189) conclude that “ratios, by themselves out of context, provide little information”. Despite the importance of comparability, a measure of financial statement comparability is not specified and there is little evidence on its benefits to financial statement users.
The financial communication process is vital in the economic life. Research carried out on the financial communication procedures of the first 100 largest industrial and trade company groups has shown that financial accounting information is the main element of a company’s financial communication policy. Both the amount of information published and especially its quality are important, which has been continuously improving due to the harmonization of international accounting standards and which therefore enabled the companies to engage in an information competition with other companies operating at national or international level.
At the beginning, financial statement only allowed a better accounting data organization, their synthesis and they were not involved in the economic decision-making process, as accounting was considered a more tool used for company assets preservation.
Corporate annual reports and financial statements in a particular, are expected to be produced by all business entities in regular interval. The statements are considered on important means not only for gauging the performance of the entity but also for understanding how money invested in the entities to make pertinent decisions.
Much earlier studies confirm that financial statements have information content (Brown and Kennelly, 2003) that has value to the users of use statement. This value includes the ability to use financial statement to predict performance of entities (Abdel-Khalik and Espejo, 2007, Coates 2001 Reilly et al, 2007).
Decision making is not the core of every investment activity. A decision is a choice between two or more alternatives. The implementation of meaningful decision gives way for achievement of investment goals and objectives while implementation of wrong decision positively gives rise to investment failure.
The ultimate objective for investments are profit maximization and growth thus it becomes necessary that capital decision have to be made implemented so as achieve the aforementioned objectives.
For a meaningful decision that will be used in these objectives for an investment to be made available analyzed and studied through what is derived, decision is made an implemented whether for action execution or corrective measures where necessary.
One of the important information needed about investment is concerned with financial aspect and the record that contains the financial aspect of an investment is what is referred to as analysis of financial statement.
This research work is based on analysis of financial statement as an aid to meaningful investment decision making using investment firms in Enugu state like De-Patony investment Ltd, Pauly links Global investment ltd and Rocky pools investment Ltd all in Ogui road Enugu.
1.2 STATEMENT OF THE RESEARCH PROBLEMS
Many investors are know to have entered into investment ventures without properly understanding such investment opportunity, thus making and implementing wrong decision thereby ending up in closing up the firm when the going proved impossible. At times when the investment activities go on, the aim for such action not realized. Many investment are carried out without emphasis laid on those investments that would generate profitable returns in the future, the risk involved and the benefits to be derived if embarked upon given the scarce financial resources and the resultant effect of failure. Such set back is the life of an investor and in the case of investment firms, liquidation.
All the above stated problem arises as a result of wrong decision making hence, this study will therefore, identify the means through which meaningful decision can be derived as to enhances the changes available for investment entities or firms through analyzing information concerning such investment opportunities.
The following problems led to the formation of this research work:
a. Investment firms in Nigeria has been recognizing the importance of financial statement in decision making.
b. Nigerian investment firms has not been observing the impacts of financial statement in business decision making.
c. There are so many decision bench marks employed by investment firms
1.3 OBJECTIVE OF THE STUDY
The aim of this research work is to evaluate the analysis of financial statements as an aid to meaningful investment decision making. With particular reference to investment firms in Enugu metropolis. The specific objectives of this research work includes the following:
1. To examine the importance of financial statement in investment decision making.
2. To evaluate the impact of financial statement on the financial performance of an organization.
3. To ascertain the different decision bench marks employed by investment firms.
4. To ascertain problems associated with the analysis of financial statement in an organization and also proffer possible solutions to the problems identified.
For the researcher to carryout extensive research work on the analysis of financial statements as an aid to meaningful investment decision making, the following research hypothesis were formulated:
Ho: Financial statement is not important in investment decision making.
H1: Financial statement is important in investment decision making.
Ho: Financial statement has significant impact on the financial performance of an organization.
H1: Financial statement has no impact on the financial performance of an organization.
1.5 RESEARCH QUESTION
The researcher formulated the following research questions:
1. What are the importance of financial statement in investment decision making?
2. What are the impacts of financial statement on the financial performance of an organization?
3. What are the different decision bench marks employed by investment firms?
4. Is there any problem associated with the analysis of financial statement in an organization?
1.6 SIGNIFICANCE OF THE STUDY
This study will serve as a secondary data for students who will carry out related research study in future.
This work will review the activities of investment firms as concerning the importance of financial statement on decision making in an organization.
The knowledge gained in this work will help investment firms to know the importance and impact of financial statement on decision making.
1.7 SCOPE OF THE STUDY
The scope of this research work is Enugu Metropolis where the researcher searched for relevant materials as it relates for the subject matter i.e. the analysis of financial statements as an aid to meaningful investment decision making.
1.8 LIMITATION OF THE STUDY
The researcher in carrying out this study encountered numerous problems, which includes.
iii. Lack of Research Material
iv. Responds of the Respondents
I. FUND: This is lack of enough fund to move around and visit the various areas in the state and also lack of money to buy enough research material which constitute an impediment on the research work.
II. TIME: Is also another constraints to the researcher. This is because the researcher was combining school activities at the same time. This made her unable to cover a lot of interesting areas.
III. LACK OF RESEARCH MATERIAL: The researcher was unable to lay hand on quality materials from different places she sent in search of materials on the subject matter.
IV. RESPONSE OF THE RESPONDENTS: Another constraint to the researcher was that some of the respondents found it difficult to express their selves as regards the analysis of financial statements as an aid to meaningful investment decision making.
1.9 DEFINITION OF TERMS
To enhance a proper understanding of this research work, the following technical terms have been defined.
FINANCIAL STATEMENT: This is a formal record of the financial activities of a business, person or other entity. It is records that contains financial reports of an investment or business entity.
DECISION MAKING: There is a deliberate through process that leads to the taking of action. Decision making can be regarded as the cognitive process resulting in the selection of a course of action among several alternative scenarios.
DECISION: this is a choice made between alternative courses of action in a situation of uncertainty.
INVESTMENT: An asset or item that is purchased with the hope that it will generate income or appreciate in the future.
INVESTMENT DECISION: This is a determination made by directors or management as to how, when, where and how much capital will be spent on investment opportunities.
FIRMS: having a solid, almost unyielding surface structure