Financial Statement as a Tool for Evaluating Performance of Companies Investment Decision
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Abstract on Financial Statement as a Tool for Evaluating Performance of Companies Investment Decision
The study examined financial statement as a tool for evaluating performance of companies’ investment decision. Data for the study were obtained from the primary source. Hypotheses were formulated and tested using chi-square. Based on the analysis the researcher found out that decision to invest or not is mostly based on the amount of reserves with a company at a particular point in time. From the analysis, the researcher discovered that ratio analysis is an effective instrument that aids in making investment decision when it attracted 76% in the responses to the questionnaire. It was equally discovered that the most important reason why investment decision is required is actually for goal actualization. This is because from the questionnaire, the researcher recorded a high response of 41% among other three. Based on the findings the researcher recommends that In analyzing the income statement, the user should be cognizant with the uncertainties surrounding the computation of net income. Bond-holders should use long-term indicators, such as the enterprises capital structure, past and projected earnings and change in financial position. Management should use other-ratio decision making techniques to confirm the reliability of computed ratios.
Chapter One of Financial Statement as a Tool for Evaluating Performance of Companies Investment Decision
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 statement, 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 statement.
Servant 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 (2000) 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 fir’s performance using financial ratios2 for instance, Stickney and Weil (2006) 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 financial statement as a tool for evaluating performance of companies investment decision the researcher will base her analysis on Nigerian Breweries Plc 9th mile Conner Enugu.
Statement of the Problem
Many investors are known to have entered into investment ventures without property understanding such investment opportunity, thus making and implementing wrong decision thereby ending up in folding up 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 scare financial resources and the resultant effect of failure. Such set back is the life of an investor and in the case of brewery 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. Breweries firms in Nigeria have been recognizing the importance of financial statement in decision making.
b. Nigerian breweries have not been observing the impacts of financial statement in business decision making.
c. There are so many problems associated with the analysis of financial statement in an organization and proffer solutions to the problems.
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