CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Recent researchers have been shown that one of the main causes of indigenous business failure in this country is failure to maintain proper financial records. Many business have been operated with merely a single entry memorandum record of transactions and others with no records whatever, except possible cheque stubs. As a result, business decisions are based on guesses and intuition. Ola (1985).
In today’s economy information and accountability have assumed a larger role in our society. This is why it is statutory company and allied matte decree (1990), for all registered companies in the country to prepare and present financial statements in accordance to the relevant accounting regulations. Business organizations have to analyze their financial statements or accounts by way of interpretation, simplification and transaction of facts and data contained in the financial statement. The essence of this is to draw relevant conclusions, make inference as to the business operations financial positions and future prospects of the organizations. In the assessment of the performance of an organization, an important area of management control is post factor assessment of financial results of the organization as a whole, that is the examination in retrospect of the financial effects of earlier decisions to invest. Management must regularly commit resources for both long term and short term purposes and because the commitment will always involve risk, or careful assessment of the anticipated results of any project on the financial position should be made before a decision is taken, and before resources are irrevocably committed. A periodic evaluation is needed, after resources have been invested, to report what has been achieved, to examine amount of the profit, or the extent of the loss, and to consider the effect of implementing the plan on the financial statement of the business, in particular to note whether financial stability has been maintained or alternatively the extent to which it has been impaired.
Information on all these aspect of the finances of the business is needed to permit management to assist the quality of past decisions at strategic level and the effectiveness with which they have been implemented. Finally, it is important that informed base of financial knowledge should be developed from which future activities can be planned. An important purpose of the appraisal of results is to confirm whether or not the project has produced the expected cash flow. The main function of the financial account of a business however is to measure the results in terms of profitability and it is on the basis of success or failure measured in these terms that management will be judged. In carrying out an analysis of accounts, a number of issues must be considered and conclusion formed thereon. These includes:
1. Profitability of the business operation, particularly in relation to the capital employed.
2. Solvency of the firm: the ability of the business to pay its creditors, the adequacy of its working capital and the current liabilities.
3. The business trend: the analysis of the point term of business over a time to determine whether profit are rising or falling and the implication for future performance .
4. The financial stability of the business, particular attention being paid to the firm’s limit of borrowing power, available resources to finance expansion and the volume of earnings.
5. The gearing and the cover which is an assessment of the adequacy of profit to meet up with interest payments, pay dividends to share holders and provide sufficient safety to share holders investment.
1.2 STATEMENT OF PROBLEMS
In Nigeria today most business are facing hard times which is a reflection of the bad shape of the economy. Government on its own has been making different efforts aimed at reviving the economy. Among the government efforts are the encouragement of the growth of small and medium term industries and also for people to invest in some of the public enterprises that have been stated for either full or partial privatization or commercialization. Unfortunately, business cannot grow reasonably under a crude business practice as most business men and investors in our society are yet to understand the need for financial statements probably, this is one of the reasons why some businesses are operating without even a book-keeper not to talk of an accountant.
Decisions are taken based on intuition references made only to their cash –box perhaps they feel that this is a way of safe wording their business secret. Secondly is the problem of loan securing.
Most businesses operate with a very poor capital. This makes growth difficult, if not impossible. Instead of growing they are declining as the result of their poor capital base :& so as there is non-existent of financial statements, they are not qualified for bank loan. Thirdly is the some investors and business operators can not understand the interpretation technique of the financial statements, because of this problem, they try to do without it, as if it its not important. Fourthly is the problem of high cost of consultancy services. Since most businesses are small or medium term in size, it becomes hard for them, judging their capital base to rely on the services of the consultancy firms for their financial statements need. The implication of this is that business decisions are bound on luck even in some cases, people resort to Native sectors to help make their businesses grow.
1.3 OBJECTIVES OF STUDY
The objectives of this study includes the following:
1. To examine the ways the financial statements can help in the growth of businesses.
2. To examine how the financial statement are interpreted.
3. To analyse how the financial statements are used for performance evaluation.
4. To examine the importance of the financial statements for investment purposes.
5. To examine the level of reliance placed on the financial statements by investors.
1.4 SIGNIFICANCE OF THE STUDY
This study is very essential to various classes of people in the area of business. Firstly, the study will go a long way in helping both the existing and potential entrepreneurs and management of business organization towards the undertaking and the knowledge of the uses of the financial statements for the expansion of their businesses. Secondly, this will be an opportunity to the creditors financials and suppliers, to study the usage of the financial statements in estimating the risk of entering into bad debts in their transactions with business organization. Thirdly, in a free economy oriented society like Nigeria, this study will help investors to know the basic factors in the financial statements that will help them to decide on whether to invest or dis-invest. Fourthly, is the corporate lawyer and Bankers. By this study they can understand more about the statement of affairs of business entities. Finally, the students both the undergraduate and the post graduate students of Business Administration are in better position to benefit not just per academic exercise, but at least, to be able to understand the interpretation of the financial statement.
1.5 SCOPE AND LIMITATION OF TH STUDY
This study is restricted to only the analysis of the principal statements of manufacturing, trading and profit making organizations &. This research work would have been given a wider coverage if not for some constraints imposed on the researcher by the availability of the time and fund.
