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1.1 Background of the Study
The basis for financial planning, analysis and decision making is the financial information needed to predict, compare and evaluate the firm’s earring ability. It is also required to aid in economic decision making investment and financial decision making. The financial information of an organization is contained in the financial statement or accounting reports.
The financial statement generated through the accounting are designed to enable users to draw relevant conclusion concerning the financial will being and performance of the reporting entity. Two basis financial statements prepared for the purpose of external reporting to owners, investors and creditors are the balance sheet and profit and loss account or income statements.
According to Pandey (2004) a typical annual report including the chairman speech, the directors report, the auditor’s report and accounting policy changes. Alliandu (2000) defined financial statement analysis as the judgment process aimed at evaluating the current and past finance positions and result of operation of an enterprise with the primary objectives of determining the best possible estimates and productions about future conditions and performance with the concluded recapitalization of bank and other financial institution by the central bank of Nigeria (CBN). It has become imperative that adequate attention be paid to financial statements analysis and it implication on business decision of business entities are to be regarded sound financial entities.
More also, the Obasanjo’s administration as noted in the NEED policy document in 2004 while setting out its millennium development goals (MDGS) asserted the emphasis placed on ensuring that the Nigerian economy is a private sector driven one and in order to attain this lofty policy objectives, Nigerian corporate entities must ensure that decision taken by them are not only qualitative but also quantitatively sound and this is where financial statement analysis come into play.
Roger el al (1995) asserted that major objectives of every business are solvency and profitability and that interest in the affairs of a company are especially interest in the solvency and profitability. Against this background, this research study seeks to examine the use of financial information in appraising the performance of business organization.
The absolute accounting figures reported in the financial statement do not provide a meaningful understanding of the performance and financial position of a firm.
Therefore, users of financial statement get further insight about financial strength and weakness of the firm of them properly analysis information reported in these statements.
At this junction, this research study will focus on the use of relevant financial ratios in appraising the performance of selected Nigeria companies.
The objectives is to examine how the basis information contained in set of accounts can be computed and interpreted, in this context is comparison. The comparison of the current figures with its own past performance and comparison with other companies in similar trades or companies.
Millichamp (2000) noted that some of the financial ratios having the most significant general applicability to most business situation are:
1. Activity ratio / performance ratio
2. Productivity ratio
3. Profitability ratio
4. Liquidity ratio
5. Capital gearing ratio
6. Investment ration
Each of these ration will be examined in chapter (2) their relevant use, limitations and interpretation.
1.2 Statement of the Problem
It is pertinent to note that are of the most important sources of information available to shareholders is the financial statement which contain in the financial reports of companies such as the balance sheet, profit and loss account. The financial statement prepared by a firm at the end of the year is not an end but a mean to an end; hence the absolute figures reported in the financial statement do not provide a meaningful performance that will meet all the financial needs of all groups. This financial statement for appraising the performance of organization, due to inappropriate interpretation of financial statement, many companies have collapsed.
1.3 Objectives of the Study
This research is targeted at the wide range of users of financial statement in making economic decision hence, the objectives of the study can be summarized as follows;
Ø To aid users of financial statement in ascertaining whether the generally accepted accounting principles are followed in the preparation of this statement.
Ø To aid the identification of any financial, economic and managerial oriented weakness likely to lead to future problems and to determine any strength the business entity can capitalize on
Ø To provide sound body of knowledge which could be of valuable use to finance and accounting professionals?
Ø To aid management and other users of financial statements to take inform business decision as regards to future business expansion and acquisition by adequately assessing areas of strength and weakness.
Ø To provide further research information which can be of valuable use to future research in this area of study?
1.4 Research Questions
For this study, the following research questions have been formulated.
1. Can financial statement adequately provide management and other users the relevant information for appraising the performance of the activities of the firm?
2. Can financial statement adequately represent a true and fair view of the performance of an organization?
3. How well the use of financial statement adequately assured potential investor the profitability of the firm to be invested in?
4. Does then use of financial statement allow management to identify the firms area of strength and weakness thereby ensuring effective and informed management action taken?
5. Finally, how well is the use of financial statement allowed for effective comparison of firms which are unlike one another?
1.5 Significance of the Study.
The finding of this study will in no small measure give rise to the following impacts;
1. Allow various users of financial statement to easily assess performance of organization portability, liquidity, etc. on order to make them informed business decision as regards to their various vested interests in the business.
2. To provide additional knowledge in the area of application of financial statement in business decisions making and both professional and academic use.
3. Allow the various users to appreciate the importance and use of financial statement in appraising the performance of organization in diverse areas of business.
4. To inform directors of company the need to ensure that financial statement are prepared in accordance with stated accounting principles and procedures as they aid users of these statement in making economic decision .
1.6 Scope and Delimitation of the Study
The target population of this study is designed to cover all public limited liability companies for easy comparison, the research study will restrict itself to only one selected publicly quoted company listed on the Nigeria stock exchange for through assessment of the annual report of the companies for a period of five years spanning from (2006 – 2010) in order to form an opinion on how financial statements is been used for users and managers in appraising the performance of business organizations.
1.7 Limitation of the Study
In the process of conducting this research, the following constraints were experienced but were not significant enough to distort the outcome of the results of the study the constraints are as follows;
1. Time; the time period allowed for the conduct of this research work was insufficient for the researcher to carry out the research work properly. The work was rushed in order for it to be submitted in due time.
2. Finance; in the conduct of the study, the researcher was restricted by a loan budget which did not allow him to have carried out the study extensively as he would have wished causing him to restrict his study to only 1 company in Nigeria.
3. The suggestion and recommendation were based on theoretical knowledge of financial management and those may not be fully practicable considering the frequency of changes in the economy.
4. Data availability and accessibility; this researcher faced a great deal of constraint in trying to access relevant data needed for the study from custodian (who show great apathy and indifference to the research while soliciting their help and support.
5. The weakness common to financial ratios may also limit the study.
1.8 Definition of Terms
1. Current assets; they are the total short term assets used within of financial year in running the daily operation of the firm.
2. Current liabilities; these are the financial obligation which are repayable within a financial year or normal operation cycle.
3. Capital employed; this is the total value of tangible assets of the business at their book value less current liabilities.
4. Fixed assets; they are the long term tangible assets of the firm which are act used up within a financial year.
5. Solvency; this is the measure of the firm’s ability to fulfill its financial obligation as at when due and still remains financially sound in carrying out its business operations.
6. Financial statement report; summary of the accounting transaction of the firm within a given accounting period.
7. Financial ratio; there are useful financial tools used in analyzing financial statement of a firm in order to pass a judgment on the health of the firm.
8. Relevant shareholders; term used in referring to all concerned likely to have interest both directly, and indirectly in a business e.g, creditors, shareholders, management, government, etc.
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