ABSTRACT

This study was conducted to assess how the financial statement is used to evaluate the performance of companies and investment decisions. It was a research survey based on the seize of respondents from Guaranty Trust Bank Nigeria Plc through the use of questionnaire. Findings indicated that the financial statement is a good instrument for evaluating companies. It also helps the management in making good decisions. Relevant literature was reviewed based on contributions made by some writers on the subject. The data collected were presented using table and percentages. The research findings also revealed that certain problems militating against financial statement includes, inability to understanding the interpretation techniques of the financial statement by the management of the company. From the findings, the following recommendations among others were made, investors should not only concentrate on the financial statement while making their investment decisions, they should check the management capability of those piloting the affairs of the company, including the record of performance of the executives.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Recent researchers have shown that one of the main causes of indigenous business failure in this country is failure to maintain proper financial records. Many businesses have been operated with merely a single entry memorandum record of transactions and others with no record 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, Companies and Allied Matters Decree (1990) require all registered companies in the country to prepare and present financial statements in accordance to the relevant accounting regulation.

              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 statements.

The essence of the study is to draw relevant conclusion, 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 past factor assessment of financial results of the organization as a whole, which 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 purpose 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 the aspect of the finances of the business is needed to permit management to assist the quality of past decision at strategic level and the effectiveness with which they have been implemented. Finally, It is important that information 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 include;

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 present term of business over a period of 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 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 shareholders and provide sufficient safety to shareholders investment.

1.2   STATEMENT OF PROBLEM     

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 slated for either full or partial privatization or commercialization.

Unfortunately, business can not grow reasonably under a crude business practice as most businessmen and investors in our society are yet to understand the need for financial statement 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 the intuition references made only to their cash book. Perhaps, they feel that is a way of safeguarding their business secret.

Secondly, the problem of loan securing, most businesses operate with a very poor capital. This makes growth difficult if not impossible. Instead of the business growing they are declining as a result of their poor capital base, and as there is non-existent of financial statements, they are not qualified for bank loan.

Thirdly, 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 is not important.

 Fourthly, the problem of high cost of consultancy services, since most businesses are small or medium in size, it become hard for them, judging their base to rely on the services of the consultancy firms for their financial needs. The implication of this is that business decisions are bound on luck even in some cases, people resort to native sector to help make their business grow.

1.3   OBJECTIVES OF THE STUDY

The objective of this study includes the following:

1.         To examine the ways financial statements can help in the growth of business

2.         To examine how the financial statements are interpreted

3.         To analyze how the financial statements are used for performance evaluation

4.         To examine the importance of the financial statements for investments purposes

5.         To examine the level of reliance placed on the financial statement by investors.

1.4   RESEARCH QUESTIONS

To serve as a guide towards a resourceful research, the following questions are formulated.

1.        What are the ways financial statements can help in the growth of business

2.        How can the financial statement be interpreted?

3.        Is the financial statement adequate to assess a company’s performance?

4.        How important is the financial statement for investment purposes?

5.        How relevant is the financial statement to the investors?

1.5   SIGNIFICANCE OF THE STUDY

The study is very essential to various classes of people in the area of business

        Firstly, the will go a long way in helping both the existing and potential entrepreneurs and management of business organization towards the understanding and the knowledge of the uses of the e financial statements for the expansion of their business.

        Secondly, this will be an opportunity to the creditors and suppliers to study the usage of financial statements in estimating the risk of entering into bad debt in their transactions with business organizations.

        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 disinvest.

        Fourthly, the corporate lawyers and bankers, by this study they can understand more about the statement of affairs of business entities.

       Finally, the student both the undergraduate and the post graduate student 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 statements.

1.6 SCOPE AND LIMITATION OF THE STUDY

This study is restricted by only the analysis of the principal statements of trading and profit making organization. This research work would have been given a wider coverage if not for some constraints imposed on the researcher by the availability of time and fund.

1.7   DEFINITION OF TERMS

NET LIQUID FUNDS

Cash at bank and in hand and cash equivalent (example, other borrowing or investment held as current assets) less bank overdraft and other borrowing repayable within one year of the accounting date.

LIABILIES

Existing financial obligations which the firm intends to meet at some time in future. Such obligations arise from legal or managerial consideration and impose restriction on the use of the assets by the firm for its own purposes.

PROVISION FOR LIABILITIES AND CHARGES

This is defined by the Companies Act as an amount retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, but uncertain as to the amount or as to the date on which it will arise.

CONTINGENCY

A condition which exists at the balance sheet date, the outcome of which will be confirmed only be the occurrence or non-occurrence of one or more future events.

REPLACEMENT COST

The cost at which an identical asset could be purchased or manufactured.

LIQUIDATING PROFIT

Any profit paid out of the retained or earning are called liquidating profit or return of capital to shareholders.

FICTITIOUS OR NOMINAL ASSETS

They are non-true assets or debt balances resulting from expansion of an exceptional or extraordinary nature which is not represented by present value and have not been written off.

FIXED ASSETS 

These are acquired for retention in the business and not for conversion into cash or resale. Their life span usually extend over some years and are portioned in a consistent and systemic manner over accounting period of their life span.

DEPLETION ASSETS

These are asset meant for earning revenue gradually depleted or exhausted or consumed in the process. Example, mineral, coal, goal etc.

CURRENT ASSETS

These are assets acquired for resale and consist of assets in their various stages of conversion, hence they are called floating or circulating assets.

LIQUIDATION

It is the winding and settlement of the affairs of a company by a person called the liquidator who collects all assets and discharges the liabilities.

DEBENTURE

This is a certificate of indebtedness given by companies which usually form a fixed charge on time or on being drawn for redemption or notice.

APPROPRIATION ACCOUNT

It is an account into which the net profit of a company are carried, and which shows how the profits are deposits are disposed off.

FINANCIAL LEVERAGE OR TRADING ON EQUITY

It is the use of fixed charges sources of funds, such as debt and preference capital along with the owner’s equity in the capital structure.

NET BOOK VALUE

It is the amount whether historical cost or valuation at which an asset is carried less the related accumulated depreciation.

FAIR VALUE

This is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arms length transaction.

USEFUL-LIFE

The useful –life of an asset is the shorter of:

a.   The predetermined physical life

b.  The economic life, during which it could be profitable employed in the operation of the enterprise.

1.8   HISTORICAL BACKGROUN D OF THE FIRM UNDER STUDY

               GUARANTY TRUST BANK NIGERIA PLC

Guaranty trust bank plc is a foremost Nigeria financial institution with vast business outlays spanning Anglophone West Africa and United Kingdom. The bank presently has an asset base of over N2, 000,000,000(two trillion Naira) and employed over 5,000 people in Nigeria, Cote d’Ivore, Gambia, Ghana, Liberia, Sierria Leone and the United Kingdom.

      The bank has a corporate banking bias and strong service culture that have enabled it record consistent year on year growth in clientele base and key financial indices since its inception in 1990. Its operation style, staff conduct and service delivery models are built on 8 core principles aptly dubbed; the orange rules in line with the bank’s vibrant orange corporate colour.

         Guaranty Trust Bank plc was incorporated as a limited liability company licensed to provide co

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