Abstract

Financial Statement Analysis and Interpretation is a very vital

instrument of good management decision-making in business

enterprise. Good decisions ensure business survival, profitability and

growth. Without financial statement analysis in investment decisions,

an enterprise is likely to make decisions, which could spell its doom.

Poor or lack of qualitative financial statement analysis could lead to

investment returns, low profitability and even inability to identify viable

investment opportunities. The main objective of this project is

therefore, was to determine how firms could use financial statement

analysis and interpretation to aid management decisions and to avert

the problems highlighted above. Primary and secondary data are

employed to broaden the scope of this study. Primary data are

sourced from questionnaire responses. This provided data for the

validation of the hypotheses tested with the use of chi-square (X

2

).

The test revealed as follows: (1) Significant difference between the

returns of the financial statement in Analysis and Interpretation based

on management decision. (2) Organizational profitability has

relationship with financial statement analysis and interpretation based

management decision but not significantly. The project concludes that

companies should pay great attention to the use of financial

statement analysis so as to properly equip themselves with this

invaluable tool. The researcher recommends the following: (a)

Accountants or financial analysts should not be rushed in collection,

preparation, analysis and interpretation off financial statements. (b)

Financial statements should be made to reflect current cost

accounting to eliminate or reduce the effects to historical cost

principle and inflation risk element. (c) A combination of different

ratios should be used in analyzing a company’s financial and/or

operating performance. Proper use of financial statement analysis

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should be made not only in investment but also in other areas of

decision making.

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

The complex nature of today’s business world and the

transformation of the entire world into a global village have been of

great concerns to manages of all forms of business organizations.

According to Ojuigo (2001), the problems of managers are multi:-

varied because of inefficiency in management of poor decision

outcomes of these organizations. Therefore, the managers are

unable to achieve the organizational objective within a period of time.

As diverse as business is, its controllable and uncontrollable

factors influence all decisions which ultimately lead to the realization

of set objectives. To achieve this, management needs reliable,

authentic and relevant information from the financial statements to

efficiently facilitate decision making.

It must be noted that every business stores at making at least

from investments “sustainable profits” so as to stay afloat and

continue in business. Therefore, profit being the concern of every

manager is a factor in business. To achieve this, available information

from the financial statements of organizations must be analysed,

interpreted and used as a basis for decision making (Needham and

Dransfield 1991). Financial statement analysis is often considered as

a vital tool used in evaluating a company’s

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performance and ensuring that decisions are based on facts rather than

rule of thumb.

A financial analyst needs financial statements of companies to

be able to identify operating and financial problems which may affect

the companies (Mbat, 2001:60). Thus, any person who analyses the

financial statements of firms should be able to identify the cause and

effect of financial and operating problems of such firms.1.2

Statement of the Problem

The principal aim of making investment decision is to get

adequate returns from it. According to Needham and Dransfield

(1991), “people as a rule will only tie up their money in a business if

they are satisfied with the returns they get from it”.

In an attempt to achieve maximum returns from investment in

production, services shares or stock and/or other securities outside

the firm, a comprehensive analysis of the company which is intended

to be invested in should be carried out using the company’s financial

statements to ascertain both its explicit and implicit investment

opportunities. However, organizations that do not use financial

statement analysis in making investment decisions could be ill

formed. As a result, the following problems may arise:

(i) Inability to identify viable investment opportunities

(ii) Decreasing returns from investments.

(iii) Decline in organizational overall profitability.

(iv) Increased investment risk: The organization might not

achieve its corporate objective at the end of the period.

If the trend continues, it will likely lead to the failure of the

organization. Therefore, there is a great need for organizations to

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consider and analyse company’s financial statements before

investing in that company. These are the focus of this study.

1.3 Objectives of the Study

On noting that most investments made by firms end in failure, it

is the overall objective of this study to determine how firms can use

financial statement analysis and interpretation to aid management

decisions. Specifically, the study is designed to:

i) Find out how the use of financial statement analysis assists

organizations in identifying investment opportunities.

ii) Find out how increasing investment returns can be achieved

using financial statement analysis.

iii) Find out the extent to which a company’s overall profitability

can be hampered if it does not analyse another company’s

financial statement before investing in it.

iv) Find out how business failures can be curbed or minimized and

corporate objective achieved through successful investment.

v) Identify alternative ways of minimizing investment risk.

1.4 Research Questions

The following questions are put forward for the purpose of the

study.

1) Is financial statement analysis important/necessary in every

organization?

2) Who are the users of financial statement?

3) How can a financial statement of an organization be

interpreted?

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4) How can its interpretation be used in making effective

management decisions?

1.5 Hypotheses of the Study

To id the achievement of the desired objectives, the following

hypothesis are formulated:

HO: Represents Null hypothesis

HI: Represents Alternative hypothesis

Research hypothesis No 1

HO: There is no significant difference between the returns of a financial

statement analysis and interpretation based on management

decisions.

H1: There is a significant difference between the returns of a financial

statement analysis and interpretation based on management

decisions.

Research hypothesis No 2

HO: There is no significant relationship between a firms profitability an

financial statement analysis and interpretation based management

decisions.

HI: There is a significant relationship between a firms profitability and

financial statement analysis and integration based management

decision.

1.6 Significance of the Study

The study of the use of financial statement analysis and

interpretation in management decision is meant to contribute immensely to

sustained business operations in selected firms south south region and

general growth in business, be it private or public. The study shall be

beneficial in the following ways:

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ii) It will inform management on the possible and available

investment ratio, their functions and uses for a greater

evaluation of a company’s capabilities and profitability.

iii) The work will also serve as a reference material to other

persons who will conduct studies in similar areas both within

and outside the university.

1.7 Scope of the Study

The study is conducted to cover selected firms both in South-

South region.

However, this study is conducted to cover the use of financial

statement which includes; (Balance sheet, income statement,

statement of cash flow and statement of retained earnings) analysis

civil interpretation management decision.

1.8 Limitation of the Study

The research work has some limitations due to some problems

encountered from the sources of collecting useful materials also

some unforeseen circumstances which posted as a threat during

preparation of this research project includes:

- TIME: A research of this kind would require enough time to

cover many areas of activity effectively, but since the

researcher is a student with other classroom works to do, the

time allocated for the study was limited.

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- FINANCE: During the course of this research, another

stumbling block. Judgment financial resources was

encountered. The researcher has to make due with little

financial provision available to achieve a qualitative and

acceptable research finding.

- Health was also a limiting factor, for instance, the researcher

falling ill in the cause of the study, which stopped the research

for some time.

- TRANSPORATION: The source of collecting useful material or

information is far and the transport logistics expensive, in some

cases, the journey was fruitless if the staff was not available.

1.9 Definition of Terms

* RATIOS: A ratio is the relationship between two amounts that

results from dividing one by the other. It is an accounting term

used to describe the financial index which compares two

financial variables such as current assets and current liabilities.

Examples of ratios are quick ratio, and test etc.

* ACCOUNTING RATIOS: “they are the relationship between

figures expressed as ratios”

* INVESTMENT DECISIONS: This relates to allocation of capital

and involves decisions to commit funds to long term assets,

which will yield benefits in future.

* RATIO ANALYSIS:

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It is an analytical tool designed to identify significant

relationships between two financial statement amounts.

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