1.1 BACKGROUND TO THE STUDY
Financial Statement is
the reflection of a company’s wealth, assets and liabilities. It show the
financial strength of an organization.
Both the Management of
such organization and the Investors act based on the information generated in
the company’s financial statement. Therefore Financial Statement stands as tool
for evaluating and decision making by the users.
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 quests and instruction. Ola
In today’s economy information and accountability
have assumed a larger role in our society.
This is why it is Statutory Company and Allied Matter 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 carful 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 plans 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. Also to compare the performance of previous
related accounting period performance with the present one. 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
In carrying out an analysis of accounts, a number
of issues must be considered and conclusion formed thereon.
of the business operation, particularly in relation to the capital employed.
the firm: the ability of the business to
pay its creditors, the adequacy of its working capital and the current
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.
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
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.
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 dereferences made only to their
cash –box perhaps they feel that this is a way of safe wording their business
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