1.0 Introduction
1.1 Background of the Study
Financial statements are part of which is to communicate information about the company to those who have a right to receive it for instance shareholders. Financial statement provide an indication if the company's trading performance.
As a minimum, financial statement includes profit and loss account, balance sheet and related explanatory notes and also a cash flow statements.
The analysis of financial statements is therefore the interpretation and transaction of facts and data contained in the financial statements. The purpose being the drawing of relevant conclusions operation, financial position and future prospects.
The procedure involves the analysis of data contained in the financial statements. For example, in carrying is a very important figure. Similarly, in balance sheet analysis, the components are net assts which is usually compared with capital, loan stock and involving capital.
Transaction of those data into clear and simple form: the translation process may lead to extraction of ratios or percentages that established relationship between comparable data or even the presentation of graph and charts, and also drawing relevant, conclusion and making inferences concerning the company's financial position, stability, profitability and solvency.
Presentation of information so obtained for decision making. The information is used for future controls and policies. The application of this information will involve the isolation of the factors responsible for the state of affairs revealed by the analysis. The analysis could be horizontal or vertical, internal or external.
Horizontal analysis is a comparison of data in financial statements of two or more consecutive accounting periods to detect whether performance has improved or not. For example, the profit if a company in a year can be compared with those of another year which a trend may arise from the analysis. This analysis is internal as if concerns financial data of one company alone. A horizontal analysis of financial statement can be internal when a comparative study of data between one company's financial statement and that of another company over a given time is wholly internal and involves a comparative analysis of data between one company's financial statement and trit of another company over a comparative analysis of data in financial statement within a single period.
In carrying out an analysis of accounts, a number of issues must be considered and conclusion formed there on. These include:
Profitably of the Business:
Operation, particularly in relation to capital employed.
Solvency of the Firm:
The ability of the firm to pay its auditors, the adequacy of its working capital and the liquidity of its current assets reviewed side by side with current liabilities.
The Business Trend:
An analysis of the pattern of business overtime to determine whether profits are rising and falling and the implications for future performance.
The Financial Stability of the Business:
The limit of its borrowing powers, available resources to finance expansion and volume of earning.
The gearing and cover assessing the adequacy of profit to meet payments, pay divided and to shareholders investment.
1.2 Statement of Problems
This research work intends to look into the extend to which investors do carry out and rely on the result of financial statement analysis before making their investment decisions, and the employment by companies of financial statement analysis in assessing their performance and that of their respective management.
1.3 Objectives of the Study
This research work is designed to highlight the objective of financial statement, which are:
- To find out whether investors carry out analysis of financial statement before making investment decisions.
- To find the extent to which investors rely on the result of their analysis in selecting their investment options.
1.4 Research Questions
- Do you think that the bad incident affect the financial statement in business organization.
- Does your organization faces a lot of limitation in the financials statement of the business.
- Does your organization keep proper financial statements records.
1.5 Significance of the Study
It is a known fact that he who does not know where he is going will never know when he gets there. Accounting is defined as the process of analyzing, interpreting and communication of financial information to the users of financial statements. Thus, the statement of affairs has to be interpreted vis-à-vis the financial statement and analysis to the core to enable interested parties to understand the business and know what is up to and to guide management on how to take decision for the day-to-day activities of the business.
This study therefore intended to provide a guide to enable bankers, lawyers, creditors, and management of the business on how best the statement of affairs of business entities is considered in the study.
1.6 Scope and Limitation of the Study
This research would have been carried out throughout the business organization in the state to a wider and valid knowledge about the usefulness of financial statements but owing to the inevitable constraints, the researcher was limited to business organization that operated at Onitsha in Anambra State.
The reasons are due to financial problems encountered during this research. The researcher would have to do more in depth study, if not for all these and limited time within the research work was expected to be submitted.
Again, the researcher was unable to visit other business organizations and presently the cost of transportation is very high. No doubt all these made the project a little bit short of what I initially intended.
1.7 Definition of Terms
The definition of term is also an essential part of this study. Those terms explained have a unique use the study and are subject to several interpretation by different readers of the research work or that are technical in nature.
Balance Sheet:
Providing information as regard to the general financial positions as at a specific day.
Cash Flow Statement:
Replace sources and application of fund statement and the idea is the clarify an area of not properly covered by the profit and loss account and balance sheet and that is the cash position of the business and how it was aimed at.
Comparisons:
To emphasize the difference between two things.
Dividend:
Periodical payment of interest on a loan share of profit to shareholders in a business company.
Financial Statements:
The annual reports of a company that shows the state of its affairs. It also provides an indication of a company's trading performance.
Gearing:
The relation between money borrowed by a company from its bank and money provided by its shareholders.
Interference:
A conclusion reached on the basis of knowledge.
Isolation: Separately, alone.
Prospects:
Something expected, hoped for, looking forward to.
Profit and Loss Account:
This is the summary and outcome of financial and operating performance over a specific period usually one year.
Profitability:
Bringing profit or advantages
Stability:
Firmly established, not likely to fall or change, the quality or state of being steady.
Solvency:
The power of dissolving or forming a solution or having money enough to meet ones debts.
Vis-à-Vis:
In relation to something in comparison with something.
Trend:
This is a general direction in which a situation is changing or developing.
