(PDF) Investors Reliance on Financial Statements

Chapter One of Investors Reliance on Financial Statements

INTRODUCTION

Background of the study

According to America Accounting Association, Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information. From this definition, it can be seen that the main objective of accounting is to provide economic information that will enable the users to make decisions. According to Patrick .A. Casabona (2006), Investors and creditors throughout the world base their decision on the information published in various financial and economic reports issued by business entities. The most important of these, are the annual and quarterly reports that depicts an entity profitability and financial condition, which investors and creditors reviews carefully before investing their fortunes. It is therefore, imperative that these reports convey information that reflects the economic reality of an entity in a meaningful, transparent and comparable fashion. Recently however, there have been a host of corporate financial scandals accompanied by fraudulent financial reporting in Nigeria, which have affected the very foundation of corporate financial reporting and investor’s confidence. Obviously, this had an adverse effect on investor’s confidence in the Global financial reporting process and ultimately on the market values of corporate equity securities. These activities leads to swift actions by Government and their regulatory agencies, i.e. accounting and Auditing standards setter and other financial influential organizations around the world, in other to restore public confidence in the global financial system. The use of different accounting standards by different countries over the years has also had adverse effects on the flow of investment capital across borders, which has negatively affects international economic growth an security valuations. However, due to economic, political and regulatory developments, progress toward attaining a convergent set of Global financial accounting reports in which users of accounting information base their opinion has to some extent be encouraging. Financial accounting statements are summaries of monetary data about an enterprise and are used in an attempt to help make informed decision in the present and future. However, financial statement portrays the operation of transaction and other event by grouping them into element according to their economic characteristics. Many entities of the world utilize financial statements, those financial statement may be drawn up for private individuals non-profit organization manufacturers and service industries but it is worth noted, that the these groups that takes much advantage of the usefulness of financial statements are large corporations, governments and the third one which is the topic of discuss “investors”.Financial statement plays a decisive role in each of these entities. Corporations decided how much credit to extend to customers and how much should be distributed to investors as dividends. Investors use company’s financial statement to decide whether or not, it would prove advantageous to invest their fortuned money and if so, what percentage to invest. The government uses financial statement to determine how much an entity is required to pay as taxes, each decision stated above does not always require the same financial information however, a balance sheet would be used in the decision making process for assessing a competing firm and determining a customers credit unit. It provides the users with data about available resources as well as the claims to those resources. An income statement is prove useful in determining credit extension to customers, distribution of dividends, taxes and investment opportunities. It provides the users with data about the profitability of the enterprise. Detailing source of revenue and the expenses, which reduce profit. A cash flow statement would be a useful tool in each instance because it gives a brief description of how much cash is coming in, going out and where exactly, it reports on cash flow from investing, financing and operating activities. Although each one is unique in its own respect, each financial statement is a necessary tool in making any financial decision.

STATEMENT OF THE PROBLEM

Research work is carried out to investigate into some areas where attention has not be focused. Some of these problem is researcher attempts to solve is the inability of most business organizations to sustain their existence on the long run which is attributed to academic weakness. However investors today no longer rely alone on the financial statements produced by the directors of company (Union Bank, Nig Plc), because of lost of confidence on the statements, that the set of financial statement might not represent the true and fail view of the company’s financial position, investors might also have the fear that the company have declared adequate profit through cash flow analysis in other to build investors confidence whereas that is not the true position of the company economic situation. Financial statement also does not guarantee the viability of the company and it does not reflect the substance of the company on the long run. These and many more problems a worth assessing in other to, advance a more realistic measure in making in investment decisions

OBJECTIVE OF THE STUDY

This research aims at achieving the following objectives,

1. To determine if the state of Affairs of the company can attracts more investors to invest through than annual reports, analysis, advertisement or publication.

RESEARCH HYPOTHESES

In attempting to reach a decision, it is useful to makes assumptions about the population involved in the study. Such assumptions which may not be true are called hypothesis. In this study the hypothesis will,To determines if there is any significances relationship between the state of affairs of the company and investors in their investment decisions.

Ho: There is no significances relationship between the state of affairs of the company and investors in their investment decisions.

Hi: There is significance relationship between the state of affairs of the company and investors in their investment decisions

Ho: There is no significances relationship between the financial statement and the confidence build on the company.

Hi: There is significance relationship between the financial statement and the confidence build on the company.

SIGNIFICANCE OF THE STUDY

The study plays significant role in student, lecturers, analyst, government, institution and companies’ activities on their investment interest and judgment. However, the study should be able to help investors to realize the importance of analyzing financial statement by using ratio on a single year data before decision taking. The study is considered crucial for highlighting and analyzing the following views;

1. Informing actual or potential investors whose concern are their returns on investment.

2. Informing creditors who rely on the current financial position and solvency of the firm as a parameter for measuring the firms liquidity.

3. Informing as many users of accounting information the need of proper analysis therefore taking decision

SCOPE AND LIMITATION OF THE STUDY

This research cantered on the investor’s reliance on the financial statement of the company. It shows the extent to which investors can make analysis of the Bank financial statement and for taking meaning decision as to, whether to invest / continue in businesses or to doctrine from investment on the company under review. The researcher encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

DEFINITION OF TERMS

Section 331 of companies and Allied Matter Act 1990 (CAMA); defines “financial statement as those records required to prepared and kept by every directors of a company containing the day to day transactions of accounting information to take adequate decision about the organization. Those records include;

1. Balance sheet: Which can also be referred to as the statement of financial position or condition, it reports on the company’s assets, liabilities and net equity as of a given point of time.

2. Income statement: This can also be referred to as profit and loss account, it reports on a company’s income, expenses and profit / loss over a given period of time profit / loss account provider information on the operation of the enterprise. This information includes sales, and various expenses incurred during the processing state.

3. Statement of return Earning: This explains the changes in a company are retained earnings over the reporting period.

4. Statement of cash flow: This reports on the company’s cash flow activities particularly its operating, investing and financing activities Professional Accountancy Tutors pointed out the following:

5. Accounting information: There are set of data that are found in a financial statement of an enterprise.

6. Accounting period: These are referred to as the times span, usually one year, which the financial statement of an enterprise covered. However, some organization produces quarterly, half year and some annual report.

7. Notes on the accounts: This forms an integral part of a financial statement and provides detailed or supplementary information in respect of items disclosed in the Balance sheet and profit and loss account.

8. Sources and application of find statement: This provides information on the derivation and utilization of funds during the period covered by the financial statement.

9. Value added statement: This reports on the wealth created by an enterprise during the period covered by the financial statement. It usually shows how the wealth created is distributed among various interest group (e.g. employees, government, creditors and proprietors).

10. Historical financial summary: This enables an instant comparison over a period. Usually five years, of vital financial information about an enterprise- turnover, profit before and after tax, dividends, assets employed, issued and paid up capital, reserves, medium and long-term liabilities, earnings and dividends per share.

ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study