ANALYSIS OF FINANCIAL STATEMENTS AS AN AID TO MEANINGFUL INVESTMENT DECISION MAKING (A CASE STUDY OF INVESTMENT FIRMS IN ENUGU STATE)
ABSTRACT
The goal of this research project was to discover how our financial statement analysis service may help investment firms in Enugu state make better decisions. Investment businesses employ financial statement analysis to make investment decisions. Management uses them to make judgments as well.
Profitability ratios, liquidity ratios, market value ratios, leverage ratios, and ordinary share ratios are some of the ratios often computed by investment businesses.
This research effort was initiated because most investment firms do not make meaningful decisions that will improve their meaningful possibilities. As a result, we presented recommendations to both investors and investment company management on how to best use financial measures in making meaningful investment decisions.
TABLE OF MATERIALS
I
ii
IIIii Certification
iv. Recognition
v
vi. table of contents
CHAPITRE ONE
1.0 INVESTIGATION 1
1.1 The Study’s Background 1
1.2 Problems of Research 8
9
Hypothesis 1.4
1.5 Investigational questions 11
12
13
13
15
CHAPITRE TWO
2.0 REVIEW OF RELATED WORKS 17
2.1 Financial statements’ function in decision making 17
2.2 The profit and loss account, also known as the income statement23
25 2.3 Financial Statement Notes
2.4 Income statement 26
2.5 Funding source and application statement 28
2.6 Financial statement objectives and usefulness 28
2.7 The Importance of Financial Statement Analysis 33
34
2.9 Financial Analysis Users 36
CHAPTER THREE
DESIGN AND METHODOLOGY OF RESEARCH
Design of Research 39
39
39
Method of sampling 3.4
3.5 Research tools 41
3.6 Research instrument validity and dependability 43
44
3.8 Investigation Methods
CHAPITRE FOUR
DATA PRESENTATION, INTERPRETATION, AND ANALYSIS
4.1 Data Presentation, Interpretation, and Analysis 48
Hypothesis Test 4.2
4.3 Analysis of Questionnaires 67
CHAPITRE FIVE
FINDINGS SUMMARY, CONCLUSION, AND RECOMMENDATION
5.1 Executive Summary 68
5.2
72
74 references
77th Annexe
1.0 INTRODUCTION TO CHAPTER ONE
1.1 THE STUDY’S BACKGROUND
Financial statement analysis is a process that evaluates previous and present financial data in order to evaluate performance and forecast future risks and opportunities. Investors, creditors, security analysts, bank leading officers, managers, taxation authorities, regulatory agencies, labor unions, customers, and many other parties who rely on financial data to make economic decisions about a company employ financial statement analysis. This course focuses on the needs of investors, particularly shareholders and bond holders.
Financial statement analysis focuses mostly on data from external sources as well as supplemental information provided by management. The analysis should reveal significant shifts or turning points in trends, numbers, and linkages.
Financial statements are nothing more than summaries of extensive financial data. Many diverse organizations, particularly investors and creditors, are interested in obtaining inside financial statements. Their goals are sometimes contradictory, yet they are frequently related. However, only all interested parties can effectively apply the basic tool and procedures of financial statements.
Financial statement analysis can help investors and creditors obtain the information they need to make judgments about their investments in a particular company.
Financial statement analysis tools and approaches are of particular importance to investment analysts and financial advisors. As it comes to their clients and potential clients, this person has the same basic disclosure requirements as investors and creditors. Analysts frequently amend accountants’ financial statements for items they do not consider significant or for items they do consider substantial but do not appear on the statements.
Several criteria suggest that “comparability” of financial statement information between organizations is important in financial analysis. According to the Securities and Exchange Commission (SEC) (2000), when investors evaluate the merits of assets and compare them, efficient capital allocation is facilitated and investor confidence is fostered.
The financial accounting standard board (FASB) accounting principles statement specifically notes that “investment and lending decisions primarily include evaluations of alternative opportunities and they cannot be conducted sensibly if comparative information is not accessible” (our emphasis).
Financial statement analysis textbooks almost always emphasize the relevance of financial statement comparability in analyzing a firm’s performance using financial ratios2. Stickney and Weil (2006, p 189), for example, conclude that “ratios, on their own, convey little information.”
Despite the necessity of comparability, no financial statement comparability metric is established, and there is little evidence that it assists financial statement users.
The process of financial communication is critical in economic life. According to research conducted on the financial communication procedures of the first 100 major industrial and commerce firm groupings, financial accounting information is the most important component of a company’s financial communication policy.
Both the quantity and quality of information released are crucial, and both have been steadily improving as a result of the harmonization of international accounting standards, allowing corporations to compete in information with other companies operating on a national or international scale.
Initially, financial statements merely allowed for better accounting data structure and synthesis, and they were not involved in the economic decision-making process, as accounting was viewed as a tool used to preserve corporate assets.
Corporate annual reports and financial statements, in particular, are expected to be issued on a regular basis by all corporate entities. The statements are seen as crucial not only for assessing the company’s performance, but also for understanding how money invested in the entity is used to make appropriate decisions.
Much earlier research confirms that financial statements contain information content that is valuable to the users of the statement (Brown and Kennelly, 2003). This attribute comprises the capacity to forecast entity performance using financial statements (Abdel-Khalik and Espejo, 2007, Coates 2001 Reilly et al, 2007).
Every investment activity does not revolve around decision making. A choice between two or more alternatives is referred to as a decision. Execution of relevant decisions leads to attainment of investment aims and objectives, whilst implementation of incorrect decisions leads to investment failure.
The ultimate goal of investments is profit maximization and expansion, hence capital decisions must be made and implemented in order to attain the aforementioned goals.
For a meaningful decision that will be employed in these objectives for an investment to be made available, what is obtained is reviewed and studied, and a decision is formed and implemented, whether for action execution or corrective measures as needed.
One of the most essential aspects of an investment is the financial component, and the record that contains the financial part of an investment is known as an analysis of financial statement.
This research is centered on financial statement analysis as an aid to meaningful investment decision making using investment firms in Enugu state such as De-Patony investment Ltd, Pauly connections Global investment ltd, and Rocky pools investment Ltd, all of which are located on Ogui road in Enugu.
1.2 RESEARCH PROBLEMS STATEMENT
Many investors are known to have participated into investment endeavors without properly comprehending such investment possibilities, resulting in making and implementing incorrect decisions and eventually closing down the firm when the going got tough.
When investment operations are ongoing, the goal of such action is not always realized. Many investments are carried out without a focus on those ventures that will provide profitable returns in the future, the risk involved, and the rewards to be garnered if embarked upon given the limited financial resources available and the consequences of failure.
Such a setback is an investor’s life, and in the case of investment firms, liquidation.
All of the aforementioned issues arise as a result of poor decision making; thus, this study will identify the means by which meaningful decisions can be derived in order to improve the changes available for investment entities or firms by analyzing information concerning such investment opportunities.
The following issues prompted the creation of this research paper:
a. Nigerian investment enterprises have recognized the relevance of financial statements in decision making.
b. Nigerian investment firms have not been paying attention to the effects of financial statements on company decisions.
c. Investment firms use a plethora of decision benchmarks.
1.3 THE STUDY’S OBJECTIVE
The goal of this research is to examine financial statement analysis as a tool for making effective investment decisions. With specific reference to investment enterprises in Enugu. The following are the precise goals of this research project:
1. To investigate the significance of financial statements in investment decision making.
2. To assess the influence of financial statements on an organization’s financial performance.
3. Determine the various decision criteria used by investment businesses.
4. To identify difficulties related with financial statement analysis in an organization and to propose potential solutions to the problems discovered.
1.4 Proposal
The following study hypothesis were developed in order for the researcher to conduct thorough research on the interpretation of financial statements as an aid to meaningful investment decision making:
Ho: Financial statements have no bearing on investment decisions.
H1: Financial statements are vital in making investment decisions.
Ho: Financial statements have a substantial impact on an organization’s financial performance.
H1: A financial statement has no effect on an organization’s financial performance.
1.5 QUESTION FOR RESEARCH
The following research questions were formulated by the researcher:
1. How important are financial statements in investment decisions?
2. What are the effects of financial statements on an organization’s financial performance?
3. What are the various decision criteria used by investment firms?
4. Is there an issue with analyzing financial statements in an organization?
1.6 THE STUDY’S SIGNIFICANCE
A STUDENT
This study will be used as secondary data by students who will conduct relevant research studies in the future.
THE PARTICIPANTS
This paper will examine the activities of investment firms in terms of the role of financial statements in organizational decision making.
INVESTMENT COMPANIES
The insights gathered from this work will assist investment businesses in understanding the significance and influence of financial statements on decision making.
1.7 STUDY OBJECTIVES
The researcher searched for relevant information as it relates to the topic area, namely the study of financial statements as an aid to meaningful investment decision making, in Enugu Metropolis.
1.8 THE STUDY’S LIMITATIONS
Among the issues encountered by the researcher while doing this investigation were.
i. Financial support
ii. The passage of time
iii. Inadequate Research Materials
iv. Responses of the Respondents
I. FUND: This is a lack of sufficient funds to go around and visit the various locations of the state, as well as a lack of funds to purchase adequate research materials, which is a hindrance to research activity.
II. TIME: Time is another restraint for the researcher. This is due to the researcher juggling multiple school activities at the same time. As a result, she was unable to explore a wide range of interesting topics.
III. LACK OF RESEARCH MATERIAL: The researcher was unable to obtain excellent materials from the several locations she sent in quest of materials on the subject.
RESPONSE OF THE RESPONDENTS IV. Another limitation for the researcher was that some of the respondents found it difficult to describe themselves in terms of financial statement analysis as a tool for making meaningful investment decisions.
1.9 THE DEFINITION OF TERMS
The following technical terms have been specified to aid comprehension of this study endeavor.
FINANCIAL STATEMENT: This is a formal record of a company’s, person’s, or other entity’s financial activity. It is a set of financial records for an investment or company entity.
DECISION MAKING: There is a deliberate and thorough procedure that leads to action. Decision making can be defined as the cognitive process that results in the selection of a plan of action from a set of alternatives.
DECISION: A choice made between alternative courses of action in an unclear situation.
INVESTMENT: An asset or thing purchased with the expectation that it will create income or appreciate in value in the future.
INVESTMENT DECISION: A decision made by directors or management regarding how, when, where, and how much capital will be spent on investment opportunities.
FIRMS: a firm, nearly unyielding surface structure
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ANALYSIS OF FINANCIAL STATEMENTS AS AN AID TO MEANINGFUL INVESTMENT DECISION MAKING (A CASE STUDY OF INVESTMENT FIRMS IN ENUGU STATE)
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