FINANCIAL STATEMENT AS DETERMINANT OF PROFITABILITY IN BUSINESS ORGANISATION
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FINANCIAL STATEMENT AS DETERMINANT OF PROFITABILITY IN BUSINESS ORGANISATION
Chapter one
INTRODUCTION
1.1 Background of the Study
Finance is the study of the long-term allocation of assets and obligations under situations of certainty and uncertainty. Alternatively, circle of finance might be described as the science of money management.
The time value of money is an important concept in finance since it states that the purchase power of one unit of cash can change over time.
Scholars have long struggled with the issue of financial management as a factor of profitability in business organisations. The importance of using financial statements to determine company performance cannot be overstated.
Emekekwue (2002) defines a financial statement as an analysis of the planning, organisation, and control of an organization’s resources in order to fulfil needs and material resources.
Dave (2012) defines financial management as an essential aspect of total management, rather than a staff specialist focused on fund-raising operations. He went on to say that the primary issue of financial policy is to rationally balance the benefits of possible uses against the costs of other potential resources in order to achieve broad financial goals.
Finance management has piqued the interest of academics and practical managers alike, owing to its enormous potential to impact an enterprise’s profitability. This potential is engrossed in both phases of fund management, whether mobilisation or deployment.
According to Pandeg (2002), a financial statement is a managerial activity that involves the planning and control of a company’s financial resources. The topic of financial statements is of great interest to both academics and actual managers.
It is of significant interest to academics because the field is still developing, and there are still some areas where conflicts persist that have yet to be resolved.
At the microeconomic level, performance is the direct result of managing diverse economic resources and ensuring their efficient use in operating, investment, and finance activities.
To optimise economic outcomes, extra emphasis should be paid to the correct foundation of managerial decisions. These should be based on complex information about the evolution of all types of activities in the company’s financial statements
which can be found in the annual financial statements, which serve as the primary informative source for qualitative analysis of how resources are used during the value creation process.
In other words, for companies to perform well in the long run, it is necessary to develop, implement, and maintain economic and financial strategies, measures, and coherent policies that are the result of a thorough understanding of the internal and external conditions under which the firm operates.
The attributes of management options are determined by the capacity to recognise those factors that can contribute to an increase in results and performance.
The research objective of this work is to investigate how to achieve these goals. We believe that the most relevant indicators that reflect aspects connected to economic development and company performance growth should be picked from the relative indicators.
The empirical investigation of the relationships between various impact factors and profitability was undertaken using data from a company’s yearly financial reports.
1.2 Statement of the Problem
Financial statement analysis can be a valuable tool for determining a company’s performance and conditions. However, some challenges and issues arise in such analyses, necessitating caution, circumspection, and judgement.
Problems in financial statement analysis include the following:
(i) The absence of an underlying hypothesis.
(ii) Conglomerate firms.
(iii) Window dressing.
(iv) Variations in accounting policies.
(v) Interpretation of results.
(vi) Correlation of ratios.
1.3 PURPOSE OF STUDY
The primary goal of the study is to investigate financial statements as a predictor of profitability in commercial organisations in Abeokuta and make realistic recommendations on how to improve or enhance an organization’s financial statement standards.
(i) To examine the financial statements of the companies.
(ii) The future performance of the companies.
(iii) The benefits that people have obtained from the companies thus far.
1.4 RESEARCH QUESTION.
The research questions were used to produce the following questions.
(i) Is there a substantial relationship between the total assets turnover ratio (TATR) and the Gross Profit Margin?
(ii) Is there a substantial relationship between the debtor turnover ratio (DTR) and the gross profit margin?
(iii) Does the inventory turnover ratio (ITR) have a substantial relationship with gross profit margins?
(iv) Does creditors’ velocity (CRSV) have a substantial association with gross profit margin (GPM)?
1.5 Significance of the Study
This study is likely to be significant in the following respects.
(i) It will serve as a reference material for individuals who are interested and may like to conduct similar study.
(ii) It will be used as a tool for organisations to make decisions.
(iii) It will assist the company’s customers with compliance.
1.6 Scope of the Study
The research study will touch on the financial statements as a determinant of the profitability of commercial organisations.
1.7 Definition of Terms
FINANCIAL: is a field that deals with the allocation of assets and liabilities across time under conditions of certainty and uncertainty.
A business is an organisation that trades goods, services, or both with consumers.
ORGANISATION: An entity, such as an institution or an association, that has a common aim and is connected to the outside world.
PROFITABILITY is the state or condition of generating a financial profit or gain. It is commonly quantified by the price-to-earnings ratio.
ECONOMICS: Is the social science that studies the factors that influence the production, distribution, and consumption of goods and services.
DETERMINANTS: Is a value connected with a square matrix.
INTEVENTORY: Refers to the items and materials that a business keeps for the purpose of reselling.
A debtor is an entity that owes money to another entity.
Gross profits, also known as sales profits, are the difference between revenue and the cost of producing a product or providing a service.
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