ABSTRACT
Corporate
organizations owe a duty to fully disclose matters concerning their operations
so as to aid investors in making investment decisions because investment
decision makers rely on information obtained from financial statements to
predict future rate of return. Without the financial statement, there will be a
problem of how to determine the profit of a company, and evaluation of
performance of a company. The general objective is to ascertain the use of
financial statement in assessing the performance of companies and in guiding
investment decisions. Survey research design was adopted in this study. The
population of the study comprises of 25 staff. The study covered a period of
five (5) years, 2007-2011. Secondary and primary sources of data were used in
the study. The data were obtained from the Gabson Aluminum Company Limited
financial annual reports. Statistical tables, charts and percentages were used
to analyze the data. Chi-square (X2), simple percentage and ratio
analysis were used to test the hypotheses at the alpha level of 5%. The results
of the study discovered that financial statements are very relevant in
assessing the performance of a company, and it also helps in guiding investment
decisions. The study recommended that: there should be prompt provision of the
financial statement at the end of each financial year; no investment decisions
on a company should be taken without the consideration of a company`s financial
statements.
CHAPTER ONE
INTRODUCTION
1.4 BACKGROUND TO THE STUDY
The
purpose of financial statement is to provide reliable information about the
financial position, performance, and relevant changes in financial position of
a company or business. Listed companies use financial statements as one of the
major medium of communication with their equity shareholders and public at
large (Cheng & Yang, 2003; Sloan, 1996; Hribar & Collins, 2002).
When
these financial statements are released, they can have large impacts on the
business and on the investors of the company. Therefore, it is critical for the
companies to ensure that the information the statements present are correct.
Financial statements can have a drastic effect on the stock price of a company.
Many investors look at the financial statements when making investment
decisions. If information is presented in a financial statement that is better
or worse than expected, it can send the stock price up or down. Investors often
use financial ratios based on information from the financial statements to make
assumptions. Because of this, the financial statements can have a serious
effect on the investors of a business.
Financial statements can also have
an impact on how easy it is for a business to get financing. If a company is
trying to take out a business loan, the lender will typically want to look at
the financial statements of that company. If the information on the financial
statements is not flattering, it may negatively impact the ability of the
company to borrow money. Lenders usually want to invest in companies that have
good financial numbers. Financial statements also have impact on new
investors. When a company issues new shares of stock, it will most likely
distribute financial statements to potential investors. The potential investors
will examine the financial statements to determine if they want to put money
into the company. Low earnings numbers could negatively impact the number of
investors willing to put money into the company. In some cases, financial
statements can even affect other businesses. For example, a leading company in
a particular industry releasing financial statements can influence that
industry as a whole. Bad numbers by a leading company can sometimes lead to a
negative outlook on other companies. This may drive down the stock prices on
other companies in the same industry or sector of the market.
Statement
of Accounting Standards (SAS) 2 provides that financial statements consist of
Balance Sheet, Profit and Loss Account or Income Statement, the Notes to the
Accounts, Statement of Sources and Application of Funds, Value Added Statements
and Historical Financial Summary. These elements of financial statement provide
information about the resources, obligation and the performance of the company
in a clear, simple and understandable manner. Shareholders of a company, both
existing and potential, will want to know how effectively the directors are
performing their stewardship function. They will use the financial statement as
a base for decisions to dispose of some or all of their shares, or to buy some.
Investment decisions depend on expectations of the benefits of the investment,
which in turn depend on expectations of future growth and product demand.
Expectations of future growth are based on information that includes earnings
per share, dividends per share, leverage, and liquidity. Thus, the financial
statements are considered very important to shareholders.
Some authors have however argued that in developing
economies, shareholders of corporate firms do not seem to pay particular
attention to financial statements in their investment decisions but rather on
other extraneous variables such as the frequency and regularity of dividend
payment and market price per share (ugwumba, 2010). Shareholders are said to be quite keen with respect to
the regularity of their (cash) dividend and, therefore, would usually...
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