The Role Of Financial Statements In Investment Decisions

ABSTRACT
The research topic of this study is “The role of financial statement in investment decisions” – a study of selected banks in Enugu metropolis. The purpose is to identify the relationship between financial statement and investment decisions, and the impact of financial statement in investment decision making and also to know if investment decisions depends solely on financial statement. The study population is 125 persons who are the member of staff of the five major selected banks. Using the Yaro Yamani formula, the sample size calculated gave (95). The formulated hypotheses were tested using Z test with statistical technique at 5% level of significance. The researcher also made use of primary methods of data collection which included questionnaires and personal interviews. Also the secondary methods of data collection used are library research of relevant materials and existing documents from the selected banks. The researcher recommends that banks in Enugu metropolis should consult the financial statement before making investment decisions, and also it is recommends that all interested parties to financial statement should used required financial ratio analysis for decision making.
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TABLE OF CONTENT
Approval page ii
Dedication iii
Acknowledgement iv
Abstract vi
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problems 3
1.3 Objective of the Study 4
1.4 Research Questions 5
1.5 Hypotheses of the Study 5
1.6 Significance of the Study 6
1.7 Scope and Limitation of the Study 6
1.8 Definition of terms 7
References 9
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CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 INTRODUCTION 10
2.1 Historical Development of Business Financial State Analysis
and Financial Ratios 12
2.2 Accounting Information Tools 14
2.2.1 The Balance Sheet 15
2.2.2 The Profit and loss Account (Income Statement) 15
2.2.3 Statement of Accounting Policies 16
2.2.4 Director Report 16
2.2.5 The value Added Statement 17
2.2.6 The five year financial summary 17
2.2.7 The Auditor’s Report 17
2.2.8 Notes on the Accounts 17
2.2.9 A Cash Flow Statement 17
2.3 Quantitative Characteristic of Accounting Information 18
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2.4 Use of Accounting Information by decision makers 21
2.5 Objective of Accounting Information 22
2.6 Importance of Accounting Information 24
2.7 Users of Accounting Information and their Objective 25
2.8 Financial Ratio Analysis 27
References 36
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design 37
3.2 Sources of Data 37
3.3 Research Instruments 38
3.4 Reliability / Validity of research Instrument 39
3.5 Population of Study 39
3.6 Sample and Sampling Technique 40
3.7 Administration of Research Instruments 44
3.8 Method of Data Analysis 45
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3.9 Decision Criterion for Validation of hypothesis 46
References 47
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 48
4.2 Data Analysis 49
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION, RECOMMENDATION
5.1 Summary of Findings 74
5.2 Conclusion 75
5.3 Recommendations 77
Bibliography 79
Appendices 81
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Every business prepares profit and loss Account or income statement to ascertain the net result of financial working of the business whether it has earned some income or profit or sustained any loss. It also prepare balance sheet to find out the financial position of the business. Profit and loss account or income statement, retained earnings statement and balance sheet are known as financial statements.
Gautam (2005) sees financial statement as financial information which is the information relating to the financial position of any firm; when presented in a concise and capsule form. Besides profit and loss account and balance sheet, some other statements are also prepared for deriving certain conclusions. A schedule of current assets and current liabilities of two years may be prepared to know the changes in working capital. Similarly a fund flow statement and cash flow statement may also be prepared to ascertain the future estimate of cash receipt and payment. Thus, financial statement include: profit and loss Account, income statement and balance sheet along with certain schedules and statement.
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Ezeamama (2010) is of the opinion that rational decisions have to be taken to manage modern business successfully and for this rational decision to be taken in line with the firms’ objective. Some analytical tools ought to be available and used based on the strengths and weakness of the firms. Thus, the financial strengths and weaknesses of a firm are revealed in its financial statement.
The nature of financial statement is that financial statement is that financial statements always relate to a past period and hence they are called historical documents. Financial statements are expressed in monetary terms and it indicates profit abilities of the business through balance sheet.
Financial statement are analyzed in order to use the information in financial statements to ascertain the profitability and financial soundness of the firm, to Judge the managerial efficiency for inter form comparison of similar nature and to make valuable for costs.
According to Remi Aborode (2006), financial statement need to be interpreted for better understanding and analysis and it can thus be interpreted using individual items contained in financial statement or/ and using ratios computed from items contained in financial statement ( Ratio analysis).
The essentials of financial statements range from the fact that financial statements should disclose correct information about profitability and financial
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position of a business. The information disclosed should be presented in such a manner that it can be easily compared with the figures of the previous year or with those of other similar firms. The information so provided in financial statement should be that which can be verified from the relevant and prepared within a reasonable time after the end of accounting period. The information provided by financial statement should also be easily understood by the interested parties. Such as investors, creditors, lender and Bankers, customer’s employees, government and other agencies, the public and stock exchange.
It can therefore be seen that financial information is very effective and essentials in making investment decisions in an organization be it private or public. Thus the role of financial statements in investment decision in some selected banks in Enugu metropolis will be critically evaluated.
1.2 STATEMENT OF THE PROBLEMS
Several investment decision tools are used an financial statement of firms and these has been used for several investment decisions, which most often pays off bearing in mind the definition of what a financial statement is. It is important to note the various roles it plays in investment decision.
However, the problems encountered by these investors include.
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 Whether these financial statements represent a true and fair view of what it purports to represents.
 Whether all necessary disclosure have been made by the management of the enterprises, which can now convince a person that deductions made base on the financial statement is not misleading.
 What benefit is this financial statement to the external users particularly investors who are taking decision on a daily basis?
 How analytical tools are set to aid prospective investors in accessing the financial position of the corporate organization.
 How to determine the profitability of a company.