THE USEFULNESS OF FINANCIAL STATEMENTS IN ASSESSING THE PERFORMANCE OF COMPANIES AS GUIDE TO INVESTMENT DECISIONS

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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Item Type: Project Material  |  Attribute: 83 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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