ROLE OF FINANCIAL STATEMENTS IN INVESTMENT DECISIONS

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.

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is that financial statement is that financial statements always relate to a past period and hence they are called historical documents.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 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.

-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.

1.3 OBJECTIVES OF THE STUDY

The general objective of this research work is to determine the role of financial statement in investment decision of selected bank in Enugu metropolis. This research work has the following objective:

- To identify the relationship between financial statements and investment decisions

- To evaluate the impact of financial statement in investment decision making.

- To identify factors influencing investment decisions on financial statements.

- To highlight the problems associated with financial statement in investment decision.

- To highlight the various tools used in investment decisions on financial statement.

1.4 RESEARCH QUESTIONS

The research questions were formulated from the objective such as:

- What significant relationship does financial statement have to do with investment decision?

-What impact does financial statement have with investment?

-Are there any factors that influence investment decision?

-Does making investment decisions depends depend solely on financial statement?

-What are the various tools used in investment decision on financial statement?

1.5 HYPOTHESES OF THE STUDY

The following questions were constructed to guide the researcher in her study.

H0 = Financial statement does not have any significant relationship with investment decision.

Hl =Financial statement has significant relationship with investment decision.

H0 = Financial statement does not have any impact in investment decision.

Hl =Financial statement has an impact on investment decision.

H0 = Making investment decisions does not solely depend on financial statement.

Hl = Making investment decisions solely depend on financial statement.

1.6 SIGNIFICANCE OF THE STUDY.

This study will be of immense help to the prospective investors and other interested parties of the general public so as to know how to study the financial report of a business firm in order for them to make a decision as to whether or not to invest in such firm. It will help the government to determine the taxation due and as well as to determine if all the company’s income has been included in the computation of taxes. By doing this, there will be an improvement in the overall assets and liabilities management and the management will also upgrade assets quality and lower cost of funds. The researcher is of the view that this research work will address the problem properly.

1.7 SCOPE AND LIMITATION OF THE STUDY.
This study is on the selected Banks in Enugu metropolis, the limitation is of the study in the selected Banks in Enugu metropolis Enugu state. This is due to some constraints; those constraints were financial difficulties which prevented the running down from one relevant selected Banks in Enugu to another for sources of information necessary for this study. Another constraint is the time limit within my disposal, the demand from the academic activities and limit within this constitutes.

1.8 DEFINITION OF TERMS

FINANCIAL INFORMATION: Financial information summarize the economic performance and situation of a business when confronted with the information and it is useful to have a framework of analysis available to make an attempt to draw what is important from the mass of less important data.

FINANCIAL RATIOS: Financial ratios provide a means by which various items in the financial accounts are related to an appropriate base and thereby enabling these items to be regarded in their proper perspective financial ratios permit comparative studies and therefore they are important tools of financial analysis.

INVESTMENT: Investment is the act of intelligently determining the uses to which saving can be put investment can also be defined as the defined as the sacrifice of current consumption for a future large gain of money or consumption which could be uncertain.

INVESTMENT COMPANY: These are financial institutions organized for the purpose of enabling an individual investor to obtain the advantages of wide diversification in a single commitment.