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 react if there is an outright omission of dividend payment, or an announcement of dividend cut. To this effect, companies whose focus is to maximize shareholders wealth see the knowledge of how dividend change relates to the value of the company as a very important issue.
Business organizations have to analyze their financial statements or accounts by way of interpretation, simplification and transaction of facts and data contained in the financial statement.
The essence of this is to draw relevant conclusions, make inference as to the business operations financial positions and future prospects of the organizations.
In the assessment of the performance of an organization, an important area of management control is post factor assessment of financial results of the organization as a whole that is the examination in retrospect of the financial effects of earlier decisions to invest. Management must regularly commit resources for both long term and short term purposes and because the commitment will always involve risk or careful assessment of the anticipated results of any project on the financial position should be made before a decision is taken, and before resources are irrevocably committed.
A periodic evaluation is needed, after resources have been invested, to report what has been achieved, to examine amount of the profit, or the extent of the loss, and to consider the effect of implementing the plan on the financial statement of the business, in particular to note whether financial stability has been maintained or alternatively the extent to which it has been impaired. Information on all these aspect of the finances of the business is needed to permit management to assist the quality of past decisions at strategic level and the effectiveness with which they have been implemented. Finally, it is important that informed base of financial knowledge should be developed from which future activities can be planned.
1.5 STATEMENT OF THE PROBLEM
In Nigeria today most business are facing hard times which is a reflection of the bad shape of the economy. Government on its own has been making different efforts aimed at reviving the economy. Among the government efforts are the encouragement of the growth of small and medium term industries and also for people to invest in some of the public enterprises that have been stated for either full or partial privatization or commercialization.
Unfortunately, business cannot grow reasonably under a crude business practice as most business men and investors in our society are yet to understand the need for financial statements. Probably this is one of the reasons why some businesses are operating without even a book-keeper not to talk of an accountant. Decisions are taken based on intuition and references made only to their cash–box. Perhaps they feel that this is a way of safe guarding their business secret and loan securing because most businesses operate with a very poor capital. This makes growth difficult, if not impossible. Instead of growing they are declining as the result of their poor capital base: and so as there is non-existent of financial statements, they are not qualified for bank loan. Some investors and business operators cannot understand the interpretation technique of the financial statements, because of this problem; they try to do without it, as if it is not important. The high cost of consultancy services in most businesses are small or medium term in size, it becomes hard for them, judging their capital base to rely on the services of the consultancy firms for their financial statements need. The implication of this is that business decisions are bound on luck even in some cases, people resort to native sectors to help make their businesses grow.
1.6 OBJECTIVES OF THE STUDY
The broad objective of this research work is to ascertain the usefulness of financial statements in assessing the performance of companies for investment decisions. The specific objectives are stated below:
a. To determine the relationship between financial statements and shareholders`
investment decisions.
b. To ascertain whether profitability have any significant impact on shareholders`
investment decisions.
c. To find out whether earnings per share have any significant impact on shareholders`
investment decisions
d. To examine if corporate firms` liquidity have any significant influence on shareholders`
investment decisions.
e. To determine the relationship between declared dividend per share and shareholders`
investment decisions.
1.4 STATEMENT OF HYPOTHESES
The following hypotheses were formulated:
Hypothesis 1: There is no significant positive relationship between financial statements and shareholders` investment decisions.
Hypothesis 2: Profitability does not have any significant impact on shareholders` investment decisions.
Hypothesis 3: Earnings per share do not have any significant impact on shareholders`
investment decisions.
Hypothesis 4: Corporate firms` liquidity does not significantly influence shareholders`
investment decisions.
Hypothesis 5: There is no significant positive relationship between declared dividend per share and shareholders` investment decisions.
1.5 RESEARCH QUESTIONS:
The following research questions will be used to get information for the purpose of ascertaining the usefulness of financial statements in assessing the performance of companies in guiding investment decisions especially as it affects Gabson Aluminum Company.
a. To what extent do financial statements have helped the shareholders for investment decisions?
b. To what extent does company’s profitability have contributed to shareholders`
investment decisions?
c. To what extent do earnings per share have helped the shareholders for investment decisions?
d. To what extent does corporate firms` liquidity have influenced the shareholders`
investment decisions?
e. To what extent does declared dividend per share have helped the shareholders for investment decisions?
1.6 SIGNIFICANCE OF THE STUDY
This study will be of immense help among management, shareholders, creditors, bankers and society at large.
MANAGEMENT: the study will go a long way in helping management of business organization towards the undertaking and the knowledge of the uses of the financial statements for the expansion of their businesses.
SHAREHOLDERS: The shareholders will know how much they are able to recover from their investment on equity shareholding.
CREDITORS: This will be an opportunity to the creditors to study the usage of the financial statements in estimating the risk of entering into bad debts in their transactions with business organization.
BANKERS: The banks executives/officials will be aware of the company`s performance level in terms of profitability, capital adequacy and debt performance on loan recovery as to know reasons for their ineffectiveness.
PUBLIC: In a free economy oriented society like Nigeria, this study will help investors to know the basic factors in the financial statements that will help them to decide on whether to invest or disinvest.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study is restricted to only the analysis of the financial statements of manufacturing, trading and profit making organizations for the period of five (5) years. And this research work would have been given a wider coverage if not for some constraints imposed on the researcher by the availability of the time and fund.
Due to time constraints, proximity, financial phenomenon and other prevalent constraints, the researcher will limit the scope of this study to private enterprise.
1.8 DEFINITION OF TERMS
NET LIQUID FUNDS: Cash at bank and in h and cash equivalent (example, other borrowings or investment held as current assets) less bank overdraft and other borrowings repayable within one year of the accounting data.
LIABILITIES: Existing financial obligations which the firm intends to meet at some time in future. Such obligation arises from legal or managerial consideration and imposes restriction on the use of assets by the firm for its own purposes.
PROVISION FOR LIABILITIES AND CHARGES: This is defined by the companies Act as an amount retained a reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, but uncertain as to the amount or as to the date on which it will arise.
CONTINGENCY: A condition which exists at the balance sheet data, the outcome of which will be confirmed only be the occurrence or non-occurrence of one or more future events.
DEPRECIATION: The measure of wearing out, consumption or other cost of value of a fixed asset, whether arising from use of time or obsolesces through technology and market changes.
REPLACEMENT COST: This is the cost at which an identical asset could be purchased or manufactured.
LIQUIDATING PROFIT: Any profit paid out of the retained profit or earning is called liquidating profit or return on capital to shareholders.
FICTITIOUS OR NOMINAL ASSETS: They are non-true assets or debt balances resulting from expenditure of an exceptional or extra ordinary nature which is not represented by present value and have not been written off.
FIXED ASSETS: These are assets acquired for retention in the business and not for conversion into cash or resale. Their life span are usually extended over some years and portioned in a consistent and systematic manner over accounting period of their life span. DEPLETING ASSETS: There are assets meant for earning revenue gradually depleted or exhausted or consumed in the process. Example: mine, coal, gold.
CURRENT ASSETS: These are assets acquired for resale and consist of assets in their various stages of conversion; hence they are called gloating or circulating assets.
LIQUIDATION: It is the winding up and settlement of the affairs of a company by a person called the liquidator who collects all assets and discharges the liabilities.
DEBENTURE: This is a certificate of indebtedness given by a company which usually forms a fixed charge on time or on being drawn for redemption or notice.
APPROPRIATION ACCOUNT: It is an account into which the net profit of a company are carried, and which shows him the profits are disposed of.
FINANCIAL LEVERAGE OR TRADING ON EQUITY: It is the used of the fixed charges sources of funds, such as debt and preference capital along with the owners’ equity in the capital structure.
NET BOOK VALUE: It is the amount whether historical cost or valuation at which an asset is carried in the box less the related accumulation depreciation.
FARE VALUE: This is the amount for which could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction.
USEFUL LIFE: The useful- life of an asset is the shorter of the predetermined physical life and the economic life, during which it could be profitably employed in the operation of the enterprise.
This material content is developed to serve as a GUIDE for students to conduct academic research
THE USEFULNESS OF FINANCIAL STATEMENTS IN ASSESSING THE PERFORMANCE OF COMPANIES AS GUIDE TO INVESTMENT DECISIONS
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