IMPACT OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING

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IMPACT OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions. Both large and small organizations in addition to satisfying the legislating requirement tend to retain existing investors and to attract potential ones through the publication of their financial statements where the capital stock of a corporation is widely held and its affairs are of interest to general public relations also available for potential investors, bond holders and trade creditors as a tool of information for investment decision. Financial statement based on result on past activities are analyzed and interpreted as a basis for predicting future rate of returns and assessment of risk.

Financial statement provides important information for a wide variety of decision, investors draw information from the statement of the firm in whose security they contemplate investing. Decision makers who contemplate acquiring total or partial ownership of an enterprise expect to secure returns on their investment such as dividends and increase in the value of their investment (capital gain). Both dividends and increase in the value of shares of company depends on the future profitability of the enterprise. So investors are interested in future profitability. Past income dividend data are used to forecast returns from dividend and increase in share prices.

Financial statement is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions. For such a business entity, financial statement is a statement that reports all relevant financial information, presented in a structured manner and in a form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2017) and also to decision making pertaining to cost planning, investment planning, expected returns and performance evaluation.

The financial statement comprises of balance sheet (for determining financial position), profit and loss statement (describes statement of comprehensive income), statement of equity changes (explain the changes of the company’s equity), and cash flow statements (reports on a company’s cash flow activities, particularly its operating, investing and financing activities). Although, these statements are often complex and may include an extensive set of notes to the financial statement and explanation of financial policies and management discussion and analysis (IASB, 2017b). The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statement are considered an integral part of the financial statements. However, the approaches that the notes and financial statement are presented and reported are critically for investment decision making by existing and prospective investors in order to earn optimal returns on their investments.

This indicates that financial statement methods in terms of information disclosure pattern, transparency, auditing, reporting standards, regulatory control and flexibility, corporate governance, and financial scandals have influence on investment decision making in any organization, especially in financial institutions with extensive range of investment activities that requires comprehensive financial facts that can be obtained from a financial statement. The perceived relevance of the financial statement are, to provide information about the financial position, performance and changes in financial position of a firm that is useful to a wide range of users in making management and investment decisions. These users include managers, directors, employees, prospective investors, financial institutions, government regulatory agencies, media, vendors and general public. Though, these financial statement are often prepared according to national standards, corporate governance, professional ethics, and code of ethics. This to avoid financial reporting fraud and scandals that might hinders effective decision making process by management and other users of reports. The purpose of ethics in financial accounting reporting with expected standards is to re-orientate corporate organization on the need to abide by a code of conduct that facilitates public confidence in their services (Okafor, 2016).

1.2     Statement of the Problem

It is observed that the role of financial statements in investment decision making in Nigeria has some problems to both investors and managers of business organizations who are either not aware of the importance of interdependence relationship that exist between investors and business organizations. Such problems include;

1. How analytical tools are set to aid prospective investors in
   accessing the financial position of the corporate organization.
2. Evaluation of performance of a company in investment decision
   making.
3. How to determine the profitability of a company.

The above listed problems are the problems to look into in this research work. The problems analyzed tend to scare away both existing and potential investors. The reason of this study is to adequately look into the above problems and suggest possible solution to any of them.

Nevertheless this research will find possible key factors to solving these
problems because financial statement in investment decision making in
Nigeria is the life blood of every organization to the potential investor.

1.3     Objective of the Study

The general objective is to ascertain the impact of financial statement in investment decision making. The specific objective is as follows;

1. To examine how a set of analytical tools will aid prospective investors in assessing the financial position of the corporate organization.
2. To evaluate the performance of a company for investment decision making.
3. To determine the profitability of the company.

1.4     Research Questions

According to Uzoagulu (2018; p96), research questions guide the researcher in constructing the questionnaires. Therefore, the researcher raised the following research questions to guide her in constructing her questionnaire which are instruments in the study. The questions are as follows;

1. To what extent is financial statements used in the investment decision making in a company?
2. Are financial statements useful for forecasting company’s performance?
3. Do financial statements determine the profitability of an organization?

1.5     Statement of Hypothesis

Hypothesis is an unproved theory, proposition sent forth as an explanation of something, often as the basis for further investigation. Hypothesis is the guides for the investigators in the entire process of research endeavor and they keep the researcher on the main line of the study, in this research, the
following hypothesis are formulated for the study;

Hypothesis I

H_o:    Financial statements are not used to be relied upon in investment
decision making in a company.

H_i:     Financial statement are used to be relied upon in investment
decision making in a company.

Hypothesis II

H_o:    Financial statements are not useful for forecasting company’s performance.

H_i:     Financial statements are useful for forecasting company’s performance.

1.6     Significance of the Study

This study will be of immense benefit to banks by improving the banking performance financial analysts, investors, companies and financial organizations.

This is because the study intends to help these stockholders in decision making. The study will help in widening knowledge financial statement in investment decision making, it will also make the organization to appreciate the importance of sound financial statement in the provision of information necessary for decision making. It will review the improvement in the organization handling the financial statement and show equally the ways through which improvement could be accomplished finally this research will equally serve as a reference to students in this noble institution and other school who may be interested to embark on a further research study of this nature and above all, report of this study shall definitely add to existing knowledge in research methodology.

1.7     Scope of the Study

This study will be restricted to the impact of financial statement in investment decision making taking a good analysis of First Banks Plc and United Bank for Africa in Abuja.

1.8     Definition of Term

Financial Statement: Are the balance sheet, which shows firm’s assets, liabilities, and net worth on a stated date.

Investment: The act of putting money, effort, time etc. in something to make a profit or get an advantage.

Decision Making: Is regarded as the cognitive process resulting in the selection of a belief or a course of action among several alternative possibilities. Every decision–making process produces a final choice, which may or may not prompt action.

Financial Planning: Is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set.

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