Project Topic

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT AS A MANAGERIAL TOOL FOR DECISION MAKING (A CASE STUDY OF NWOKEJI URBAN PLANNING AND ARCHITECTURAL STUDIO [NUPAS]

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 Format: MS word ::   Chapters: 1-5 ::   Pages: 185 ::   Attributes: Questionnaire, Data Analysis,Abstract  ::   560 people found this useful

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                                    1.0 INTRODUCTION

 

    1.1 Background of the Study



 The  complex  nature  of  today’s  business  world  and  the

      transformation  of  the  entire  world  into  a  global  village  have  been  of

      great  concerns to  manages  of  all  forms  of  business  organizations. 

      According  to  Ojuigo  (2001),  the  problems  of  managers  are  multi:-

      varied  because  of  inefficiency  in  management  of  poor  decision

      outcomes  of  these  organizations.    Therefore,  the  managers  are

      unable to achieve the organizational objective within a period of time.


     As  diverse  as  business  is,  its  controllable  and  uncontrollable

      factors influence all decisions which ultimately lead to the realization

    of  set  objectives.    To  achieve  this,  management  needs  reliable,

      authentic  and  relevant  information  from  the  financial  statements  to

      efficiently facilitate decision making.


     It must be noted that every business stores at making at least

      from  investments  “sustainable  profits”  so  as  to  stay  afloat  and

      continue  in  business.    Therefore,  profit  being  the  concern  of  every

      manager  is  a  factor  in  business.    To  achieve  this,  available

      information  from  the  financial  statements  of  organizations  must  be

      analysed,  interpreted  and  used  as  a  basis  for  decision  making

      (Needham  and  Dransfield  1991).    Financial  statement  analysis  is

      often  considered  as  a  vital  tool  used  in  evaluating  a  company’s

 
      performance  and  ensuring  that  decisions  are  based  on  facts  rather

      than rule of thumb.


     A financial analyst needs financial statements of companies to

      be able to identify operating and financial problems which may affect

    the companies (Mbat, 2001:60).  Thus, any person who analyses the

      financial statements of firms should be able to identify the cause and

      effect of financial and operating problems of such firms.


     The  cause  of  any  financial  or  operating  problem  is  an  event,

      which produces an effect (the problem).  However, in order to identify

    the  cause  and  effect,  the  system,  which  represents  an  indictor  f  the

      problem,  should  be  observed.    This  process  is  referred  to  as

      interpretation  (Pandey,  2005).    According  to  (Mbat,  2001),  it  is  the

      responsibility  of  the  financial  manager  or  analyst  to  enable  them

      make better management decisions.


     The symptoms could be:


        - Declining liquidity

        - Declining profit

        - External debt recovery period

        - Increased volume of inventory

        - Declining return on total assets

        - Increasing operating expenses etc


        The  identification  of  causes  should  also  be  important  in  order  to

      appropriately evolve corrective measures.


         Financial analysis and interpretation assist in the:

 
        - Identification  of  organizational  performance  through  the  use  of

            analystical data.

        - Identification  of  empirical  relationships  between  operating

            results and those items which have influenced the achievement

            of the results.

        - Identification of historical data order to determine which internal

            or  external  factors  have  exerted  positive  or  negative  influence

            on the operating results (Mbat 2001:61).


          Categorically,  there  are  three  forms  of  financial  analysis.    These

      include:  multivariate,  univariate  and  ratio  analysis  (Welsh,  1987). 

      Moreover,  ratios  are  the  end  results  of  basis  analysis.    The  ratio

      requires an interpretation on the basis of their trends and in the lights

    of  what  is known  of the  business  as  a  young  concern.   It  should  be

      noted that financial statements represent the positions of a firm at a

      particular point in time.


          However, the success or failure of a business depends largely on

    the quality of decisions made by management, which in turn depends

      on reality of accounting information available on them.


         Research  into  this  area  is  quite  relevant  given  the  apparent

      investment  failures  experienced  by  many  business  organizations. 

      The collapse of many business either private or public is due to poor

      decision.  The question is whether management has used information

      provided  in  the  financial  statement  extensively  to  enable  rational

      decision making?


 

    1.2 Statement of the Problem


     The  principal  aim  of  making  investment  decision  is  to  get

      adequate  returns  from  it.    According  to  Needham and  Dransfield

      (1991), “people as a rule will only tie up their money in a business if

      they are satisfied with the returns they get from it”.


     In  an  attempt  to  achieve  maximum  returns  from  investment  in

      production,  services  shares  or  stock  and/or  other  securities  outside

    the firm, a comprehensive analysis of the company which is intended

    to be invested in should be carried out using the company’s financial

      statements  to  ascertain  both  its  explicit  and  implicit  investment

      opportunities.    However,  organizations  that  do  not  use  financial

      statement  analysis  in  making  investment  decisions  could  be  ill

      formed.  As a result, the following problems may arise:


        (i) Inability to identify viable investment opportunities

        (ii) Decreasing returns from investments.

        (iii) Decline in organizational overall profitability.

        (iv) Increased  investment  risk:  The  organization  might  not

                achieve its corporate objective at the end of the period.


        If  the  trend  continues,  it  will  likely  lead  to  the  failure  of  the

      organization.    Therefore,  there  is  a  great  need  for  organizations  to

      consider  and  analyse  company’s  financial  statements  before

      investing in that company.  These are the focus of this study.

 

    1.3 Objectives of the Study


     On noting that most investments made by firms end in failure, it

    is the overall objective of this study to determine how firms can use


 
      financial  statement  analysis  and  interpretation  to  aid  management

      decisions.  Specifically, the study is designed to:


        i) Find  out  how  the  use  of  financial  statement  analysis  assists

                  organizations in identifying investment opportunities.

        ii) Find  out  how  increasing  investment  returns  can  be  achieved

                using financial statement analysis.

        iii) Find  out  the  extent  to  which  a  company’s  overall  profitability

                can  be  hampered  if  it  does  not  analyse  another  company’s

                financial statement before investing in it.

        iv) Find out how business failures can be curbed or minimized and

                corporate objective achieved through successful investment.

        v) Identify alternative ways of minimizing investment risk.


 


    1.4 Research Questions



     The  following  questions  are  put  forward  for  the  purpose of the

      study.


        1) Is  financial  statement  analysis  important/necessary  in  every

              organization?

        2) Who are the users of financial statement?

        3) How  can  a  financial  statement  of  an  organization  be

            interpreted?

        4) How  can  its  interpretation  be  used  in making  effective

              management decisions?

 

 

    1.5 Hypotheses of the Study


 
     To  id  the  achievement  of  the  desired  objectives,  the  following

      hypothesis are formulated:

 

      HO: Represents Null hypothesis

    HI: Represents Alternative hypothesis
 

      Research hypothesis No 1



      HO:There  is  no  significant  difference  between  the  returns  of  a  financial
 

            statement  analysis  and  interpretation  based  on  management

              decisions.


      H1:There  is  a  significant  difference  between  the  returns  of  a  financial
 

            statement  analysis  and interpretation  based  on  management

              decisions.


      Research hypothesis No 2

      HO:There  is  no  significant  relationship  between  a  firms  profitability  an
 
              financial  statement  analysis  and  interpretation  based  management

              decisions.

    HI: There  is  a  significant  relationship  between  a  firms  profitability  and

              financial  statement  analysis  and  integration  based  management

            decision.
 

    1.6 Significance of the Study



     The  study  of  the  use  of  financial  statement  analysis  and

      interpretation in management decision is meant to contribute immensely to

      sustained  business  operations  in  selected  firms  south  south  region  and

      general  growth  in  business,  be  it  private  or  public.    The  study  shall  be

      beneficial in the following ways: 


        i) It  will  redirect  management  on  the  need  for  the  use  of  financial

                statement  analysis  and  interpretation  of  rational  investment

                decision.


                                                                                         
 
        ii) It  will  inform  management  on  the  possible  and  available

                investment  ratio,  their  functions  and  uses  for  a  greater

                evaluation of a company’s capabilities and profitability.

        iii) The work  will  also  serve  as  a  reference  material  to  other

                persons who will conduct studies in similar areas both within

                and outside the university.


 


    1.7 Scope of the Study



     The  study  is  conducted  to  cover  selected  firms  both  in South-

      South region.


     However,  this study  is  conducted  to  cover  the  use  of  financial

      statement  which  includes;  (Balance  sheet,  income  statement,

      statement  of cash  flow  and  statement of  retained  earnings)  analysis

    civil interpretation management decision.

 

    1.8 Limitation of the Study


     The research work has some limitations due to some problems

      encountered  from  the  sources  of  collecting  useful  materials  also

      some  unforeseen  circumstances which  posted  as  a  threat  during

      preparation of this research project includes:


        - TIME:  A  research  of  this  kind  would  require  enough  time  to

            cover  many  areas  of  activity  effectively,  but  since  the

              researcher  is  a  student  with  other  classroom  works  to  do,  the

            time allocated for the study was limited.

 
        - FINANCE:  During  the  course  of  this  research,  another

            stumbling  block.  Judgment  financial  resources  was

              encountered.    The  researcher  has  to  make  due  with  little

              financial  provision  available  to  achieve  a  qualitative  and

            acceptable research finding.

        - Health  was  also  a  limiting  factor,  for  instance,  the  researcher

            falling ill in the cause of the study, which stopped the research

            for some time.

        - TRANSPORATION: The source of collecting useful material or

              information is far and the transport logistics expensive, in some

            cases, the journey was fruitless if the staff was not available.

 
 

    1.9 Definition of Terms


    *
RATIOS:  A  ratio  is  the  relationship  between  two  amounts  that

            results from dividing one by the other.  It is an accounting term

            used  to  describe  the  financial  index  which  compares  two

              financial variables such as current assets and current liabilities.


     Examples of ratios are quick ratio, and test etc.


    * ACCOUNTING  RATIOS:  “they  are  the  relationship  between

            figures expressed as ratios”


    * INVESTMENT DECISIONS: This relates to allocation of capital

            and  involves  decisions  to  commit  funds  to  long  term  assets,

            which will yield benefits in future.


    * RATIO ANALYSIS:


            It  is  an  analytical  tool  designed  to  identify  significant

              relationships between two financial statement amounts.


    * SECURITY:    Security  is  a  financial  asset  which  earns  a fixed

            and/or  variable  periodic  income  till  terminal  maturity  period  if

            any.

 

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