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FINANCIAL STATEMENT: A TOOL FOR EVALUATING PERFORMANCE OF COMPANIES AND INVESTMENT DECISION

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Recent researchers have been shown that one of the main causes of indigenous business failure in this country is failure to maintain proper financial records.  Many business have been operated with merely a single entry memorandum record of transactions and others with no records whatever, except possible cheque stubs.  As a result, business decisions are based on quesses and intruition. Ola (1985). 

In today's economy information and accountability have assumed a larger role in our society.  This is why it is statutory company and allied matte decree (1990), for all registered companies in the country to prepare and present financial statements in accordance to the relevant accounting regulations. 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 imfortant 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 reoularly commit resources for both long term and short term purposes and because the commitment will always involve risk, or cargul 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. An important purpose of the appraisal of results is to confirm whether or not the project has produced the expected cash flow. The main function of the financial account of a business however is to measure the results in terms of profitability and it is on the basis of success or failure measured in these terms that management will be juged. In carrying out an analysis of accounts, a number of issues must be considered and conclusion formed thereon.

These includes:

1.   Profitability of the business operation, particularly in relation to the capital employed.

2.   Solvency of the firm:  the ability of the business to pay its creditors, the adequacy of its working capital and the current liabilities.

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