Full Project-FINANCIAL STATEMENT: A TOOL FOR EVALUATING PERFORMANCE OF COMPANIES AND INVESTMENT DECISION (A STUDY OF NESTLE NIGERIA PLC.)

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Financial Statement is the reflection of a company’s wealth, assets and liabilities. It show the financial strength of an organization. Both the Management of such organization and the Investors act based on the information generated in the company’s financial statement. Therefore Financial Statement stands as tool for evaluating and decision making by the users. 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 quests and instruction. 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 Matter 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 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 carful 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 plans 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. Also to compare the performance of previous related accounting period performance with the present one. 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 judged. 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.
3. The business trend: the analysis of the point term of business over a time to determine whether profit are rising or falling and the implication for future performance.
4. The financial stability of the business, particular attention being paid to the firm’s limit of borrowing power, available resources to finance expansion and the volume of earnings.
5. The gearing and the cover which is an assessment of the adequacy of profit to meet up with interest payments, pay dividends to share holders and provide sufficient safety to share holders investment.
1.2 STATEMENT OF PROBLEMS
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 dereferences made only to their cash –box perhaps they feel that this is a way of safe wording their business secret. Secondly is the problem of loan securing. 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 & so as there is non-existent of financial statements, they are not qualified for bank loan. Thirdly is the some investors and business operators can not understand the interpretation technique of the financial statements, because of this problem, they try to do without it, as if it its not important. Fourthly is the problem of high cost of consultancy services. Since 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. And finally, a fake or default information included in the financial statement on the side of the organization simply to mislead the users of such Accounting Statement. This is affected by both Government and public members of the society
1.3 PURPOSE OF STUDY
The purpose of this study includes the following:
1. To examine the ways the financial statements evaluation performance in a company.
2. To examine how the financial statement investment decision are being process.
3. To analyse how the financial statements are used for performance evaluation.
4. To examine the importance of the financial statements for investment purposes.
5. To examine the level of reliance placed on the financial statements by investors.
1.4 SIGNIFICANCE OF THE STUDY
This study is very essential to various classes of people in the area of business.
Firstly, the study will go a long way in helping both the existing and potential entrepreneurs and management of business organization towards the undertaking and the knowledge of the uses of the financial statements for the expansion of their businesses.
Secondly, this will be an opportunity to the creditors financials and suppliers, to study the usage of the financial statements in estimating the risk of entering into bad debts in their transactions with business organization.
Thirdly, 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 not.
Fourthly, is the corporate lawyer and Bankers. By this study they can understand more about the statement of affairs of business entities. Finally, the students both the undergraduate and the post graduate students of Business Administration are in better position to benefit not just per academic exercise, but at least, to be able to understand the interpretation of the financial statement.
1.5 SCOPE AND LIMITATION OF THE STUDY
This study is restricted to only the financial statement in performance of companies and investment decision. This research work would have been given a wider converge if not for some constraints imposed on the researcher by the availability of the time and fund.
1.6 RESEARCH QUESTIONS The research questions would be based mainly on the objective of the study and the short-coming highlighted above.
(a) Does an improper financial statement evaluate performance of a company growth?
(b) Does financial statement used in investment decision?
(c) Is financial statements used for performance evaluation?
(d) Does the level of reliance placed on the financial statements by investors?
(e) What is the importance of financial statements for investment purposes
1.7 RESEARCH HYPOTHESIS The research is based on the following hypotheses.
Ho: There is no proper financial statement evaluate performance of a company growth
Hi: There is proper financial statements evaluate performance of a company growth
Ho: Financial Statements can not use for performance evaluation
Hi: Financial Statements can be used for performance evaluation
Ho: There is no reliance placed on the financial statements by investors.
Hi: There is reliance placed on the financial statements by investors.
1.8 DATA ANALYSIS TECHNIQUES
Data will be analyzed using descriptive and chi-square statistics for test of hypotheses. The five point like scale will be used to analyze the data for the study. The research questions will be analyzed using the percentage analysis. For hypotheses testing, chi-square statistics will be used to test the individual hypothesis formulated.
1.9 DEFINITION OF TERMS

Net Liquid Funds: Cash at bank and in hand 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 arise from legal or managerial consideration and impose 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 exist 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 flue of time or obsolesce through technology and market changes.
Replacement Cost: 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 of 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 usually extend over some years and are 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 etc.
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 asset 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 an could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arms length transaction.
Useful-life: The useful- life of an asset is the shorter of.
1.The predetermined physical life.
2. ii. The economic life, during which it could be profitably employed in the operation of the enterprise.
SUMMARY
The essence of this is to draw a accurate and 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. Also the decision of any organization is based on the effect of its Financial Statement

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