Analysis and interpretation of financial statement as a managerial tool for decision making (a case study of nwokeji urban planning and architectural studio [nupas]

Thesis Overview

<p> 1.0 INTRODUCTION<br>1.1 Background of the Study<br>The complex nature of today’s business world and the<br>transformation of the entire world into a global village have been of<br>great concerns to manages of all forms of business organizations.<br>According to Ojuigo (2001), the problems of managers are multi:-<br>varied because of inefficiency in management of poor decision<br>outcomes of these organizations. Therefore, the managers are<br>unable to achieve the organizational objective within a period of time.<br>As diverse as business is, its controllable and uncontrollable<br>factors influence all decisions which ultimately lead to the realization<br>of set objectives. To achieve this, management needs reliable,<br>authentic and relevant information from the financial statements to<br>efficiently facilitate decision making.<br>It must be noted that every business stores at making at least<br>from investments “sustainable profits” so as to stay afloat and<br>continue in business. Therefore, profit being the concern of every<br>manager is a factor in business. To achieve this, available<br>information from the financial statements of organizations must be<br>analysed, interpreted and used as a basis for decision making<br>(Needham and Dransfield 1991). Financial statement analysis is<br>often considered as a vital tool used in evaluating a company’s<br>12<br>performance and ensuring that decisions are based on facts rather<br>than rule of thumb.<br>A financial analyst needs financial statements of companies to<br>be able to identify operating and financial problems which may affect<br>the companies (Mbat, 2001:60). Thus, any person who analyses the<br>financial statements of firms should be able to identify the cause and<br>effect of financial and operating problems of such firms.<br>The cause of any financial or operating problem is an event,<br>which produces an effect (the problem). However, in order to identify<br>the cause and effect, the system, which represents an indictor f the<br>problem, should be observed. This process is referred to as<br>interpretation (Pandey, 2005). According to (Mbat, 2001), it is the<br>responsibility of the financial manager or analyst to enable them<br>make better management decisions.<br>The symptoms could be:<br>– Declining liquidity<br>– Declining profit<br>– External debt recovery period<br>– Increased volume of inventory<br>– Declining return on total assets<br>– Increasing operating expenses etc<br>The identification of causes should also be important in order to<br>appropriately evolve corrective measures.<br>Financial analysis and interpretation assist in the:<br>13<br>– Identification of organizational performance through the use of<br>analystical data.<br>– Identification of empirical relationships between operating<br>results and those items which have influenced the achievement<br>of the results.<br>– Identification of historical data order to determine which internal<br>or external factors have exerted positive or negative influence<br>on the operating results (Mbat 2001:61).<br>Categorically, there are three forms of financial analysis. These<br>include: multivariate, univariate and ratio analysis (Welsh, 1987).<br>Moreover, ratios are the end results of basis analysis. The ratio<br>requires an interpretation on the basis of their trends and in the lights<br>of what is known of the business as a young concern. It should be<br>noted that financial statements represent the positions of a firm at a<br>particular point in time.<br>However, the success or failure of a business depends largely on<br>the quality of decisions made by management, which in turn depends<br>on reality of accounting information available on them.<br>Research into this area is quite relevant given the apparent<br>investment failures experienced by many business organizations.<br>The collapse of many business either private or public is due to poor<br>decision. The question is whether management has used information<br>provided in the financial statement extensively to enable rational<br>decision making?<br>14<br>1.2 Statement of the Problem<br>The principal aim of making investment decision is to get<br>adequate returns from it. According to Needham and Dransfield<br>(1991), “people as a rule will only tie up their money in a business if<br>they are satisfied with the returns they get from it”.<br>In an attempt to achieve maximum returns from investment in<br>production, services shares or stock and/or other securities outside<br>the firm, a comprehensive analysis of the company which is intended<br>to be invested in should be carried out using the company’s financial<br>statements to ascertain both its explicit and implicit investment<br>opportunities. However, organizations that do not use financial<br>statement analysis in making investment decisions could be ill<br>formed. As a result, the following problems may arise:<br>(i) Inability to identify viable investment opportunities<br>(ii) Decreasing returns from investments.<br>(iii) Decline in organizational overall profitability.<br>(iv) Increased investment risk: The organization might not<br>achieve its corporate objective at the end of the period.<br>If the trend continues, it will likely lead to the failure of the<br>organization. Therefore, there is a great need for organizations to<br>consider and analyse company’s financial statements before<br>investing in that company. These are the focus of this study.<br>1.3 Objectives of the Study<br>On noting that most investments made by firms end in failure, it<br>is the overall objective of this study to determine how firms can use<br>15<br>financial statement analysis and interpretation to aid management<br>decisions. Specifically, the study is designed to:<br>i) Find out how the use of financial statement analysis assists<br>organizations in identifying investment opportunities.<br>ii) Find out how increasing investment returns can be achieved<br>using financial statement analysis.<br>iii) Find out the extent to which a company’s overall profitability<br>can be hampered if it does not analyse another company’s<br>financial statement before investing in it.<br>iv) Find out how business failures can be curbed or minimized and<br>corporate objective achieved through successful investment.<br>v) Identify alternative ways of minimizing investment risk.<br>1.4 Research Questions<br>The following questions are put forward for the purpose of the<br>study.<br>1) Is financial statement analysis important/necessary in every<br>organization?<br>2) Who are the users of financial statement?<br>3) How can a financial statement of an organization be<br>interpreted?<br>4) How can its interpretation be used in making effective<br>management decisions?<br>1.5 Hypotheses of the Study<br>16<br>To id the achievement of the desired objectives, the following<br>hypothesis are formulated:<br>HO: Represents Null hypothesis<br>HI<br>: Represents Alternative hypothesis<br>Research hypothesis No 1<br>HO: There is no significant difference between the returns of a financial<br>statement analysis and interpretation based on management<br>decisions.<br>H1: There is a significant difference between the returns of a financial<br>statement analysis and interpretation based on management<br>decisions.<br>Research hypothesis No 2<br>HO: There is no significant relationship between a firms profitability an<br>financial statement analysis and interpretation based management<br>decisions.<br>HI<br>: There is a significant relationship between a firms profitability and<br>financial statement analysis and integration based management<br>decision <br></p>