Financial Statement: A Tool for Evaluating Performance and Investment Decision of Companies

Financial Statement: A Tool for Evaluating Performance and Investment Decision of Companies

Financial Statement – 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 guesses and intuition. Ola (1985).

In todays 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 judged.

In carrying out an analysis of accounts, a number of issues must be considered and conclusion formed therein.

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.


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.

1.2            OBJECTIVES OF STUDY

The objectives of this study includes the following:

  1. To examine the ways the financial statements can help in the growth of businesses.
  2. To examine how the financial statement are interpreted.
  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.



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 disinvest.

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.


This study is restricted to only the analysis of the principal statements of manufacturing, trading and profit making organizations &.  This research work would have been given a wider converage if not for some constraints imposed on the researcher by the availability of the time and fund.



This is a manufacturing company which started with the manufacture of Bons Semolina.  It is located in the federal low cost Housing Estate, Trans – Ekulu, very near to Penoks petrol service station.

Bons Nigeria limited is a private company with two directors: the husband and wife, chief B.O Odira is the Chairman and managing director.  The company has many departments structured according to functions and each department are being controlled by a manager, which includes:

  1. Sales Manager
  2. Finance and administration manager
  3. Production manager
  4. Operation manager

The staff strength of the company is about 60 workers with an annual turnover of about #20 million.

In 1996, Bons Nigeria Limited embarked on expansion of its operations by launching a new product.  The product is a beverage called Bonita, because of its market break through which the product, more additional new products have been added to the credit of the company.

These products are beverages and they are



Quick growth (for infants)

Banana custard

Vanilla custard

However the Bons-semolina is not much in the market.  This is because the produces the semolina only when there is an order reasonable enough from a customer.  This is unlike before when it was their major product.


Benix Nigeria limited is a private company.  The managing Director is a white-man known as F..E. Ravelli.  The company was incorporated in 1960.  it is located at No 7 old Abakaliki Road Emene Enugu.

Benix limited specializes in the production of roofing materials.

The materials are:

  1. Standard light weight sheets
  2. Big size corrugated sheets
  3. Benix flat sheets
  4. Duraceal Recorative card
  5. Qualitile Recorative card
  6. Emelueze Recorative card

The company is owned by five states with a foreign firm as the technical partner.  The technical partner is the exgroup of Belgium, while the states are:

Enugu State

Ebonyi state

Abia state

Anambra state

Imo state

Benix has a staff strength of about 200 workers.  Their product are distributed in various parts of Nigeria.

However, the main concentrated areas are : Imo state, Abia state, Anambra state and Enugu state.  Their products have been making interest in the market.  This is why they have been recording high sales yearly.  However, in the year 1997, the company operated at the production level of about 30%of the installed capacity.  This is due to a constraint caused by the economy.

In Benix the departmentation is by function and each department is being head by a professional in that field.  For example, the accounting department is head by a chief accountant while the marketing department is head by a marketing office.

1.6            DEFINITION OF TERMS

1.        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.

2.        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.


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.

4.        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.


The measure of wearing out, consumption or other cost of value of a fixed asset, whether arising from use, offlue of time or obsolence through technology and market changes.


The cost at which an identical asset could be purchased or manufactured.


Any profit paid out of the retained profit or earning is called liquidating profit or return of capital to shareholders.


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.

9.        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.



There are assets meant for earning revenue gradually depleted or exhausted or consumed in the process.  Example, mine; coal, gold etc.


These are assets acquired for resale and consist of assets in their various stages of conversion, hence they are called gloating or circulating assets.


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.

13.      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.


It is an account into which the net profit of a company are carried, and which shows him the profits are disposed of.


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.

16.      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.

17.      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.

18.      USEFUL-LIFE:

The useful- life of an asset is the shorter of.

(a)              The predetermined physical life.

(b)             The economic life, during which it could be profitably employed in the operation of the enterprise.


What is financial information:  The basis for financial planning, analysis and decision making is the financial information financial information is needed to predict, compare and evaluate the firms earning ability.  It is also required to aid in economic decision-making on investment and financing decisions-making pandy (1991).  The financial information of an enterprise is contained in the financial statements or accounting reports.

Management is responsible for establishing an accounting system to identify measure.  Record, and adequately disclose an entity’s transactions and other events that affects its financial position and results of operations,  in addition, management is responsible for selecting accounting principal that appropriately regulate events that occur and for making other accounting estimates and judgments.

If management is to fulfill its responsibility for preparing useful financial statements, it must pay attention carefully to the quality of its accounting judgments.  Financial statement prepares are guided by accounting standards on financial measurement and disclosure.

In providing information to the users, accounting has to perform three functions: accumulation measurement and communication of information.  The accounting system identifies and gathers data.  The process of data accumulation involves the recording and analysis of economic events.  The accounting records includes journals and ledgers.  These records are essentially historical in nature as the events recorded are the ones which have already occurred.  Accounting also performs the measurement founds.  It assigns monetary values (for example, naira, dollar or pounds) to economic events.  While performing the measurement function, it acts in accordance with the generally accepted principles.

Some economic events can not be measured accurately; they are estimated.  Accounting, is the language of business.  Therefore, the information accumulated and measured by the accounting system should be periodically communicated through statements and reports.  The financial statements and reports should be reliable and accurate.


The owners have the primary interest in the financial information.  They have entrusted their financial resources to the firm and therefore, would like to know periodically its performance.  Managers are the custodians of their investments and therefore; they must submit periodical financial reports to owners.


The managers are responsible for the overall performances of the firm.  They make several decisions and therefore need information.  Accounting provides relevant information in which managers have a direct interest.


The creditors supply financial resources to the firm.  They are interested in the continuing profitable performance of the firm to any may regularly receive interest and repayment of the principal sum.  They need the accounting information to evaluate the performance of the firm and to determine the degree of risk to which they are exposed.


The creditors or owners, get an idea about the firms financial strength and performance from its financial reports.  They are generally interested in the earnings dividend and growth trend of the firm.  Usually they take the services of financial analysis in evaluating the performance of the firm.


These people also make use of the financial information revealed in the financial statements.  They can bargain on matters relating to salary determination, bonus, fringe, benefits, or working conditions on the basis of the accounting information.  This financial information is useful to employee and unions, as they get in sight into matters affecting their economic and social interests.


The customers might be interested in the financial information because a careful study of the financial statements may provide information about the prices being charged by the firm.


The government has an interest in the financial statement for regulatory purpose.  The tax department of government has an interest in determining the taxable income of the firm.


In the literature of financial Accounting different terms were used, such as accounting principles accounting postulates, accounting concepts, accounting imperatives and accounting assumptions to describe those basic points of agreement on which financial accounting theory and practice are founded.

The term accounting completions is used to stress that the ground of financial accounting are not the subject of immutable law, but are based on consents.  Convention define the assumptions on which the financial accounts of a business are prepared.

Financial transactions are interpretated in the light of the conventions which govern accounting methods.  In effect the conventions of financial accounting largely determine the interpretation given reports of the events and results which they portray for example, the conventions relations to the recognition of revenue determine the dimension of the profit reported to share holders and the value of the enterprise as judged from the balance sheet.

If accountants as a grow wish to change some of their conventions they are free to do so.  Indeed, accounting bodies in Britain and in the United states are engaged in the review of their conventions and practices for their purpose the financial accountancy standards award was established in the united states in 1973 (replacing the accounting principles Board) and in the united kingdom.  The accounting standard committee was established in 1970 with similar objectives.

The term “accounting conventions” serves in another sense to underline the freedom accountants have enjoyed in determine their own rules.  There is no tradition of state interference in the united states and united kingdom, for example, as regards the practice of accounting.  Such land as are to be found are contained in statutes dealing with the activities of corporate bodies, such as the companies act, which specify the nature of accounting information that must be disclosed to share holders, and income tax and corporation tax acts which impose a duty on business firms to submit accounting information for the purpose of assessing the liability to tax.  So far neither parliament, nor the courts have issued directives to the accounting profession as regards the conventions which they should observe.  In france by contrast there is a different political traditions, and there is legistation dealing with accounting practices and they are detailed in the ‘plan compliable” which is an edict issued by the French government detailing the manner in which accounting statement should be prepared.


Financial statements are based on accounting principles.

The concepts and the conventions constitute the principles underlying accounting theory.  The concept are:


Financial accounting distinguishes the business entity from the individuals connected with and /or coming into contact with the business including the owners an managers of the business.

Therefore accounts are maintained for a business entity distinct from the accounts maintained for employers, employees, customers, bankers and other parties connected with the business.  The shareholders, debenture holders, creditors and banks are seen merely as contributing the financial resources entrusted to the directors of the company to manage in the over all interest of the business.

The law regards an incorporated company as a separate legal entity from its members.  In partinership and sole proprietorship’s such distinctions are not made in law.  But even then the accounts maintained for all companies partnerships, and sole traders alike are all different from the accounts of the respective owners of each types of organization.


Money is the common denominator for goods and services.  Therefore, accounting records are made of only those facts which could be expressed in monetary terms with a fair degree of objectivity.  Its use implies homogeneity.


All assets and services acquired by a business enterprise are measured at the date of acquisition by the cost incurred to secure them.  Cost incurred are measured by the amount invested on a cash or cash equivalent basis.

If the consideration given for a particular asset is cash, the measure of cash incurred is the entire cash outlay made to secure the asst and put it to use.  If consideration other than cash was given, the measure of the consideration would be the equivalent value of the consideration or the fair market value of the asset received, which is more clearly evident.


The accounting system treats values relating to a business on the assumption that the business will continue in operation……………………

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