CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY        

A financial statement refers to a summary explaining or providing a picture of the financial position/business performance (Atrill & Mclaney 2015) and or activities of a business during a certain period. Generally accepted accounting principles (GAAP) require a company to prepare a full set of financial statements that conform to regulatory guidelines and should be accurate. A full set of financial reports include statements of retained earnings, cash flows and the statement of a financial position (balance sheet). A good financial statement should document information such that it is easy to read and understandable.

Presenting a financial statement clearly and professionally, helps companies interpret results and thus plan for a more profitable future. Growth in a business refers to a company expanding its business using its own resources and assets. This growth also depends on the financial statement of the organization. Similarly, a financial statement is a summarized report (Benedict & Elliott 2011) that indicates a cooperation’s operating data during a period or its economic standing at a giving period. Financial statement preparations in a company are usually done by internal accountants, who are directly influenced by the management of the company. Companies make certain decisions based on information from financial statements. Thus, a fraudulent or an erroneous financial statement implies a risk possibility which can cause wrong investment decisions making in an organization. Financial statements of companies are prepared either using generally accepted accounting principles (GAAP), defined by the law on accounting and the law on financial statements, or using international financial reporting standards (IFRS) and international accounting standards (IAS), issued by the international accounting standards board. These standards are not enforceable together; therefore, companies choose one of them for reporting purposes. Investment decisions can be explained as the determination made by directors or management body as to when and how much capital can be spent on investment opportunities. The decision often follows research on financial statements.

Financial statement is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions. For such a business entity, financial statement is a statement that reports all relevant financial information, presented in a structured manner and in a form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2007a) and also to decision making pertaining to cost planning, investment planning, expected returns and performance evaluation. The financial statement comprises of balance sheet (for determining financial position), profit and loss statement (describes statement of comprehensive income), statement of equity changes (explain the changes of the company’s equity), and cash flow statements (reports on a company’s cash flow activities, particularly its operating, investing and financing activities).

Although, these statements are often complex and may include an extensive set of notes to the financial statement and explanation of financial policies and management discussion and analysis (IASB, 2007b). The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statement are considered an integral part of the financial statements. However, the approaches that the notes and financial statement are presented and reported are critically for investment decision making by existing and prospective investors in order to earn optimal returns on their investments.

This indicates that financial statement methods in terms of information disclosure pattern, transparency, auditing, reporting standards, regulatory control and flexibility, corporate governance, and financial scandals have influence on investment decision making in any organization, especially in financial institutions with extensive range of investment activities that requires comprehensive financial facts that can be obtained from a financial statement.

The perceived relevance of the financial statement are, to provide information about the financial position, performance and changes in financial position of a firm that is useful to a wide range of users in making management and investment decisions. These users include managers, directors, employees, prospective investors, financial institutions, government regulatory agencies, media, vendors and general public. Though, these financial statement are often prepared according to national standards, corporate governance, professional ethics, and code of ethics. This to avoid financial reporting fraud and scandals that might hinders effective decision making process by management and other users of reports. The purpose of ethics in financial accounting reporting with expected standards is to re-orientate corporate organization on the need to abide by a code of conduct that facilitates public confidence in their services (Okafor, 2006). In Nigeria, it has become common practice by financial institutions to adopt creative accounting in anticipation of sourcing for equity capital from the capital firms. Although this approach in financial reporting process often lead to over-valuation of assets and company’s net worth in the views of prospective shareholders and other stake holders. Therefore, this study focuses on an investigation of availability and uses of financial statements in small businesses in Nigeria, a case study of Ota LGA.

 STATEMENT OF THE PROBLEM

It was observed that the roles of financial statement on investment decision making of financial institutions in Nigeria has some problems to both investors and managers of business organizations who are either not aware of the importance of interdependence relationship that exist between investors and financial organizations.

The insurgence of corporate failures, like that of Enron Corporation and World.com in the year 2002 and other accounting scandals compounded by the global energy, food and financial crisis leading to credit squeeze across the globe, has partly been attributed to impact of financial statement manipulations which portrayed some ailing company as if they were sound. In Nigeria also, corporate failures and distresses have been witnessed in the banking sector. Evidence was the huge collapse of the commercial banks all due to massive accounting related frauds. This problem resulted in the establishment of Asset Management Company of Nigeria (AMCON) to prevent corporate failures particularly in the Nigeria banking sector by acquiring and financially distress companies.

Most organizations are still ignorant of the benefits of financial statement, thereby limiting their knowledge about their financial position and above all their ability to use financial statements to make important investment decisions. For this reason, it was very important for the researcher to carry out a proper study and research on this issue, to point out the alarming signal on the impact of the financial statement in investment decisions in an organization. Incidentally, bookkeeping as a practice is a necessary pointer of strength and weakness in a business entity, however, the level of business management expertise and financial reporting skills necessary for sound decision making has been way below the conventional standards expected. These problems necessitates the need to carry out a study on Investigation of availability and uses of financial statements in small businesses in Nigeria, a case study of Ota LGA.

OBJECTIVES OF THE STUDY  

The general objective of this study is to carry out an Investigation of availability and uses of financial statements in small businesses in Nigeria, a case study of Ota LGA. The specific objectives of this study include the following:

1.     To find out the practice of keeping financial statements among small businesses in Ota LGA.

2.     To know the types of financial statements used by different small businesses in Ota LGA.

3.     To ascertain the influence of financial statements on investment decisions among small businesses in Ota LGA.

4.     To examine the various tools used for the presentation of the financial statements.

5.     To investigate the impact of financial statements on the performance of small businesses in Ota LGA.

RESEARCH QUESTIONS

The relevant research questions related to this study include the following:

1.     Is there a practice of keeping financial statements among small businesses in Ota LGA?

2.     What are the types of financial statements used by different small businesses in Ota LGA?

3.     What is the influence of financial statements on investment decisions among small busi