Description
Abstract
Financial Statement Analysis and Interpretation is a very vital
instrument of good management decision-making in business
enterprise. Good decisions ensure business survival, profitability and
growth. Without financial statement analysis in investment decisions,
an enterprise is likely to make decisions, which could spell its doom.
Poor or lack of qualitative financial statement analysis could lead to
investment returns, low profitability and even inability to identify viable
investment opportunities. The main objective of this project is
therefore, was to determine how firms could use financial statement
analysis and interpretation to aid management decisions and to avert
the problems highlighted above. Primary and secondary data are
employed to broaden the scope of this study. Primary data are
sourced from questionnaire responses. This provided data for the
validation of the hypotheses tested with the use of chi-square (X 2 ).
The test revealed as follows: (1) Significant difference between the
returns of the financial statement in Analysis and Interpretation based
on management decision. (2) Organizational profitability has
relationship with financial statement analysis and interpretation based
management decision but not significantly. The project concludes
that companies should pay great attention to the use of financial
statement analysis so as to properly equip themselves with this
invaluable tool. The researcher recommends the following: (a)
Accountants or financial analysts should not be rushed in collection,
preparation, analysis and interpretation off financial statements. (b)
Financial statements should be made to reflect current cost
accounting to eliminate or reduce the effects to historical cost
principle and inflation risk element. (c) A combination of different
ratios should be used in analyzing a company’s financial and/or
operating performance. Proper use of financial statement analysis
should be made not only in investment but also in other areas of
decision making.
TABLE OF CONTENT
Title page – – – – – – – — – i
Approval page – – – – – – – – ii
Dedication – – – – – – – – – iii
Acknowledgement – – – – – – – iv
Abstract – – – – – – – – – v
Table of content – – – – – – – – vi
Chapter One: INTRODUCTION
1.1 Background of the Study – – – – – 1
1.2 Statement of Problem – – – – – – 4
1.3 Objectives of the Study- – – – – – 4
1.4 Research Questions – – – – – – 5
1.5 Hypotheses of the Study – – – – – 6
1.6 Significance of the Study – – – – – 6
1.7 Scope of the Study – – – – – – 7
1.8 Limitation of the Study – – – – – – 7
1.9 Definition of Terms – – – – – – 8
References- – – – – – – – 10
Chapter Two: LITERATURE REVIEW
Introduction – – – – – – 11
What is Financial Statement?- – – – 12
Objective of a Financial Statement Analysis – 13
Uses and Users of Financial Statement – – 14
Classification of Financial Statement – – 15
Relationship among the Statement of Financial
Position, Income Statement, Statement of cash
Flows and Statement of Retained Earnings – 18
Techniques and financial Statement Analysis and
Interpretation – – – – – – 19
Horizontal Analysis – – – – – 19
Trend Analysis – – – – – – 20
Vertical Analysis – – – – – – 24
Ratio Analysis – – – – – – 24
Definition of Ratio – – – – – 24
Types and Classification — – – – 26
Liquidity Ratios – – – – – – 27
Leverage Ratios – – – – – – 30
Activity Ratios – – – – – – 32
Profitability Ratios – – – – – 34
Nature of Accounting Ratios – — – – 37
Uses of Ratio in Analyzing Financial Statement 39
Limitations of Financial Statement Analysis – 40
Use of Different Accounting Principles – – 40
Industry Affiliation – – – – – 41
Accounting Differences Between Countries – 42
The Impact of Inflation of Financial Statement
Analysis – – – – – – – – 42
Features of a Good Management Decision
Technique – – – – – – – 44
Environment of Management Decision Making – 45
References – – – – – — – 47
Chapter Three
Research Design- – – – – – 4
Sources and Method of Data Collection — – 48
Research Instrument – – – – – 49
Reliability/Validity of Research Instrument – 49
3.5 Population – – – – — – – 50
Sample size and Technique – – – – 50
Administration of Research Instrument – – 53
Method of Data Analysis – – – – 53
Decision Criteria for Validation of Hypothesis – 56
References- – – – – – — 57
Chapter Four: DATA PRESENTATION AND ANALYSIS -58
4.1 Data Presentation – – – – – 60
4.2 Analysis of Question – – – – – 61
4.3 Test of Hypothesis – – – – – 71
Chapter Five: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
Summary of Findings – – – – – 76
Conclusion – – – – – – – 77
Recommendations – – – – – 77
Bibliography – — – – – – 79
Appendix – – — – – – – – 80
CHAPTER ONE
INTRODUCTION
Background of the Study
The complex nature of today’s business world and the
transformation of the entire world into a global village have been of
great concerns to manages of all forms of business organizations.
According to Ojuigo (2001), the problems of managers are multi:-
varied because of inefficiency in management of poor decision
outcomes of these organizations. Therefore, the managers are
unable to achieve the organizational objective within a period of time.
As diverse as business is, its controllable and uncontrollable
factors influence all decisions which ultimately lead to the realization
of set objectives. To achieve this, management needs reliable,
authentic and relevant information from the financial statements to
efficiently facilitate decision making.
It must be noted that every business stores at making at least
from investments “sustainable profits” so as to stay afloat and
continue in business. Therefore, profit being the concern of every
manager is a factor in business. To achieve this, available
information from the financial statements of organizations must be
analysed, interpreted and used as a basis for decision making
(Needham and Dransfield 1991). Financial statement analysis is
often considered as a vital tool used in evaluating a company’s
performance and ensuring that decisions are based on facts rather
than rule of thumb.
A financial analyst needs financial statements of companies to
be able to identify operating and financial problems which may affect
the companies (Mbat, 2001:60). Thus, any person who analyses the
financial statements of firms should be able to identify the cause and
effect of financial and operating problems of such firms.
The cause of any financial or operating problem is an event,
which produces an effect (the problem). However, in order to identify
the cause and effect, the system, which represents an indictor f the
problem, should be observed. This process is referred to as
interpretation (Pandey, 2005). According to (Mbat, 2001), it is the
responsibility of the financial manager or analyst to enable them
make better management decisions.