An Analysis of the Use of Financial Statements in Assessing the Performance of an Organization (a Comparative Analysis of Financial Statements of First Bank Nigeria Plc. And Fidelity Bank Nigerian Plc. For the Year 2012 – 2014).
The study sought to analyze the usefulness of financial statements in assessing the performance of an organization with emphasis on the financial statement of Fidelity Bank Plc and First Bank Nigeria Plc. For the year (2012 – 2014) it was measured using Net profit margin , return on capital employed (ROCE), return on Assets (ROA), Return on Equity (ROE). The percentage of hypothesis was tested using chi-square table and it was found out that financial statements is relevant in the operation of banks and organizations. The study recommends that organizations should ensure that financial statements prepared by them are in conformity with GAAP (General accounting principles) to enhance smooth running in the operations of the organizations and are audited by professional auditors.
1.01 GENERAL DESCRIPTION OF THE AREA OF STUDY
Financial statements according to International Financial Reporting Standards (IFRS) is defined as a structured representation of the financial position and financial performance of an entity.
Financial statements according to Charles, (2012) are accounting reports which serve as the principal method of communicating financial information about a business or an individual to outside parties such as banks and investors. In a technical sense, financial statements summarise the accounting process and provides a tabulation of accounting titles and amounts of money.
The basic purpose of financial statements is to communicate to external and internal parties about financial decisions that have been made. The general purpose of financial statements are designed to meet the needs of diverse users particularly present and potential owners and creditors.
Charles, (2012) said that financial statements result from simplifying, condensing and aggregating masses of data obtained primarily from the financial system. They are outputs of the accounting system. Companies release financial statements at least, once a year for the accounting period. Companies either follow the calendar year beginning January 1st and ending December 31st, or they follow their own fiscal year which can be any complete 12month period. Consequently, companies have either calendar-year accounting periods in addition, businesses frequently prepare financial statements quarterly or whenever necessary, which are referred to as interim statements.
Financial statements is needed in the banking industry to acquaint the shareholder to access sufficient financial information and decide upon the company’s courses of action. Such information will enable the risk takers become much better informed to make decisions and take actions concerning their interests in the enterprise. The need for financial statements to shareholders and other interested parties is to provide them with regular information intended to increase their knowledge of the company’s business and financial affairs. There is obvious need for reliable information which shareholders and other users of financial statements can acquire an essential knowledge of the way in which business enterprises are behaving in relation to public interests.
This research work tend to also look at the followings:
i. The nature and objectives of financial statements.
ii. The forms of financial statements.
iii. The components of financial statements.
iv. The elements of financial statements.
v. The qualities of a good financial report.
vi. The usefulness of financial statements to general user group.
vii. The companies act and published financial statements.
viii. Financial statement and the underlying assumptions.
ix. Financial statement and effects of different accounting policies.
x. Problems associated with using financial statements to assess the
performance of an organisation.
xi. How banks use financial statements to assess their performance.
xii. How organizations use financial ratio analysis to analyse their performance.
1.02 STATEMENT OF THE PROBLEM
This research work tends to look into the problems from the point of view of the use of financial statements in assessing the performance of an organisation. The problems are stated below:
What is financial statements?
Financial statements according to IFRS is defined as a structured representation of the financial positions and financial performance of an entity.
Charles, (2012) said that financial statements reports the financial position or financial status of a business or an individual as well as financial changes at a particular time or during a period of time. It is reported to outside parties such as banks, government, investors, etc.
Why financial statements are used in assessing the performance of an organisation?
The readers of the financial statement seek to understand key facts about the performance and disposition of a business based on their reading of the statement. Because financial statements are widely relied on, they must be straight forward to read and understand.
For large corporations, these statements are often complex and mainly include an extensive set of notes to the financial statement and an explanation of financial policies, management discussion and analysis. The notes typically describe each items on the balance sheet, income statement and cash-flow statements in further details. Notes to financial statements are considered an integral part of the financial statements.
Owners and managers frequently use financial statements to make important financial decisions, for example:
- Whether or not to continue or discontinue parts of the business.
- Whether to make or to purchase certain materials.
- Whether to acquire or to rent/lease certain equipment in the production of goods.
Financial statements are also helpful in making long term decisions and are also a source of historical records.
How are financial statements used?
- Owners and managers require financial statements to make important decisions that affect its continued operation. Financial analysis is then performed on this statement to provide management with a more detailed understanding of the figures. These statements are also used as part of management’s annual report to stakeholders.
- Employees also need this report in making Collective Bargaining Agreements (CBA) with the management, in case of labour unions for individuals in discussing their compensations, promotion and rankings.
- Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analysis are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basics for making investment decisions.
- Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or to extend debt securities (such as a long term bank loan or debentures) to finance expansion and other significant expenditures.
- Philanthropists may use financial statements of a non-profit organisation as a component in determining where to donate funds.
- Government entities (tax authorities) need financial statements to ascertain the property, accuracy of taxes and other duties declared and paid by a company.
- Vendors who extend credit may use financial statements to ascertain the credit worthiness of the business.
1.03 OBJECTIVES OF THE STUDY
Companies including those in the banking industry have to face the onerous task of presenting a credible and generally acceptable financial statement in their annual reports to various people to whom they owe such obligations. The purpose of the study is:
a. To identify the nature and objectives of financial statements.
b. To identify the forms of financial statements.
c. To examine the components of financial statements.
d. To examine the elements of financial statements.
e. To examine the qualities of a good financial report.
f. To identify the usefulness of financial statements to general user groups.
g. To examine the companies act and published financial statements.
h. To examine the underlying assumptions of financial statements.
i. To examine the effects of different accounting policies on financial statements.
j. To examine the problems associated with using financial statements
to assess the performance of an organisation.
k. To examine how banks use financial statements to assess their
I. To examine how organizations use financial assessment ratios to
assess their performance.
1.04 RESEARCH HYPOTHESIS
Based on the statement of problem and objectives of research work the following general hypothesis are formulated:
HO: Financial statements is not relevant in the operation of Nigerian banks.
H1: Financial statements is not relevant in the operations of Nigerian
HO: Financial statements assists in assessing the performance of an organization.
H1: Financial statements does not assist in assessing the performance of an organization.
1.05 DELIMITATION (SCOPE) OF THE STUDY
The aim of this study is examine the use of financial statements in assessing the organizational performance, however, it will be restricted to investigations carried out on the financial statements of FirstBank Nigeria PLC and Fidelity Bank Nigeria PLC
This study however could have covered the financial statements of other organizations but for the inaccessibility of the financial statements of other organizations due to numerous constraints, it was limited to the audited annual report of First Bank Nigeria PLC and Fidelity Bank Nigeria PLC.
The following are the constraints:
Literature: The dearth of related books and journals will no doubt affect the quality of this research work.
Time: The great employer of man which is time was not in my favour, but I managed it considering the time allocated to my studies and the project.
Finance: The research work generally involves money but considering my stand as a student, I was limited financially in achieving my aim of the research.
It is assumed that limited time, finance and other resources would be hindrance to the timely completion of the project.
Finally, the researcher also assumed that the necessary information on the study will be gathered form different sources as mapped out
1.07 SIGNIFICANCE OF THE STUDY
The banking industry is a very important sector of the economy. This is because banks can determine the direction of growth or development of the economy through the financial services rendered by them. The financial services which include funds mobilization, safe keeping and custodianship, funds transfer, foreign exchange transactions, equipment leasing, extensions of loans and advances, investment in security bills discounting, etc. Investment is a key sector of the national economy of which the banking industry becomes a go getter priority. Owing to this, it becomes necessary that financial statements presented by banks satisfy the need of the users of the statement.
Specifically, at the end of this study, we shall be able to establish:
1. Whether or not banks follow rigid accounting policies.
2. Whether or not financial statements assesses the performance of organizations.
The emphasis of this research is not only to discuss the determinant of performance but to establish a relationship between financial statement and its performance in the organisation so that potential investors in the organisation may clearly define the stand.
1.07 DEFINITION OF UNFAMILIAR TERMS/CONCEPTS
i. Financial Statements: According to IFRS, it can be defined as a structured representation of financial position and financial performance of an entity
ii. Equipment leasing: According to Investopedia, it is defined as a means of obtaining the use of machinery and other equipment on a rental basis.
iii. Loans: According to Surbhi, (2015) it is defined as the amount lent by the lender to the borrower for a specific purpose like construction of a building, capital requirement, purchase of machinery and so on, for a period of time. It carries an interest rate on the debt advanced.
iv. Advances: According to Surbhi, (2015) it is defined as a source of finance, which are provided by banks to companies to meet short term financial requirement. It is a credit facility which should be repaid within one year.
v. Investment: It is defined in finance, as the buying of a financial product or any valued item with an anticipation that positive returns will be received in the future.
vi. Financial Ratio Analysis: According to John, (2009). It is the analysis of financial statements for the interpretation, amplification and translation of facts and data contained therein with a view to drawing relevant conclusions.