ABSTRACT
The research topic of this study is “The role of financial statement in investment
decisions” – a study of selected banks in Enugu metropolis. The purpose is to
identify the relationship between financial statement and investment decisions, and
the impact of financial statement in investment decision making and also to know
if investment decisions depends solely on financial statement. The study
population is 125 persons who are the member of staff of the five major selected
banks. Using the Yaro Yamani formula, the sample size calculated gave (95). The
formulated hypotheses were tested using Z test with statistical technique at 5%
level of significance. The researcher also made use of primary methods of data
collection which included questionnaires and personal interviews. Also the
secondary methods of data collection used are library research of relevant materials
and existing documents from the selected banks. The researcher recommends that
banks in Enugu metropolis should consult the financial statement before making
investment decisions, and also it is recommends that all interested parties to
financial statement should used required financial ratio analysis for decision
making.
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TABLE OF CONTENT
Approval page ii
Dedication iii
Acknowledgement iv
Abstract vi
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problems 3
1.3 Objective of the Study 4
1.4 Research Questions 5
1.5 Hypotheses of the Study 5
1.6 Significance of the Study 6
1.7 Scope and Limitation of the Study 6
1.8 Definition of terms 7
References 9
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CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 INTRODUCTION 10
2.1 Historical Development of Business Financial State Analysis
and Financial Ratios 12
2.2 Accounting Information Tools 14
2.2.1 The Balance Sheet 15
2.2.2 The Profit and loss Account (Income Statement) 15
2.2.3 Statement of Accounting Policies 16
2.2.4 Director Report 16
2.2.5 The value Added Statement 17
2.2.6 The five year financial summary 17
2.2.7 The Auditor’s Report 17
2.2.8 Notes on the Accounts 17
2.2.9 A Cash Flow Statement 17
2.3 Quantitative Characteristic of Accounting Information 18
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2.4 Use of Accounting Information by decision makers 21
2.5 Objective of Accounting Information 22
2.6 Importance of Accounting Information 24
2.7 Users of Accounting Information and their Objective 25
2.8 Financial Ratio Analysis 27
References 36
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design 37
3.2 Sources of Data 37
3.3 Research Instruments 38
3.4 Reliability / Validity of research Instrument 39
3.5 Population of Study 39
3.6 Sample and Sampling Technique 40
3.7 Administration of Research Instruments 44
3.8 Method of Data Analysis 45
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3.9 Decision Criterion for Validation of hypothesis 46
References 47
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 48
4.2 Data Analysis 49
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION,
RECOMMENDATION
5.1 Summary of Findings 74
5.2 Conclusion 75
5.3 Recommendations 77
Bibliography 79
Appendices 81
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Every business prepares profit and loss Account or income statement to
ascertain the net result of financial working of the business whether it has earned
some income or profit or sustained any loss. It also prepare balance sheet to find
out the financial position of the business. Profit and loss account or income
statement, retained earnings statement and balance sheet are known as financial
statements.
Gautam (2005) sees financial statement as financial information which is the
information relating to the financial position of any firm; when presented in a
concise and capsule form. Besides profit and loss account and balance sheet, some
other statements are also prepared for deriving certain conclusions. A schedule of
current assets and current liabilities of two years may be prepared to know the
changes in working capital. Similarly a fund flow statement and cash flow
statement may also be prepared to ascertain the future estimate of cash receipt and
payment. Thus, financial statement include: profit and loss Account, income
statement and balance sheet along with certain schedules and statement.
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Ezeamama (2010) is of the opinion that rational decisions have to be taken to
manage modern business successfully and for this rational decision to be taken in
line with the firms’ objective. Some analytical tools ought to be available and used
based on the strengths and weakness of the firms. Thus, the financial strengths and
weaknesses of a firm are revealed in its financial statement.
The nature of financial statement is that financial statement is that financial
statements always relate to a past period and hence they are called historical
documents. Financial statements are expressed in monetary terms and it indicates
profit abilities of the business through balance sheet.
Financial statement are analyzed in order to use the information in financial
statements to ascertain the profitability and financial soundness of the firm, to
Judge the managerial efficiency for inter form comparison of similar nature and to
make valuable for costs.
According to Remi Aborode (2006), financial statement need to be
interpreted for better understanding and analysis and it can thus be interpreted
using individual items contained in financial statement or/ and using ratios
computed from items contained in financial statement ( Ratio analysis).
The essentials of financial statements range from the fact that financial
statements should disclose correct information about profitability and financial
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position of a business. The information disclosed should be presented in such a
manner that it can be easily compared with the figures of the previous year or with
those of other similar firms. The information so provided in financial statement
should be that which can be verified from the relevant and prepared within a
reasonable time after the end of accounting period. The information provided by
financial statement should also be easily understood by the interested parties. Such
as investors, creditors, lender and Bankers, customer’s employees, government and
other agencies, the public and stock exchange.
It can therefore be seen that financial information is very effective and
essentials in making investment decisions in an organization be it private or public.
Thus the role of financial statements in investment decision in some selected banks
in Enugu metropolis will be critically evaluated.
1.2 STATEMENT OF THE PROBLEMS
Several investment decision tools are used an financial statement of firms and
these has been used for several investment decisions, which most often pays off
bearing in mind the definition of what a financial statement is. It is important to
note the various roles it plays in investment decision.
However, the problems encountered by these investors include.
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Whether these financial statements represent a true and fair view of what it
purports to represents.
Whether all necessary disclosure have been made by the management of the
enterprises, which can now convince a person that deductions made base on
the financial statement is not misleading.
What benefit is this financial statement to the external users particularly
investors who are taking decision on a daily basis?
How analytical tools are set to aid prospective investors in accessing the
financial position of the corporate organization.
How to determine the profitability of a company.
1.3 OBJECTIVE OF THE STUDY
The general objective of this research work is to determine the role of
financial statement in investment decision of selected bank in Enugu metropolis.
This research work has the following objective
To identify the relationship between financial statements and investment
decisions
To evaluate the impact of financial statement in investment decision making.
To identify factors influencing investment decisions on financial statements.
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To highlight the problems associated with financial statement in investment
decision.
To highlight the various tools used in investment decisions on financial
statement.
1.5 RESEARCH QUESTIONS
The research questions were formulated from the objective such as:
What significant relationship does financial statement have to do with
investment decision?
What impact does financial statement have with investment?
Are there any factors that influence investment decision?
Does making investment decisions depends depend solely on financial
statement?
What are the various tools used in investment decision on financial
statement?
1.5 HYPOTHESES OF THE STUDY
The following questions were constructed to guide the researcher in her study.
H0 = Financial statement does not have any significant relationship with
investment decision.
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Hl =Financial statement has significant relationship with investment decision.
H0 = Financial statement does not have any impact in investment decision.
Hl =Financial statement has an impact on investment decision.
H0 = Making investment decisions does not solely depend on financial statement.
Hl = Making investment decisions solely depend on financial statement.
1.6 SIGNIFICANCE OF THE STUDY.
This study will be of immense help to the prospective investors and other
interested parties of the general public so as to know how to study the financial
report of a business firm in order for them to make a decision as to whether or not
to invest in such firm. It will help the government to determine the taxation due
and as well as to determine if all the company’s income has been included in the
computation of taxes. By doing this, there will be an improvement in the overall
assets and liabilities management and the management will also upgrade assets
quality and lower cost of funds. The researcher is of the view that this research
work will address the problem properly.
1.7 SCOPE AND LIMITATION OF THE STUDY.
This study is on the selected Banks in Enugu metropolis, the limitation is of
the study in the selected Banks in Enugu metropolis Enugu state. This is due to
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some constraints; those constraints were financial difficulties which prevented the
running down from one relevant selected Banks in Enugu to another for sources of
information necessary for this study.
Another constraint is the time limit within my disposal, the demand from the
academic activities and limit within this constitutes.
1.8 DEFINITION OF TERMS
FINANCIAL INFORMATION
Financial information summarize the economic performance and
situation of a business when confronted with the information and it is
useful to have a framework of analysis available to make an attempt to
draw what is important from the mass of less important data
FINANCIAL RATIOS
Financial ratios provide a means by which various items in the financial
accounts are related to an appropriate base and thereby enabling these
items to be regarded in their proper perspective financial ratios permit
comparative studies and therefore they are important tools of financial
analysis.
INVESTMENT
Investment is the act of intelligently determining the uses to which
saving can be put investment can also be defined as the defined as the
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sacrifice of current consumption for a future large gain of money or
consumption which could be uncertain.
INVESTMENT COMPANY
These are financial institutions organized for the purpose of enabling
an individual investor to obtain the advantages of wide diversification in a
single commitment
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