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THE ROLE OF FINANCIAL STATEMENT IN THE INVESTMENT DECISIONS OF MICRO FINANCE INSTITUTE (MFI). A CASE STUDY EXCEL MICRO FINANCE, ERUWA
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1.0 Background of 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 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.
1.2 Statement of Problem
As a current situation in most Micro finance in Nigeria, investment decisions in Excel Micro Finance have been very slow due to the negligence on the use of financial statement and other important financial records. 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. Also, most Micro finance institutes(MFI) complying with the bookkeeping principles have fallen short of living up to the laid down standards, but to satisfy the mandatory and statutory requirement. Subsequently, this has further raised the urgency to provide technical support and management training needs, to the operators in this sector to cope with the ever-growing demand for new and existing players in the industry because of competition, creativity and innovation. Financial statements hold the potential of unraveling the future of MFIs as an integral driver of economic growth and development in low income economies. Despite the use of financial statements in Excel Micro Finance, the institution is still unaware of the importance in the frequency and manner of presentation of these statements as far as investments are concerned. Having in mind the fact that financial viability is quite important, what therefore is the role of financial statements in investment decisions of micro financial institutions?
1.3 Research Questions
To attain the objectives of this study, the researcher had the main research question,
i. what role does financial statement play in helping managers make investment decisions in an organization?
ii. what is the importance of financial statement to an organization?
iii. to what extent do investors make use of financial statements in investment decision making?
iv. how reliable is financial statement as a tool in making investment decisions
v. how many types of financial statements are there?
vi. what are the various tools used for the presentation of the financial statements?
1.4 Objectives of Study
The objectives of this research are:
i. to find out the contribution of financial statement in investment decisions of an organization.
ii. to determine the types of financial statements, used by different organizations
iii. to determine the reliability of financial statement in investment decision making
iv. to determine the various tools, used for the presentation of the financial statements and its importance to an organization.
1.5 Research Hypothesis
H0: Financial statements do not have any impact on investment decision making in organization.
H1: Financial statements have an impact on investment decision making in organization.
1.6 Scope of the Study
The scope of the study involves the financial statement in the investment decision of Micro Finance Bank, Eruwa. The study was extended to the financial department in particular and for the confiner to Micro Finance Bank.
1.7 Significance of Study
A financial statement is a significant tool/document because investors and regulators rely on accounting information to make managerial decisions. Consequently, financial data’s that are inaccurate or misleading can cause readers and users to make wrong investment or regulatory calls. This study will help create awareness with respect to the great impact account reporting has on investment decisions. It will reveal how finance has been raised and how it has been deployed in finance organisations, Furthermore, it will show the relationships between wealth generated and wealth invested and how they can be important and helpful indicators of business effectiveness.
Finally, it will serve as a reference document for future researchers interested in this subject of study.
1.8 Limitation of the Study
i. The analysis was made with the help of the secondary data collected from the company.
ii. All the limitations of ratio analysis, financial statement, common-size statement, comparative statement and interpret are applicable to the study.
1.9 Operational Definition of Terms
Financial statements: Are written records that convey the financial activities and conditions of a business or entity and consist of four major components
Investment: Is using money to purchase assets in the hope that the asset will generate income over time or appreciate over time.
Decision: process is described as a series of steps, starting with information output and analysis and culminating in resolution, namely a selection from several available alternatives.
Microfinance Institution: Is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services.
Income Statement: is a financial statement that reports a company’s financial performance over a specific accounting period.
Equity: A stock or any other security representing an ownership interest. This may be in a private company.
Balance Sheet: is a statement of the financial position of a business which states the assets, liabilities, and owners’ equity at a particular point in time.
Asset: is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit.