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FINANCIAL
STATEMENT AS DETERMINANT OF PROFITABILITY IN BUSINESS ORGANISATION
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Finance is a
field that deals with the allocation of assets and liabilities over time under
conditions of certainty and uncertainty. In other way round of finance can also
be defined as the science of money management.
A key point
in finance is the time value of money, which states that purchasing power of
one unit of currency can vary over time.
Financial
Management as a determinants of profitability over the years that the
determinant of profitability in business organization has been a problem faced
by scholars. The use of financial statement as a determinant of profitability
in companies is a very important aspect that cannot be overemphasized.
According to
Emekekwue (2002), financial statement is an analyst of planning, organization
and control of the resources available to an organization in other to meet the
demands and materials resources.
Dave (2012)
defines financial management as an integral part of overall management rather
than as a staff speciality concerned with fund raising operations. He added
that the central issue of financial policy is a rational matching of advantages
of potential uses against the cost of alternative potential resources, so as to
achieve the broad financial goals. Management of finance has evinced local
interest both among the academicians and practicing managers primarily due to
its immense potential to influence the profitability of an enterprise. This
potential is engrossed in both the aspects of management of funds be it
mobilization of funds or deployment of funds.
Pandeg
(2002) argue that financial statement is that managerial activity which is
concerned with the planning and controlling of the firm’s financial resources.
The subject of financial statement is of immerse interest to both academicians
and practicing manager. It is of great interest to academicians because the
subject is still developing, and these are still certain areas where
controversies exist for which no unanimous solutions have been researched at
yet.
At micro
economic level, performance is the direct result of managing various economic
resources and of their efficient use within operational, investment and
financing activities.
To optimize
economics results, a special attention should be given to the proper grounding
of managerial decisions. These should be based on complex information regarding
the evolution of all types of activities with the company’s financial
statements which therefore is found in the annual financial statements which
therefore become the main informative source that allow the qualitative
analysis of how resources are used during the process of creating value.
In order
words, companies run on a long terms performance ways, it is needed to develop,
implementation and maintaining the strategies, measures and coherent policies
from economic and financial point of view, resulted from a good knowing of
internal and external specific condition in which the firms acts.
The
qualities of managerial options depends by the ability of identifying those
elements that productivity used could lead to increasing of the results and
performances.
The research
objective of this paper is to investigate how to reach these goals, we believed
that the most appropriate indicators that express the aspect related to
economic development and performance growth of companies should be chosen among
the relative indicators.
The
emphericalstudy of the correlations between different impact factors and
profitability has been conducted by using the information taken from the annual financial reports of a
company.
1.2 STATEMENT OF THE PROBLEM
Financial
statement analysis can be a very useful tool for understanding a firm’s
performance and conditions. However, there are certain problems and issues
encountered in such analysis which call for care, circumspection and judgment.
Problems in
financial statement Analysis include:
(i) Lack of an underlying theory.
(ii) Conglomerate firms
(iii) Window dressing
(iv) Variations in Accounting Policies.
(v) Interpretation of Results.
(vi) Correlation among ratios.
1.3 PURPOSE OF THE STUDY
The primary
purpose of the study is to examine the financial statement as determinate of
profitability in business organization in Abeokuta and give some reasonable
recommendation on how to improve or enhance the standard of financial
statements of an organization.
(i) To look into the financial
statement of the companies
(ii) Future performance of the
companies.
(iii) The benefits that people have gain
in the companies so far.
1.4 RESEARCH QUESTION
Based on the
research questions, the following questions were developed.
(i) Is there significant
relationship between total assets turnover ratio (TATR) and Gross Profit Margin
(GPM)
(ii) Is there significant
relationship between debtors turnover ratio (DTR) and Gross Profit Margin
(GPM).
(iii) Is inventory turnover ratio (ITR)
has significant relationship on Gross Profit Margins
(iv) Is creditors velocity (CRSV) has
significant relationship on Gross Profit Margin (GPM )
1.5 SIGNIFICANCE OF THE STUDY
This study
is expected to be significant in the following ways.
(i) It will serve as a reference
materials to those who are interested and may want to carry out similar
research.
(ii) It will serve as a tool for the
companies for decision-making.
(iii) It will help the companies
customers for compliance.
1.6 SCOPE OF THE STUDY
The research
study will touch the financial statement as determinant of profitability of
business Organization
1.7 DEFINITION OF TERMS
FINANCIAL:
Is a field that deals with allocation of assets and liability overtime under
condition of certainty and uncertainty
BUSINESS: Is
an organization involved in the trade of goods services or both to consumers.
ORGANISATION:
Is a entity such as institution or an association that has a collective goal is
linked to an external environment.
PROFITABILITY:
Is the state or condition of yielding a financial profit or gain. It is often
measured by price to earnings ration
ECONOMICS:
Is the social sciences that seeks to describe the factors which determine the
production, distribution and consumption of goods and services.
DETERMINANTS:
Is a value associated with a square matric.
INTEVENTORY: Referees to the goods and material that a
business holds for the ultimate purpose of resale.
DEPTORS: Is
an entity that owes a debt to another entity.
GROSS
PROFITS: Is also called sales profits is the difference between revenue and the
cost of making a product or providing service.
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