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EFFECT OF PUBLISHED
FINANCIAL STATEMENT ON SHAREHOLDER INVESTMENT DECISION
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
Each person like every business requires some measures of
both financial position and financial performance in assessing his financial
conditions. The financial position depicts one’s wealth at ascertain point in
time while one’s financial performance describes once.
Financial statements according to Illoumezie (2006:33) are
like compasses “which navigators use to locate their bearing and find
direction”. People use them to gauge their financial positions at various
points in their lives in order to judge their progress towards their financial
goals.
Financial statements according to meigs and meigs (1981:28)
refers to reports which summarize the financial position and operating results
of a business (balance sheet and income statements). It referred to as genera
purpose that satisfy the need of many groups generally called stakeholders.
These groups are particularly concerned with the risk inherent in and returns
provided by their investments, and who require accounting information to enable
their assess the ability whether they should buy, hold and sell their
investments.
According to Anayaogu (2002:14) financial accounting provides
information to eternal decision makes such as shareholders government,
creditors, employees etc, these are people with whom or from whom money is
ultimately paid or received. Anayaogu (2002:20) also states that records of
financial accounting includes various ledges accounts, profits and loss
accounts, balance sheet and other financial records. These records are intended
to show the strength, progress, portability, management effectiveness and
stewardship. Financial statement are
the means of communicating to interested partners information or the resource,
obligation and performance of the reporting enterprise in a simple, clear and
understandable form to all its user with such attributer of relevance to
decision reliability, consistency and comparability materiality efficiency and
understandability.
According to information provides continuity in history as
quality in monetary terms of economic activities resources and obligations of a
business enterprises as well as the various activity that cause a change in the
level of these resources and obligation. It is also serves as parameter for
evaluating the performance of a business enterprise and as a measuring tool to
both the management and decision markers and possible sale of shares by
shareholder when actual results deviate from the target objectives. The
importance attached to accounting information cannot only be related to
management and the government but it also cuts across the cars of the various
categories of creditors, employee, and other water cooperate bodies and
potentials investors as well.
The annual report and accounts are said to be published owing
to the fact. It is being printed and dispatched to each shareholder and any
other unfrosted where person on request. The annual reports and accounts are
the primary means of communicating vital economic information in the
cooperation’s resources and obligation to absentee owners and could be investor
by the management. The published financial statement serve as a means of
conveying business information to the equity investor groups (shareholders),
the loans creditors group, the employee groups, the business contract group,
the government and its agencies as well as the general public. It gives a
concise and genuine picture of an enterprise profitability trend and its
financial position. The information contained in the published financial
statement act as a basis for which shareholder maker investment decisions.
However, the account days of pre-colonial administration, the
preparation and publication of financial reports used by owner managers for
internal control and cost determination. This inter became. Inadequate role to
increase completely of business organization. At the onset of industrial
revolution, trade begins to increase and expand. This necessitated employing
managers to manage the business on behalf of the shareholders. Managers
positions now necessitated companies to prepare and publish a financial report
that would reveal to the owners (shareholders) the operational state and
financial position of the company and how the capital contributed by the
shareholder had been utilized in the realization of the set out objectives of
the company.
The company Act 1963 outline that every registered business
organization should maintain and submit audited financial
statements every year during the annual general meeting (agm) where. It is laid
to the members. This is in consonance with the provision of schedule two of the
companies and allied matter decree of 1990 which states internally that the
form and contents of published financial statements and with the accounting
standard issued from time to time by the Nigeria Accounting Standard Board
(NASB).
Meigs & Meigs (1981: 14) states that the preparation of
financial statement is not the first step in the accounting financial statement
is not the first step in accounting process. At the close of financial period,
the stakeholders such as investors of a company naturally desires to ascertain
the following:
The result of the company’s operations for the period.
The resources and hostilities of the company over the period
in question.
Wealth created by the company and how it has been
distributed.
Financial resources acquired and how they have been a
expanded.
Thus, published financial statement prepared under companies
and allied matter decree (CAMA) 1990 supplies information about the above. As a
matter of fact, shareholders of any corporation would require annual corporate
report published about the entity and which must be relevant, sufficient and
reliable.
The corporate report published in 1994 by a working paper
setup by Accounting Standard Committee (ASC) to be reexamined the scope and
aims of published financial reports identified seven user groups to include:
The equity – investors group
The analysis – advisory group
The employee group
The creditors
The business contact group
The government and its agential
The public
Bell (1998) identified (15) fifteen information needs of
users of financial statements, which art concisely summarized here as the
financial need of shareholders in the published financial statement of any
business entity. These includes information for
Evaluating the performance of the entity.
Assessing the objectives established previously by its
management members or owners.
Evaluating managerial performance, efficiency and objectives
including employment, investment and profit distribution plans.
Assessing the liquidity of the entity.
Assessing the economic stability and inevitability of the
reporting entity.
Assessing the capacity of the entity to make future realer
nation of its resource for either economic or social purposes or for both.
Estimating the future prospects of the entity which respect
to dividend payment remuneration and other cash outflows and predicating future
levels of investment, production and employment.
Predicting, compressing and evaluating potential cash flow
Guinness Nigeria is a Nigerian Brewery founded in 1962. It
engages in brewery, packaging and marketing of spirits, wines and beer in
Nigeria. It offers its products under Guinness Foreign Extra Stout (1962)
Guinness Extra Smooth
(2003) Malta Guinness (1990) Harp Lager Beer (1974) Gordon’s
Spark (2001) Smirnoff Ice (2006) and Satzenbrau (2006).
The company was incorporated in 1950 and it’s headquartered
at 24 Oba Akra Avenue Ikeja industrial estate, Ikeja Lagos Nigeria. Guinness
and unlevered are the main shareholders, although some of the shares are
locally owned. Guinness Nigeria plc is a company that believes in enriching its
community. This it has achieved by embarking on laudable corporate social
responsibility projects in several communities. In Nigeria these projects are
water of life initiative, which currently provides potable water of over
500,000 Nigerians spread across several rural communities from Northern to
Southern Nigeria.
The company was listed in exchange market in the year 1965,
with its managers/ directors. Engr. (Chief) R.A. Alabi, OON (Chairman) Mr. N.
Blazquez (vice chairman) Mark R.M. Taylor (MD/CEO) and B.A. savage (OMD) of
Guinness Nigeria Plc, and so many other staffs.
The company’s registrars is union registrars limited 2, Burma
Road Apapa Lagos. And there end of accounting year is every 30th June of every
year as the case maybe. The company has four branches in Nigeria so far, they
have been to grow their turnover at average ratio of 20.7% per year over past
five years and they are currently on track to overtake their turnover for the
2011 full year. Based on this result the return on equity improved from 0.17 to
0.31, this leads to an estimated full year return on equity of 0.60. They have
a current ratio of 1.56 and a quick ratio of 0.98.
1.2 STATEMENT OF THE
PROBLEM
Virtually, every economic entity maintains its records on a
historical cost basis. The historical cost figures alone are inadequate. This
is because net profit is over stated, the balance sheet does not reflect the
current worth of the enterprises and inflationary situation, and the charging
of the historical cost of operations to profit and loss account may endanger
the maintenance of the operating capital of the entity. It is obvious that the
current situation of published financial statement has some limitations. This
is because the result of operation (net profit) is a function of accounting
standards, policies and conventions adopted by a company and used in the
preparation of the financial statements.
The financial statement should provide accurate financial
information; which shareholders can effectively manipulate to get the best out
of their investment. It is pertinent to say that analysis and interpretation of
any financial statement will descend on the adequacy and accuracy of the said
statement and how the financial information is being disclosed so as to enable
to shareholder make major investment decision such as “if to hold their shares
or sell them and invest in bond other than equity”. If they are to buy more
share of the same firm, but the problems statements.
Some shareholders cannot interpret financial information
correctly and cannot be able to make good use of the financial information
disclosed to get the best out of their investment.
Company’s concepts, conventions and principles are not
capable of meeting the user needs.
Published financial statements do not induce more people to
make investment in some companies.
Some shareholders are not oriented before making investment
decision.
Sometimes the dividend are not satisfactory considering the
risk involved in investment.
Some financial statement sometimes guide the investors. vii)
Some financial statement prepared are window dressing. viii) Some company’s
find it difficult to make their financial statement available to the
shareholder at any point in time.
1.3 PURPOSE OF THE
STUDY
This research was undertaken to find a better solution to the
research problem(s) already existing in this area of study. It is therefore
imperative to establish some guiding steps and principles in decision making
process which will ensure that a given objective is not defeated and to find
out if the financial information that emanate from the published finance
statements makes any meaning to investing public.
To know whether the information in the financial reports of
companies and other financial information areas are understood and used for
investment decision making.
To ascertain the extent the company’s concept, convention and
principles are capable of meeting users/ investors needs.
It is deemed to state categorically and in clear terms that
the influence of corporate reporting to investment differences in accounting
methods and how financial statement deficiency affects the investors
(shareholders).
To ascertain the extent published financial statement induced
more people to invest in companies.
1.4 RESEARCH
QUESTIONS
Bragging into consideration the complexity of making
financial decision and the immediate problems which necessitated this
researcher study, the work seeks or intends to provide answers to the following
questions posed.
Do investors understand financial statement very well?
What do they (investors) see as the importance of published
financial statement of companies?
Do the companies publish the market value of shares and
dividend of the company to the shareholders?
To what extent do companies concepts, conventions and
principles capable of meeting users need?
To what extent do the financial statement of a company
encourage investors to invest?
What is the best source of information to the shareholder on
investment decision?
Do the shareholders carryout analysis to the appropriate
personnel?
1.5 STATEMENT OF THE
HYPOTHESIS
Hypothesis One
Ho: Most investor does not analyze financial report before
making an investment decision.
Ho: Most investor
does analyze financial report before making an investment decision.
Hypothesis Two
Ho: Financial statement does not show true and fair view of
the statement in your company.
Ho: Financial statement show true and fair view of the
statement in your company.
1.6 SIGNIFICANCE OF THE STUDY
This research work is expected to be of great importance to
investors and shareholders in particular. It will serve them as a guide to
individuals who are interested to acquire shares in any firm, company or
business organization. It is expected to serve also as an indispensable tool
for current and potential investors of business organization as well as
companies in their investment decision making by way of providing sound
investment strategies for
shareholders and other users of published financial
statement.
1.7 SCOPE OF THE STUDY
This research work covers all the relevant accounting
information that was needed by investors/ shareholders of Guinness Nigeria Plc and
their investment states of Guinness Nigeria Plc using its published annual
report and financial statements between 2004-2003. The goal behind every
investment is either return, capital appreciation, therefore the general goal
of any investment decision that is obtainable in our business enterprise can be
related to another.
1.8 LIMITATIONS OF THE STUDY
There is no research/ study that is hitch free, during the
course of this study, some of the constraint failed and those envisage making
this task all the more daunting are;
Financial constraints
Lack of co-operation among staffs
Limited time
1.9 DEFINITION OF TERMS
DIVIDEND: Is the distribution of part of the earnings of a
company to its shareholders. The dividend is normally expressed as an amount
per share on the par value of the share.
DILUTION OF EARNINGS: This is when additional shares of stock
are sold without an immediate increase in income. This result is a decline in
earnings per share until earning can be generated from funds raised.
EARNING PER SHARE: Is the amount of profit after tax and
preference dividend (but before taking accounting of extra-ordinary income and
expenses attributable to each ordinary share in issue and ranking for dividend
during the period.
FINANCIAL INFORMATION: This is any information dealing with
the
operation of company and how the fund acquired.
EFFICIENCY: This refers to achievement of organization goals
within minimum waste of resources that is best possible use of resources.
FINANCIAL STATEMENT: This is a periodic financial reports
accounts and other related documents that highlights the financial position of
an enterprise as well as the financial profitability.
INVESTMENT: This is the commitment and utilization of funds
and other scare resources in a project with the expectation, that the
utilization will generate return.
ORDINARY SHARES: These are the common stock of a company
which is to be issued out for sale to individual public.
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