CHAPTER ONE
1.1 INTRODUCTION:
This essay focuses on published financial accounting statements as
contrasted to the several forms of analysis, reports and statements prepared
for internal use in business organisations, often described as management
accounting.
It is thus important to define here what is meant by financial statements
and their analysis and interpretation.
A layman might simply refer to financial statements as the summary of the
financial affairs of an organisation. The encyclopaedia Britannica broadly
defines a financial statement as any report of the financial condition or the
financial results of the operations of a business, a government or other
organisation”.
Accountants in a more limited sense refer to financial statements as
consisting of a balance sheet, an income statement, a funds flow statement and
an analysis of other changes in stock holders’ equity. Each of these statements
will be examined, analysed and interpreted in detail later in this essay.
The analysis and interpretation of financial statements can be defined as
the detailed examination and explanation of financial statements made in order
to evaluate the economic condition and operating effectiveness of a firm.
There are several alternative methods use in the preparation analysis and
interpretation of financial statements. Each of the methods has their own
merits and demerits and they are all widely used in the accounting profession.
It is important to mention here that this essay is not directed at
standardizing financial statement analysis, as differing conditions require
analytical flexibility. But it attempts to throw more light and simplify the
techniques used in analysing and interpreting financial statements of business
concerns.
1.2 AIMS
AND OBJECTIVES
This this research work is generally aimed at explaining the nature and significance of financial statements, the tools and techniques used in analyzing and interpreting
them and the problems encountered together with recommended solutions of such
analysis and interpretation. The main objective is to assist the various users
of the published reports of companies in making their financial and other
related decisions. To achieves this purposes, particular reference has been
made to a well know Nigerian conglomerate, UAC of Nigeria Plc.
The various users of the financial statements of the above mentioned
company that this essay is trying to serve may include the management of the
company, Banks and financial institutions, creditors, shareholders, trade
unions etc. analysis and interpretations of the financial statements of UAC of
Nigeria Plc made in this essay will assist the management in carrying out
decisions regarding day to day operation and long - term or strategic plans.
Banks, financial institutions and creditors decide on whether to continue
lending the company or not on the basis of the analysis and interpretations of
the company’s financial statements.
This essay is also intended to help shareholders and investors make
rational decisions about their holdings in the company. The analysis of the
past and current financial statements enables the shareholders to decide on
whether to maintain, increase or sell their investments in the company.
Trade unions base their arguments for higher wages and more fringe
benefits on the results of the operations of the company as reflected in the
financial statements. Thus analysis and interpretation of the statements will
help assess the viability or otherwise of their argument.
Other possible users, this essay is aimed at serving, may include the
government, students and the accounting profession at large. The analysis made
many assist the tax authorities in making future analysis of financial
statements. It is also intends to help the government in obtaining relevant
information for formulating economic policies, especially in this time of
inflation.
Finally, this essay is also aimed at furthering research in the field by
assisting students and other research organisations in the accounting
profession (for example, the Nigerian accounting standards Board) in order to
acquire more knowledge and over come problems facing the field.
1.3 PROBLEMS
STATEMENTS:
The financial statement takes many forms. The best known of it includes
the balance sheets, profit and loss account. This account are produced
annually, other include the directors reports and a fund flow statement.
These financial statements are produced by the directors (as manager) to
the shareholders (as owners) and a wide range of people who are interested on
the annual reports and accounts of the company. The financial statements annual
reprts are made to people such as leaders or debentures holders, employees,
customers, suppliers, advisers to the company, the government, and the public
etc. To all these group of people, they must be sure that the financial
statement can be relied upon.
However there might be problems when managers report to owners the report
might contains, errors, not disclose fraud, inadvertently misleading, fails to
disclose relevant information.
Furthermore, modern company’s might be very large with multi-national
activities and subsidiaries. The preparation of such account might be very
complex. Taking into cognisance subsidiaries, conventionary legal system and
accounting. To avoid these problems, there arise the need for the employment of
an expert trained in the assessment of financial information.
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