AN APPRAISAL OF THE USEFULNESS OF FINANCIAL STATEMENTS IN BUSINESS ORGANIZATION.

CHAPTER ONE

1. INTRODUCTION

     A financial statement is a final output of the entire accounting process. It consists of a profit and loss account and a balance sheet for that particular financial year, and it is released either at the end of the given financial year or at the beginning of the next financial year. A financial statements helps users (who are decision makers for an organization) to understand the financial position and performance of an organization. It is with the help of these financial statement also known as final accounts that an organization decides its business strategies for the upcoming financial year. 

1. BACKGROUND OF THE STUDY

Financial statements are those parts of statement which is used to communicate information about the company to those who have a right to receive it. for instance, shareholders. Financial statement provide an indication if the company’s trading performance.

As a minimum, financial statement includes profit and loss account, balance sheet and related explanatory notes and also a cash flow statement.

The analysis of financial statements is therefore the interpretation and transaction of facts and data contained in the financial statements. The purpose being the drawing of relevant conclusions operation, financial position and future prospects.

The procedure involves the analysis of data contained in the financial statements. For example, in carrying, is a very important figure. Similarly, in balance sheet analysis, the components are net assets which is usually compared with capital, loan stock and involving capital.

Transaction of those data into clear and simple form: the translation process may lead to extraction of ratios or percentages that established relationship between comparable data or even the presentation of graph and charts, and also drawing relevant, conclusion and making inferences concerning the company’s financial position, stability, profitability and solvency.

Presentation of information so obtained for decision making. The information is used for future controls and policies. The application of this information will involve the isolation of the factors responsible for the state of affairs revealed by the analysis. The analysis could be horizontal or vertical, internal or external.

Horizontal analysis is a comparison of data in financial statements of two or more consecutive accounting periods to detect whether performance has improved or not. For example, the profit of a company in a year can be compared with those of another year which a trend may arise from the analysis. This analysis is internal as if concerns financial data of one company alone. A horizontal analysis of financial statement can be internal when a comparative study of data between one company’s financial statement and that of another company over a given time is wholly internal and involves a comparative analysis of data between one company’s financial statement and that of another company over a comparative analysis of data in financial statement within a single period.

In carrying out an analysis of accounts, a number of issues must be considered and conclusion formed there on. These include:

PROFITABILITY OF THE BUSINESS: operation, particularly in relation to capital employed.

SOLVENCY OF THE FIRM: the ability of the firm to pay its auditors, the adequacy of its working capital and the liquidity of its current assets reviewed side by side with current liabilities.