CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE 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 a 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. Financial statement is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions. For such a business entity, financial statement is a statement that reports all relevant financial information, presented in a structured manner and in a form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2007a) and also to decision making pertaining to cost planning, investment planning, expected returns and performance evaluation. The financial statement comprises of balance sheet (for determining financial position), profit and loss statement (describes statement of comprehensive income), statement of equity changes (explain the changes of the company’s equity), and cash flow statements (reports on a company’s cash flow activities, particularly its operating, investing and financing activities). Although, these statements are often complex and may include an extensive set of notes to the financial statement and explanation of financial policies and management discussion and analysis (IASB, 2007b). The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statement are considered an integral part of the financial statements. However, the approaches that the notes and financial statement are presented and reported are critically for investment decision making by existing and prospective investors in order to earn optimal returns on their investments.