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This particular chapter is an introduction to the topic “financial reporting as a tool for management decision in an economy” and taking management decision in an economy” and taking reynold construction plc, Ibadan as a case study.
To make rational, decision towards achieving the objectives of the firm, the financial managers needs to have certain analytical tools, one of such tools is financial data. Every business firm Prepare financial statement that must at least include the balance sheets and the profit and loss account. The balance sheet the profit and loss account. The balance sheet shows the result of operations over a particular period. Financial reporting makes use of financial data in the balance sheet and profit and loss accounts to enable users of financial statements gain insight into better understanding of the financial statements.
Financial statements can be defined as the total financial information come day to day and periodic transacton of an organization the financial statement of a company represent its certificate of health which share the company’s annual rate of affair by giving the number of the company is engaged and proposed creditor and other third party with whom the company is engaged in transactions, the opportunity of knowing the true position of the company
From the petty cash book, stock inventory, Bank\cash book, income and outgoing cheques registrers, trial balance debtors, schechile profit and loss account and balance sheet etc.
Through the financial statement is always in summary form, the above are some of the source of data or books through which the sourced of data or book through which the financial information are gathered.
As said earlier, the financial statements of a company represent its certificate of health, the past, the present, the future of the company could appraise. In other words, the financial statement mirrors the performance of any organization financially.
In the olden days the nerchant handles their money themselves when entrepreneurship was still the order of business, only few out of many that has many business use to put a trust worthy member of his family in charge of their business to manage for them. The case today has taken a different direction entirely. Business owner in most case are not participating in the running of business while some prefer employment other to take good and proper control of their business for them. Reynold construction company plc, Ibadan is one of those company owned by participating and non-participating shareholders.
The individual companies’ government value accountable and financial statements are just at that. Among the first set of companies set up by the Nigeria government in 1951 is a public accounting committee to see how the wealth created by the nation could be generated and managed.
Hence, the importance of financial statement s cannot be over emphasized. We can equally say that if there were no financial statements there wouldn’t be any need of calling of any general meeting.
Financial statements include the following:-
1 Statement of accounting policies
2 The balance sheet\statement of assets and liabilities
3 A profit and loss or income and expenditure account
4 Note of the account
5 The auditor’s reports
6 Cash flow statement
7 Value added statement
8 The director’s report
9 Five years financial summary
10 Group income statement and balance sheet in case holding company.
11 Audit committee reports.
The statement of accounting policies should comply with the statement of accounting polices (SAP) and provision will contain the method of vahing stock (i.e whether FIFO, LIFO, averagerate, market value or replacement value)
Method of charging depreciation (i.e whether straight line, Diminishing balancing or revaluation method) the percentage of ratio used for depreciation/. The balance sheet wil show the assets. Liabilities and owner interest. It must also show the true and fair view of its state of affairs. The profit and loss account or in the case of a company not traching profit and income and expenditure account of a company for the years
In the notes of the account is explanation necessary for any reader to able to understand the ways in which some item were treated. It shall contain additional information, which could not ordinarily be included in the balance sheet as profit and loss account. The auditor being an outsider and independent is expected to express his opinion on the financial statement and this opinion will make it more credible to the users.
The cash flow statements the income sources and on what were spent during the year. The value added statement reports the wealth created by the company during the year and its distribution among various interest group such as the employer, the government, creditors, proprietors and the company. It can thus be said that the value added is the difference between input value and output value, which equals factor payment.
The five year financial summary is for comparison of performance by the organization and can be used as yardstick for future prediction.
Users of financial statement include the following:
- The creditors
vii. The public
viii. Potential investor etc.
Financial statement can also be interpreted with the use of ratio, for example, taking return on capital employed (ROCE)
ROCE = Net profit/ capital x 100/1
It will enable a potential investor have an idea of what to expect from whether to invests.
These are some other financial ratios such as:
- Profitability ratio
- Gearing ratio
- Interest lower ratio
- Earning per share
- Ratio of gross profit to sale
- Ratio of expense to sale
- Ratio of net profit to sale etc.
1.1 BACKGROUND OF THE STUDY
The company, Reynold construction company plc, Ibadan was incorporated as a private limited company in 1970. It was converted to public limited liability company in 1977 and share is quoted on the Nigeria stock exchange.
The principal activities of the company cover planning, design and construction of civil engineering and berthing work.
The board of directors comprises of Mr Brig and (Dr) M.O. Johnson (Rtd) as the Chairman Mr. L. Haussmann the former managing director restored 1997 and was replaced by Mr. F.K AbdulRazak. The other director of the company include Chief (Mrs) L.A. Lastina-ALU, Alhaji Modupe Sheriff, Mr H.W. Hmamm the vice chairman, Mrs. G. Marks (German), Mr. J.N Kum, HRH Igwe, P.N Anugwu, J.P among others.
The companies employed both able and disabled and given equal opportunities to develop their experience and knowledge.
1.2 PURPOSE OF THE STUDY
The specific of objectives of the company will be to show the relevance of the ratio analysis as an index of measuring organization performance and with which will be of interest management, shareholders, creditors and employees for this project, the interest of the above mentioned actors re-stated as follows.
- Management: These are concerned with internal control profitability of company and efficiency in the management of asset. They are interested in all aspect of financial ratio that all outside investors used in evaluating the firm to bargain effectively for more funds.
- Shareholders: Both the existing and potential investors would be able to determine the earning, versatility of the organization, its profitability potential for growth and dividend policy and this decide where to place their funds.
- Creditors (long term and short term): They are the ability of the business to pay interest and repay the principal on a due date while the short term creditors such as suppliers, banks and other financial institution o short term financial obligation. The long term solvency and stability for the company. They would also form this opinion on the capacity of the company to withstand the long term financial pressure.
- Employees: These are interested in the long term stability of the company which their job depend on the company’s ability to meet wages demand.
1.3 STATEMENT OF THE PROBLEM
Some bothering questions such as the following will be addressed and solution found to take each problem.
- How could an organization measure its long term and short term financial pressure?
- Does the company have too heavy investment and account reversible.
- Are inventories adequate to support the projected level of sales?
- How could overall effectiveness of management of a firm be measured.
- How could e management measure how effectively the firm’s resources have been utilized.
- How effective is the company’s credit policy?
1.4 RESEARCH QUESTIONS
(a) What does financial ratio contains?
(b) What are the reasons for preparing ratios?
(c) Who are users of financial statement?
(d) How can financial ratio be used?
(e) What effect will ratio have to performance evaluation of an organization?
1.5 SIGNIFICANCE OF THE STUDY
The study is most appropriate particularly in an environment where the political, economically, social, cultural factors and international environment are not stable.
The use of ratio will also enable the management of an organization to determine the ability to met the long term and short term solvence, as well as the effectivenees and efficience of an organization without going through a complex procedure which maybe subjective and unreliable.
Ratio itself it a simple analytical tool, which is more reliable if the accounting data are accurate.
- DEFINATION OF TERM
- RATIO: these are tools of financial analysis it is a quotient of two mathematical expressions. It is a mean of expression one figure in relation hip to another.
- ROCE: this means return on capital employment, it shows the overall profit of the business.
- LIQUIDITY RATIO: this is the ability of an organization to meet its current obligations.
- ACID TEST RATIO: this ratio expressed the inactive amount of cash and other asset that can easily be converted to cash and that able to meet current liability
- PROFITABILITY RATIO THE ratio deal with profitability and efficency of resource utilization in an organization.
- MANAGEMENT : this can be define as social process entailing responsibility for the effective and economical planning and regulating of the operation of an enterprise infulfillment of a giving purpose of task (EFL brech )
- SHEREHOLDERS RATIO: these ratio one of interest to the investor in the stock exchangeas they use them to compare alternative investor.
- PROFIT AND LOSS ACCOUNT: this is otherwise knows income statement reflecting the earning capacity of the firm.
- BALANCE SHEET: The indicate the financial or the state of affairs of a business at a particular moment.
- GEARING RATIO: This ratio measures the degree of the company to the financial risk attaching to fixed interest security.
- PROPRIETARY RATIO: This shows the degree to which unscured shareholders are protecting against loss in the event of liquidation.
- FIFO: These mean first in first out, here issues are applied at the price paid for the materials first taken into the stores from which the material to be priced would have been drawn.
- LIFO: These means last in first out, is for materials taken into the stock from the material to be which could have been drawn.