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CHAPTER TWO

LITERATURE REVIEW

2.1   INTRODUCTION

 The aim of this chapter is to bring together views of different relevant literature connected with financial statement analysis in Nigeria. It seeks to discuss the information available in Nigeria and elsewhere as it is considered pertinent to the study. The study analyses the extent to which investors can place reliance on financial statement presented by the directors of the company under view. In order that this will be well placed, a general view of the financial statement is also being considered.

 It however, not worthy to mention that there is the shortage of materials for analyzing the degree investors can rely on financial statement of companies in Nigeria, as it is a relatively new concept. Consequently, what is being highlighted is the diverse discussion and opinions of various writers and commentators. The present study therefore seeks to bring different views into focus in an attempt to obtain a good understanding of the nature of financial statement preparation and presentation.

2.2   THE CONEPT OF FINANCIAL STATEMENT

 Anao R.A. (1989): posited that financial statement is the  procedures which has the special aim of ultimately generating of information which would be presented to various interested parties for their respective decision. It is the medium for presenting information which can form certain specified standards with regards to content and style of presentation. These statements are company law, the pronouncement of major professional accounting bodies and in certain cases also the requirement of the stock exchange.

 Professional Accountants tutors (2002), defines financial statement as the means of communicating toe interested parties information on the resource obligation and performance of the reporting entity, or enterprise. Financial statement shows corresponding figure for the proceeding period. Financial statements are expected to be simple, clear and easy to understand by all users.

 Barton (1979:273), defines financial statements as a report of financial condition or of the financial result of the operation of the business, a government or other organizations.

 Neven P. (1984), defines financial statements as the output of an accounting system through which selected information about the entity economic activities can be communicated to management, investors and creditors about the past and present financial statement and forming expectation about performance.

 Financial statements are the instrument panel of business enterprise in decision-making. They constitute a report on managerial performance attesting to managerial success of fortune an flashing warning signal of impending difficulties to read a complete instrumental panel, one must understood the gauges and their calibrations to make sense out of the array of data they convey.

 Jenings A.R. (1993:401), says financial statement including the final accounts of their own sake but for the sake of various parties who are interested in different aspects of these statements.

2.2.1         PURPOSE OF FINANCIAL STATEMENTS

 The financial Accounting standard board (FASB) highlighted that, the purpose of financial statement is to provide information that is useful to present and potential investors and creditors and other users in making rational investments, credit ad similar decision. The information should be comprehensible to those who have reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

 They also stated that financial statement should provide information to help present and potential investors and creditor and other users in assessing the amounts, timing and uncertainty of prospective cash receipts from dividends or interest and proceeds from the sale, redemption, or maturity of securities or loan. Since investors cash flow are related to enterprise cash flows, financial reporting should provide information to help investors, creditors and others assess the amounts, timing, and uncertainty of prospective net cash flows to the related enterprise.

 FASB further stated that, financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owner’s equity) and the effect of transaction, events and circumstance that changes its resources and claims to those resources.

 Okolie A.O (2004:134), noted that the purpose of financial statements is to provide information about the financial position performance and changes in financial position of an enterprise, that is, it is useful to a wide range of users in making economical decisions he pointed out that financial statement should be understandable, relevant, reliable and comparable. He adds that reported assets and liabilities and equity should be directly related to an organization financial positions and also that reported income and expenses should be directly related to an organization’s financial performance.

2.2.2         CONTENTS OF FINANCIAL STATEMENT

 Remi Aborode (2005), state the following as content of the financial statement;

Chairman’s Report

Director’s Report

Auditor’s Report

Audit Committee’s report

Statement of accounting policies

Notes to the accounts

Income statement (profit and loss account)

Balance sheet (profit and loss account)

Cash flow statement

Value added statement

Five – year financial summary

All this shall be elaborated on, one after the other.

a.     CHAIRMAN’S REPORT: Remi Aborode (2005) noted the following as importance of chairman’s report,

 i.        It highlights the financial performance of the company in the current year.

 ii.       It hights the significant development in the company

 iii.      It projects into the future as to how to improve the company performance

 iv.      It reviews the quality of management staff of the company and explains how the company intends to improve their performance for better productivity.

 v.       It reviews the economy in which the company operates and highlights strategy to be adopted by the company to improve it’s performance.

b.     DIRECTOR’S REPORT: Session 334 of CAMA 1990 placed upon the directors, the responsibility of preparing the company’s financial statement. Why Remi Aborode stated the following as the items contained in director’s report as follows; 

 i.        Principal activities and business review

 ii.       List of the company is directors and their shareholding structures.

 iii.      Details of the gifts and donations to charitable organization

 iv.      Employment of Disabled persons

 v.       Staff welfare scheme and training

 vi.      Names and address of the company’s distributor an suppliers

 vii.     Information relating to changes and movement in fixed Assets

 viii.    Directors interest in the company’s share

 ix.      Operating result of the company including appropriation from profit.

 x.       Research and development activities of the company

 xi.      Post Balance sheet event

 xii.     Acquisition of company’s own share (if any)

 xiii.    Auditors willingness to continue in office.

c.     AUDITOR’S REPORT: Section 359 (1) of CAMA 1990 “the auditor of a company shall make a report to its members on the accounts examined by them, and on every balance and profit and loss account and on all group financial statements copies of which are to be laid before the company in a general meeting during the auditors tenure of office”. Where the company is quoted in the Nigeria stock exchange (NSE) the auditor will as well report to the members of the company and the audit committee.

 The auditors report which shall be counter signed by a legal practioner shall state the matters set out in the schedule of this decree, and also the auditors shall in the case of a public company also made report to an audit committee which shall be established by the public company.

 The auditor of a company in carryout his assignment has to ensure that he obtains sufficient information in order be able to express opinion on the financial statement in performing this duty the auditor exercise the following rights and powers;

Right and power of access at all times to the accounting records, financial reports and other documents relating to the activities of the organization.

Powers to require and to obtain information  and explanation from the companies directors and officers as the need arise.

Right to receive notice and to attend annual general meeting of the company.

Right to be head in all matters concerning the audit and to defend any matter that concerns him as an auditor.

Right to make written representation to members of the company. Particularly when he is facing and intended removal.

d.     AUDIT COMMITTEE

 Section 359 (4) of CAMA 1990 stipulates the maximum number of an audit committee to be six. By implication, the with a good mix of business judgment and experience but not too large to be unlikely to be able to do so.

 Section 359 (6) (d,f) requires the audit committee to “keep under review the effectiveness of the companies system of accounting and internal control. Which is primary the work of an internal audit which is a supposed responsibilities of the directors of the company.

 Section 359 (6) – (a) to (d) is laden with heavy and complicated accounting responsibilities that only highly trained and experienced accountants can carry out. Audit committee would need expert guidance to be able to carry the functions and only the accountants possess the requisite knowledge to do this. The law does not empower the audit committee to engage paid experts of their own in time of need in the course of carrying out their statutory duties.

 Areas and leobbecks (1975: 140) have argued that in practice, it is not possible to state how often an audit committee should meet during a year, This depends on the responsibilities that an individual company assigns to its audit committee. It has been suggested that three meetings a year is appropriate for most business organizations.

e.     STATEMENT FO ACCOUNTING POLICIES:   Okolie A.O. (2007: 102), defined accounting policies as the principles, bases, rulers and procedures adopted by management of a given entity in preparing and presenting financial statement. He noted that accounting policies are the specific accounting bases (i.e accounting conventions) followed for items judged to be material in determining profit or loss for the  period and in stating the financial position, such policies should be chosen by management as being most appropriate to the circumstance and best suited to present a true and Fairview of the company results and financial position.