Effects of Financial Statement on investment Decision

The financial statements according to Companies and Allied Matters Acts of 1990 is defined as “the basic statement of accounts used to convey quantitative information about a business to shareholders, creditors, and others interested in the reporting of a company’s condition, results of operations, and sources of funds.” In other words, financial statements are the statements of accounts that are used to report a company’s financial condition, results of operations, and sources of funds (CAMA).

It is also a description of a company’s financial condition, performance, and/or activities for a certain time. Financial statements are required by law.

The past performance of a financial statement of an organization is used to forecast future rates of return and risk.

As we are well aware, the contents of financial statements is derived from the financial transactions carried out by the organisation over the preceding accounting period, making them historical in nature. They are monetary values that represent commercial or financial operations using money as a measure of value and reflect whether a firm or concern has made a profit or loss through an income statement or cashflow statement by matching earnings and expenditures.

Financial Statement makes it possible for a more effective decision. It is also used by the investing public in contemplating making a purchase decision before investing in the organization.

Those in charge of making decisions who are interested in owning partial or full ownership of a company do so with the expectation that they will get dividends and that the value of their investment will increase over time.

It is said that the dividends paid out and the value of the firm’s shares are dependent on the profitability of the company and its expected value in the future.

The investors are worried about the future profitability of the company. The past earnings and distribution of dividends are used to make future projections on dividends and share prices.

The need to know the Importance of Published Financial Statement and the perception of investors about a company’s ability affects the market prices of the company’s security relative to others in the industry. It is also stated that the financial statement can only be useful if they are well understood published financial document which are the information source that is most directly related to the items of interest to both existing and potential investors.

Also, to note that the financial statement can fairly represent the business and economic situation of a country, where this is studied carefully, it can lead to the achievement of some financial and economic goals.

To understand the balance sheet, it provides the investing public with a clear picture of the financial condition of the company. It gives details of composition of its fixed assets which can be categorised into tangible and intangible assets that the company owns and owes, while the profit and loss accounts summaries the income and expenditure of a company in each period. And it shows the result of operation during these accounting periods. Also, it is with financial reports that users can assess the project of receiving cash as divided or interest and proceeds from sales, exemption or maturing securities or loans for instance, in the annual financial report on cash flow statement, it shows how cash is predicted to move around at a particular given period.

The most important purpose of the annual report is to get the shareholders informed about the financial status of their company, especially as to its income and financial position. It helps the investors the know the ability of a company to pay divided and interest when due while for the potential investors, the published financial statement is used to decide on the type of security to invest in or which company to invest in.

It is important to highlight the problems of the published financial statement and regards to accounting information by shareholder will depend on their efficiency on both making reasonable decision from such statement and the level of their knowledge over the board areas of accounting information.

For the accounting concepts, it does not rest on universal truth or general laws. It is based on judgment which is applied to the interpretation of economic and social events and the subjective nature of these values implies that measurement process in accounting is not precise and there is opportunity for controversy as regards to how to measure events.

Another problem or effect of the financial statement is creative accounting. The creative accounting is described as the manipulation of the financial numbers, usually within the law and accounting practices and standards but very much against their spirit and certainly not providing the true and fair view of a company that accounts are supposed to. The creative accounting is characterised by excessive complication and the use of other ways of characterising income, assets, or liabilities and with the intention to influence readers of the financial statement, as a systematic representation of the true income and asset of corporation or organisations.

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