CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
No business of any kind could succeed as a profit making organisation without utilising accounting as the basis for providing financial information to owners for economic decisions.According to Rommey and Steinbart (2012), accounting is the recording, classifying, interpreting, communicating and summarising of financial transactions or events in terms of money and reporting the results to management and other information users for decision purposes. Pandey (2005) stated that an accountant is a person who is specialised in book-keeping and the preparation of accounts and who is competent to analyse financial statements of the business. It is seen that the whole bulk of financial reports are in the hand of accountants and other qualified accounting personnel.Zhou (2010) maintained thatmanagement of medium scale enterprises, like any other category of business concern, requires financial statements which are the basic financial accounting information. The enterprise deals with financial transactions which involve receipts and payments of goods and services in terms of money. The management of medium scale enterprises involves effective and efficient utilisation of available financial information for the planning and control of the enterprise in order to achieve its objectives.
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Aremu and Adeyemi (2011) maintained that medium scale enterprisesdeal with financial transactions which involve the exchange of cash and other financial documents with goods and services of the business enterprise for profit. Medium scale enterprises engage in a lot of economic activities includingbuying and selling, transportation business, hotel management, restaurant, computer service,and many others operating in Akwa Ibom South Senatorial District. Financial statements contain financial information which are useful and important records in an enterprise.
Ogbonnaya (2005) stated that financial statement, are the bedrock for evaluating the performance of any enterprise without which the firms’ or organisationalgoals cannot be attained. The author maintained that financial activities involvenot only the raising of funds for the purpose of achieving an organisational objective, but it also entails the allocation and prudent management of such funds. Libby, Libby and Short (2000) confirmed that financial statements of medium scale enterprises are those financial information that the enterprise requires for its effective and efficient decision making.
Therefore, it is realised that one of the important information about the conduct of organisation is financial information and report meant for management decision and planning of the enterprise. The main purpose of preparing financial statement is to keep the owners of the enterprise informed about the current financial performance and conditions of the business entity. These financial statements are also used by banks thatprovide loans to the business, creditors, customers, suppliers and those business partners who supply goods and services to the enterprise either by cash or on credit. William, Haka,Bettner and Carcello (2006) asserted that creditors are interested in the ability of the enterprise to operate at a sufficient profit level as this will go along way to enhance financial strength of the entity.Creditors are interested in the ability of the enterprise to meet its payment obligations. Similarly, investors are interested in the market value of the shares as this will give the enterprise the ability to pay their dividends and interests as they fall due.
The principal means of communicating financial information to the stakeholders of the enterprise is through financial statements. Kieso and Weygandt (2002) maintained that the financial statementsare the statements of financial position, the Statement of Profit or Loss Account, Cash flow statements,funds flow statement and statement of changes in financial position of an enterprise.
It is important to note that financial statement is an information system that provides financial data to some interested parties for decision making purposes. The result of the accounting processes is the preparation of various financial statements that serve as important communication devices to the interested parties.Helmkamp, Imdieke and Smith (2004) admitted that the purpose of financial statement is to communicate to the users the effect of operating activities during a specified time period.Pandey (2005) opined that financial information is needed to predict, compare and evaluate the enterprise’s earning potential.
Smith and Keith (2004) emphasised that financial statements are the end product of the financial accounting activities. The main objective of financial accounting is to communicate information concerning the financial condition and operations of the business, which is done through financial statements. Financial statements are designed to provide users with information concerning the profitability and solvency of the business.Millichamp (2002) confirmed that financial statements provide a picture of the overall financial position and performance of the business. Therefore, to produce this overall picture, the accounting system will normally produce three(3) major financial statement on a regular basis. These are, the Cash Flow Statements, Statement of Profit orLoss Accountsand the Statement of Financial Position. Financial statements are important financial documents.Most of the issues that the management addresses are contained in the financial statements.
The medium scale enterprise is always in the hand of specialised and trained executive officers or managers. The utilisation of financial statements would be of paramount important to management and owners for making rational decision on the enterprise to achieve its set objectives. According to Oduma (2012) medium scale enterprise has been justified to have a maximum asset base ofN200 Million excluding land and working capital with the number of staff employed by the enterprise not less than 40 and not more than 300, the enterprise must be registered as Limited Liability Company with the corporate affairs commission and comply with all relevant regulations of the Companies and Allied Matters Act (2004), such as filing annual returns including audited financial statements. This is where the enterprise is qualified and relevant to functions as profit-oriented organisation since it has met these requirements. The utilisation of financial statements in the enterprise for decisions making would afford the enterprise to remain in business and continue to operate effectively.
