UTILISATION OF FINANCIAL STATEMENTS IN MANAGEMENT OF MEDIUM SCALE ENTERPRISES IN AKWA IBOM SOUTH SENATORIAL DISTRICT
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 that management 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.
Aremu and Adeyemi (2011) maintained that medium scale enterprises deal 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 including buying 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 organizational goals cannot be attained. The author maintained that financial activities involve not 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 that provide 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 statements are 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 or Loss Accounts and 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 of N200 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.
According to Bodie and Kane (2014), statements of sources and application of funds usually benefits management of an enterprise in the following ways:
It can be utilised for implementation of the budget and capital expenditure control in the firm.
It is usually help in deciding financial policies needed in the firm.
It helps the management to quickly identify whether working capital could be effectively utilised or not or if the working capital is insufficient or adequate for the requirement of business. This working capital helps management takes policy decision regarding to payment of dividends.
It schedule helps the investors to decide whether the enterprise has been able to manage the funds properly.
It also helps to depict the credit worthiness of an enterprise which assists the lenders of loans to decide whether to lend money to the enterprise or not.
It helps management to take economic decisions and to decide about financial policies and capital expenditure for the future.
Barton (2010) specified that the uses of statements of sources and application of funds is prepared for financial analysis in order to meet the needs of people serving these purposes as follows:
It gives a comprehensive detailed explanation about movement of funds from different sources and uses of funds during a particular accounting period.
It helps to predicting future financial policies which could be encountered in repaying large loans, and so on.
It highlights the difference sources and application of funds between two accounting period.
It also highlights the financial strength and weakness of the firm.
It assists management to use this statement as instrument for stakeholders and shareholders for effective and efficient decision on their investments proposals.
It provides detailed financial information about profitability, performance, operational efficiency and overall financial affairs of the enterprise.
It serves as a useful tool in guiding management formulation dividend policies as well as investments policies ahead.
It assists managers to evaluate the financial consequences of enterprise transaction involved in operational activities, financing and investments taking place in the firm.
It helps to utilise the statement as a veritable tool to measure the causes of changes in working capital.
Epstein and Jermakowicz (2007) emphasised that the statements of sources and application of funds analysis helps the management of medium scale enterprises to ascertain whether the working capital has been effectively utilised or not and working capital level is adequate or inadequate for the requirement of a business enterprise. This statement based on which the working capital position is calculated assists the management of SMEs in making policy decisions regarding payments of dividends.
According to Barton (2009), every transaction of the enterprise involves a two-fold flow aspect. The enterprise must be financed from its cash resources, by borrowing or by the credit of its suppliers at a given point in time, or date firm’s cash resources. Likewise, the sale of goods and services to customers results in the receipt of cash or financial claim on customers, which are subsequently extinguished by a cash transfer. The sources of finance for the acquisition of all resources are seen to result in a credit entry to the relevant source account, while the use to which the finance was put was debited to the appropriate account. Hence, the double-entry record for each external transaction of the enterprise records the source of finance involved in the transaction and the use to which the finance is put. Nevertheless, the statement of sources and application of funds is a summary of the two-fold effect of all such transactions entered into by the enterprise over the period of which shows the total sources of funds for those transactions and the way in which those finances have been utilised. In other words, the statement of sources and application of funds summarises the financing aspect of all external transactions of the enterprise.
Porter and Norton (2009) noted that there are two criteria which must be satisfied for an item to be recorded in the statement of sources and application of funds. These are as follows:
It must involve an external transaction. It must also involve resources flows. This statement includes all external transactions of the enterprise involve in the acquisition or disposal of resources. However, it does not include any transaction or events which are internal to the firm outside the firm which do not involve resources and hence funds
The type of transactions do affect the relationship of the firm with outsiders, but again no funds are involved at the time of the transaction. Therefore, expected dividend and tax payments are recorded immediately at the end of the financial year as liabilities of the enterprise even though no funds are recorded from shareholders or the government to give rise to those particular liabilities.
The statement of financial position specifically contains information about resources and obligations of a business enterprise, and about its owners interests in the enterprise at a particular point in time. Spiceland, Sepe and Tomassini (2001) admitted that statement of financial position of an enterprise is a statement that presents an organised list of assets, liabilities and equity at a particular point in time. It is always presents, the financial position of the enterprise on a particular date in the language of accounting, communicates information about assets, liabilities as well as owner’s equity for an enterprise as on a specific date. Value added statement serves useful purposes to an enterprise in providing financial information about financial transactions of the enterprise occurring each day. It is therefore, interesting to note that this statement is another veritably financial information to an enterprise to utilise in formulating policy decision in the enterprise. It is the value added statement to the materials available by the process of production undertakings in an enterprise. It represents the total wealth of the firms that could be distributed to all capital providers, employees, and the government. This statement of amount can be used for profit planning of an enterprise as well as productivity of various means of production can also be measured. It is against this background that the study was carried out to determine the relationship between utilisation of financial statements and management of medium scale enterprises in Akwa Ibom South Senatorial District of Akwa Ibom State.
UTILISATION OF FINANCIAL STATEMENTS IN MANAGEMENT OF MEDIUM SCALE ENTERPRISES IN AKWA IBOM SOUTH SENATORIAL DISTRICT
