Financial Statement Analysis as a Measure of Management Performance and Efficiency
Chapter One
PURPOSE OF STUDY
Annual reports and account provides a method of assessing the financial strength and weakness of an enterprises using information found in its financial statement. The purpose of this analysis is to gain an understanding of the firm’s current financial condition as well as the future prospect, which in turn can serve as the basis for decision making.
The purpose of this research work are of two folds:
One, it seeks to determine the efficiency of the management of any case study, Literamed Publications Limited. To accomplish this objectives, the financial ratio that measures the efficiency of an enterprise such as gross profit making, net profit margin, returns on total assets, net assets and other necessary ratio will be calculated and compared over a period of five years (2001-2005).
Second, the calculations of other types of ratio to determine the overall performance of the management of the Literamed Publication Limited and calculation will be compared over a period of five years, (2001-2005). These ratios are liquidity ratio, profitability ratio, debt and gearing ratio.
CHAPTER TWO
LITERATURE REVIEW
Introduction
The survey of related literature covers many studies that were done nationally and at the international levels, here, this study covers some of them as follows: The study of Laitinen (2006) presents a framework for the financial statement analysis of a network of small and medium-sized enterprises. The objective is to make an approach towards a systematic network financial statement analysis. The data for the study are drawn from the public financial statements of the partner firms. The proportion of income statement items and balance sheet items is traced by a simple estimation to the resources used by the network and identified by each firm. Virtual network income statement and balance sheet are made up of the allocated proportions. The paper is focused on eight measurement objects that are causally related to form a strategic map: resources; growth; concentration; productivity; profitability; mutual flows; risk and value; and, several measures for each object are suggested. The study that has been done by Al-Aameri and Alrikabi (2007) was focusing on one of the important techniques in financial analysis, namely, the financial ratios, for the purpose evaluating the performance of petroleum projects company, and to find out the main strength and weakness points, so as to suggest the remedial actions for treatment of negative points and enhance the positive one. The paper’s contains detail study for the data included in financial statements to explain the financial performance of the company, and that will help the management for planning the future according to the previous performance, and also contain the converting process of the data of financial statements to meaningful information through several techniques, the financial statement analysis among them. Maggina (2008) used the financial ratios so as to investigate the distributional properties of financial ratios. Distributions presented in both theory and practice such as Cauchy, chi-square, Erlang, exponential, extreme value, Gamma, Laplace, logistic, lognormal, Student t, triangular, uniform and Weibull have been tested in the study. Panel data of financial ratios for the time period 1974-2006 for Greek listed companies indicate that none of the financial ratios selected in the study follows a normal distribution. The value of test statistic (KolmogorovSmirnov) is relatively large and the p-value of the test is lower than 1%. This is merely inconsistent with the literature. Malhotra, et al (2009) investigated the credit crisis in the financial markets had led to tremendous turmoil in the financial services industry. As a result, a substantial decline in the profitability and liquidity of the financial services companies was seen. They analyzed the financial performance of thirteen leading financial services firms to evaluate their relative standing in the industry. They illustrate the use of data envelopment analysis (DEA), an operations research technique, to evaluate the relative financial strength of thirteen financial services firms by benchmarking the financial ratios of a firm against its peers. DEA clearly brings out the firms that are operating more efficiently in comparison to other firms in the industry, and points out the areas in which poorly performing firms need to improve. Pazarskis et al (2011) empirically, examine the impact of merger and acquisitions on the post-merger performance of Greek merger-involved firms in the long-run perspective. The post-merger performance of an extensive sample of acquiring listed firms is investigated with accounting data analysis. For the purpose of the study, an explanatory set of 24 financial ratios (divided into five main groups) is employed, in order to measure firms’ post-merger performance. The results revealed that six out of all the examined ratios had decreased and showed, in general, deterioration in several business functions of merger-involved firms’ performance in the post-merger period. Yaseen (2011) investigates the effects of accounting principles and accounting assumptions of the financial analysis, since the financial analysis process comes after the disclosure of accounting system output. The research reveals that there are both positive and negative effects of accounting principles and assumptions on the accounting measurement process.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine financial statement analysis as a measure of management performance and efficiency. Literamed Publication Limited , Lagos state forms the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain financial statement analysis as a measure of management performance and efficiency. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of financial statement analysis as a measure of management performance and efficiency.
Summary
This study was on financial statement analysis as a measure of management performance and efficiency. The purpose of this research work was of two folds: One, it seeks to determine the efficiency of the management of any case study, Literamed Publications Limited. To accomplish this objectives, the financial ratio that measures the efficiency of an enterprise such as gross profit making, net profit margin, returns on total assets, net assets and other necessary ratio will be calculated and compared over a period of five years. Second, the calculations of other types of ratio to determine the overall performance of the management of the Literamed Publication Limited and calculation will be compared over a period of five years. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from Literamed Publication Limited. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
This study presents a model for the financial statements analysis of Literamed Publication Limited on profitability that traced the measurement of performance. The foregoing analysis reveals that there were gray areas took place, which resulted in decline of all the concerned profitability ratios and subsequently the performance of Literamed Publication Limited, during the two years. In conclusion, ROE is the most comprehensive measure of profitability of a firm; it considers the operating and investing decisions made as well as the financing and tax related decisions
Recommendation
ROE should be a tool that all business owners, managers, and all users of accounting and finance have at their disposal when evaluating a firm and making recommendations for improvement. It is anticipated, given the conditions of the country in general and Lagos where the company is located and high consumption of soft drinks by the masses, that Literamed Publication Limited will recover from the inconvenience evidenced in its financial statements and might be able to gain a handsome profits to its shareholders and outstanding performance in the years ahead.
References
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