Project – The Impact Of Financial Reporting On SMEs

ABSTRACT

The study examined the impact of financial reporting on SMEs. Great emphasis has been placed on the growth and development of small and medium enterprise (SME’s) all over the world including Nigeria, the SME’S has greatly contributed to the annual gross domestic product, industrial development and economic growth of various countries inclusive is Nigeria. This study examines the impact of financial reporting on investment decision of small and medium scale enterprises in Nigeria. The study employed survey research design. The target population of the study SMEs employees consisting of Accounting and Finance, Management and Human resources. The data for the study were collected through the sued of structured questionnaire. The data collected were analyzed using descriptive statistics and chi-square square. The result of the analysis revealed that statement of financial position affects investment position. Comprehensive income statement affects small and medium enterprise; Ratio analysis affects investment decisions. There is a significance importance of investment decision on small and medium scale enterprises. The study concludes that financial reporting has significance impact on investment decisions of small and medium enterprises. The study also revealed that SMEs do not prepares yearly statement of financial position. The study recommends that there is a need for adequate record-keeping which will help the proprietors to keep track of the performance of their enterprises in order to enhance the profitability of Small Scale Enterprises and their continuity. The study also recommends that advised SMEs to invest in information technology tools as it improves their efficiency, effectiveness and their overall performance.

CHAPTER ONE

Introduction

The introduction to this research work will be focused on giving a brief explanation into the

Background to the study, the statement of the problem is also outlined, Reasons for the research in the form of an objective. This is followed by the research questions which the author wishes to answer in the later chapters of this study. The significance and the scope of the study, the hypothesis to be tested, an outline of the study as well as Definitions of terms used in the first chapter of this study are further outlined as well

1.1. Background to the study

The place of sound accounting and internal control systems in any business, irrespective of its scale cannot be overemphasized. A clear majority of small –scale businesses cannot afford the complexity of a well-documented accounting system even if they would have. Hence it will be an existence of a single entry, incomplete record or lack of interpretation to help in decision making like in the case of this research project. Every business prepares her financial statement and goes ahead to carry out an interpretation which forms up what is called a financial report, Financial statements benefit owners, managers, and investors in many ways, for instance, the stakeholders can make use of financial reporting to gain a better understanding about financial aspects, risk profile and investment avenues of their firm (Van Auken, 2013). They also contain all the necessary information required to make financial decisions either investing or lending.

Effective decision making in Small and medium enterprise necessitates the obtainability of financial information and then its deployment in decision making (Gibson, 1992). Through this, the owners and stakeholders can make better decisions by utilizing financial statements, but small firm owners often are not well equipped with the efficient use of financial statements.

The essentials of financial statements range from the fact that financial statements should disclose correct information about profitability (financial performance) and the financial position of a business. It can, therefore, be seen that financial information is very effective and essentials in making investment decisions in an organization be it private or public.

Therefore, even reliable and timely prepared financial statements are not enough, when owners do not have the ability to use and interpret them accurately (Van Auken, 2005). It also appears that financial statements are often of little use to owner-managers. For example, Page (1984) found that only 41 percent of directors considered the annual reports to be useful for providing management information. Page believes that the company’s managers don’t even get an expert to do the process of interpretation. Page( 1984); Collis and Jarvis, who are accountants , In 2000 asked about their view on the use of financial statement and it was discovered that most of the decisions made by managers was backward-looking rather than forward-looking for planning and better decision making.

Many studies have been conducted on financial reporting in small and medium enterprises some of these works include; Fowokan (2011); Okafor and ogiedu (2011); Eke and Onafalujo & Akinlabi (2011). Ezeamama (2010) believes rational decisions have to be taken to manage modern business successfully. He added that for these rational decisions to be taken in line with the firm’s objective some analytical tools must be available based on the strength and weaknesses of the firms which are revealed through the financial statement in financial and non –financial terms.

According to Adelaja (2014), SMEs are generally seen as labor-intensive, capital saving and capable of creating most of the million new jobs the world will need. Accounting and reporting information enables an enterprise to perform the function of measuring its financial standing, assessing profitability and cash flows.

The international accounting standards board (IASB) in July 2009, introduced the international financial reporting standards (IFRS) for small and medium enterprises (SMEs) as a way of enhancing the activities of a small and medium enterprise through improved accounting and reporting practices. Before this standard was put in place it was generally believed in the United Kingdom, that extant UK financial reporting standards are aimed at larger organizations and developed from the viewpoint that capital markets are the most important user group which is, therefore, not always appropriate for medium and smaller entities. These SMEs would rather interpret with their non-accounting understanding to make decisions which oftentimes turn out negatively. This is no longer the case. Thus, a need to find out what is obtainable in SME’s quest to make decisions today and how financial reports affect investment decisions.

 

1.2 Statement of the problem

Great emphasis has been placed on the growth and development of small and medium enterprise (SME’s) all over the world including Nigeria, the SME’S has greatly contributed to the annual gross domestic product, industrial development and economic growth of various countries inclusive is Nigeria. A financial statement is a major criterion used in making investment decisions to enable the investor to make the right decisions. Most SMEs in Nigeria do not take the appropriate procedure after financial reporting to interpret and make crucial decisions like investment decisions,

In the case of this research, the major problem encountered include the inadequate provision for interpretation of financial reports or statement after preparation, Insufficient funds to employ the right expertise for interpretation and the inability of the financial report to affect go -and -no go decisions of proposed investors. The inability to effectively and efficiently interpret financial statements is very crucial to the development of an organization and if this is not handled by an expert the organization will remain on a spot thereby, bringing about no potential investors.

1.3 Objectives of the study

The purpose of this project work is to determine the impact of financial reporting on SMEs.

1. To assess the effect of statement of financial position on investment decision.
2. To examine the effect of comprehensive income statement on small and medium enterprise.

• To evaluate the effect of ratio analysis on investment decision.

1. To determine the importance of investment decision in small and medium enterprises.

1.4 Research questions.

1. What is the effect of statement of financial position on investment decision?
2. To what extent does comprehensive income statement affect small and medium enterprise?

• How does ratio analysis affect investment decisions?

1. What are the importance of investment decision in small and medium enterprises?

1.5 Research hypothesis

Based on the objectives of the study, the following null hypotheses guiding the study are as follows.

H01: statement of financial position does not affect investment decision of small and medium enterprises.

H02: Comprehensive income statement does not affect small and medium enterprise.

H03: Ratio analysis does not affect investment decision.

H04: Investment decision has no significance importance in small and medium enterprises.

1.6 Significance of the study

The term investment is very important to organizations, government and other forms of business; investment in simple terms is the future of every organization .it ensures that management makes the right go -and -no go decisions on every transaction. Such decisions are important because they will influence the company’s size (fixed assets, sales, and retained earnings). Investment decisions require special attention because they are irreversible, or reversible at a substantial loss. Hence, the essence of this research is not only for the benefit of owners to make the right decisions on investment but also for the management of various SMEs in ascertaining the specific investment guidelines to follow. This study will help to broaden the horizon of knowledge of regulatory agencies, the legislative arm of government and relevant professional bodies in accountancy, to provide adequate measures on investment decisions in SMEs. This study will also inform other organizations non-SMEs or SMEs on the right guideline after financial interpretation to follow concerning investment decisions. The research provides wisdom to future accountants on the importance of well-prepared accounting information.

In addition to these, this study can serve as secondary data to researchers that might want to dig deep on the subject matter.

1.7 Scope of the study

The study was based on the impact of financial reporting on SMEs(income statement and statement of financial position) and the dependent variable is an investment decision.

1.8 Operational definition of terms

Financial reports or (financial statements): are formal records of the financial activities and position of a business, person, or other entity. Financial reporting is made up of statement of financial position (reports on a company’s assets, liabilities, and owners’ equity at a given point in time), an income statement (reports on a company’s income, expenses, and profits over a stated period of time) and A cash flow statement (reports on a company’s cash flow activities, particularly its operating, investing and financing activities over a stated period of time).

Investment: In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. Investment decision; determination of where, when, how, and how much capital to spend and/or debt to acquire in the pursuit of making a profit.

Small and medium enterprises: Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits. The abbreviation “SME” is used by international organizations such as the World Bank, the United Nations. In Nigeria, the limit is 50 employees which contribute to over 60% of the Gross domestic product.

Project – The Impact Of Financial Reporting On SMEs