The impact of financial statement on the decision making of micro finance institutions

CHAPTER ONE

Introduction                              

This study seeks to examine the impact of the financial statement on the decision-making of microfinance institutions dealing with financial reporting.

In order to successfully undertake this research work, this chapter has been divided into sections. In this chapter, we shall be observing the following items which make the way out of the study; background of the study, statement of the problem, purpose and objective of the study, research hypotheses, significance of the study, the scope of the study’ definition of terms and abbreviation.

1.1 Background of the study

The complex nature of today’s business world and the transformation of the entire world into a global village have been of great concern to manage all forms of business organisations. According to Ojuigo (2001), the problems of managers are much because of inefficiency in the management of poor decision outcomes of these organisations. Therefore, the managers are unable to achieve the organisational objectives within a period of time.

As diverse as a business is, its controllable and uncontrollable factors influence all decisions which ultimately leads to the realisation of set objectives. To achieve this, management needs reliable, authentic and relevant information from the financial statements to efficiently facilitate decision-making.

It must be noted that every business stores at making at least from investments “sustainable profits” so as to stay successful and continue in business. Therefore, profit being the concern of every manager is a factor in business.

According to Richard (2009), a financial; statement is more than just a snapshot of one’s business’ health that is provided to shareholders or potential investors. It is a powerful diagnostic tool used by business owners to evaluate their strength, weakness and look for the way forward.

In the same light, Article 8 of the Uniform Act (UA) stipulates that a financial statement consists of funds. They form an invisible whole and they faithfully and sincerely represent the events, transactions and state of affairs throughout the accounting period thus give a true and fair view of the undertakings assets, financial position and results.

These financial statements are usually prepared from a document called a trial balance. The trial balance is a list of balance extracted from the general ledger account to determine the arithmetical accuracy of the balances.

Different users of financial statements have different information needs. General-purpose financial statements have been developed to meet the needs of financial statements, primarily the needs of investors. There are three main financial statements or reports generated by the accounting system and included in the company’s annual report: the balance sheet, income statement, and the statement of cash flows.

1. The balance sheet or statement of financial position summarises the financial position of an accounting entity at a particular period of time.
2. The income statement or profit and loss statements summarise the results of operations for a given period of time.
3. The statement of cash flows summarises an enterprise’s operating, financing and investing activities over a given period of time.

Information can be defined as ‘data organised for a purpose. It is true that information in the financial statement is enabled to enable users of the financial statement to make a decision and draw a conclusion.

Management, (Oxford Advanced Learners Dictionary) is the control and making of decisions in a business or similar organisation. For this study, management is defined as the process of assessing or examining financial statements for efficient decision making.

1.2 Statement of the problem

In a modern business environment, which is becoming more competitive, the survival of firms, be it small or large; depend upon the strategic decisions by management.

In Cameroon, businesses are obliged to make an available financial statement at the end of the accounting period after a month, I realised that such statements are being established primarily to serve tax declaration and know whether the firm realises profit or loss.

The poor economic state of the financial institution in the time of study made me wonder if financial records can enable firms to make decisions that put them in a better state in future. As a result, this study is to investigate the impact of financial statement decisions making using Matuelle Communaute de Croissance (MC²) Bali for the case study.

1.3 Objective of the study

The main objective of the study is to examine the impact of financial statement as a tool for decision making in MC² Bali.

Specific Objectives

• To examine the extent to which financial statement has helped to decision making in MC².
• To examine whether income statement influence decision making in MC².
• To examine the impact of the cash flow statement on the decision making of MC².

1.4 Research Questions

The main question here is;

Are financial statements valuable tools for the decision of MC² makes?

Specific Questions

• To what extent is the financial statement on decision making in MC²?
• How can income statement influence decision making in MC²?
• How can the cash flow statement influence decision making in MC²?