The role of financial reporting on investment decision making in Microfinance Institutions(MFIs)

Abstract

This study looks at the role of financial reporting on investment decision making in Microfinance Institutions(MFIs) Information derived from financial statement reports are very vital in understanding financial situations of MFIs and as such, used as the for decision making.

The purpose of this research was to find out the reliability of the influence of financial statements on investment decision making in MFIs precisely, CCC Plc Buea.

The main explanatory tools used here are, the balance sheet, income statement, equity statement and the cash flow statement.

Investment decision making enables corporate leaders to analyse various investment opportunities and to show how departments should make good commercial beds.

The researcher used both primary and secondary data to study financial reports and their effects on decision making.

The data were analysed with the use of frequency tables and graphs.

The findings showed that financial reporting plays influential roles in making investment decisions with a majority of the staff of ccc plc agreeing to the fact from tables 5 to 9 of the data presented.

To this effect, management should ensure the timely and orderly presentation of reports to help boost investments in the enterprise

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the study

Generally, the financial statement can also be seen as a summary explaining how a business performed during a certain time frame and what to expect in the future.

Generally accepted accounting principle [GAAP] require a company to prepare a full set of financial statements that conformed to regulatory guidelines and are accurate.A full set of financial report include statement of retained earnings and statement of cash flow.

Good financial statement should document the information in such a way that is easy to read and understand presenting the financial statement clearly and professionally help people interpret the results and plan for a more profitable future. Growth in business refers to a company expanding its business through the use of its own resources and asset and growth also depends on the financial statement of an organization.

Financial statement of companies are prepared either using Generally Accepted Accounting Principle [GAAP], defined by the law on accounting and the law financial statement or using International Financial Reporting Standard [IFRS], and International AccountingStandard[IAS], issued by the international accounting standard board [IASB]. Those standard are not enforceable together; therefor, companies choose one of them for reporting purposes. Investment decision making as used by the researcher is a determination made by director or management as to how, when and how much capital would be spend on investment opportunities. The decision often follows research on financial standard.

Corporate organizations owe a duty to fully disclose matters concerning their activities so as to help investors in making investment decisions. Both large and small organizations in addition to satisfying the legislative requirements turn to maintain existing investors and attract potential ones through the publication of their financial statements. Where the capital stock of corporations is widely held and its affairs are of the interest of the public relations.   

Financial statements of companies are prepared either using Generally Accepted Accounting Principles (GAAP) defined by the law of accounting and the law of financial statements or using the International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board.Every business prepares statement of comprehensive income (profit and loss account) to ascertain the net result of financial working of the business whether it has earned some income or profit or sustained any loss.        

Gautan (2005) sees financial statement as financial information which is the information relating to the financial position of any firm; when presented in a concise form. Beside statement of comprehensive income and statement of financial position, some other statement are also prepared for deriving certain conclusions.

Financial statements are prepared either using the Generally Accepted Accounting principles (GAAP) defined by the law of accounting and the law of financial statement, or using International Financial Reporting Standard (IFRS) and the International Accounting Standard (IAS). Therefore, companies choose one of them for reporting purpose.

IFRS originated in the European Union after the First World War. IFRS are set of international accounting standard stating how particular types of transaction or event should be reported in the financial statement. IFRS are issued by international accounting standard board (IASB) and they specify how accountant must maintain their reports.                                                                          

IFRS was established to obtain a common accounting language, so that businesses and accounts can understood from company to company and country to country. The main point was to maintain stability and transparency throughout the financial world. This allows individuals investor to make educated financial decisions because they are able to see clearly what has been happening with the institution which they wish to invest.                                                                           

IFRS spread globally to the European and African countries whereby companies were oblige to prepare financial statement base on IFRS. Since IFRS is globally accepted accounting standard of financial reporting, Cameroon financial institution follow this same standard in which CCC PLC Buea is not an exception.        

1.2 Statement of the problem

Every business prepares profit or loss account or income statement to ascertain the net result of financial working of the business. Whether end some income or profit or sustained any loss. It also prepares balance sheet to find out the financial position of the business.

Profit and loss account or the income statement, retained earnings statement and balance sheet are known as financial statement.

Gautam (2005) sees financial statement as financial information which is the information relating to a financial position of any firm when presented in a concise and capsule form.

Beside profit and loss account and balance sheet, some other statements are also prepared for deriving certain conclusion.

In our current situation in the society now, the investment decision making community credit company plc. [CCC], has been very slow due to the negligence on the use of financial statement and other important financial records. Most organizations are still ignorant of the benefit of financial statement there by limiting their knowledge about their financial position and above all their ability to use financial statement to make financial investment decision making.                         

It is for this reason that we search embarked on this study to draw the alarming signal on the impact of the financial statement on the investment decision in an organization.

Besides, most MFls complying with the bookkeeping principle, the have fallen short of living up to the laid down standard, but to satisfy the mandatory and statutory requirement. Subsequently, this has further raised the urgency to provide technical support and management training needs to the operators in this sector to cope with the ever growing demand for new and existing players in the industry as a result of competition, creativity, innovation.

Many businesses have failed because of little consideration of accounting information in decision making. It is for this reason that the researcher embarked on, to investigate the role of accounting information on decision making in micro finance and looking at some of the information’s used by management in making a decision.

Despite the use of financial statement inCommunity Credit Company PLS [CCC], the institution is still unaware of the importance in the frequency and manner of presentation of these statement as far as investment are concerned. Having in mind in fact that financial viability is quite important, what therefore is the role of financial reporting n investment decision making in Micro Financial Institutions [MFI]?

1.3 Research questions

According to Uzoagulu (1998; 96), research questions guide the researcher in constructing the questionnaires. Therefore the researcher raise the following research question to guide her in constructing her questionnaire which are instruments in the study.

Financial statement includes profit and loss account, income statement and balance sheet along with certain schedules and statements.

The main research question is,

How do financial statements affect investment decisions in MFIs?

1. To what extent is financial statements used in the investment decision making of a company?
2. Are financial statement useful for forecasting a company performance?
3. How many types of financial statements are there?
4. What are the various tools used for the presentation of the financial statement and what are its importance to MFIs?

What recommendations could be made as far as this study is concerned?