CHAPTER ONE

INTRODUCTION
1.0
This chapter introduces the reader to the general overview of research work. It consist of
project background, problem statement or research problem, research objectives, research
questions and significant of the study, limitation and scope of the study and organization
of the study.

1.1 BACK GROUND OF THE STUDY

Financial statements are of prime importance to every business entity as they show the
financial position, financial performance, the cash flow and the changes in the financial
position of the company, as well as any explanatory information or schedules identified
as an integral part of the financial statements or positions.
Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions. Financial statements also
show the results of the managements stewardship of the resources entrusted to it.
(International Accounting Standards 1)In recent years, financial statements are prepared
and presented for external users by many entities around the world. Although such
financial statements may appear similar from country to country, there are differences
which have probably been caused by a variety of social, economic and legal
circumstances and by different countries having in mind the needs of different users of
1

financial statements when setting national requirements. (IFRS conceptual framework).

Therefore, it is the desire of the researchers to find how financial statements should be
prepared to enable managers who may have no knowledge of accounting to be able to
have understanding of the needs to prepare and use financial statements in order to
manage their businesses for economic benefit of the nation as a whole.
In addition, most investors use financial statements as a yardstick for measuring the
performance or otherwise of business.
Per the definition of IAS1, General purpose financial statements (referred to as
financial statements) are those intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their particular information
needs.
Robert Libby et al (1998) define financial statements as a statement prepared by profit
making organizations for external reporting to owners, potential investors, credits and
other decision makers.
They further stressed that, financial statements summarize the financial activities of the
business and can be prepared at any point in time such as the end of the year, quarterly or
monthly and apply to anytime span.
The complete components of the financial statements as per IAS1.10 are as follow. The
financial statements that reflect a companys profitability is the income statement. A
companys financial statements are analyzed internally by management and externally by
investors, creditors and regulatory agencies.
The uses of financial statements are many and varied:

a.

Senior Corporate Executive and Board of directors analyzed internal financial

statements to assess the performance of operating divisions and their managers.

b.

Financial and non-banking institutions, insurance companies, pension funds and

others analyze statements to assess the ability of potential borrowers to repay
principal and interest.

The preparation of financial statements in conformity with generally accepted accounting

principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Since actual
results may differ from those estimates, the company revalues its estimates and
assumptions as new information becomes available.
Users of financial statements are interested in three (3) types of information. These
include;

Information about the future performance of the business.

Information about the present condition of the business.

Information about the past performance of the business.

It is also an obligation to prepare the statements to ascertain whether the organization is

achieving its target profit.

1.2 PROBLEM STATEMENT OR RESEARCH PROBLEM

The main problem of the study seeks to address the relevance of financial statements and
their impact on the performance of organizations. The impacts are as follows:

 It is quite unfortunate that, management of these institutions does not report the
true and fair view effectively and accurately of their financial statements and even
if they do, there are some errors generated in it over the years.
Assets on the balance sheet are always shown at the original purchasing prices
(Historical cost) even though the current value may be different and therefore
ignoring the inflationary trends which may reflect the true current worth of the
enterprise.
There is the need for management of these organizations to understand or follow
the modern accounting standards and regulatory framework procedures in the
preparation of the financial statements and let them do away with the old methods
in the preparation of their financial statements.
To appreciate the importance of preparing financial statements on time for timely
decisions to be made when necessary.
The problem statement is The relevance of financial statements and their impact on
the performance of organization: a case study of Dzialets Distribution Company, Ho.

1.3 RESEARCH OBJECTIVES

To identify the problems faced by organizations in the preparation of financial
statements.
To identify the financial statements on which financial indicators are being
calculated.
To identify the performance of organizations based on financial statements.
To know the relevance of financial statements in meeting organizational targets.
4

 To make suggestions and recommendations to improve organizations

performance through the use of financial statements.

1.4 RESEARCH QUESTIONS

What are the problems encountered in the preparation of financial statements?
On which financial statements are the desired financial indicators being
calculated?
Which types of ratios are being used in assessing the performance of the
company?
How has the preparation of financial statements help in meeting the companys
objectives?

1.5 SIGNIFICANCE OF THE STUDY

The general purpose of financial statements is to provide information needed by users for
their decision making purposes. These financial statements are reports of the operations
that provide information on companys financial position, cash inflows and outflows.
Similarly, they also assess the companys past performance and current financial
position.
Public owned companies are required by the Company Code 1963 (ACT 179) to prepare
financial statements at the end of each quarter (3-month period) and a separate set of
statements covering the entire year. The annual financial statements of public owned
companies are audited by a firm of certified public accountants (CPAS).

The auditors are experts in financial reporting and one independent of the company
issuing the statements. Recommendations made in this project or research work will
benefit the organizations on completion. Again, the study will ensure that accurate
financial statements are prepared and provided.
The study when implemented will improve and enrich the standard of financial
statements to users and corporate bodies to enhance the development of the economy of
Ghana. Finally, it is important to the researchers in fulfillment for the award of Higher
National Diploma (HND) certificate.

1.6 SCOPE AND LIMITATION OF THE STUDY

The research was solely based on Dzialets Distribution Company in Ho. The study was
limited to the management, the workers and finally, the customers. This was to ensure
that the direct parties are covered since management and employees are the direct parties
when dealing with preparation and usage of financial statements internally.

1.7 BRIEF PROFILE OF DZIALETS DISTRIBUTION COMPANY

Dzialets Distribution Company was formed in September 1997 and registered with the
Registrar General Department in Accra with an Authorized share capital of 250000
shares which were fully issued and paid for. It has its Head Quarters located at Sokode
Lokue, Ho.
It has three branches situated at Keta, Hohoe and Ho market. It has a total number of
employees to be sixty-five (65). The Chief Executive Officer (CEO) of this noble

company is Mr. Franklin Kofi Gedzia. Dzialets Distribution Company also has the
following people to form the Board of Directors:
1. Mr. Franklin Kofi Gedzia
2. Elsie Gedzia
3. Philip Gedzia
4. Phillies Gedzia
5.
OBJECTIVES AND GOALS
It is the objective of the company to give the best care to customers in distribution of
goods and services. In addition, the company delights in providing the best ever customer
service in Volta regions and other areas.

1.8 RESEARCH METHODOLOGY

Both secondary and primary data were used for the study.
The primary data involves data collected from respondents using questionnaires and
interviews.
The secondary data also involves data collected from books, internet and other researchers
of similar study.
The researchers used some statistical models such as tables, charts, graphs, figures and
percentages for the data analysis and presentations.

1.9

ORGANIZATION OF THE STUDY

The study is divided into five chapters.

Chapter one is the introduction stage. It covers project background, problem statement,
aims and objectives of the research, research questions, significance of the study, the
limitation & scope of the study and the organization of the study.
Chapter two consists of literature review relevant to the topic.
Chapter three highlights on methodology showing how data was collected and analyzed.
Chapter four focuses on the empirical study, research findings and discussions.
Finally, chapter five summarizes the major findings, draws conclusions and makes the
necessary recommendations.

CHAPTER TWO
LITERATURE REVIEW
2.0

INTRODUCTION

This chapter involves the review of the literature on the study. Literature review deals
with an overview or historical background of the study. However, this can be obtained
from magazines, journals, daily news papers, published text books, through internet and
so on.

2.1 FINANCIAL STATEMENTS

Financial Statement has been defined in diverse ways by various authors. According to
Robert J. Eskew et al (1996), financial statements are the principal way businesses
communicate information about what they do. The business activity is recorded by
accounting systems in the form of detailed transactions. However, most users of financial
statements want information about the impact on business activities on a broadly defined
cycle of financing and operating activities.
To effectively communicate what a business has done, these detailed transactions must be
summarized and reported to emphasize their impact on larger patterns of business
activity. Through financial statements provide the kind of information stakeholders want
and need, the statements do not interpret the information. The stakeholders of financial
statements must use his/her general knowledge of business activity and accounting
methods to interpret the statements as a basis for decision-making.

To Larson et al (1999), financial performance and condition of an organization. They are

useful to both internal and external decision makers. Financial Statements are the way
business people communicate.
Financial Statements are descriptive monetary measurement of financial condition and
operating result for a unit of enterprise. The term financial statements are most
frequently used to include the following as per International Accounting Standard
(IAS1);
(a) A statement of financial position as at the end of the period;
(b) A statement of profit or loss and other comprehensive income for the period;
(c) A statement of changes in equity for the period;
(d) A statement of cash flows for the period;
(e)

Notes, comprising a summary of significant accounting policies and other

explanatory information; and

(f) A statement of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it reclassifies items
in its financial statements.

2.2 TYPES OF FINANCIAL STATEMENTS AND THEIR PURPOSES

2.2.1 STATEMENT OF FINANCIAL POSITION
According to Dyckman R. Thomas et al.,(1998), Statement of financial position
which is also known as the balance sheet, is a the descriptive measurement of the
properties or assets owned by the company, the equity of the creditors and the
10

equity of the owners in these assets. The balance sheet is the most widely used
financial statement produced by Accountants reflecting the financial position of
the company at a specified date such as the end of fiscal years, rather than for a
period of time. As mentioned earlier, the balance sheet of a company presents a
listing of a firms assets liabilities and shareholders equity which is a critical
feature of a modern accounting express in the following.

BALANCE SHEET EQUATION

Assets = Liabilities +owners equity
Assets Liabilities = Capital
Since this reflects the double entry book keeping concept which is based on the principle
that the assets owned must equal the equities in them, it is logical that one of the
statements prepared at the end of the fiscal period would show the assets owned and the
equities of the owners as well as the debt element in the assets.
As a minimum, the statement of financial position shall include line items that present the
following amounts:
(a) Property, plant and equipment;
(b) Investment property;
(c) Intangible assets;
(d) Financial assets (excluding amounts shown under (e), (h) and (i));
(e) Investments accounted for using the equity method;
(f) Biological assets;
(g) Inventories;
11

(h) Trade and other receivables;

(i) Cash and cash equivalents;
(j) The total of assets classified as held for sale and assets included in disposal groups
classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations;
(k) Trade and other payables;
(l) Provisions;
(m) Financial liabilities (excluding amounts shown under (k) and (l));
(n) Liabilities and assets for current tax, as defined in IAS 12 Income Taxes;
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
(p) Liabilities included in disposal groups classified as held for sale in accordance with
IFRS 5;
(q) Non-controlling interests, presented within equity; and
(r) Issued capital and reserves attributable to owners of the parent.
An entity shall present current and non-current assets, and current and non-current
liabilities, as separate classifications in its statement of financial position in accordance
with paragraphs 6676 except when a presentation based on liquidity provides
information that is reliable and more relevant. When that exception applies, an entity
shall present all assets and liabilities in order of liquidity. (International Accounting
Standards1)
An entity shall classify an asset as current when:
(a) It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle;
12

(b) It holds the asset primarily for the purpose of trading;

(c) It expects to realize the asset within twelve months after the reporting period; or
(d) The asset is cash or a cash equivalent (as defined in International Accounting
Standards 7) unless the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period. An entity shall classify all
other assets as non-current.

When an entity presents current and non-current assets, and current and non-current
liabilities, as separate classifications in its statement of financial position, it shall not
classify deferred tax assets (liabilities) as current assets (liabilities). (International
Accounting Standards1)

2.2.2

STATEMENT OF FINANCIAL PERFORMANCE

According to Hungren T. Charles et al (1999) income statement report revenues earned

and expenses incurred by a business over a period of time. Expenses are subtracted from
revenues on the income statement to show whether the business earned net profit or loss.
A net loss means expenses exceed revenues. An income statement does not simple report
net income or net loss. It lists the types and amounts of both revenues and expenses. This
is crucial information for users. It helps in understanding and predicting company
performance .Libby, Norbel (1999)
Information to be presented in the statement of comprehensive income (International
Accounting Standards1)

13

As a minimum, the statement of comprehensive income shall include line items that
present the following amounts for the period:
An entity shall disclose the following items in the statement of comprehensive
income the profit or loss for the period (attributable to non-controlling interests,
and owners of the parent), total comprehensive income for the period (attributable
to non-controlling interests, and owners of the parent).
An entity shall present additional line items, headings and subtotals in the
statement of comprehensive income and the separate income statement (if
presented), when such presentation is relevant to an understanding of the entitys
financial performance.
Revenue; gains and losses arising from the derecognition of financial assets
measured at amortized cost; finance costs; tax expense; share of the profit or loss
of associates and joint ventures accounted for using the equity method ( if a
financial asset is reclassified so that it is measured at fair value, any gain or loss
arising from a difference between the previous carrying amount and its fair value
at the reclassification date (as defined in International Financial Reporting
System 9);
A single amount comprising the total of the post-tax profit or loss of discontinued
operations and the post-tax gain or loss recognized on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation;
Profit or loss; share of the other comprehensive income of associates and joint
ventures accounted for using the equity method; and total comprehensive income.
14

USES OF STATEMENT OF FINANCIAL PERFORMANCE

The income statement provides information of interest to persons both inside and
outside the business.
Managers and employers are interested in net income because it is an indicator of
the availability of resources for additional compensation part of the compensation
of managers is tied directly to net income.
Creditors and stakeholders are interested in net income as an indicator of the
availability of resources for interest and dividends.
Net income is also an indicator of the business growth rate which demonstrates both
present and potential stakeholders.

FORMAT OF STATEMENT OF FINANCIAL PERFORMANCE (IAS1)

Expenses are sub-classified to highlight components of financial performance that may
differ in terms of frequency, potential for gain or loss and predictability. This
classification is done in two forms namely:

1. By Nature
Revenue

Other income

Changes in inventories of finished goods and work in progress

Raw materials and consumables used

Employee benefits expense

Depreciation and amortization expense

X
15

Other expenses

Total expenses

(X)

Profits before tax

2. By Function
Revenue

Cost of sales

(X)

Gross profit

Other income

Distribution costs

(X)

Administrative expenses

(X)

Other expenses

(X)

Profits before tax

Belkaoui, A. R. (2000),

2.2.3 THE STATEMENT OF CHANGES IN EQUITY

The owners of a business contribute capital to a company in two ways;
1. Directly, through purchases of capital stock from the company.
2. Indirectly, by allowing the company to retain some money or all the net
income earned each year (rather than paying it out in dividends)
The income earned by a business but not paid out of dividends is called retained earnings.
Millichamp, A. (1992)the statement of retained earnings reports the way that net income

16

and the distribution of dividends affected the financial position of the company during the
accounting period.

Two major factors that cause changes in retained earnings are;

The earning of net income during the year which increases the balance of retained
earnings; showing the relationship of the income statement to the balance sheet.
The declaration of dividends to the stock-holders that decreases retained earnings.
The retained earnings equation that describes these relationships is
Ending Retained Earnings = Beginning Earnings +Net Income Dividends
This is prepared once net income has been determined. One purpose of the statement of
retained earnings is to explain the changes in retained earnings between two balance
sheet dates. These changes usually consist of the addition of net income (or deduction of
net loss and the deduction of the dividends.

INFORMATION TO BE PRESENTED IN THE STATEMENT OF CHANGES IN

EQUITY (IAS 1)
An entity shall present a statement of changes in equity as required by paragraph 10. The
statement of changes in equity includes the following information:
(a) Total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests;
(b) For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with IAS 8; and

17

(c) For each component of equity, reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
(i) Profit or loss;
(ii) Other comprehensive income; and
(iii) Transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control.

2.2.4

NOTES

The notes shall:

(a) Present information about the basis of preparation of the financial statements and the
specific accounting policies used in accordance with paragraphs 117124;
(b) Disclose the information required by IFRSs that is not presented elsewhere in the
financial statements; and
(c) Provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them. (IAS 1)

THE NAME OF THE ENTITY

Accounting requires a precise definition of the specific organization for which financial
data are to be collected when the organization is defined, it is called accounting entity.
For measurement purposes, the resources, debts and activities of the entity are kept from
those of the owners and other entities. This focus is called the separate-entity assumption.

18

The business entity itself, not the business owners is viewed as owning the economic
resources it uses and as owning its debts.

THE TITLE OF THE STATEMENT

The purpose of the balance sheet is to report the financial position of the accounting
entity at a point in time Krah, D. R. Y. (2009), Therefore, the balance sheet is some time
called the statement of financial position. The meaning of financial position will become
moved evidence when the body of the statement is read.

THE SPECIFIC DATE OF THE STATEMENT

The heading of each statement indicates the time dimension of the report. The balance
sheet is like a financial snapshot indicating the entitys financial position at a specific
point in time.

UNIT OF MEASURE
Companies normally prepare reports denominated in the major currency of the country in
which they are located.

2.2.5

THE STATEMENT OF CASHFLOWS

Statement of cash flows reports inflows and outflows of cash during the accounting
period in the categories of operation, investing and financing. Management is interested
in cash inflows to the company and the cash outflows from the company because these
determine the companys cash it has available to its bills when due.
19

The International Accounting Standards (IAS7) makes it clear what the statement of cash
flows entails. It deals with the following;
Cash:
It comprises cash on hand and demand deposits.
Cash equivalents:
These are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. Cash
equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes . Millichamp, A. (1995)
Cash flows:
These are inflows and outflows of cash and cash equivalents.
Operating activities:
These are the principal revenue-producing activities of the entity and other activities that
are not investing or financing activities.
Investing activities:
These are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
Financing activities:
These are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity.
Finally, stakeholders are also interested in the adequacy of cash flows as an indicator of
the business ability to pay dividends and to invest to enhance the value of the business.

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2.3 USES OF FINANCIAL STATEMENTS INFORMATION

Why are financial statements evaluated? Financial statement analysis is essentially an
application of Management by exception. In many cases, such an analysis will boil
down to company ratios for one business with some kind of average or representative
ratios. Maheshari, S. N. and S. K. (2003)

2.3.1 INTERNAL USE

Financial Statement information has a variety of uses within a company. Among the most
important of these is performance evaluation. For example, managers use accounting
ratios such as profit margin and return on equity for evaluating their performance. Also,
companies with multiple divisions frequently compare the performance of those divisions
using financial statement information.
Another important internal use of financial statement information involves planning for
the future. Historical financial statement information is very useful for generating
projections about the future and for checking the realism of assumptions made in those
projections. Example is using the historic cost to as a base to calculate the current
purchasing power (CPP) of the company. Gaber, G. Brain et al (1993)

2.3.2 EXTERNAL USE

Financial statements are useful to parties outside the company, including short-term and
long-term creditors and potential investors. Example, such information would be quite
useful in deciding whether or not to grant credit to a new customer. Also, this information

21

is used for evaluation by suppliers and suppliers would use this statement before deciding
to extend credit to us.
Large customers use this information to decide if the company is likely to be in existence
in the future. Credit-rating agencies rely on financial statements in assessing a firms
overall credit worthiness.
The common theme here is that, financial statements are a prime source of information
about a firms financial health such information is useful in evaluating our main
competitors. The company would be interested in their competitors financial strength to
see if they could get to the set targets .Hermanson, H. Robert et al (1998)

2.4 IMPORTANCE OF FINANCIAL STATEMENT ANALYSIS

1. To predict their expected returns.
2. To assess the risk associated with those returns.
3. Creditors mainly want to know about short-term liquidity and long-term solvency.
4. Cash a company has on hand to meet current payments, such as interest, taxes and
so on as they become due. Conversely, long-term solvency refers to a companys
ability to general cash to repays the principals on long-term debts to creditors as
they mature.
5. Financial statement analysis helps creditors and equity investors because part
performance is often a good indicator of future performance.
The same trends in past sales, operating expenses and not income may continue, so
financial statement analysis of past performance gives clues to future returns.

22

This is perhaps not significant when past trends are downward and an abrupt, significant
reversal of the trends is required to make the company attractive.

2.5 OBJECTIVES OF FINANCIAL REPORTING

The Financial Accounting Standard Boards (FASB), the official role-making body in the
private sector in the United State, has established a broad set of financial reporting
objectives to guide the financial reporting process to
1. Provide information useful for making rational investment and credit decision. The
general purpose objective states simply that financial reporting should be aimed
primarily at investors and creditors and should be useful to these individuals in their
decisions.
2. Provides information to help investors and creditors assess the amount, timing and
uncertainly of cash flows. This objective follows from the first by defining
Useful information fully. It states that, investors and creditors and interested
primarily in the cash they will receive from investing in a firm. Those cash flows
are affected by the ability of
3. The firm to generate cash flows.
4. Provide information about the economic resource of a firm and the claims on those
resources. The balance sheet satisfies this objective.
5. Provides information about a firms operating performance during a period. The
income statement accomplishes this objective.
6. Provides information about how management has discharged its stewardship
responsibility to owners. Stewardship refers to the prudent use of resources
23

entrusted to a firm. No single statement helps in assessing stewardship. Rather,

owners assess stewardship using information from all three financial statements
and notes.
7. Provides information about how enterprise obtains and uses cash. The statement of
changes in financial position accomplishes this objective.
8. Included explanations and interpretations to help users understand the financial
information provided supporting schedules and notes to the financial statements
satisfy this objective.

2.6 LIMITATIONS OF FINANCIAL STATEMENTS

Financial statements report quantitative economic data; they do not reflect

quantitative economic variables. Thus, the value to the firm of a management

team, or of the morale of the workforce, is not included as balance sheet assets
because it cannot be objectively measured. Such quantitative attribute of the firm
are frequently relevant to the decisions and informed judgments that the financial
statement user is making, but they are not communicated in the financial
statements. Meigs and Meigs et al (1993)
As already emphasized, the cost principle requires assets to be recorded at their
original cost. The balance sheet does not show the current market value or the
replacement cost or market value, and in some cases market value may be
reported parenthetically, but asset values are not increased to reflect current
value. For example, the trademark of a firm has virtually no cost; its value has

24

developed over the years as the firm has successfully met customers needs.
Thus trademarks are usually excluded from the balance sheet listing of assets.
Estimates are used in many areas of accounting and when the estimated is
made, about the only fact known is the estimate is near the true amount (the
concept of materiality), it usually is. For example, recognizing depreciation
expenses involves estimating both the useful life to the entity of the asset being
depreciated and the probable salvage value of the asset to the entity when it is
disposed of. The original cost minus the salvage value is the amount to be
depreciated or recognized as expense over the assets life. Estimates must also
be made to determine pension expense, warranty costs and numerous other
expense and revenue items to be reflected in the current years income
statement because they reflect the economic activity of the current year. These
estimates also affect balance sheet accounts. So even though, the balance sheet
balances to the penny, do not mislead by this aura of exactness. Accountants do
their best to make their estimates as accurate as possible but estimates are still
estimates.
The principles of consistency suggest that an entity should not change from
one generally accepted method of accounting for the same item. However, it is
quit possible that two firms operating in the same industry may follow different
methods. This means that comparability between firms may not be appropriate
or if comparisons are made, the effects of any differences between the
accounting methods followed by the firms must be understood.

25

 Related to the use of the original cost principle is the fact that financial
statement is not adjusted to show the impact of inflation. Likewise,
depreciation expense and the cost of goods sold-both significant expense
elements of the income statement of many forms-reflect original cost, not
replacement cost. This weakness is not significant when the a rate of inflation
is low, but the usefulness of financial statement is seriously impaired when the
inflation rate rises to double digits in 1980 the FASB began to require that
large, publicly owned companies reports certain data to show some of the
impacts of changing prices as supplementary information in the footnotes to
the financial statements. In 1986 the FASB discontinued the requirement that
this information be the effects of inflation and changes in specific prices. This
is a very inflated rises significantly in the future.
Financial statements do not reflect opportunity cost which an economic
concept is relating income not earned because an opportunity to earn income
was not pursued. For example, if an individual or organization maintains a
checking account balance that is GH300 more than that required to avoid any
service charges, the opportunity cost associated with that GH300 is the
interest that could otherwise be earned on the money if it had been invested.
Financial accounting does not give formal recognition to opportunity cost;
however, financial managers should be aware of the concept as they plan the
utilization of the firms resources. Krah, D.R.Y.(2009),

26

2.7 QUALITATIVE CHARACTERISTICES OF ACCOUNTING INFORMATION

The Financial Accounting Standard Board (FASB) specified in Statement of Financial
Accounting Concept (SFAC No.2) that the two most important attributes of accounting
information in terms of usefulness to external decision makers are relevance and
reliability. These attributes are called Primary Qualities.

2.7.1 RELEVANCE
This is the capacity of accounting information to make a difference to the external
decision makers who use financial reports. Stated more technically, relevant accounting
information helps stakeholders to evaluate current conditions, make predictive about
future events (it has a predictive value) and confirm or connect prior expectations (it has
feedback value). Relevance can be evaluated according to three qualitative criteria.
Belkaoui, A.R. (2000)

TIMELINESS
Accounting information should be helpful to external decision makers by increasing their
ability to make predictions about the outcome of future events. Decision makers working
from accounting information that has little or no predictive value are merely speculating.

FEED BACK VALUES

Accounting information should be helpful to external decision makers who are
confirming past predictions or making updates, adjustments or connection to predictions.

27

2.7.2 RELIABILITY
To ensure Reliability, Accounting information must be free from error and bias and
faithfully represent what it claims to represent. It must not mislead or deceive like
relevance; reliability must meet three qualitative criteria. Libby, Robert et al (1998)

REPRESENTATIONAL FAITHFULNESS
Accounting information should represent what it purposed to represent and should ensure
that the selected method of measurement has been used without error or bias. This
attribute sometimes called VALIDITY. Information must give a faithful picture of the
facts and circumstances involved.
Accounting information must report the economic substance of transactions, not just their
form and surface appearance.

VERIFIABILITY
Verifiability pertains to maintaining audit trails to information source documents that can
be checked for accuracy. Verifiability also pertains to the existence of alternative
information source as backup. Verifiability implies a consensus and implies that
independent measures using those same measurement methods would reach substantially
that same conclusion. International Financial Reporting Standard (IASB)

28

NEUTRALITY
Accounting information must be free from bias regarding a particular view point
predetermined result or particular party preparers of financial reports must not attempt to
induce a predetermined outcome or a particular mode of behavior (such as to purchase a
companys stock).
External decision makers should be able to count on the relevance and reliability of all
accounting information in financial statements. The statement of cash flows has relevance
for decision makers only if it provides information about current inflows and outflows of
cash that is properly classified and understandable to decision makers.
Statement of cash flows is reliable if it reports what it claims to report, with information
that is both verifiable and free from bias. For example, consider the difficulty of
achieving both relevance and reliability using alternative measures of revenue.
For most companies, using only cash sales provides reliable data but by failing to include
credit sales, the cash basis revenue measure that included orders for future delivery is less
reliable in some care because these future orders may be cancelled.
Accountants take the middle ground by including both cash and credit sales in revenue
but excluding orders for future delivery. Many types of accounting information are of
little value for external decision makers unless that date can be compared with date from
other companies and industry averages with composite date on a group of similar
enterprises or with specific information for other accounting periods. The two attribute
required for these comparisons called Secondary Qualities are; Marshall H. David et al
(1997)

29

 COMPARABILITY
This enables users to identify similarities and differences between two or more sets of
economic circumstances. For example, an income statement should be designed so that
the measures of revenue, expense and net income information of one company can be
compared with that of other companies in the same industry. International Financial
Reporting Standard (IFRS)

CONSISTENCY

This means that the reported information confirm with procedures that remain unchanged
from period to period. Comparisons overtime are difficult unless there is consistency in
the way accounting principles are applied across fiscal years. International Financial
Reporting Standard (IFRS)

30

CHAPTER THREE
METHODOLOGY
3.0 INTRODUCTION
This chapter discusses population of the study, sampling, data collection method and data
analysis in order to achieve the objectives set out in chapter one.

3.1 AREA OF THE STUDY

The study is limited to small and medium scaled business located within the Ho
municipality. The study is focused precisely on Dzialet Distribution Company located
within the Ho Township. This organization formed the sample size of the study.

3.2 POPULATION OF THE STUDY

The population of the study is made up of 50 customers, 30 junior staffs and 20 senior
staffs of Dzialets Distribution Company Limited in the Ho municipality. This is to ensure
that all parties, directly and indirectly were covered a better conclusion.

3.3 SAMPLE SIZE AND SAMPLING PROCEDURES

The total sample size of the study was fifty (50) of which twenty-five (25) will be selected
from customers, fifteen (15) from the junior staffs and ten (10) from the senior staffs of the
company.
Sampling of the respondents for this study was done by adopting the simple random and
purposive sampling techniques. The simple random sampling is used to select the staffs and

31

customers that will be part of the population. This is because it is possible to draw a
sampling frame and therefore a random sampling method could be applicable.
The researchers purposely choose the respondents who in their opinion were thought to be
relevant to the research topic. The researchers arranged with the identified population
groups and meet them at the time convenient to them. This is done in ensuring that the
respondents give all the information needed at their will without pressure.

3.4 DATA COLLECTION METHOD

In ensuring that reliable and accurate information will be obtained, the researchers use both
secondary and primary data for the study.
For the primary data, the researchers administer questionnaires and conduct interviews to
obtain certain vital information from the company.
The questionnaires are the major tools used for the collection of data. Open-ended and
closed-ended questions will be used for this study. The closed-ended questions which
demand yes or no response will be easy to respond or it provides a range of set of
alternative or simple answer categories for the respondents to make a choice while openended questions were not limited to a range of alternatives or simple answer categories for
each question. Respondents were allowed to provide answers their own way.
The researchers interviewed individual customers and other population groups face to face
in gathering the information needed. The questions asked were not structured as compared
to the questionnaires. This is use to assure them to furnish the researcher with honest and
reliable answers to the questions.

32

For the secondary data, the researchers use books, internet and published text books to
gather information for the study.

3.5 DATA ANALYSIS

Under data analysis procedures Microsoft excel which consist of charts, graphs, figures and
percentages were used in the data presentations.

33

CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.0 INTRODUCTION
It is an established fact that, in undertaking a research, there is the need to gather data and
analyze it in order to arrive at a meaningful conclusion. In searching for such data to carry
out this research, a sample size of fifty was chosen.
Out of the fifty copies of questionnaires administered, twenty-two were received from
customers and twenty-three retrieved from the staff of the Dzialets Distribution Company
comprising of both senior and junior officers.
The summary of the questionnaires that were given out to staff and customers of the
company is as follows.
Table 4.1 Questionnaires to staff and customers.
RESPONDENTS NUMBER ISSUED NUMBER

PERCENTAGE PERCENTAGE

COLLECTED (%) ISSUED

(%) COLLECTED

STAFF

25

24

50

48

CUSTOMERS

25

22

50

44

TOTAL

50

46

100

92

Source: Field Survey-July, 2015

4.1 QUESTIONNAIRES FOR STAFF OF DZIALETS DISTRIBUTION COMPANY

On the question of which financial statements were the desired financial indicators
calculated, the responses are presented in table 4.1 below.

34

Table 4.2 Financial statements used for calculating Financial Indicators

Table 4.1.1 shows that, out of the twenty-four staff (including senior and junior) who
responded to this questions. 37.5% were of the view that financial indicators are calculated
on the comprehensive income statement whilst 41.67% said the organization uses the
statement of financial position. Thus the comprehensive income statement and the
statement of financial position are mostly used by the organization for calculating financial
indicators.
When respondents were asked whether the interpretation of financial statements affect
management decision, the result was as follows:
RESPONSE

RESPONDENTS

PERCENTAGE %

Income Statement

37.5

Statement of Financial Position

10

41.67

Statement of Changes in Equity

20.83

Statement of Cash Flow

TOTAL

24

100

Source: Field Data-July, 2015

Table 4.3 The effect of financial statements interpretation on management
decisions.
RESPONSE

RESPONDENTS

PERCENTAGE (%)

Yes

19

79

No

21

TOTAL

24

100

Source: Field Data-August, 2014

35

79% of respondents said that, the interpretation of financial statements had effect on
management decisions. Therefore, the performance of every institution is a direct reflection
on decision and polices of its management. Thus, financial statements are direct
measurement of management effectiveness and efficiency. Similarly, the financial
statements help to ensure that compliance is in line with regulatory obligations.
To the question as to whether accounting policies have any effect on financial statements,
all respondents replied YES. This is shown in the table below:

Table 4.4 The effect of Accounting Policies on Financial Statements.

In analyzing the result, all respondents, representing 100% said that, accounting policies
have effect on financial statements preparation. They further stressed that, the accounting
policies put in place are the basis along which the financial statements are presented. Thus,
accounting policies are the guiding framework for the preparation of financial statements.
Also, the natures of these accounting policies direct the financial statements of the
company.
RESPONSE

RESPONDENTS

PERCENTAGE (%)

Yes

24

100

No

TOTAL

24

100

Source: Field Data- July, 2015

36

Table 4.5 Types of ratios used in assessing the companys performance.

From table 4.3 and figure 4.1, 83.33% of the respondents said that profitability and
liquidity ratios are used in assessing the performance of the company. Only 8.33% said that
gearing ratios were used in assessing the performance of the company. And also, 8.33%
respondents said activity ratios were for assessing the companys performance.
In every organization, profit making is of great importance, since the profit level of a
company partly indicates the income generated through distribution. This ratio measures
the companys operating success and indicates the companys ability to recover costs and
expenses. Liquidity determines the ability of the company to settle all its current liabilities
using its current assets is dealt with using liquidity ratios.
RESPONSE

RESPONDENTS

PERCENTAGE (%)

Profitability and Liquidity Ratios

20

83.33

Activity Ratios

8.33

Gearing Ratios

8.33

TOTAL

24

100

Source: Field Data- August, 2014

Table 4.6 Impact of financial statements on the companys performance

RESPONSE

RESPONDENTS

PERCENTAGE (%)

Yes

19

79

No

21

TOTAL

24

100

Source: Field Data-July,2015

37

Figure 4.1 A chart showing the impact of financial statements on the companys
performance

Source: Field Data-July, 2015

Most respondents about 79% expressed their view that, the financial statements were the
only means by which stakeholders (users) measure the performance of the institution.
Thus, financial statements have direct impact on the organizational performance.
They said previous financial statements are used to set targets for the subsequent financial
year of the company. Trend analysis of the indications and ratios enable the organization to
know where it is falling short for redress. Similarly, the financial statements enable the
company to compare its actual performance with its budgeted performance. This is done by
comparing the actual statements with the budgeted to ensure that targets set are achieved.

38

QUESTIONNAIRES DIRECTED TO CUSTOMERS

Customers were asked about what influenced their choice of the company. The following
were the reasons.
Table 4.7 Reasons for choice of the company.
In analyzing the below data, it was realized that 50% of customers said the performance of
the company influenced their decision on the choice of the company. Also, 41% said their
choice was based on the companys service delivery.
Nine percent (9%) were of the view that the physical structures of the company influenced
their decision on the choice of the company. Thus factors that influence customers choice
of a company include the companys performance, service delivery, and physical structure
among others.
In response to what difficulties are faced in the preparation of financial statements, the
respondents were emphatic that they dont face difficulties so often.
RESPONSE

RESPONDENT

PERCENTAGE (%)

Performance

15

60

Service Delivery

19

41

Physical Structure

TOTAL

41

110

Source: Field Data July, 2015

39

CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATION
5.0 INTRODUCTION
This chapter covers the summary of findings, conclusions arrived at, and recommendations
made. The procedures and findings were summarized in general terms with enough details
given to readers to obtain a general view of what has been done.
The main objective of this study was to make a critical study on the topic The Relevance
of Financial Statements and Their Impact on The Performance of Organizations. The
emphasis was placed on Dzialets Distribution Company in Ho.

5.1 SUMMARY OF FINDINGS

Based on the research carried out by the researchers, the findings are:
Financial indicators are mainly calculated on comprehensive income statement and
statement of financial position.
The interpretation of financial statements has effect on management decision.
The accounting policies have major effect on financial statements preparation.
The profitability ratios and liquidity ratios are the major ratios used in assessing the
companys performance.
Financial statements have direct impact on the organizational performance.
Difficulties are not often faced when preparing financial statements.
The choice of company by customers is mainly based on the performance and service
delivery by the company.

40

5.2 CONCLUSION
Analyzing the findings, it could be concluded that financial statements play a significant
role in an organization. This is because they help to calculate financial indicators which
show the improvement or the down-fall of an organization. And hence have direct impact
on organizations performance. Also, financial statements provide information needed by
management to revise and review their strategies for decision making.

5.3 RECOMMENDATION
It is recommended by the researchers after their analysis and conclusion that
Financial statements should be prepared without any material misstatements since
financial indicators are calculated on them.
The interpretation of financial statements should be done without bias and any
personal conflict.
Accounting policies should be complied with when preparing financial statements.
Ratio analysis especially profitability and liquidity ratios should be carefully done to
reflect the actual things in the financial statements.
Companys performance and service delivery among others should be encouraged to
help attract customers.

41

APPENDICES
APPENDIX A
HO POLYTECHNIC
FACULTY OF BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT OF ACCOUNTANCY

Dear respondent
This is a questionnaire designed to gather data on the research topic: The Relevance of
Financial Statements and Their Impact on the Performance of Organizations: A
Case Study Of Dzialets Distribution Company, Ho in partial fulfillment of the
requirements for the award of Higher National Diploma (HND) in Accounting.
This is purely an academic exercise and therefore the outcome shall not be used for any
other purpose. You are thereby assured of confidentiality and anonymity and guaranteed
that no information on any of this questionnaire will be associated to you.

INSTRUCTION: Tick and provide answers where appropriate.

1. Rank..Senior

Junior Staff

2. Age group 18-25

36-45

3. Gender

26-35

a. Male

4. Level of Education;

Above 45

b. Female
(a) JHS

(b) SHS

(c) Tertiary

(d) others please specified

5. How long have you been with the company?
(a) 1 5 yrs

(b) 6 10yrs

(c) 11yrs and above

42

6. Nature of responsibility..........................
7. Are you happy working with the company?
Yes

No

and why................................................................................

8. Which branch/offices/section/department of the company are you?

(a) Account

(b) Marketing

(c) warehouse

(d) others please specify ..

9. Does your section prepare financial statements?
Yes

No

10. If yes, do you normally encounter difficulties in the preparation of financial

statements?
a. often

b. very often

c. not so often

11. What is the occurrence rate of error from the past financial statements?
a. 10%-20%

b. 20% -40%

c. 40%-60%

d. 80%-100%

b. How do you minimize the errors in the financial statements of the company?

12. How many staff do you have in the Accounts Department?

.
13. Are the qualifications of the staff in the accounts department good enough for the
job?
a. Yes

No

14. If No, please state your reason: .........................

.
43

15. Which department is in charge of preparing financial statements?

16. How has the preparation of financial statements helped in meeting the companys
targets?
.

17. How do you ensure that there is effective and accurate preparation of financial
statements?

18. Do financial statements actually serve as tools for evaluating performance?

a. Yes

b. No

19. Does the interpretation of financial statements affect management decisions?

a. Yes

b. No

(b) Give reasons for your

answer

20. Does the operation of the company reflect the true nature of the financial
statements?
a. Yes

b. No

44

(b) Give reasons for your answer

21. On which final accounts are the desired financial indicators being calculated?
a. Income statement
b. Balance sheet
c. Statement of changes in equity
d. Cash flow statements
22. Which of the following types of ratios are mostly used in assessing the performance
of the company?
a. Profitability and Liquidity
b. Activity ratio
c. Gearing ratio

23. What input do you make in the preparation of financial statements?

..
24. Do financial statements have effect on accounting policies?
a. Yes

No

b. Give reasons for your answer..

.
..

45

25. How do financial statements have impact on the companys performance?

..........................................................................................................................................

26. Which type of analysis does the company use in comparing the financial
statements?
a. Trend Analysis
b. Ratio Analysis
c. Vertical Analysis
d. Horizontal Analysis
27. Is management decisions based on the performance of the company?
a. Yes

No

28. How will you describe the activities/performance of the company?

a. Excellent
b. Very good
c. Good
d. Poor
e. any other (specify)
29. What is the difficulties face in preparing financial statement?
(a) Skills

(b) resources

(c) data

(d) others please specify .

B. state your suggestions or recommendations that will help solve the above question

46

30. What areas of the business do you consider weak in adhering to the financial
statement
(a) Account

(b) marketing

(c) warehouse

(d) others please specify .

B. what are the corrective actions taken to improve upon them?

..

31 What are the problems uncounted when gathering information from the various
Departments

B. what are the corrective actions taken to improve upon them?

..
32. What are the problems uncounted when calculating financial indicators

B. Give any suggestion to improve the above problem

....

47

HO POLYTECHNIC
FACULTY OF BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT OF ACCOUNTANCY

We request for your attention to take few minute to fill these questionnaire on the topic
The Relevance of Financial Statement and there Impact on the Performance of
Organization
A case study of Dzialet Distribution Company, In Ho Municipality
This questionnaire is solely for academic purpose and any information provided will be
treated as such and with utmost confidentiality. The anonymity of the respondent would
be maintained.

QUESTIONNAIRE DIRECTED TO THE CUSTOMERS

INSTRUCTION: Tick and provide answers where appropriate.

1.

Gender

2.

Level of Education

3.

Are you a shareholder of the company?

b.

Male

Female
Basic

Secondary
Yes

Tertiary

None

No

If yes what prompted you in buying shares in the company?

........................................................................................................................

48

4.

Will you buy shares in the company if there is new floating of shares?
Yes
(b)

No

What will be your basis in buying from the company?

a. Profit

(c)
5.

b. Dividends

If any other reason please specify

Have you ever made purchases from the company?

(b)

Yes

No

If no why? ...........................................................................................................
.

(c)

If yes what guides you in making those decisions?

..

6.

Which types of purchases do you make?

a. Bulk purchases

7.

b. For consumption

c. Both

For how long do you intend to continue with the purchases from the company?

...................
b.

What are some of the benefits you enjoy for buying from the company?

..
..
8.

For how long have you been a customer?

............................................................................................................
9.

What influence you in making the choice of other distribution company?

a. Performance

b. Service delivery
49

c. Physical structure

d.

If any other reason, specify

..
10.

What influence your choice of purchases?

...
...........................................

11.

Do you face any problem when making purchases from the company?
a. Yes

b. No

(b) If yes please state some of the problems.

12.

How will you describe the companys environment?

a. Comfortable and Convenient
b. Comfortable but not convenient
c. Uncomfortable but convenient
d. Uncomfortable and Inconvenient

13.

How will you see the image of the company?

a. Very high

14.

b. High

c. Low

Which other distribution company do you transact business with apart from
Dzialets?

15.

Are you granted credit purchases?

a. Yes

b. No

(b) If yes, for how long? ........................................................................................

50

16.

How do you describe the services you receive from those companies?
a. Better

17.

b. Good

c. Average

Do you receive discount when you purchase from the company?

a. Yes

(b)

d. Below average

b. No

If yes, which type of discount?

a. Cash discount

b. Trade discount

51

c. Both

APPENDICES
APPENDIX B
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Hoffmann Press, Inc.

4.

Gaber G. B et al (1993) Financial Accounting Canada

5. Marshall H. D et al (1997) Accounting, What the numbers mean USA, R. R Donnelly

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6. Hermanson, H. R et al (1998) Financial Accounting A Business Press Perspective,
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7. Libby, R et al (1998) Financial Accounting USA, Von Hoffmann Press Inc
8. Hurngren T. C et al (1999) Introduction to Financial Accounting, Canada
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Hoffmann Press Inc.
10. Meigs and Meigs et al (1993) Financial Accounting The Basis for Business Decisions,
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11. Ross, Westerfield and Jordan (2001) Essentials of Corporate Finance, USA, McGraw
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12. International Financial Reporting Standards, IASB
13. Belkaoui, A .R. (2000 4th edn) Accounting Theory
52

14.Wood, F.,and Sangster, A (1995,10th edn), Business Accounting, London: Prentice Hall
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16. Millicamp, A. (1992, 3rd edn), Foundation Accounting, London; DP Publication Ltd
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19. Glautier,M W. E., Underdown, B. and Clark, A. C. (1985, 3rd edn), Basic Accounting
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53