UNIVERSITY OF MUMBAI

PROJECT ON
ROLE OF FINANCIAL STATEMENTS IN INVESTMENT
DECSION MAKING
BACHELOR OF COMMERCE
ACCOUNTING & FINANCE
(2019-2020)

SUBMITTED
In partial Fulfillment of the requirement for the Award of Degree of
Bachelor of Commerce – Accounting & Finance

SUBMITTED BY,
YOGESH GHANSHYAM JAISWAL
ROLL NO – 191024

UNDER GUIDANCE,
ASST. PROF. POURNIMA RELEKAR
MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE
&
COMMERCE PAREL, MUMBAI – 400012

MAHARSHI DAYANAND COLLEGE

OF ARTS, SCIENCE, & COMMERCE
PAREL, MUMBAI - 400 012.
 CERTIFICATE

This is to certify that MR. YOGESH GHANSHYAM JAISWAL, of

B. Com (ACCOUNTING AND FINANCE) Semester VI (2019-2020) has

Successfully completed the project on ROLE OF FINANCIAL

STATEMENT IN INVESTMENT DECISION MAKING under guidance

of

ASST. PROF. POURNIMA RELEKAR.

Course Coordinator Principal

Project Guide/Internal Examiner External Examiner

 DECLARATION

I, MR. YOGESH GHANSHYAM JAISWAL, the student of B.com

(ACCOUNTING AND FINANCE) Semester VI (2019-2020) has declare

that I have completed the Project on ROLE OF FINANCIAL STATEMENT

IN INVESTMENT DECISION MAKING. The information submitted is

true and original to the best of my knowledge.

Signature of student

Name of Student

MR. YOGESH GHANSHYAM JAISWAL.

Roll No. 191024

 ACKNOWLEDGEMENT

The college, the faculty, the classmates & the atmosphere, in the college

were all the favorable contributory factors right from the point when the

topic was to be selected till the final copy was prepared. It was a very

enriching experience throughout the contribution from the following

individuals in the form in which it appears today. We feel privileged to take

this opportunity to put on record my gratitude towards them.

Course Co-ordinator PROF. PRIYANKA PRASAD made sure that the

resource was made available in time & also for immediate advice &

guidance throughout making the project. The principal of our college Dr.

C.S PANSE has always been inspiring and driving force.

 EXECUTIVE SUMMARY

The objective of the study “Role of financial statement in investment

decision making” is a study that shows how financial statements and it’s

ratiosare useful for investment decision making and which financial

statement is most useful for investing. The purpose is to identify the

relationship between financial statement and investment decisions, and the

impact of financial statement in investment decision making and also to

know if investment decisions depends solely on financial statement. The

study shows the secondary methods of data collection used. They are library

research of relevant materials and existing documents of others researchers.

This research recommends that cashflow statement is most useful for

investment decision making for the investor.

 INDEX

SR NO. TABLE OF CONTENTS PAGE NO.

1.0 CHAPTER ONE: INTRODUCTION

1.1 WHAT IS FINANCIAL STATEMENT? 1

1.2 TYPES OF FINANCIAL STATMENTS 2
1.3 PURPOSE (ROLE) OF FINANCIAL STATEMENT 5
1.4 USERS OF FINANCIAL STATEMENT 6
1.5 WHAT IS INVESTMENT? 8
1.6 TYPES OF INVESTMENT 9
1.7 WHAT IS INVESTMENT DECISION? 11
1.8 TYPES OF INVESTMENT DECISION 11
1.9 WHO IS INVESTOR? 12
1.10 TYPES OF INVESTOR 13

2.0 CHAPTER TWO: RESEARCH METHODOLOGY

2.1 OBJECTIVES OF THE STUDY 15

2.2 SCOPE OF THE STUDY 15
2.3 LIMITATIONS OF THE STUDY 15

3.0 CHAPTER THREE: REVIEW OF LITERATURE

3.1 CASE STUDY OF FIRST BANK OF NIGERIAN PLC (2012) 17

3.2 CASE STUDY OF UNITED BANK OF AFRICA PLC (2004-2013) 18
3.3 CASE STUDY OF ALHAJI KAWUGANA (2019) 20

4.0 CHAPTER FOUR: DATA ANALYSIS AND

INTERPRETATION

4.1 LINK BETWEEN FINANCIAL STATEMENTS 21

4.2 FINANCIAL STATEMENT RATIO'S AND CALCULATIONS 24
4.3 IMPORTANCE OF FINANCIAL STATEMENTS 26
4.4 BENEFITS OF FINANCIAL STATEMENTS 28
4.5 NATURE OF FINANCIAL STATEMENTS 32
4.6 INVESTMENT DECISION PATTERN OF INVESTOR 33
4.7 NEED FOR INVESTMENT DECISIONS 34
4.8 FACTORS AFFECTING INVSTMENT DECISION 36
4.9 IMPORTANCE OF INVESTMENT DECISIONS 37
4.10 INVESTMENT DECISION PROCESS 41
4.11 WHAT INVESTOR LOOKS BEFORE INVESTING? 43
4.12 WHAT DOES AN INVESTOR WANTS TO SEE IN FINANCIAL 48
STATEMENT?
4.13 WHICH FINANCIAL STATEMENT IS THE MOST IMPORTANT 52
FOR INVESTOR?
4.14 FACTORS CONSIDERED BY INVESTOR BEFORE 54
INVESTMENT DECISION
4.15 ROLE OF FINANCIAL STATEMENT IN INVESTMENT 56
DECISION MAKING

5.0 CHAPTER FIVE: FINDINGS, CONCLUSION AND

SUGGESTIONS
5.1 FINDINGS 58
5.2 CONCLUSIONS 58
5.3 SUGGESTIONS 59

BIBLIOGRAPHY 60
1.0 CHAPTER ONE: INTRODUCTION

1.1 WHAT IS FINANCIAL STATEMENT?

Financial statements are reports prepared by a company’s management to present the
financial performance and position at a point in time. A general-purpose set of financial
statements usually includes a balance sheet, income statements, statement of owner’s
equity, and statement of cash flows. These statements are prepared to give users outside
of the company, like investors and creditors, more information about the company’s
financial positions. Publicly traded companies are also required to present these
statements along with others to regulatory agencies in a timely manner.
The financial statements of a company reflect a true picture of its financial performances.
They depict not only profits and losses, but even assets and liabilities. It is only at the end
of all accounting processes that we can generate financial statements.
Generally, financial statements are designed to meet the needs of many diverse users,
particularly present and potential owners and creditors. Financial statements result from
simplifying, condensing, and aggregating masses of data obtained primarily from a
company's (or an individual's) accounting system.
What Does Financial Statements Mean?
Financial statements are the main source of financial information for most decision
makers. That is why financial accounting and reporting places such a high emphasis on
the accuracy, reliability, and relevance of the information on these financial statements.

Example
The balance sheet a summary of the company position on one day at a certain point in
time. The balance sheet lists the assets, liabilities, and owners’ equity on one specific
date. In a sense, the balance sheet is a picture of the company on that date. Investors and
creditors can use the balance sheet to analyze how companies are funding capital assets
and operations as well as current investor information.
The Income statement shows the revenue and expenses of the company over a period of
time. Most companies issue annual income statement, but quarterly and semi-annual
income statements are also common. Users can analyze the income statement to see if
companies are operating efficiently and producing enough profit to fund their current
operations and growth.
The statement of owner’s capital summarizes all owner investments and withdrawals
from the company during a period. It also reports the current income or loss recorded in
retained earnings.

1.2 TYPES OF FINANCIAL STATEMENTS

There are four main financial statements. They are: (1) balance sheets; (2) income
statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance
sheets show what a company owns and what it owes at a fixed point in time. Income
statements show how much money a company made and spent over a period of time.
Cash flow statements show the exchange of money between a company and the outside
world also over a period of time. The fourth financial statement, called a “statement of
shareholders’ equity,” shows changes in the interests of the company’s shareholders over
time.
The four main types of financial statements are:

1. Statement of Financial Position

Statement of Financial Position, also known as the Balance Sheet, presents the financial
position of an entity at a given date. It is comprised of the following three elements:
 Assets: Something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc.
 Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
 Equity: What the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between the
assets and liabilities.
2. Income Statement
Income Statement, also known as the Profit and Loss Statement, reports the company's
financial performance in terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:
 Income: What the business has earned over a period (e.g. sales revenue, dividend
income, etc.
 Expense: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc.
 Net profit or loss is arrived by deducting expenses from income.

3. Cash Flow Statement

Cash Flow Statement, presents the movement in cash and bank balances over a period.
The movement in cash flows is classified into the following segments:
 Operating Activities: Represents the cash flow from primary activities of a
business.
 Investing Activities: Represents cash flow from the purchase and sale of assets
other than inventories (e.g. purchase of a factory plant)
 Financing Activities: Represents cash flow generated or spent on raising and
repaying share capital and debt together with the payments of interest and
dividends.

4. Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:
 Net Profit or loss during the period as reported in the income statement
 Share capital issued or repaid during the period
 Dividend payments
 Gains or losses recognized directly in equity (e.g. revaluation surpluses)
 Effects of a change in accounting policy or correction of accounting error
1.3 PURPOSE (ROLE) OF FINANCIAL STATEMENTS
The general purpose of the financial statements is to provide information about the results
of operations, financial position, and cash flows of an organization. This information is
used by the readers of financial statements to make decisions regarding the allocation of
resources. At a more refined level, there is a different purpose associated with each of the
financial statements. The income statement informs the reader about the ability of a
business to generate a profit. In addition, it reveals the volume of sales, and the nature of
the various types of expenses, depending upon how expense information is aggregated.
When reviewed over multiple time periods, the income statement can also be used to
analyze trends in the results of company operations.
The purpose of the balance sheet is to inform the reader about the current status of the
business as of the date listed on the balance sheet. This information is used to estimate
the liquidity, funding, and debt position of an entity, and is the basis for a number of
liquidity ratios. Finally, the purpose of the statement of cash flows is to show the nature
of cash receipts and cash disbursements, by a variety of categories. This information is of
considerable use, since cash flows do not always match the sales and expenses shown in
the income statement.

As a group, the entire set of financial statements can also be assigned several additional
purposes, which are:
 Credit decisions: Lenders use the entire set of information in the financials to
determine whether they should extend credit to a business, or restrict the amount
of credit already extended.
 Investment decisions: Investors use the information to decide whether to invest,
and the price per share at which they want to invest. An acquirer uses the
information to develop a price at which to offer to buy a business.
 Taxation decisions: Government entities may tax a business based on its assets
or income, and can derive this information from the financials.
 Union bargaining decisions: A union can base its bargaining positions on the
perceived ability of a business to pay; this information can be gleaned from the
financial statements.
In addition, financial statements can be presented for individual subsidiaries or business
segments, to determine their results at a more refined level of detail.
In short, the financial statements have a number of purposes, depending upon who is
reading the information and which financial statements are being perused.

1.4 USERS OF FINANCIAL STATEMENT

There are many users of the financial statements produced by an organization. The
following list identifies the more common users of financial statements, and the reasons
why they need this information:

 Company management: The management team needs to understand the

profitability, liquidity, and cash flows of the organization every month, so that it
can make operational and financing decisions about the business.
 Competitors: Entities competing against a business will attempt to gain access to
its financial statements, in order to evaluate its financial condition. The
knowledge they gain could alter their competitive strategies.
 Customers: When a customer is considering which supplier to select for a major
contract, it wants to review their financial statements first, in order to judge the
 financial ability of a supplier to remain in business long enough to provide the
goods or services mandated in the contract.
 Employees: A company may elect to provide its financial statements to
employees, along with a detailed explanation of what the documents contain. This
can be used to increase the level of employee involvement in and understanding
of the business.
 Governments: A government in whose jurisdiction a company is located will
request financial statements in order to determine whether the business paid the
appropriate amount of taxes.
 Investment analysts: Outside analysts want to see financial statements in order
to decide whether they should recommend the company's securities to their
clients.
 Investors: Investors will likely require financial statements to be provided, since
they are the owners of the business, and want to understand the performance of
their investment.
 Lenders: An entity loaning money to an organization will require financial
statements in order to estimate the ability of the borrower to pay back all loaned
funds and related interest charges.
 Rating agencies: A credit rating agency will need to review the financial
statements in order to give a credit rating to the company as a whole or to its
securities.
 Suppliers: Suppliers will require financial statements in order to decide whether
it is safe to extend credit to a company.
 Unions: A union needs the financial statements in order to evaluate the ability of
a business to pay compensation and benefits to the union members that it
represents.
In short, there are many possible users of financial statements, all having different
reasons for wanting access to this information.
1.5 WHAT IS INVESTMENT?
An investment is an asset or item acquired with the goal of generating income or
appreciation. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. 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. An investment always concerns the outlay
of some asset today (time, money, effort, etc.) in hopes of a greater payoff in the future
than what was originally put in.

Understanding Investment:

Investing is putting money to work to start or expand a project - or to purchase an asset or

interest - where those funds are then put to work, with the goal to income and increased
value over time. The term "investment" can refer to any mechanism used for generating
future income. In the financial sense, this includes the purchase of bonds, stocks or real
estate property among several others. Additionally, a constructed building or other
facility used to produce goods can be seen as an investment. The production of goods
required to produce other goods may also be seen as investing.
1.6 TYPES OF INVESTMENT
Investments are generally bucketed into three major categories: stocks, bonds and cash
equivalents. There are many ways to invest within each bucket.

Here are six types of investments you might consider for long-term growth, and what you
should know about each.

1. Stocks

A stock is an investment in a specific company. When you purchase a stock, you’re

buying a share a small piece of that company’s earnings and assets. Companies sell
shares of stock in their businesses to raise cash; investors can then buy and sell those
shares among themselves. Stocks sometimes earn high returns, but also come with more
risk than other investments. Companies can lose value or go out of business.

2. Bonds

A bond is a loan you make to a company or government. When you purchase a bond,
you’re allowing the bond issuer to borrow your money and pay you back with interest.
Bonds are generally considered safer than stocks, but they also offer lower returns. State
and city government bonds are generally considered the next-safest option, followed by
corporate bonds. The safer the bond, the lower the interest rate.

3. Mutual funds

If the idea of picking and choosing individual bonds and stocks isn’t your bag, you’re not
alone. In fact, there’s an investment designed just for people like you: the mutual fund.

Mutual funds allow investors to purchase a large number of investments in a single

transaction. These funds pool money from many investors, then employ a professional
manager to invest that money in stocks, bonds or other assets.

4. Index funds

An index fund is a type of mutual fund that passively tracks an index, rather than paying
a manager to pick and choose investments. For example, an S&P 500 index fund will aim
to mirror the performance of the S&P 500 by holding stock of the companies within that
index. The benefit of index funds is that they tend to cost less because they don’t have
that active manager on the payroll. The risk associated with an index fund will depend on
the investments within the fund.

5. Exchange-traded funds

ETFs are a type of index fund: They track a benchmark index and aim to mirror that
index’s performance. Like index funds, they tend to be cheaper than mutual funds
because they are not actively managed.

The major difference between index funds and ETFs is how ETFs are purchased: They
trade on an exchange like a stock, which means you can buy and sell ETFs throughout
the day and an ETF’s price will fluctuate throughout the day. Mutual funds and index
funds, on the other hand, are priced once at the end of each trading day — that price will
be the same no matter what time you buy or sell. Bottom line: This difference doesn’t
matter too many investors, but if you want more control over the price of the fund, you
might prefer an ETF.
6. Options

An option is a contract to buy or sell a stock at a set price, by a set date. Options offer
flexibility, as the contract doesn’t actually obligate you to buy or sell the stock. As the
name implies, doing so is an option. Most options contracts are for 100 shares of a stock.

When you buy an option, you’re buying the contract, not the stock itself. You can then
either buy or sells the stock at the agreed-upon price within the agreed-upon time; sell the
options contract to another investor; or let the contract expire.

1.7 WHAT IS 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. An investment decision is often reached
between an investor and his/her investment advisors. Depending on the type of brokerage
account an investor has, investment managers may or may not have tremendous leeway
in making decisions without consulting the investor himself. Factors contributing to an
investment decision include, but are not limited to capital on hand, projects or
opportunities available, general market conditions, and a specific investment strategy.

1.8 TYPES OF INVESTMENT DECISION

A financial decision which is concerned with how the firm’s funds are invested in
different assets is known as investment decision. Investment decision can be long-term or
short-term.

 Long term:
A longterm investment decision is called capital budgeting decisions which
involve huge amounts of long term investments and are irreversible except at a
huge cost.
  Short term:
Short-term investment decisions are called working capital decisions, which affect
day to day working of a business. It includes the decisions about the levels of
cash, inventory and receivables.
A bad capital budgeting decision normally has the capacity to severely damage the
financial fortune of a business.

A bad working capital decision affects the liquidity and profitability of a business.

1.9 WHO IS INVESTOR?

An investor is any person or other entity (such as a firm or mutual fund) who commits
capital with the expectation of receiving financial returns. Investors utilize investments in
order to grow their money and/or provide an income during retirement, such as with an
annuity.

A wide variety of investment vehicles exist including (but not limited to) stocks, bonds,
commodities, mutual funds, exchange-traded funds (ETFs), options, futures, foreign
exchange, gold, silver, retirement plans and real estate. Investors typically perform
technical and/or fundamental analysis to determine favorable investment opportunities,
and generally prefer to minimize risk while maximizing returns.
An investor typically is made distinct from a trader. An investor puts capital to use for
long-term gain, while a trader seeks to generate short-term profits by buying and selling
securities over and over again.

Investors typically generate returns by deploying capital as either equity or debt

investments. Equity investments entail ownership stakes in the form of company stock
that may pay dividends in addition to capital gains. Debt investments may be as loans
extended to other individuals or firms, or in the form of purchasing bonds issued by
governments or corporations which pay interest in the form of coupons.

1.10 TYPES OF INVESTOR

 Active investor:
Active investors stay abreast of their stocks' performance, do a lot of research and
keep up with the daily financial news. They don't necessarily buy one day and sell
the next, but they do pay attention to changes in trends and buy or sell based on
those trends. This person is an avid investor who takes a great deal of care with
each investment decision and does not necessarily hold an investment long term.

 Passive investors:
This kind of investor doesn't try to go for the biggest possible gains at all times.
Instead, the passive investor accepts reasonable gains in exchange for a lower
stress level and more free time. This person may invest in mutual funds so the
funds' money managers can make buy and sell decisions. She may buy individual
stock in established companies and hold that investment for a year or more.
Passive investors tend to remove stress from investment decisions by setting
parameters for adding more stock to their portfolios. For example, when their
stocks rise 20 percent, they may sell some to take profits.

 Speculators:
Some investors look for a chance to make money fast. They search the market for
stocks that are poised to go up because of an impending deal. They scour the news
for announcements about mergers that could affect a company positively, and
 then they pounce on the stocks of those companies. They tend to sell after a stock
makes them a little money, reasoning that they can repeat the process of buying
and selling frequently and therefore outperform the market.

 Retirement Investor:
People investing for retirement tend to change their tactics as they approach
retirement age. They may choose an aggressive approach when they are younger.
This involves buying riskier stocks that have the potential for growth. Such an
investor may switch to more moderate-risk stocks during midlife and then switch
to dividend stocks that produce income during retirement.
2.0 CHAPTER TWO: RESEARCH METHODOLOGY

2.1 OBJECTIVES OF THE STUDY

 To know what are the different types of financial statements
 To study investment decision patterns of investors
 To study the role of financial statements in investment decision
 To know which financial statement is most important
 To know what factors considered by investor for investment decision

2.2 SCOPE OF THE STUDY

The scope for the role of financial statement in investment decision making is to provide
information to the various investors that how to take investment decision with the help of
financial statements. This study includes types of financial statements, role of financial
statements, financial ratios, investment decision pattern of the investors to help to take
investment decisions.

2.3 LIMITATIONS OF THE STUDY

Every study has limitations. Study limitations can exist due to constraints on research
design or methodology, and these factors may impact the findings of this study. However,
many researchers are reluctant to discuss the limitations of their study in their papers,
feeling that bringing up limitations may undermine its research value in the eyes of
readers and reviewers.

In spite of the impact it might have and it should clearly acknowledge any limitations in
this project in order to show readers—whether journal editors, other researchers, or the
general public—that we are aware of these limitations and to explain how they affect the
conclusions that can be drawn from the research.
Although limitations address the potential weaknesses of a study, writing about them
towards the end of this research actually strengthens this study by identifying any
problems before researchers or reviewers find them.

 Lack of previous research studies on the topic

Citing and referencing prior research studies constitutes the basis of the literature review
for thesis or study, and these prior studies provide the theoretical foundations for the
research question we are investigating. However, depending on the scope of this research
topic, prior research studies that are relevant to this thesis might be limited.

 Time constraints

Just as students have deadlines to turn in their class papers, academic researchers also
must meet the deadline for submitting a research manuscript to a journal. Therefore, the
time available to study a research problem and to measure change over time is
constrained by the deadline of your “assignment.”

 Measure used to collect the data

Sometimes it is the case that, after completing your interpretation of the findings, you
discover that the way in which you gathered data inhibited your ability to conduct a
thorough analysis of the results. For example, you regret not including a specific question
in a survey that, in retrospect, could have helped address a particular issue that emerged
later in the study.

 Access

In this study data is depends on having access to people, organizations, or documents

and, for whatever reason, access is denied or otherwise limited, the reasons for this need
to be described.
3.0 CHAPTER THREE: REVIEW OF LITERATURE

3.1 CASE STUDY OF FIRST BANK OF NIGERIAN PLC (2012)

ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING. (A

CASE STUDY OF FIRST BANK OF NIGERIAN PLC) BY AMEDU, MERCY A.
ACC/2008/502 August 2012

Corporate organizations owe a duty to fully disclose matters concerning their operations
so as to aid investors in making investment decisions because Investment decision
makers rely on information obtained from financial statements to predict future rates of
return. Without the financial statement, there will be a problem of how to determine the
profit of a company, and evaluation of performance of a company. The general objective
is to ascertain the role of financial statement in investment decision making. The study
will be based on survey and questionnaire will be used to gather information. There is a
total population of 70 personnel but the sample size is 60 using Taro Yamane’s formula.
The methods used in analyzing this study are simple percentage and chi-square. We
discovered from the test of hypotheses that financial statement is relied upon in
investment decision making and financial statements are useful for forecasting
company’s performance. Concluded was drawn based on the findings that financial
statement plays a vital role in investment decision making and recommends that no
investment decision should be taken without the consideration of a company’s financial
statements.
3.2 CASE STUDY OF UNITED BANK OF AFRICA PLC (2004-2013)

THE ROLE OF FINANCIAL STATEMENTS ON INVESTMENT DECISION

MAKING: A CASE OF UNITED BANK FOR AFRICA PLC (2004-2013)

This study analyzes the role of financial statements on investment decision making: a
case of United Bank for Africa Plc. in Nigeria. Financial Reporting Standards and
Practices have in the recent past come under great criticisms, demanding that accountants
take further steps in ensuring that the true and fair view of the actual worth of business
are also incorporated in the financial statements published by them. The general objective
is to ascertain the role of financial statement on investment decision making in United
Bank for Africa Plc. of Nigeria. This study used the secondary data from ten years
financial statements of the bank. Ordinary least squares (OLS) regression method of
analysis, was adopted to test the hypotheses. The parameter estimates of the regression
equation obtained revealed that, the transparency of financial statements of the bank has
significant influence on the investment decision making of the users of financial
statements. All the parameter estimates employed in the regression equation were
statistically significant via the test of hypotheses. It is an indication that, the model for
this research work is good for investment decision making by the prospective investors
and policy making purposes by the management of the bank. From the descriptive
statistics and percentage analysis used for the verification of the questionnaire collected
via survey method; the results reveal that one of the primary responsibilities of
management to the investors is to give a standardized financial statement evaluated and
authenticated by a qualified auditor or financial experts. It also showed that investors do
understand the financial statement well before making investment. The results of the
analysis also indicated that investors depend heavily on the credibility of
auditors/financial expert approval of financial statement in making investment decisions
and as such published financial statement is very important in the investors’ decision
making. We therefore agreed that, profitability, assets, liabilities and equities of banks are
significant ways of evaluating the performance of a bank report on investment decision
making. We therefore, recommended that adequate care and due diligence should be
maintained in preparation of financial statements to avoid faulty investment decisions
which could lead to loss of funds and possible litigations. The study proffered other
proper recommendations emanating from the findings.
3.3 CASE STUDY OF ALHAJI KAWUGANA (2019)

ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING .

ALHAJI KAWUGANA (INTERNATIONAL JOURNAL OF MANAGEMENT - 2019)

Financial statements are prepared for accounting maintained by companies generally

accepted accounting principles and procedures are followed to prepare these statements
which are used for the purpose of decision making. The Financial strengths and
weaknesses of a firm are revealed in its financial statements. Financial statement plays a
vital role in investment decision making; for instance, where companies invest hundreds
of billions of naira every year in fixed assets. By their nature, these investment decisions
have the potential to affect the firm’s fortunes over several years. For a good decision can
boost earning sharply and dramatically increase the value of the firm.
This financial information can be subjected to various scrutiny and analysis depending on
the investors before making their investment decisions. This is quickly appreciated in the
banking sector as one of the various years. This is subjected to their analysis and
interpretation before they can go ahead in the loan negotiation concerning any company.
Hence it is opined that companies should try as much as possible to posit financial
statements that reflects a true and fair view of what is purpose to represent as a way of
appreciating their companies the more.
4.0 CHAPTER FOUR: DATA ANALYSIS AND
INTERPRETATION

4.1 LINK BETWEEN FINANCIAL STATEMENTS

The following diagram summarizes the link between financial statements.
 1. Balance Sheet

Balance Sheet, or Statement of Financial Position, is directly related to the income

statement, cash flow statement and statement of changes in equity.

Assets, liabilities and equity balances reported in the Balance Sheet at the period end
consist of:

 Balances at the start of the period;

 The increase (or decrease) in net assets as a result of the net profit (or loss)
reported in the income statement;
 The increase (or decrease) in net assets as a result of the net gains (or losses)
recognized outside the income statement and directly in the statement of changes
in equity (e.g. revaluation surplus);
 The increase in net assets and equity arising from the issue of share capital as
reported in the statement of changes in equity;
 The decrease in net assets and equity arising from the payment of dividends as
presented in the statement of changes in equity;
 The changes in composition of balances arising from inter balance sheet
transactions not included above (e.g. purchase of fixed assets, receipt of bank
loan, etc).
 Accruals and Prepayments
 Receivables and Payables

2. Income Statement

Income Statement, or Profit and Loss Statement, is directly linked to balance sheet, cash
flow statement and statement of changes in equity.

The increase or decrease in net assets of an entity arising from the profit or loss reported
in the income statement is incorporated in the balances reported in the balance sheet at
the period end.
The profit and loss recognized in income statement is included in the cash flow statement
under the segment of cash flows from operation after adjustment of non-cash
transactions. Net profit or loss during the year is also presented in the statement of
changes in equity.

3. Statement of Changes in Equity

Statement of Changes in Equity is directly related to balance sheet and income statement.

Statement of changes in equity shows the movement in equity reserves as reported in the
entity's balance sheet at the start of the period and the end of the period. The statement
therefore includes the change in equity reserves arising from share capital issues and
redemptions, the payments of dividends, net profit or loss reported in the income
statement along with any gains or losses recognized directly in equity (e.g. revaluation
surplus).

4. Cash Flow Statement

Statement of Cash Flows is primarily linked to balance sheet as it explains the effects of
change in cash and cash equivalents balance at the beginning and end of the reporting
period in terms of the cash flow impact of changes in the components of balance sheet
including assets, liabilities and equity reserves.

Cash flow statement therefore reflects the increase or decrease in cash flow arising from:

 Change in share capital reserves arising from share capital issues and redemption;
 Change in retained earnings as a result of net profit or loss recognized in the
income statement (after adjusting non-cash items) and dividend payments;
 Change in long term loans due to receipt or repayment of loans;
 Working capital changes as reflected in the increase or decrease in net current
assets recognized in the balance sheet;
  Change in noncurrent assets due to receipts and payments upon the acquisitions
and disposals of assets (i.e. investing activities)

4.2 FINANCIAL STATEMENT RATIO’S AND CALCULATIONS

We’ve probably heard people banter around phrases like “P/E ratio,” “current ratio” and
“operating margin.” But what do these terms mean and why don’t they show up on
financial statements? Listed below are just some of the many ratios that investors
calculate from information on financial statements and then use to evaluate a company.
As a general rule, desirable ratios vary by industry.

If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two
dollars of debt to every one-dollar shareholder invest in the company. In other words, the
company is taking on debt at twice the rate that its owners are investing in the company.

Inventory Turnover Ratio = Cost of Sales / Average Inventory for the Period
If a company has an inventory turnover ratio of 2 to 1, it means that the company’s
inventory turned over twice in the reporting period.

Operating Margin = Income from Operations / Net Revenues

Operating margin is usually expressed as a percentage. It shows, for each dollar of sales,
what percentage was profit.
P/E Ratio = Price per share / Earnings per share
If a company’s stock is selling at $20 per share and the company is earning $2 per share,
then the company’s P/E Ratio is 10 to 1. The company’s stock is selling at 10 times its
earnings.

Working Capital = Current Assets – Current Liabilities

 Debt-to-equity ratio compares a company’s total debt to shareholders’ equity.

Both of these numbers can be found on a company’s balance sheet. To calculate
debt-to-equity ratio, you divide a company’s total liabilities by its shareholder
equity, or
 Inventory turnover ratio compares a company’s cost of sales on its income
statement with its average inventory balance for the period. To calculate the
average inventory balance for the period, look at the inventory numbers listed on
the balance sheet. Take the balance listed for the period of the report and add it to
the balance listed for the previous comparable period, and then divide by two.
(Remember that balance sheets are snapshots in time. So, the inventory balance
for the previous period is the beginning balance for the current period, and the
inventory balance for the current period is the ending balance.) To calculate the
inventory turnover ratio, you divide a company’s cost of sales (just below the net
revenues on the income statement) by the average inventory for the period, or
 Operating margin compares a company’s operating income to net revenues.
Both of these numbers can be found on a company’s income statement. To
calculate operating margin, you divide a company’s income from operations
(before interest and income tax expenses) by its net revenues, or
 P/E ratio compares a company’s common stock price with its earnings per share.
To calculate a company’s P/E ratio, you divide a company’s stock price by its
earnings per share, or
 Working capital is the money leftover if a company paid its current liabilities
(that is, its debts due within one-year of the date of the balance sheet) from its
current assets.
4.3 IMPORTANCE OF FINANCIAL STATEMENTS
The importance of financial statements lies in their utility to satisfy the varied interest of
different categories of parties such as management, creditors, public, etc.

1. Importance to Management:
Increase in size and complexities of factors affecting the business operations necessitate a
scientific and analytical approach in the management of modern business enterprises.
The management team requires up to date, accurate and systematic financial information
for the purposes. Financial statements help the management to understand the position,
progress and prospects of business vis-a-vis the industry.
By providing the management with the causes of business results, they enable them to
formulate appropriate policies and courses of action for the future. The management
communicates only through these financial statements, their performance to various
parties and justify their activities and thereby their existence.
A comparative analysis of financial statements reveals the trend in the progress and
position of enterprise and enables the management to make suitable changes in the
policies to avert unfavorable situations.
2. Importance to the Shareholders:
Management is separated from ownership in the case of companies. Shareholders cannot,
directly, take part in the day-to-day activities of business. However, the results of these
activities should be reported to shareholders at the annual general body meeting in the
form of financial statements.
These statements enable the shareholders to know about the efficiency and effectiveness
of the management and also the earning capacity and financial strength of the company.
By analyzing the financial statements, the prospective shareholders could ascertain the
profit earning capacity, present position and future prospects of the company and decide
about making their investments in this company.
Published financial statements are the main source of information for the prospective
investors.

3. Importance to Lenders/Creditors:
The financial statements serve as a useful guide for the present and future suppliers and
probable lenders of a company.
It is through a critical examination of the financial statements that these groups can come
to know about the liquidity, profitability and long-term solvency position of a company.
This would help them to decide about their future

4. Importance to Labour:
Workers are entitled to bonus depending upon the size of profit as disclosed by audited
profit and loss account. Thus, P & L a/c becomes greatly important to the workers. In
wages negotiations also, the size of profits and profitability achieved are greatly relevant.

5. Importance to the Public:

Business is a social entity. Various groups of society, though directly not connected with
business, are interested in knowing the position, progress and prospects of a business
enterprise.
They are financial analysts, lawyers, trade associations, trade unions, financial press,
research scholars and teachers, etc. It is only through these published financial statements
these people can analyze, judge and comment upon business enterprise.

6. Importance to National Economy:

The rise and growth of corporate sector, to a great extent, influence the economic
progress of a country. Unscrupulous and fraudulent corporate managements shatter the
confidence of the general public in joint stock companies, which is essential for economic
progress and retard the economic growth of the country.
Financial Statements come to the rescue of general public by providing information by
which they can examine and assess the real worth of the company and avoid being
cheated by unscrupulous persons.
The law endeavors to raise the level of business morality by compelling the companies to
prepare financial statements in a clear and systematic form and disclose material
information.
This has increased the confidence of the public in companies. Financial statements are
also essential for the various regulatory bodies such as tax authorities, Registrar of
companies, etc. They can judge whether the regulations are being strictly followed and
also whether the regulations are producing the desired effect or not, by evaluating the
financial statements.

4.4 BENEFITS OF FINANCIAL STATEMENTS

Other than the legal ramifications of not keeping good books, there are many other
benefits of financial reporting that financial statements provide to the long-term health
and growth of a company. Each has its own role to play in the snapshot it offers: -
 Better debt management: The amount of debt your company carries and in what
form is an important measure of the financial health of your company. Financial
statements separate your assets from liabilities and give you a picture of what you
owe versus what you are bringing in.
One of the advantages of financial statements knows what your liquid assets are
so you can help you manage those debts you have – and pay off the highest-cost
liabilities first.
 Identifying trends: Financial statements help a company's management take a
quick and detailed look at the ways in which they have been doing business over a
period of time, as well as to identify any past or present trends that can either lead
to problems down the road and need to be tackled right away. They can also be
used to identify sales and growth trends that could lead to increased profitability.
 Progress tracking in real time: Financial Statements are designed to be fluid
documents that change many times over the course of a reporting period,
depending on many different income and expense factors. Therefore, paying close
attention to statements such as the balance sheet can make it easier to make
important decisions while things are happening, rather than having to
retroactively respond to receiving bad news later on.
 Managing liabilities: Every business has liabilities ranging from business loans
to credit cards to vendor accounts and other accounts payable. It’s always a good
 idea to have this information available, and if you apply for most loans or lines of
credit, it’s usually expected that you will have this information available quickly
and in an easy-to-read format.
 Progress and compliance: Another of the many advantages of financial
statements is that by having a series of accurate financial documents, it will be
much easier for you to gauge whether or not your business is making progress or
falling behind.
In addition, if the company is ever audited, the first thing an accountant will ask for are
the company’s financial statements to stay in compliance with Generally Accepted
Auditing Standards that govern their industry.
What’s more, they are bound to financial reporting requirements required by law to report
if your documents are not up to standards. That can look bad to government regulators
and investors.

Benefits of Individual Statements

There are many different benefits of financial reporting that each of the five financial
statements can provide to management

.
 Income statement: The income statement is the most important of the financial
statements, because it reveals dirty truths about the financial performance of a
company for a given reporting period. Beginning with sales, it then subtracts
expenses and arrives at a net profit or loss, and in the case of publicly reported
companies, an earnings-per-share figure for investors.
An income statement can reveal reasons for business growth, and can for instance
reveal an increase or decrease in sales for the period reviewed, and whether you
are able to control the expense side of your business.
It can signal efficient management and give investors a good clue as to how solid
the company may (or may not) be.
 Statement of retained earnings: If the income statement measures financial
health at any given moment, this document offers the information over time. It’s
an important document for management and investors who want to know if they
are making or losing money, so the statement reconciles the beginning and ending
retained earnings for the period (for instance, over a year or so), using information
such as net income from the other financial statements.
The statement of retained earnings is generally used as a marker to help analyze
the health of a company, and can help improve market and investor confidence.
 Balance sheet: This report shows the financial position of a business as of the
report date. Like the income statement, it’s a snapshot of financial performance at
a given moment because it can change daily or hourly depending on
circumstances. The information is divided into the general classifications of
assets, liabilities and equity, and both sides of the equation must always balance.
The balance sheet is a great tool because it gives you important information in
real time, and changes depending on many different factors including increases in
sales, income and liabilities.
It is one of the many advantages of financial statements that can give you vital
information to help you make decisions right away that can affect the financial
health of your company.
 Statement of Shareholder’s Equity: This document helps give investors
information on their equity investment in your company, by using several metrics
 that measure profitability, liquidity and efficiency. It helps show how well the
company manages debt and assets, and whether it can continue to generate
income and grow using current assets - or whether it will need to go into further
debt to remain profitable.

4.5 NATURE OF FINANCIAL STATEMENTS

1. The Financial Statements should be relevant for the purpose for which they are
prepared. Unnecessary and confusing disclosures should be avoided and all those that are
relevant and material should be reported to the public.

2. They should convey full and accurate information about the performance, position,
progress and prospects of an enterprise. It is also important that those who prepare and
present the financial statements should not allow their personal prejudices to distort the
facts.

3. They should be easily comparable with previous statements or with those of similar
concerns or industry. Comparability increases the utility of financial statements.

4. They should be prepared in a classified form so that a better and meaningful analysis
could be made.

5. The financial statements should be prepared and presented at the right time. Undue
delay in their preparation would reduce the significance and utility of these statements.

6. The financial statements must have general acceptability and understanding. This can
be achieved only by applying certain “generally accepted accounting principles” in their
preparation.
7. The financial statements should not be affected by inconsistencies arising out of
personal judgment and procedural choices exercised by the accountant.

8. Financial Statements should comply with the legal requirements if any, as regards
form, contents, and disclosures and methods. In India, companies are required to present
their financial statements according to the Companies Act, 1956.

4.6 INVESTMENT DECISION PATTERN OF INVESTORS

The investment pattern is a long-term perspective and investing one’s hard earned money
is a serious subject that can have a major impact on investor's future wellbeing. In fact,
everyone makes savings and investments. For any investor who invests money in various
financial instruments, there will be varying degree of risks involved. Every investor has
to appraise his risk-appetite, understand his financial goals and make investments. It is
also important to analyze the risk-return trade off and then make investment decision.
The investment is the employment of funds with the aim of achieving additional income
or growth in value. The essential quality of an investment is that it involves "waiting" for
a reward. It involves the commitment of resources, which have been saved or put away
from current consumption in the hope that some benefits accrue in future. Broadly
speaking, an 89-investment decision is a trade - off between risk and return. All
investment choices are made at points of time in accordance with the personal investment
ends and in contemplation of uncertain future.
4.7 NEED FOR INVESTMENT DECISION
Investments are both important and useful in the context of present-day conditions. The
following points have made investment decision increasingly important.
1. Planning for retirement
2. Interest rate
3. High rate of inflation
4. Increase rate of taxation
5. Income
6. Investment channels

1. Planning for retirement:

A tremendous increase in working population, proper plans for life span and longevity
have ensured the need for investment decisions. Investment decision have become
significant as working people retire between the age 55 and 60. The life expectancy has
increased due to improved living conditions, medical facilities etc. The earnings from
employment should, therefore, be calculated in such a manner that a portion should be
put away as savings. Saving from the from the current earning must be invested in a
proper way so that principal and income thereon will be adequate to meet expenditure on
them after their retirement.
2. Interest rate:
The level of interest rates is another factor for a sound investment plan. Interest rates may
vary between one investment to other risky and non- risky investments. They may also
differ due to different benefit schemes offered by the investments. These aspects must be
considered before actually allocating any amount. A high rate of interest may not be the
only factor favoring the outlet for investment. The investor has to include in his portfolio
several kinds on investments. Stability of interest is as important as receiving a high rate
of interest.
3. High rate of inflation:
In the conditions of inflation, the prices will rise and purchasing power of rupee will
decline. On account of this, capital is eroded every year to the extent of rise in the
inflation. The return on any investment should be regarded as positive, when such return
compensates the effect of inflation. For maintaining purchasing power stability, investors
should carefully plan and invest their funds by making analysis.
 The rate of expected return and inflation rate.
 The possibilities of expected gain or loss on their investment.
 The limitation imposed by personal and family considerations.
4. Increase rate of taxation:
Taxation is one of the crucial factors in a person’s savings. Tax planning is an essential
part of overall investment planning. If the investment or disinvestment in securities in
made without considering the various provisions of the tax laws, the investor may find
that most of his profits have been eroded by the payment of taxes. Proper planning could
lead to a substantial increase in the amount of tax to be paid. On the other hand, good tax
planning and investing in tax savings schemes not only reduces the tax payable by the
investor but also helps him to save taxes on other incomes. Various tax incentives offered
by the government and relevant provisions of the Income Tax Act, the Wealth Tax Act,
are important to an investor in planning investments.
5. Income:
Income is also a factor in making a sound investment decision. The general increase in
employment opportunities which gave rise to income level and avenues for investment,
have led to the ability and willingness of working population to save and invest such
savings.
6. Investment Channels:
The growth and development of the country leading to greater economic activity has led
to the introduction of a vast array of investments. Apart from putting aside savings in
savings banks where interest is low, investors have the choice of a variety of instruments.
The question to reason out is which is the most suitable channel? Which media will give
a balanced growth and stability of return? The investor in his choice of investment will
have to try and achieve a proper mix between high rate of return and stability of return to
reap the benefits of both. Some of the instruments available are corporate stock,
provident fund, life insurance, fixed deposits in corporate sector, Unit Trust Schemes and
so on.
4.8 FACTORS AFFECTING INVESTMENT DECISION
Investment choices vary from investor to investor depending on their goals, risk tolerance
and individual personality. But there are certain common factors that affect everyone’s
investment decisions.
Whether you make investment decisions on your own or rely on professional help,
knowing the factors that affect your investment decision is essential to maximize your
portfolio return.

Factors affecting investment decisions are:

▪ Net worth
Your family’s wealth or net worth plays a major role in investment decision-making. For
example, two friends with similar salaries can have completely different family
background and thus completely different investment patterns. Someone from a wealthy
family would easily be able to take exposure in equity without having the fear of losing a
part of the portfolio while another person with limited means might be more conservative
in nature.
▪ Risk appetite
If you are one of those who lose their sleep if the investment portfolio goes below your
invested amount even for a day, then equity is not your forte. Your willingness to take
risk affects your investment choices. For example, if you are comfortable with daily
volatility of the market, you can consider to build an aggressive portfolio.
▪ Time horizon
A longer time horizon allows you the opportunity to invest in relatively riskier options
like stock. That’s because the volatility of stocks usually flatten over time. However, if
you have a shorter time span, investments with stability and guaranteed return is the
probable choice for you.
▪ Investment need
Once the financial goals are known, the primary reason for investment is evident. That
helps in making investment decisions easily. This is because the amount of money
needed for the specific goal and timelines would be specified, making it easier to plan.
▪ Return expectations
Depending on your return expectation, you can choose the right investment avenue to
meet your desired goal. Each investment has its associated risk and expected return and
being an investor, you would know that there is a trade-off between risk and return, i.e.
higher the expected return, higher would be the associated risk.
▪ Investor knowledge and experience
An experienced investor usually takes faster and smoother investment decisions without
too much time. Thus, an Investor’s experience plays a role in decision making. It’s also
good to seek help of expert advisers to smart decisions.

4.9 IMPORTANCE OF INVESTMENT DECISIONS

1. Draw a personal financial roadmap.

Before you make any investing decision, sit down and take an honest look at your entire
financial situation -- especially if you’ve never made a financial plan before.
The first step to successful investing is figuring out your goals and risk tolerance – either
on your own or with the help of a financial professional. There is no guarantee that
you’ll make money from your investments. But if you get the facts about saving and
investing and follow through with an intelligent plan, you should be able to gain financial
security over the years and enjoy the benefits of managing your money.

2. Evaluate your comfort zone in taking on risk.

All investments involve some degree of risk. If you intend to purchase securities - such as
stocks, bonds, or mutual funds - it's important that you understand before you invest that
you could lose some or all of your money. Unlike deposits at FDIC-insured banks and
NCUA-insured credit unions, the money you invest in securities typically is not federally
insured. You could lose your principal, which is the amount you've invested. That’s true
even if you purchase your investments through a bank.
The reward for taking on risk is the potential for a greater investment return. If you have
a financial goal with a long-time horizon, you are likely to make more money by
carefully investing in asset categories with greater risk, like stocks or bonds, rather than
restricting your investments to assets with less risk, like cash equivalents. On the other
hand, investing solely in cash investments may be appropriate for short-term financial
goals. The principal concern for individuals investing in cash equivalents is inflation
risk, which is the risk that inflation will outpace and erode returns over time.

3. Consider an appropriate mix of investments.

By including asset categories with investment returns that move up and down under
different market conditions within a portfolio, an investor can help protect against
significant losses. Historically, the returns of the three major asset categories – stocks,
bonds, and cash – have not moved up and down at the same time. Market conditions that
cause one asset category to do well often cause another asset category to have average or
poor returns. By investing in more than one asset category, you'll reduce the risk that
you'll lose money and your portfolio's overall investment returns will have a smoother
ride. If one asset category's investment return falls, you'll be in a position to counteract
your losses in that asset category with better investment returns in another asset category.
In addition, asset allocation is important because it has major impact on whether you will
meet your financial goal. If you don't include enough risk in your portfolio, your
investments may not earn a large enough return to meet your goal. For example, if you
are saving for a long-term goal, such as retirement or college, most financial experts
agree that you will likely need to include at least some stock or stock mutual funds in
your portfolio.
Lifecycle Funds -- To accommodate investors who prefer to use one investment to save
for a particular investment goal, such as retirement, some mutual fund companies have
begun offering a product known as a "lifecycle fund." A lifecycle fund is a diversified
mutual fund that automatically shifts towards a more conservative mix of investments as
it approaches a particular year in the future, known as its "target date." A lifecycle fund
investor picks a fund with the right target date based on his or her particular investment
goal. The managers of the fund then make all decisions about asset allocation,
diversification, and rebalancing. It's easy to identify a lifecycle fund because its name
will likely refer to its target date. For example, you might see lifecycle funds with names
like "Portfolio 2015," "Retirement Fund 2030," or "Target 2045.”

4. Be careful if investing heavily in shares of employer’s stock or any individual

stock.
One of the most important ways to lessen the risks of investing is to diversify your
investments. It’s common sense: don't put all your eggs in one basket. By picking the
right group of investments within an asset category, you may be able to limit your losses
and reduce the fluctuations of investment returns without sacrificing too much potential
gain.
You’ll be exposed to significant investment risk if you invest heavily in shares of your
employer’s stock or any individual stock. If that stock does poorly or the company goes
bankrupt, you’ll probably lose a lot of money (and perhaps your job).
5. Create and maintain an emergency fund.
Most smart investors put enough money in a savings product to cover an emergency, like
sudden unemployment. Some make sure they have up to six months of their income in
savings so that they know it will absolutely be there for them when they need it.

6. Pay off high interest credit card debt.

There is no investment strategy anywhere that pays off as well as, or with less risk than,
merely paying off all high interest debt you may have. If you owe money on high interest
credit cards, the wisest thing you can do under any market conditions is to pay off the
balance in full as quickly as possible.

7. Consider dollar cost averaging.

Through the investment strategy known as “dollar cost averaging,” you can protect
yourself from the risk of investing all of your money at the wrong time by following a
consistent pattern of adding new money to your investment over a long period of time.
By making regular investments with the same amount of money each time, you will buy
more of an investment when its price is low and less of the investment when its price is
high. Individuals that typically make a lump-sum contribution to an individual retirement
account either at the end of the calendar year or in early April may want to consider
“dollar cost averaging” as an investment strategy, especially in a volatile market.

8. Take advantage of “free money” from employer.

In many employer-sponsored retirement plans, the employer will match some or all of
your contributions. If your employer offers a retirement plan and you do not contribute
enough to get your employer’s maximum match, you are passing up “free money” for
your retirement savings.
9. Consider rebalancing portfolio occasionally.
Rebalancing is bringing your portfolio back to your original asset allocation mix. By
rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset
categories, and you'll return your portfolio to a comfortable level of risk.
You can rebalance your portfolio based either on the calendar or on your investments.
Many financial experts recommend that investors rebalance their portfolios on a regular
time interval, such as every six or twelve months. The advantage of this method is that
the calendar is a reminder of when you should consider rebalancing. Others recommend
rebalancing only when the relative weight of an asset class increases or decreases more
than a certain percentage that you've identified in advance. The advantage of this method
is that your investments tell you when to rebalance. In either case, rebalancing tends to
work best when done on a relatively infrequent basis.

10. Avoid circumstances that can lead to fraud.

Scam artists read the headlines, too. Often, they’ll use a highly publicized news item to
lure potential investors and make their “opportunity” sound more legitimate. The SEC
recommends that you ask questions and check out the answers with an unbiased source
before you invest. Always take your time and talk to trusted friends and family members
before investing.

4.10 INVESTMENT DECISION PROCESS

It is a scientific process, which, if done in the right sprit, can help you achieve your
financial goals. Here are the basic steps of Investment decisions.

Step 1: Identify your financial needs and goals

The starting point of a sound investment decision is to begin with a clear understanding
of your financial needs and goals. Typically, any financial need or goal would translate
into determining the tenure of your investment (investment horizon). All investment
needs and goals can therefore be translated into short-term (less than 1 year), medium-
term (more than 1 year) and long-term (more than 5 years).
Step 2: Understanding investment choices

There are three basic investment categories: Equity, Debt and Cash. Any investment can
be classified into one of these three categories, or asset classes. The key to investment
success lies in understanding how each asset class performs over the various investment
horizons, the choices within each category and the risks involved in making investment
decisions in each of these choices.
Equity or Stocks are ownership shares that investors buy in a corporation. When you
make equity investments, you become part-owner (to the extent of your shareholding) of
the company you have invested in. However, there is no particular rate of return indicated
while investing. The current value of your holding is reflected in the price at which the
stock/share is traded in the stock markets. Hence, these constitute a relatively riskier form
of investment.
Debt Instruments or Bonds are loans investors make to corporations or the government.
They promise a fixed return at the time of making the investment. Also the promise of
getting the money back is dependent on who is making the promise. In case of the
Government, the promise will certainly get fulfilled, but if the issuer of debt is a company
or an institution, the quality of the issuer needs to be adjudged, to ascertain its ability to
keep the promise. Debt investments, therefore, provide you with the promise that your
principal will be returned along with the interest payable thereon.
Cash includes money in bank savings accounts and other liquid investment options.

Step 3: Do not put all the eggs in one basket

Based on a need analysis, one should select such schemes which should help generate
regular income and part of it should contribute to growth and capital appreciation. The
proportion however, will vary based on individual needs, time horizons available to meet
those goals and one's risk profile (the tolerance reaction to any down turn in the
stock/debt markets). The key to investment success lies in determining the appropriate
mix of the above-mentioned categories and not just the individual investments that are
done within each category.
4.11 WHAT INVESTOR LOOKS BEFORE INVESTING?
Investors are fundamentally different from lenders, and you’ll need to consider that when
you decide what kind of funding you want. Lenders give you money and you repay it
with interest. Investors give you money in exchange for ownership of part of your
business. Their investments may come with restrictions–that you have to get approval for
transactions over a certain dollar amount, for example, or that you have to set up an
independent Board of Directors. And investors have certain rights, too, which you should
discuss with your lawyer before jumping in.

Investors can be a great thing for your business. First, an investor isn’t demanding
repayment every month because it’s not a loan. An investor can also be a reliable source
for business advice and may have a strong business network that you can draw on. But
this isn’t free money – your investors will have certain expectations.

If you do decide that you want to seek funding from investors, how do you draw them in?
What is it that makes them decide to put money into a business?
More than anything, investors want to see a return on their investment. Investors are in
the business of putting money into growing businesses so they can make money. If you
can demonstrate that your business will make them money, then you’re 90% there.

While each investor will want to make money, the hard part becomes knowing how to
woo each prospective investor in a way which peaks their interest. Remember, at the end
of the day, investors are just people — each investor will have different pain points and
different intangible sets of criteria for how they arrive at investment decisions. Some
investors will be strictly number-based, whereas other investors will base their decisions
on a “gut” feeling.

Here’s how to hit all the points for potential investors so that you’ve covered all bases as
best you can. We break down the top ten criteria many investors will use, so that you can
develop your best plan and your best possible pitch to earn capital for your small business
funding needs.

1. Hard Data: Crunch the Numbers

Let’s start with hard data. As we just covered, investors want to make money. It’s your
job to show them that your company will make that goal happen for them.

If your company has been up and running for a while, then you need to show that you’ve
had excellent financial performance so far. If your company hasn’t yet started up, then
you need to show what you can expect to bring in, when you’ll hit your goal numbers,
and when your investor can expect to start earning their money back. In other words, you
need a really strong (and well backed-up) business plan.

2. A Rock-Solid Solid Business Plan

A solid business plan demonstrates to investors that you’re serious about your business
and that you’ve given thought to your plans to make money. While your business plan
alone won’t be enough to convince investors to back you, no investor will put money in
without one.
Among other things, your business plan should include:

 Your intended market, with data to show why that market is your target
 Data-based, hard number financial projections
 Sales channels, with data to show why those channels will be effective
 Marketing plans and goals, with data to show why those plans will be effective
 Analysis of the competition for your product or service
 Projected timeline for when you’ll start making money
 Potential obstacles and your plans for dealing with them

3. A Unique Idea

Both investors and the general public get excited about the words “new and innovative.”
The bottom line is that if the market is saturated with hundreds of identical products, then
your company isn’t likely to be a huge hit.

Convey to investors what it is about your product or services that make it stand out. Is
there a market potential for your unique product? Does it solve a unique problem? Is it a
brand-new innovation or invention?

You don’t have to have come up with a brand-new invention, but you do need show why
your product or service is different from or better than what your competitors offer. In
business terms, this is your “competitive advantage.”  It’s what will make you
successful over your competitors. You may also show that your business is going to
fulfill an unmet need – like a bakery in an area that doesn’t already have one.

4. A Strong Narrative

Investors hear a lot of pitches packed with hard data – given two companies with similar
projected returns, what makes an investor choose one over the other? The story! Your
investors are people, not robots, and they can be swayed by a great narrative about why
this business matters to you, where the idea came from, and where you’re planning to
take it. What need is your business going to meet? How will it change the world? What
makes it special? In fact, opening your pitch with your story is a great way to set the tone
and draw your potential investors in.

5. Business Readiness

Many people have prospective business ideas, but not many people have the drive and
wherewithal to take those ideas and shape them into a working, financially viable
business. Show your investors that not only can you talk the talk, but that you’re ready to
walk the walk.

Is your company ready to take off and hit the ground running? If you can show that
you’ve got all the key components in place, you’ll peak investors’ interest because they’ll
know that they’ll get a return on their investment sooner rather than later.

To show business readiness, you have to do your homework – your market research and
your business plan, for example. You need to show that you have a clear plan in place
(for example, you’ve already staked out a new location or supplier).

6. What You Need, Where It Will Go, And When They’ll Get It Back

Your investors aren’t just going to hand you the cash you want and walk away. Again,
they’re in this for the return. So they’re going to want to know exactly why you need the
cash and exactly what you plan to do with it. They’ll also want to know when they can
expect a return – that should be a part of your business plan.

Investors will also be looking for an exit strategy, and you need to think about that in
advance. When they want to sell, will you buy them out? Can they sell to another party?
If they don’t know that they can get their money out, they’re not going to want to put it in
the first place.

7. A Clear Investment Structure

Buying ownership in a company has legal ramifications and investors will want to know
that you’ve already considered those issues. You’ll need to have a business structure in
place that allows for other parties to buy in. You’ll also need to have a clear plan for how
the investment will work. If the investors are partners or shareholders, will they have the
right to vote on business decisions?

Part of this involves having a clear valuation for your business – a way to back up your
request for a certain amount of money in exchange for a certain amount of ownership. If
you want $100,000 for a 10% share, for example, you need to be able to show that your
business is actually worth $1 million.

Part of it involves putting together a stockholder’s agreement (and maybe also a

corporate constitution) that clearly sets out the rights of all owners. That should include
owners’ rights and obligations, what happens if an owner wants to sell, what happens if
there’s a change in leadership, what happens if the business closes, and other issues. Will
investors get dividends or just the increase in the value of their shares over time? If
you’re planning on distributing dividends, you need to have a plan for how much, how
often, and what will happen if you can’t make a distribution.

Note that this particular area is likely to involve some negotiation. Your investors may
want a larger share for a lower price and they may want adjustments or additions to the
stockholder’s agreement. The trick is to come in prepared, knowing that these issues are
important and that you’ve already thought of them. This is one of those times when you
should really consult your lawyer – you don’t want to grow into a successful business
only to find that you’ve lost control to your investors.

Investors are in it to make money. Your task is to show them that you’ll do just that – and
that you’ll do it better than their other investment opportunities. To make a successful
pitch, the most important thing you can do is to be prepared. That business plan should be
as watertight as you can make it. Your story should be compelling and well-thought-out.
You should know exactly what you’re going to do with the money and exactly how the
investment is going to be structured. Show your potential investors that you’re thinking
about the future – because that’s their number one concern.
4.12 WHAT DOES AN INVESTOR WANTS TO SEEIN FINANCIAL
STATEMENT?
There are key performances indicators that investors and lenders will want to see in a
company's financial statements before they will invest or loan to the business. Investors
will be looking at these key metrics, so work with your controller services to track and
improve them. Business financial statements are like a financial report card showing how
well your business is doing.

 Net Profit

Financial statements will reveal a company's net profit, The net profit is the money that a
business has left over after paying all expenses. "Are you making money?" is often the
first question asked, but it's only a starting point. Unsustainable profits are bad, and losses
can be good if you're on track to profitability as you scale up. But as many business
owners do not often have a clear understanding of their net profit, this is a good place to
start.

 Sales

You may have an objectively amazing product or service, but the real question is, are
people willing to buy it? If you establish a track record of sales before seeking
investment, investors don't take on the risk of not knowing the answer to that question.
Investors also care about sales growth. Are you showing an upward trend, or did the
initial excitement fizzle out?

 Margins

Sales are meaningless if you aren't making money. Investors also want to see your profit
margins both overall and at the individual product level.

They'll also compare your margins against industry standards and their other available
investment opportunities. Higher margins generally lead to a better return for investors.

If you have low margins, you'll need to demonstrate a plan for improving them. For
early-stage businesses, demonstrating how economies of scale will reduce costs as you
grow is usually the answer.

 Cash Flow

In business, cash is king. A solid five-year plan does you no good if all your employees
will walk out if you can't make payroll next week.

Investors view of cash in the bank as a sign that you can deal with unexpected problems
and capitalize on new opportunities. Free cash flow, the amount of cash that's left after
you meet your expenses each period, is a sign of sustainable operations. If you have both,
investors won't have to worry that you could go under at any time.

 Customer Acquisition Cost

Customer acquisition cost tells how much you have to spend to get one new customer. It's
calculated by dividing your marketing spend by your number of new customers. For a
fledgling business, this can sometimes be a very large number. For businesses that are
mostly established, this amount can be blended and reduced by repeat and referred
customers, who are likely easier to acquire.

Acquisition cost is important because a product that's profitable from a material and labor
standpoint may not actually be profitable if you have trouble getting people to buy it.
This problem can occur with super-niche areas where it's hard to spread the word about
your product or in hyper-competitive areas where advertising competition is fierce.

As with other measures, your ability to find economies of scale or otherwise lower the
cost can be more important than the actual number.

 Customer Churn Rates

Coupled with the acquisition cost is your churn rate. Once you get customers, can you
keep them? A low churn rate can compensate for a high acquisition cost, and it's often an
indicator of less risk for investors if you have steady repeat business. Of course, high
churn rates may be the norm in sectors with long purchase cycles and/or heavy
competition.

 Debt

Debt scares investors for two reasons. One is simply that if you go out of business, debt
holders get their money back before equity holders have a chance to claim what's left.

The second, and more important, is that debt payments eat up your cash. High debt
payments can hinder your ability to meet payroll and other expenses during slow periods.
They may also mean you have less cash available to help you handle a sudden surge in
orders or an emergency equipment replacement.

One of the most common debt measures is the quick debt ratio—current assets (excluding
inventory) divided by current liabilities. A quick ratio of 1 indicates that you can exactly
meet your obligations, and the higher it is above that, the more flexibility you have.

 Accounts Receivable Turnover

Accounts receivables turnover shows how long it takes you to collect money from
customers. This tells investors two important things.

First, are you willing to do what's necessary to make sure you get paid? Many new
business owners feel bad asking for money and end up never getting paid. An investor
looking for a return doesn't want to work with someone who isn't good at tracking down
customer payments.

Second, how stable are your customers? A slow turnover combined with a large
percentage of write-offs could indicate that many of your customers don't have
financially sound operations. This adds risk to your business model, and investors will
want to see an increased return to compensate.

 Break-Even Point

Investors accept short-term losses, but they want to see a profit and a return on their
investment sooner rather than later. Your break-even point says what is needed to make
this happen.

Often, the break-even point is a specific sales target that will cover your expenses and get
you to profitability. You may also build on other assumptions, such as economies of
scale, improved production efficiency or reduced marketing expenses, as long as you can
explain them in a way that's acceptable to investors.

 Personal Investment

You deserve sweat equity for the hard work it took to get your business running, but
many investors will want to see that you've made a financial equity investment as well. If
you have money at stake, investors believe that you'll do what it takes to protect it. If
you're not at risk of losing financial capital, investors may fear that you'll view them as a
blank checkbook and burn through cash without enough focus on protecting their
investments.

You can discuss the specific ratios that apply in each category of analysis with your
controller services. Even if you're not ready to seek investment, finding ways to improve
can help the overall health of your business.
4.13 WHICH FINANCIAL STATEMENT IS THE MOST IMPORTANT FOR
INVESTOR?
Investor perspective: Investor analysis of share value is largely based on cash flows, so
they will have the greatest interest in the statement of cash flows.

Statement of cash flow: A possible candidate for most important financial statement is
the statement of cash flows, because it focuses solely on changes in cash inflows and
outflows. This report presents a clearer view of a company's cash flows than the income
statement, which can sometimes present skewed results, especially when accruals are
mandated under the accrual basis of accounting.

What is it and why do I care?

The statement of cash flows tells you how much cash went into and out of a company
during a specific time frame such as a quarter or a year. You may wonder why there's a
need for such a statement because it sounds very similar to the income statement, which
shows how much revenue came in and how many expenses went out.

The difference lies in a complex concept called accrual accounting. Accrual accounting
requires companies to record revenues and expenses when transactions occur, not when
cash is exchanged. While that explanation seems simple enough, it's a big mess in
practice, and the statement of cash flows helps investors sort it out.

The statement of cash flows is very important to investors because it shows how much
actual cash a company has generated. The income statement, on the other hand, often
includes noncash revenues or expenses, which the statement of cash flows excludes.

One of the most important traits you should seek in a potential investment is the firm's
ability to generate cash. Many companies have shown profits on the income statement but
stumbled later because of insufficient cash flows. A good look at the statement of cash
flows for those companies may have warned investors that rocky times were ahead.

The Three Elements of the Statement of Cash Flows

Because companies can generate and use cash in several different ways, the statement of
cash flows is separated into three sections: cash flows from operating activities, from
investing activities, and from financing activities.

 The cash flows from operating activities section shows how much cash the
company generated from its core business, as opposed to peripheral activities such
as investing or borrowing. Investors should look closely at how much cash a firm
generates from its operating activities because it paints the best picture of how
well the business is producing cash that will ultimately benefit shareholders.
 The cash flows from investing activities section shows the amount of cash firms
spent on investments. Investments are usually classified as either capital
expenditures--money spent on items such as new equipment or anything else
needed to keep the business running--or monetary investments such as the
purchase or sale of money market funds.
 The cash flows from financing activities section includes any activities involved
in transactions with the company's owners or debtors. For example, cash proceeds
from new debt, or dividends paid to investors would be found in this section.

Free cash flow is a term you will become very familiar with over the course of these
workbooks. In simple terms, it represents the amount of excess cash a company
generated, which can be used to enrich shareholders or invest in new opportunities for the
business without hurting the existing operations; thus, it's considered "free." Although
there are many methods of determining free cash flow, the most common method is
taking the net cash flows provided by operating activities and subtracting capital
expenditures (as found in the "cash flows from investing activities" section).

Cash from Operations - Capital Expenditures = Free Cash Flow

4.14 FACTORS CONSIDERED BY INVESTOR BEFORE INVESTMENT

DECISION
Investments are a must have in this day and age. Not only do they allow an individual to
create a corpus for savings but they also enable them to earn good returns on their savings
and can even generate regular income if done right. Searching the internet, one will come
across scores of articles on what to invest where to invest and comparison articles but
seldom do you find articles on what investors must not do in order to secure their
investments in the long run. Below are key pitfalls people often tend to overlook while
investing. Whether you are a first time investor or have been in the investment game for a
while, keeping a note of these points will surely help bolster your investment tactics and
maximize returns in the long run

 Lacking The Financial Literacy: Many people who begin investing are often
confused with terminology and what a dip or rise in stocks would indicate. Most
 people should follow the market closely and identify trends and patterns and not
use an approach of callousness. The problem faced is that most investors lack the
basic financial literacy and do not know the effects of important economic factors
on their investments. Many people only have a faint clue of what the effects of
inflation, risk and interest rates have on their investments and many more would
have no idea of important world events that would shape their returns. For
effective long time investment, one should always have an ear on the ground and
be aware of important economic activities, be it introduction or change in
economic policies in the resident country or on a global scale
 Initial Investment Amounts are Too High: With the dynamic nature of markets,
it makes it highly unpredictable and even seasoned investors often get predictions
wrong and end up investing the other way. One should keep in mind that
investments are to provide maximum results in the long run and hence should be
treated as a marathon and not a sprint. To get a hang of investing, one should start
off with smaller amounts and buy smaller portions of stock of a particular
company and see how it fares over a period of time.
 Too Much of a Good Thing is a Bad Thing: Say you’ve been successful for a
short while now and are just getting the hang of things, the successful spree eggs
the person to invest more or increase the amount of activity which can be a bad
thing at times. As it has been already mentioned, investment should be
approached as a marathon and not a sprint. All the excess activity attracts fees and
savings and these commissions tend to eat into the returns and when investors see
the poor returns they get discouraged to continue investing. The constant buying
and selling of trendy stocks lead to commissions and other sale related costs that
can diminish the returns substantially
 Long Run: Investments made need to be made in a way that they help pay out in
the long run and high enough to beat the levels of inflation. There is no point
telling oneself that they are in for the long run and keep checking on market
prices every two seconds. Investors need to be mentally prepared and not expect
results to appear instantly or should be able to not access their funds for the lock
in period of an investment
  Don’t Panic: If certain stocks purchased fall then one should definitely not panic.
There will be many instances when stock of a particular company will witness a
fall in its prices. Investors should not take rash decisions in a state of panic but
should rather try and minimize the damage to a portfolio. Diversifying of stock
and even buying more stock at lowered prices can help minimize this risk.
Investments will pay off in the long run and these rise and fall of prices tend to
average out given a long enough time period
 Don’t Sell on The Rise: This works both ways. Do not sell stock on the rise nor
buy it on the rise. Selling winning stocks right after a small rise is actually a very
common error and investors can miss out on big paydays and buying stock on the
rise is just as erroneous as most seasoned investors will know that stocks that rise
will eventually fall and hence there’s no point buying stocks that have witnessed a
rise only to find a fall in prices the day after you purchase them. Investors should
stick to their game plan and long term investors should not change tactics to day
trading all of a sudden as heavy losses may be incurred

Investment cannot be mastered in a single day. Returns cannot be achieved in a single

day and a consistent and cautious approach is the best way to guarantee returns in the
long run.

4.15 ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION

The aim of financial statement is to provide financial information about an entity to

interested parties. The information contained the reports, however, it can only become
meaningful through financial interpretation derived from the analysis of the reported data.
This interpretations and decision unveils the essence of financial statements as the major
custodian of financial information necessary for any investment decisions. Investment
decisions are not made on a vacuum hence; there are bedrocks on which they will stand.

One major tool for these investment decisions is the ratio analysis. Ratio analysis is the
judgmental process which aims at evaluating the current and the past financial position
and the result of an entity is the primary objective of determining the best possible
estimate about the future conditions and performance. It provides a quick diagnostic look
at an entity’s financial health and trigger off subsequent financial and operational
analysis, from the foregoing; the figures that are used in the financial analysis are being
dedicated from the financial statements which in turns inform our investment decisions.
Several ratios exists and helpful for investment decision and the major issues to note here
is that financial statements are the major source of raw material for the investment
decision.

Simply, it is a process of determining and interpreting the relationship between the items
of financial statements to provide a useful understanding of the performance, solvency
and profitability of an enterprise. More so, for ratio to be useful investment decision, it
must be compared with earlier periods to indicate trends or compare with the similar
organization in the industry to determine strength and weaknesses ideally compared with
the industry average.
5.0 CHAPTER FIVE: FINDINGS, CONCLUSION AND
SUGGESTIONS
5.1 FINDINGS
This study set out to study the role of financial statement in investment decision making,
discovered the following:

 Financial statement is used to be relied upon in investment decision making.

 Financial statements are useful for forecasting company’s performance.
 There is a positive and significant relationship between financial statement and
investment decision making.
 Financial statements provide various facts of a business such as, accurate records
of its income and expenses and also its assets and liabilities.
 Cash flow statement is the most preferred statement in all financial statements for
investor.
 Investor cannot take accurate investment decision without financial statements.

5.2 CONCLUSION
Financial statements are critical factor to ensure that the actual financial picture of the
business presented to management and external stakeholders as it not only open a
window for known and educated decision making and strategic planning for stakeholders
but financial statements also aims at mitigating errors that may arise due to discrepancies
of numbers in various financial statements. Understanding the basic financial statements
is a necessary step towards the successful investor.Also, accurate financial statements
induce trust in the company. Building trust is also crucial objective of financial
statements.

Finally, the basic aim of this study is to determine the role of financial statement in
investment decision making. This because prospective investor’s uses financial statement
of concerns as a major parameter for assessing the profitability and the risk of investing
in such ventures and the aim of financial statement is to provide financial information
about an entity to interested parties.Investment are not made on a vacuum hence, there
are bedrocks on which they will stand.

5.3 SUGGESTIONS
Having gone through this study and the suggestions for financial statement plays a vital
role in investment decisions:
 Every company should ensure that all material fact is reflected in their financial
statement.
 There should be prompt provision of the financial statement at the end of each
financial year.
 Investment decision should not be on a vacuum or rule of thumb rather, the
financial statements should be used as bedrock.
 Every company should adhere to the demand of subjecting their financial
statements to statutory audit as a way of authenticating their contents.
 No investment decisions on a company should be taken without the consideration
of a company’s financial statements.
Bibliography

Website:

www.shodhganga.com

www.investopedia.com

scholar.google.com

www.researchgate.net

www.academia.edu

www.accountingtools.com

www.myaccountingcourse.com

Books:

Financial Statement Analysis - Wild, John J

Investment Analysis & Portfolio Management - Prasanna Chandra (Fourth Edition)

Fundamentals of Financial Management - D. Chandra Bose (Second Edition)