CHAPTER ONE

INTRODUCTION

1.1.Background of the Study

A financial statement refers to a summary providing a picture of the financial position/business performance (Atrill & Mclaney 2015), and or activities of a business during a certain period. Generally accepted accounting principles (GAAP) require a company to prepare a full set of financial statements that conform to regulatory guidelines and should be accurate. A full set of financial reports include statements of retained earnings, cash flows and the statement of a financial position (balance sheet). A good financial statement should document information such that it is easy to read and understandable. Presenting a financial statement clearly and professionally helps companies interpret results and thus plan for a more profitable future. Growth in a business refers to a company expanding its business using its own resources and assets.

This growth also depends on the financial statement of the organization. Similarly, a financial statement is a summarized report (Benedict & Elliott 2011), that indicates a cooperation’s operating data during a period or its economic standing at a giving period. Financial statement preparations in a company are usually done by internal accountants, who are directly influenced by the management of the company. Companies make certain decisions based on information from financial statements. Thus, a fraudulent or an erroneous financial statement implies a risk possibility which can cause wrong investment decisions making in an organization. Financial statements of companies are prepared either using generally accepted accounting principles (GAAP), defined by the law on accounting and the law on financial statements, or using international financial reporting standards (IFRS) and international accounting standards (IAS), issued by the international accounting standards board. These standards are not enforceable together; therefore, companies choose one of them for reporting purposes. Investment decisions can be explained as the determination made by directors or management body as to when and how much capital can be spent on investment opportunities. The decision often follows research on financial statements.

Generally accepted accounting principles [GAAP] require a company to prepare a full set of financial statements that conformed to regulatory guidelines and are accurate. A full set of financial report include statement of retained earnings and statement of cash flow. Microfinance institutions (MFIs) play a crucial role in promoting financial inclusion and economic development, particularly for low-income individuals and communities. These institutions provide a range of financial services, including microloans, savings accounts, and insurance (Armendáriz de Aghion & Morduch, 2010).  Making informed investment decisions is crucial for MFIs to sustain their operations, expand their reach, and achieve their social and financial objectives (Cull, et al. 2012). This research project aims to explore the influence of financial statements on the investment decision-making process of MFIs.

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

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

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

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

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

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

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

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

1.2 Statement of the Problem

In our current situation in the society now, the investment decision making in MFIs in Bamenda, has been very slow due to the negligence on the use of financial statements and other important financial records. Most organizations are still ignorant of the benefit of financial statement there by limiting their knowledge about their financial position and above all their ability to use financial statement to make financial investment decision making. It is for this reason that we search, embarked on this study to draw the alarming signals on the impact of financial statement on the investment decision in organizations.

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

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

  Despite the use of financial statements in MFIs in Bamenda, the institution is still unaware of the importance in the frequency and manner of presentation of these statements as far as investments are concerned. Having in mind the fact that financial viability is quite important, what therefore is the role of financial statements in investment decisions of micro financial institutions?

1.3 Research questions

1.3.1. Main Research Question

What is the effect of financial statements on the investment decision making in MFIs?

1.3.2. Specific research questions

What is the effect of a balance sheet on investment decision making in MFI?

What is the effect of income statement on investment decision making in MFI?

 How cash flow statement affects investment decision making in MFI?

1.4 Objectives of Study

 1.4.1 The main objective

The study aims to explore the effect of financial statements on investment decision making in MFI.

1.4.2. Specific objectives

To assess the effect of balance sheet on investment decision making in MFI.

To know how the income statement affect investment decision making in MFI.

To examine how cash flow statement affect investment decision making in MFI.