Financial Statement Analysis of Manufacturing Company in the Solid Mineral Sector of Nigeria (A Case Study of Barrick Gold Corporation and Multiverse Mining and Exploration Plc.)
The rapid growth in international market, and globalization of financial markets and businesses, makes financial reports prepared inaccordance with national accounting standards (Local-GAAP) no longer satisfy the requirements to make international comparison by users (Terzi, Oktem, &Sen, 2013). Purely national accounting information may even be a handicap for businesses as well as investors to ascertain the true picture of financial statement (Zeghal&Mhedhbi, 2006).
As a result of this reality, accounting regulating authorities came out with a solution for the need to harmonized financial statements in a single set of high quality and comparable transaction in the preparation and presentation of an entities financial statement. These would have wider acceptance among investors, regulators, auditors, policy makers and financial analysts in both national and international scope with a unique information approach, comparable and reliable for decision making (Edogbanya&Kamardin, 2014). To achieve the consistent need of high quality financial reporting, International Accounting Standards (IASs) issued and published by International Accounting Standards Board (IASB) in 2001, and subsequently replaced with international financial reporting standards
(IFRSs) which is poised as universal accounting language required to be adopted by companies regardless of their place of domicile across the globe (Ramanna&Sletten, 2009).
Financial reports apart from stating the financial position of an organization , provides other information such as the value added, changes in equity if any and cash flows of the enterprise within a defined period time to which it relates (Iyoha and Fabode, 2011). It involves a process of formally recording the company’s financial activities with the use of financial reports or statements, which includes all the relevant financial information.
On the 28th of July 2010, the Nigerian Federal Executive Council accepted the recommendation of the committee on the roadmap to the International Financial Reporting Standards (IFRS) In Nigeria. In that it will be in the interest of the Nigerian economy for reporting entities in Nigeria to adopt globally accepted, high quality accounting standards by fully adopting the International Financial Reporting Standards (IFRS) in a phased transition.
Moreover, these standards have the problem of automatic by all countries on account of differences in background and tradition of countries, differences in the needs of various economic environment and the perceived challenges to sovereignty of States in making and enforcing standards (Fantl,1971). A number of African countries including Nigeria, Ghana, Sierra Leone, South Africa, Kenya, Zimbabwe among others have adopted or declared intentions to adopt the standard. This development is welcomed considering the fact that the quality of financial reporting is indispensable to the need of users who requires them for investment and other decision making purposes. To prepare and audit financial statements, some standards have been put in place by appropriate bodies set up for the purpose of encouraging uniformity and reliability. It also reduces the cost of preparing different version of financial statements where an organization is a multi-national. Accounting standards ensures that important matters regarding preparation and presentation of financial statements as well as auditing same are not left to whim of the preparers and auditors.
Financial reports can only be regarded as useful if it represents ‘economic substance’ of an organization in terms of relevance, reliability and comparability (Penman, 1984). The implementation of IFRS would reduce information irregularity and strengthens the communication link between all stakeholders (Bushman and Smith, 2001). It also reduces the cost of preparing different version of financial statements where an organization is a multi-national (Healy and Palepu, 2001). Accounting standards ensures that important matters regarding preparation and presentation of financial statements as well as auditing same are not left to whim of the preparers and auditors. Most companies have significant international operations, multiple regulatory and capital market considerations, complex organizational structures (often including multiple subsidiaries and joint venture relationships), and global competitors who already are reporting under IFRS. Also, some of these companies are listed on other stock exchange markets outside Nigeria which requires reporting under IFRS. The companies in these circumstances have discovered compelling reasons to adopt IFRS even before it was mandated, more so when one considers the huge impact made by the income from foreign activities. Before IFRS era, most countries had their own standards with local bodies responsible for developing and issuance. The Nigerian Accounting Standards Board (NASB) was responsible for developing and issuing standards known as Statements of Accounting Standards (SAS) and in the new dispensation, the body was renamed Financial Reporting Council (FRC) of Nigeria as the regulatory body overseeing the implementation IFRS.
1.1 BACKGROUND OF THE STUDY
Each person like every business requires some measures of both financial position and financial performance in assessing his financial conditions. The financial position depicts one’s wealth at certain point in time while one’s financial performance describes once.
Financial statements according to Illoumezie (2006:33) are like compasses “which navigators use to locate their bearing and find direction”. People use them to gauge their financial positions at various points in their lives in order to judge their progress towards their financial goals.
Financial statements according to meigs and meigs (1981:28) refers to reports which summarize the financial position and operating results of a business (balance sheet and income statements). It referred to as general purpose that satisfy the need of many groups generally called stakeholders. These groups are particularly concerned with the risk inherent in and returns provided by their investments, and who require accounting information to enable them assess the ability whether they should buy, hold and sell their investments.
According to Anayaogu (2002:14) financial accounting provides information to eternal decision makes such as shareholders government, creditors, employees etc, these are people with whom or from whom money is ultimately paid or received. Anayaogu (2002:20) also states that records of financial accounting includes various ledges accounts, profits and loss accounts, balance sheet and other financial records. These records are intended to show the strength, progress, portability, management effectiveness and stewardship.
Financial statement are the means of communicating to interested partners information or the resource, obligation and performance of the reporting enterprise in a simple, clear and understandable form to all its user with such attributer of relevance to decision reliability, consistency and comparability materiality efficiency and understandability.
Meigs&Meigs (1981: 14) states that the preparation of financial statement is not the first step in the accounting financial statement is not the first step in accounting process. At the close of financial period, the stakeholders such as investors of a company naturally desires to ascertain the following:
(a) The result of the company’s operations for the period.
(b) The resources and hostilities of the company over the period in question.
(c) Wealth created by the company and how it has been distributed.
(d) Financial resources acquired and how they have been expanded.
Thus, published financial statement prepared under companies and allied matter decree (CAMA) 1990 supplies information about the above. As a matter of fact, shareholders of any corporation would require annual corporate report published about the entity and which must be relevant, sufficient and reliable.
One of the tools for the analysis of financial statements is the ratio analysis. This analysis describes a particular relationship between elements of one with the other elements in a financial report. Financial statements referred to is the balance sheet and income statement. Balance sheet shows assets, debt and the company’s capital at a given time. Income statement reflects the results achieved by the company within a certain period (usually one year).
An accountant interpret the financial statement so as to evaluate the financial soundness and stability, the liquidity position and the profitability or the earning capacity of borrowing concern. Analysis of financial statement is necessary because it helps in depicting the financial position on the basis of past and current records. Analysis of financial statement helps in making the future decision and strategies. Therefore, it is very necessary for every manufacturing companies to make financial statement and to analyze it. Finally, once the financial decisions have been made, accounting tools are used to evaluate the success or failure of those decisions.
The most common and oft-used financial statement is the income statement, which is a fairly simple notion on the surface. It begins with revenues, or all raw cash inflows, the firm generated over a period of time. Then, once all costs associated with those sales are removed, the so-called bottom line is obtained. This latter figure is most often labeled net income. Therefore, the income statement attempts to obtain a reasonable estimate of how much of the company’s revenues were retained as income throughout the accounting period.
Anyone who has seen a balance sheet can quickly understand the meaning of the name. There are two sides and, well, they must balance. Each side must sum to an equal value. The variables on the left-hand side take many forms but are all some type of asset. An asset is anything the firm owns, likely in hopes of using it to generate revenue.
The analysis of the financial statements and interpretations of financial results of a particular period of operations with the help of ‘ratio’ is termed as “ratio analysis.” Ratio analysis used to determine the financial soundness of a business concern. Alexander Wall designed a system of ratio analysis and presented it in useful form in the year 1909.
The liquidity of a company is measured with the use of some financial ratios refers to as liquidity ratio. These groups of ratios measured the ability of the firms to meet its current obligations (liabilities).
Profitability is the ability to make profit from all the business activities of an organization, company, firms, or an enterprise. It measures management efficiency in the use of organizational resources in adding value to the business.
Manufacturing company refers to those companies which involve in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition. The manufacturing companies accounts for significant share of the industrial sector in developed countries. The final product can either serve as finished good for sale to customers or as intermediate goods used in the production process.