Accounting Project Topics

A Critical Analysis of the Use of Financial Statements in Assessing the Performance of an Organization

A Critical Analysis of the Use of Financial Statements in Assessing the Performance of an Organization

A Critical Analysis of the Use of Financial Statements in Assessing the Performance of an Organization

Chapter One

Objectives of the Study

Banks in Nigeria are statutorily required to prepare and present credible financial statement in line with the International Financial Reporting Standard (IFRS) to the various stakeholders at end of each accounting period. Therefore, the objectives of the study are to:

  1. Examine how financial statements reflect the performance of financial institutions with focus on
  2. Evaluate the use of financial statements in performance improvement of banks.
  3. Determine the decision-support role of financial statements in




 The literature review involves classifying; summarizing and evaluating previous research in order to avoid replication of work done and enable the researcher shed more light on newer perspectives relating to the topic. It also helps in: (i) providing a basis for re-examining the effectiveness of approaches successfully used by previous researchers; (ii) augmenting the overall development and conduct of the research work; (iii) acknowledging well-articulated research problem; (iv) supporting steadier considerations of theoretical inferences of proposed study

Financial statements have been the foundations upon which organization’s performance are assessed in monetary terms. The underlying purpose of financial statements is to present information about the financial position, performance and fluctuations in the financial position of an enterprise (Elliot and Elliot, 2005).

Profit is a prerequisite for ideal financial institutions like banks and the cheapest source of funds at the micro level of the economy. Hence, the basic aim of every bank management is to maximize profit, as a requirement for conducting business. (Aburime, 2009). Ratio analysis acts as a measure of the performance of a company, it could also make indications relating to the company’s financial position. In view of assessing financial efficiency and position of an organisation, performance indicators are essential so to enable comparisons. Usually, inventory turnover ratio, liquidity ratio, debt to net worth ratio, interest coverage ratio, debt equity ratio and return on investment ratio are very relevant in determining and evaluating the financial stability, financial performance and financial position or otherwise of such management (Ginevicius et al, 2011).The Return on Equity (ROE), Return on Assets (ROA) and Net Interest Margin (NIM) were acknowledged by Ahmed (2003) to be widely employed in the literatures to measure profitability.

Conceptual framework

 The conceptual framework is intended to provide the interrelationship between and among different variables and highlight conceptual distinctions of previous research conducted in order to guide the flow of ideas in this study. The relevance of annual reports is largely attributed to its function of informing stakeholders about the financial health of his organisation, particularly its income and financial position According to (Aroh, Ndu & Aroh 2011). Conversely, financial statements of an organisation should depict information regarding the economic resources of a company, which are the streams of potential cash inflow. It should also fulfil its obligation of transferring economic resources to others which is the source of potential cash outflow from an organisation and its earnings which are the financial results of its operation.

According to Meigs and Meigs (1993), financial statements are the principal means of reporting general-purpose financial information to users. The accounting data presented in the financial statements must be relevant and meaningful to the user (Omolehiwa, 2000). According to Drake (2010), analysis of financial statements is the selection and evaluation of financial data, along with other relevant data, to facilitate financial and investment decision-making. Analysis of financial statements helps in both long-term and short-term forecasting. Through financial performance analysis, growth of a company can be gauge growth rate of a company.

The ability to understand financial statements is assessed based on the transparency and straightforwardness of the information in yearly reports. It must be Comparable, meaning that stakeholders and other users of financial information should be have enough clarity in order to be able to distinguish similarities and contrast information among various statements. Financial statements must also be timely meaning that information should be assessable to the necessary authorities in an organisation so as to impact decisions before it loses its ability to do so. These are all prerequisite for financial related reports. corporate bodies are obligated to provide information about the financial performance, position and changes in their financial activities due to the relevance of the information to users making economic decisions. To guarantee the desired relevance and reliability on the financial statements, it is the aim of accounting bodies e.g. the International Accounting Standards Board (IASB) to advance acceptable high quality financial reporting standards internationally, which would portray the overall objectives and underlying effectiveness of financial information to all financial information users.

The financial statements of listed companies may consist of two major kinds of accounting information which are financial accounting information and the non-financial accounting information. The financial accounting information are based on historical cost and usually prepared for both internal and external users e.g. statement of financial position, income statement, statement of changes in equity and statement of cash flow. Though investors also use nonfinancial accounting information in making investment decisions, conventional and rational investors rely more on financial accounting information (Malhotra & Tandon, 2013).

In order to effectively evaluate a financial statement in relation to financial performance, certain factors and their relevance have to be determined. This is an attempt by the researcher to effectively highlight the relevant areas and requirements of banks and how they are assessed with a view to enable the reader understand the basis for successfully evaluate the performance of a bank. These factors are but not limited to: capital adequacy, credit risk, bank size, bank efficiency and income diversification, etc. The measurement of bank performance using financial statements particularly deposit money banks is a well-researched area which has received greater attention over years (Seiford and Zhu, 1999). There have been a large number of empirical studies on commercial bank performance around the world (Yeh, 1996; Webb, 2003; Lacewell, 2003; Halkos and Salamouris, 2004; Tarawneh, 2006). However, diminutive effort has been put in terms of bank comparison using more than the average amount of financial ratios in order to rank and evaluate their performance in Nigeria and evaluating financial statements as a suitable means of performance evaluation. Interestingly, the impact of the recent global financial crisis has generated significant interest among scholars and industry stakeholders on financial statements analysis with a view of evaluating their performance.






This chapter describes the methodology adopted in this study. It also presents the population of the study, the chosen sample size, method of data collection and method of data analysis.

 Research design

This study adopts the experimental research design as it establishes a relationship between the cause and effect of a situation. It is a design where one observes the impact caused by the independent variable on the dependent variable.

A study of information over time and focus based on secondary data is opted is a Longitudinal study, where repeated observations are made on the selected banks Financial statements over a ten-year period (2010-2019) so as to make objective observations and achieve significant results. It is retrospective in nature as it makes use of already existent information without a need to acquire new data

Population of the Study

The population of this study consists all the 22 commercial banks as listed on the Nigerian Stock Exchange. The study was based on the analysis of ten years audited financial statements of the banks.




In this chapter, the researcher presents the collated data from the various financial statements of the banks employed in this study. Also, the descriptive analysis and the testing of the formulated hypotheses were also carried out in this chapter.




The performance of any economy is to largest extent dependent on the stability of the banking sector. It is therefore important to allude to the fact that banks play a key role in the efficient allocation of financial resources among economic agents. At this point, the study revealed that analysis of financial statement is important to performance evaluation of banks and also support decision making regarding the operations of an organization as observed in the ten years’ financial statements of the selected. The analysis of the financial statement has helped to address the objectives of the study as it revealed the impact of financial statements on bank performance. It was discovered that financial statements of banks influenced most investment decisions. Categorically a large percentage of the sampled population relied on the ten-year summary of banks in their performance evaluation.

Furthermore, there as a consensus opinion that financial statements were prepared to satisfy the needs above facts that the major items of financial statement, i.e. statement of comprehensive income, statement of financial position, statement of cash flow, statement of changes in equity, had positive influence on major decisions regarding the operations of the banks and also a veritable tool in performance analysis. There is definitely a need for the preparation of financial statements by banks, due to the fact that financial statements show the position of bank in terms of effective performance. The financial statement provides insight on how a bank is faring in an economy and also its resilience in recuperating and maintaining a strong positon. Financial statements also help in decision making by the bank, regulating authorities, potential investors and other relevant information users. Financial statements are crucial for the development of policies and other steps put in place to help improve and maintain successful ideal financial performance as a bank. Financial statements shed light on areas that thrive and areas that require improvement in a bank or any organization, however that is the limitation of it. It only indicates, it does not give detailed steps on what to do to rectify an issue or what may have caused an issue. That is why investors typically rely on interpretations by experts.


The study shows how financial statements are used in assessing bank performance, and identified role financial statements play in evaluating the performance of selected banks in Nigeria (i.e. GTB, ZENITH, UBA). The statistical SPSS t-test regression analysis was conducted to establish the relationship between financial statements and banks performance. The result showed that all the selected banks performance indicators had positive mean value. The findings from this test support the fact that financial statements have significant relationship with performance evaluation of the banks under review. Furthermore, this was revealed in the earnings per share; a p-value of 0.000 which was less than the 5% benchmark set by the SPSS t-test regression model. The foregoing, indicates that the banks deployed their resources efficiently to achieve optimum return and support that the financial statements effectively captures the performance of the banks. This facilitates comparison between banks leading to better economic decisions. The model also revealed that the financial statements helps to identify profit expense ratio (PER) as a critical indicator in assessing profitability as it showed the p-value at 0.000 which was less than the 5% benchmark set by the model. This indicated that the selected banks under study were profitable. Similarly, the return on equity was observed to have a significant relationship with the financial statements. The test revealed a positive return on shareholders’ investment. This is an important measurement for potential investors because they would like to see how efficiently a bank will use their money to generate net income.

After taking into context the analysis of the above findings and results of the ratio analysis, it was obvious that financial statements improve bank performance and are efficient measures of performance evaluation, through the analysing of the financial statements using ratio analysis to identify areas risk and vulnerabilities with a view to mitigating them in a timely manner. Although, there are other factors that could come into play at this stage such as good corporate governance practices, customer satisfaction and macroeconomic environment, these factors do not undermine the relevance of financial statements in improving bank performance, it serves as a literal tell tale of how the bank is performing.


The research was carried out to ascertain the use of the financial statement for evaluating performance in the bank, with particular reference to UBA, ZENITH AND GTB over a ten-year period (2010-2019). The analysis supported the fact that financial statement support performance evaluation of banks, and decision making in an organization. The analysis revealed that the three banks are sound, stable and safe based on the results of the findings. It is also important to note that the financial statements are a strong tool through which the performance of the institutions can be assessed. Although, the reliability of financial reports has been challenged by stakeholders and scholars due to the impact of inflation arising from the used of historical cost as a basis for asset valuation as well as failure to recognize customer satisfaction, risk etc. Nevertheless, empirical evidence suggest that financial statements are still the most efficient means of evaluating the performance of a bank. As the economy continues to evolve and new policies are formulated greater importance would continue to be placed on the preparation of financial statements.


Based on the result of the research findings, I wish to recommend the following:

  1. Greater emphasis should continue to be placed on the preparation of financial statements by banks
  2. Banks should continue to provide  adequate  supporting information to their financial statements for ease of analysis and interpretation by the relevant
  3. The continuous and efficient preparation of financial statements in line with applicable accounting standards and regulatory
  4. The banks should continue to use financial statements as a yard-stick in regulating their

Limitation of the study

Due to the global COVID-19 pandemic the researcher was unable to conduct interviews with key staff of the of the relevant banks under study, hence hindering analysis and results that would have been beneficial in enhancing the overall quality of the research.


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