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THE ROLE OF FINANCIAL ANALYSIS IN MANAGEMENT CONTROLS

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Financial analysis is the process of reviewing and analyzing company’s financial statement to make better economic decision. These statements include the income statement, consolidation statement of financial position, statement of cash flow, and statement of profit or loss and other comprehensive income. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, financial health and future prospects of an organization. It is used by a variety of stakeholders, such as credit and equity investors, the government, the public and decision-makers within the organization. These stakeholders have different interest and apply a variety of different techniques to meet their needs.

Financial analysis involves analyzing the financial problems that the company faces and deciding which course of action should be taken. In order to make financial decision, one must be able to identify potential financial problems and analyze the effect of alternative cost of action. Financial analysis for a company depends on its perceived needs and the types of decisions its management makes. Companies needs differ, but the area of financial long-range planning, profit planning and budgeting capital investment, decision, operational auditing, mergers and acquisitions, and the administration of temporary corporate investments.

The financial analysis is to increase the owner’s wealth. The way to increase the owner’s wealth is to increase the market value of their investment (equity) in the enterprise. Financial analysis are used to help improve the value of a company frequently, they are also sensitive. There are many project that financial analyst must perform periodically. These activities include analyzing the company’s liquidity, performing operational audits and supervising the company day-to-day financial activities. In addition, the analyst has annual or semiannual duties, including conducting a sales analysis, analyzing the company’s debt structure, developing the financial statement and ratio analysis and analyzing investment of liquid reserves.

The law requires that companies incorporated under the company and Allied matters Act of 1990 to publish a set of account in their financial statement. The purpose of financial statement is to assist users in future prospect of a business, profitability and evaluating the financial position. In seeing where to invest their limited resources, investors and creditors of the companies must reasonably, while examining a set of financial statement, the asset are prepared in conforming to set of group rules called Generally Acceptable Accounting Principles (GAAP). Users of the financial statements can get a better insight about the financial strength and weakness of a firm.

First Bank of Nigeria PLC (First Bank) was founded in 1894 by Sir Alfred Jones, a shipping magnate from Liverpool, the Bank stated out as small operation in the office of Elder Dempster and company in Lagos.

At inception, the Bank was incorporated as Limited Liability Company on 31st March, 1894, under the same Bank of British West Africa (BBWA), with the head office originally in Liverpool. In response to a rapidly changing economic and business environment, they have various times restructured their operations. In 1955 First Bank Plc changed their name from Bank of British West Africa (BBWA) to Bank of West Africa (BWA), in 1966 following out merger with Standard Bank, UK, they adopted the name Standard Bank of West African Limited and 1969 First Bank Plc was incorporated locally as the Standard Bank of Nigeria Limited in line with the companies decree of 1968 changes of their name also occurred in 1979 to First Bank Nigeria Limited, in 1991 the name also changed to First Bank of Nigeria Plc, respectively. A breach was opened in Accra Gold Coast (now Ghana), in 1896 another in Freetown, Sierra Leone in 1898. First Bank of Nigeria Plc opened its second branch in Nigeria at Calabar in 1912 and, 12 years later, extended its service to northern Nigeria by opening its Zaria branch. The Kanu branch was opened in 1928, current FBN has over 570 branches.

First Bank of Nigeria Plc has Mr. Stephen Olabisi Onsanya as its managing director/chief executive officer. The boards of director FBN Plc is made of 7 executives directors and 11 non-executives directors all of whom have varying high level of competence and experience with tract records of achievement in their respective endeavour.

Some firm do not regard good financial analysis as an aid in management control but many writers have argued that financial analysts help in liquidity and the productivity management of the firm as an indication of good management control through decision making. It is also seen that information available to outsiders is limited to others in the annual reports and accounts which are difficult for them to understand or interpreted. The problems existing when carrying out analysis include changes in assets figures, changes in accounting policies from one period to another, changed in equipment to leasing equipment identifying costs and expenses, identifying financial statement ratio analysis, change in government incentives packages. This project aims at finding out if financial analysis playing a good role in facilitating management control through the use of financial ratio.

Therefore, the problem of the study is to evaluate empirical relationship between financial analysis and management control in terms of liquidity and profitability.

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