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ASSETS VALUATION AND ITS EFFECT ON THE FINANCIAL STATEMENTS OF MANUFACTURING COMPANIES A STUDY OF OBAJANA CEMENT INDUSTRY, KOGI STATE

5,000 2,500

Topic Description

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

It is no exaggeration to conclude that the major challenges that beset most Nigerian manufacturing firms in this decade are increasing need for deliberate planning, performance evaluation and comparison, asset utilization and corporate decisions by both public and private organizations. Though success cases reported from companies may dominate the mass media yet, failures reported are also reality. The news of reported business failure, liquidation and or winding up is however, becoming increasingly unbearable (Saunter, 1998). Reasons responsible for these include; subjective and uninteresting valuation process of business assets, financial competition, etc.

According to Afolabi (1998) assets that represent the worth of the organization occupy a unique position in making the financial statement a valuable vehicle for providing information to various economic users.

The valuation of such assets whether fixed or current assets is therefore necessary to assess the financial position of an organization, while this is necessary, the effects of such valuation on the financial statements and most importantly, the basic methods available for such valuation, the requirements of such valuation in terms of disclosure are subject to concern in this research work.

Generally, assets can be defined as economic resources that are owned by a business and which are expected to bring benefits to future operations.

According to Douglas (1982) it is traditional with the balance sheet component of the financial statement to incorporate assets, which are arranged in order of permanency, and these assets invariably serve as representations of equities and obligations of any given organization.

Typical balance sheets will among others, who separately the fixed assets and the current assets on its assets side. While the fixed assets include land and building, plant and machinery, motor vehicle, fixture and fittings, long term investment and so on. Current assets on the other hand, comprises of stocks, debtors, short-term investment and cash.

Although, the list of both fixed assets and current assets is in exhaustive, however, fixed tangle asset and few current assets whose values are significant in the financial statements and material to the economic users of the financial statements are the main concern of this study. This is so because, they provide substantial information needed for making economic decision of resources allocation and investments.

However, due to this fact that, these valuation proves and requirements are unlike the natural laws in the physical science, which are universally and externally true, they are constantly undergoing changes to meet the needs of emerging and changing financial, economic and legal situations.

It is therefore, against this background that the researcher in this study examine the contents and efficacies of this valuation process and appraise its relevancies and consequences as it relates to the recent development of accounting.

1.2       STATEMENT OF PROBLEM

It is important that companies, for financial reasons are aware of all the rules and regulations surrounding this issue. However, the other aspect, quantity, is essential as the pricing of material. In order for a valuation to be correct, the quantity on hand needs to be accurate (Friberg et al., 2006).

The FIFO and WAP assets methods can result in different cost of goods sold in naira amount and they affect the figure of closing stock. These differences are important because they affect the manufacturing company’s financial statements. The cost of goods sold is usually one of the large assets on their balance sheets.

As a result of the issues raised above, there is need for a superiority test between the two commonly used assets valuation methods that are recommended by IFRS and their influence on the financial reporting in the Obajana cement industry.

Treatment of assets by the early accountants was based on the recording of their costs. As businesses grew into corporations, there was the need for the business to source for funds externally for expansion purposes.

However, in recording assets, certain concepts and accounting principles has almost been universally accepted by professional accounting bodies. Moreover, owners of businesses are required by statutory bodies to submit the statements of financial position of their businesses, and this further necessitated the specification of the contents and extent of disclosure requirements of every business organizations financial statement.

1.3       PURPOSE OF THE STUDY

The main objective of this study is to determine the  effect of asset valuations on financial statements of manufacturing companies.

The specific objectives are:

  1. To ascertain the common method being used by manufacturing companies in valuing their asset.
  2. To find out the method preferred between FIFO and WAP by the firms in the industry and why
  • To determine the significant effect asset valuation method has on the financial statement of manufacturing companies.
  1. To determine the extent to which manufacturing companies complies with the provision of CAMA(1990) as amended and International Financial Reporting Standard (IFRS) regarding assets valuation over a period of five years.

1.4       SIGNIFICANCE OF THE STUDY

The study will enlighten individuals and organizations on the appropriate valuation and reporting practices of assets. To the global economy, the paper will enhance adequate contribution to organization (s) that will be making use of the recommendations of the recent write up in terms of effective valuation. The research will also assist organizations that use assets to evaluate the role played by assets management system in safeguarding against fraud, waste, inefficiency and inaccuracy and help in securing compliance with company’s policies and evaluating the level of performance in all areas or divisions of the companies.

Also, this research is to shed more light on the significance and implications of assets valuation as an aid to enable management produce effective and reliable financial information with which the preparations with statutory and regulatory requirements, the effect of asset valuation methods is important because of the differences in assets accounts that occur between the statement of financial position of a manufacturing business and that of a merchandising business. this research work however, does not only discuss these difference but also employs all available means within its reach to strategize harmonization approaches for such differences in asset accounts in other to produce a more reliable financial information for the end users. This research also reflects the latest development in accounting for assets valuation.

Finally, the research is the outcome derived from the study that applied to a reasonable degree, to similar and related organization and manufacturing concerns as long as they operate a uniform valuation process and method.

1.5       STATEMENT OF HYPOTHESIS

In order to assist in achieving the objectives of the study, the following null hypothesis are formulated in order to provide for statistical test:

Ho: WAP method is a commonly used method of valuing current assets in manufacturing industry.

Hi: FIFO method is the commonly used method of valuing current assets in           manufacturing industry.

H0: Assets valuation method has no significant effect on financial statement of      manufacturing companies

Hi: Assets are valuation method has a significant effect on financial statement of   manufacturing companies

1.6       SCOPE OF THE STUDY

This research work would be based on asset valuation and reporting practices in manufacturing companies. The focus of the study was on asset practice and reporting and testing the superiority between the FIFO and WAP methods as it applies to the Nigerian cement.

The research work “Asset valuation and its effect on the financial statement of manufacturing company” intend to examine all manufacturing companies. However, due to the wide nature of manufacturing companies and lack of time, the researcher limit the study to Obajana manufacturing company as a point of reference.

The study will cover the period of 2008-2014 using both the financial statements of manufacturing companies and the structured questionnaire to the staff of the companies. It also examines whether manufacturing companies uses historical cost or current cost method of valuing assets. This is to ensure compliance with statutory requirements as regards asset valuation in the manufacturing organizations.

1.7       LIMITATION OF THE STUDY

In the course of this research work, certain problems or constraints were encountered. These problems curtailed the extent to which the objectives of this research work can be achieved. Below is a summary of these problems.

Firstly, as a result of the continuous changes of these valuation principles and concepts, with the objective of meeting the needs of emerging and changing financial situation, the major constraint experiences was the rigor and fund inadequacy to obtain current data and information on these valuation methods and concepts owing to persistent inflation in the country.

Moreover, some of the data which could be of greater help in the analysis were said to be confidential in nature and as such, they were not released for examination. The reason being the fear of divulging business secretes and strategies to competitors. A number of successes were however achieved because the researcher also makes use of manual report for this research work which was eventually made available after persistent effort.

Other limitations experiences were external factors, such as the time limit set by the school authority, which immensely limited the ability of the researcher to gather sufficient texts on this research work. The scarcity of current data on these valuation methods and the concepts also contributed to the limitations of this study.

Finally, financial constraint was another problem encountered. Research work requires substantial commitment, the fund made available though judiciously utilized was not sufficient.

1.8       DEFINITION OF TERMS AND ACRONYMS

The topic under discussion is asset valuation and its effect on the financial statements of manufacturing companies, and for the purpose of clarity, all the terms and acronyms in the topic is discussed below:-

Asset: In financial accounting, an asset is an economic resource. Asset is anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value.

Non-current Asset: This is an asset that is not likely to turn to unrestricted cash within one year of the statement of financial position date.

Current Asset: these are resources that a company can convert into cash quickly.

Inventory: The raw materials, work in progress and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale.

International Financial Reporting Standards (IFRS)

Weighted Average Price (WAP)

First-In-First-Out (FIFO)

Last-In-First-Out (LIFO)

Last Purchase Price (LPP)

Written Inventory Method (RIM)

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