The relevance of Financial Statements

and Its Impact in Organizational

Performance – a case study of Atwima
Mpomua Rural Bank.

Eric Kwame Buah & Christopher Darko-Amankrah

Thesis for the Master’s degree in Business

Administration
 2010

ABSTRACT

The aim of the thesis is to investigate the perception of investors in a

rural bank as regards the uses of financial statements. Rural banks are
the main source of financial service in rural sub-Saharan Africa and
their services are mostly patronized by rural folks. Illiteracy rates in
developing countries are very high as compared to developed
countries and most of these people are living in rural areas. Sixty
percent (60%) of Ghana’s population are rural dwellers and illiteracy
levels are high in these areas. Financial information from relevant
literature is used purposely for the comprehension of various financial
positions of a company. Financial information from studies is most
understood by expects with knowledge of account and finance.
Investors who don’t have knowledge of account or finance rely on
expects advice when making financial decisions. The study is
therefore examining what extent of knowledge the rural dwellers who
are mostly illiterates, and hence might not be able to understand
financial statements, have of financial performance of the bank in
which they are investing.

The data was collected from a sample of one hundred and eighty
respondents using questionnaires and face to face interviews
conducted with management staff of the bank and used for analysis.
Analyses were presented in a statistical format using mean score, vein
diagrams and ratio calculation.

Majority of investors in the bank were found to have tertiary level

education making them literate, and they could understand and
interpret financial statements. They preferred to have more access to

2
financial statements and perceived service delivery a priority.
Managers of the bank use profitability and liquidity ratios calculated
from the various financial statements of the bank to determine their
performance.

The research was conducted on just one of the many rural banks in
Ghana and as such could lead to results which might be not
representative of what patens in rest of the many rural banks
scattered across the country.

The present study adds to the existing literature by examine the issue
of user perception of financial statements in sub-Saharan Africa i.e. a
developing economy and the issue of illiterates knowledge of financial
performance. This seeks to determine their understanding of the
bank’s performance measures.

3
 ACKNOWLEDGEMENT

We would like to offer our appreciation to the following;

God, for his guidance, protection and strength throughout the period
of this research.

Jan Svanberg, our supervisor, who has been of tremendous help in

guiding and encouraging us through this process. Furthermore, for his
serious yet gentle commitment to the completion of this thesis.

Special thanks to the management and staff of Atwima Mpomua Rural

Bank limited for all the help and support during the interview.

Thanks also to our respondents without which this research would not
have been a success.

Last but not the least, to our family members who encourage and
supported us in diverse ways to the end of the thesis.

4
 GLORY BE TO GOD

ACRONYMS
RCBs RURAL AND COMMUNITY BANKS
BoG BANK OF GHANA
EBIT EARNINGS BEFORE INTEREST AND
TAXE
EPS EARNINGS PER SHARE
SME SMALL AND MEDIUM ENTERPRISE
MFI MICRO-FINANCE INSTITUTION
ICT INFORMATION AND COMMUNICATION
TECHNOLOGY
IFPRI INTERNATIONAL FOOD POLICY RESEARCH
INSTITUTE

5
FASB FINANCIAL ACCOUNTING STANDARDS
BOARD
SFAC STATEMENT OF FINANCIAL ACCOUNTING
CONCEPTS
GAO GENERAL ACCOUNTING OFFICE
MSLC MIDDLE SCHOOL LEAVING CERTIFICATE
JHS JUNOIR HIGH SCHOOL
OECD ORGANISATION OF ECONOMIC CO-
OPERATION AND DEVELOPMENT

TABLE OF CONTENT
TITLE
PAGE.......................................................................................................
....................1

ABSTRACT...............................................................................................
.............................2

ACKNOWLEDGEMENT..............................................................................
........................3

ACRONYMS..............................................................................................
...........................4

TABLE OF
CONTENT.................................................................................................
.........5

LIST OF FIGURES,
TABLE.................................................................................................7

6
CHAPTER
ONE.........................................................................................................
...........8

1.0 INTRODUCTION...................................................................................
........................8

1.1CONTENT AND
MOTIVATION....................................................................................8

1.2 RESEARCH
FOCUS.....................................................................................................
..9

1.3 SCOPE OF THE

THESIS................................................................................................10

CHAPTER
TWO........................................................................................................
...........11

2.0 LITERATURE
REVIEW...............................................................................................
.11

2.1FINANCIAL STATEMENT AND

PERFORMANCE....................................................11

2.1.1 BALANCE
SHEET......................................................................................................
11

2.1.2 INCOME
STATEMENT.............................................................................................
..12

2.1.3 CASH FLOW

STATEMENT........................................................................................12

2.1.4 FINANCIAL
PERFORMANCE..................................................................................13

2.2 RURAL AND COMMUNITY

BANKS.........................................................................14

2.3 EVALUATING THE FINANCIAL PERFORMANCE OF

RCB’s...............................18

7
2.4 INVESTORS
PERCEPTION.........................................................................................1
9

2.5 ORGANIZATIONAL PROFILE OF CASE

STUDY...................................................20

2.5.1
VISION.....................................................................................................
..................21

2.5.2
MISSION...................................................................................................
.................22

2.6 SUMMARY OF CHAPTER AND IMPLICATION OF

STUDY................................22

CHAPTER
THREE.....................................................................................................
........23

3.0 METHODOLOGY..................................................................................
.....................23

3.1
INTRODUCTION.......................................................................................
..................23

3.2 RESEARCH
DESIGN..................................................................................................2
3

3.3 SAMPLE AND SAMPLE

TECHNIQUE.....................................................................23

3.4 RESEARCH
INSTURMENT.......................................................................................24

3.5 DATA COLLECTION

PROCEDURE........................................................................24

3.6 PROBLEM ENCOUNTERED DURING DATA

COLLECTION..............................25

3.7 METHOD OF DATA

ANALYSIS...............................................................................25

8
CHAPTER
FOUR.......................................................................................................
........26

4.0 RESEARCH
FINDINGS............................................................................................
..26

4.1
INTRODUCTION.......................................................................................
..................26

4.2 INVESTORS KNOWLEDGE OF BANK’s

PERFORMANCE..................................26

4.3 RESULT OF INTERVIEW WITH

MANAGEMENT.................................................36

CHAPTER
FIVE.........................................................................................................
........38

5.1
CONCLUSION...........................................................................................
..................38

5.2
RECOMMENDATION.................................................................................
...............38

5.3 PROPOSAL FOR FURTHER

RESEARCH................................................................38

REFERENCE.............................................................................................
.........................39

APPENDIX................................................................................................
.........................41

LIST OF FIGURES

9
FIGURE 1.1: OUTLINE OF THE
THESIS......................................................................10

FIGURE 4.1: AGE OF

RESPONDENTS.........................................................................27

FIGURE 4.2: SEX OF

RESPONDENTS..........................................................................28

FIGURE 4.3: LEVEL OF

EDUCATION..........................................................................29

FIGURE 4.4: YEARS OF

INVESTING...........................................................................30

FIGURE 4.5: REASON FO INVESTING IN

BANK.......................................................31

FIGURE 4.6: TYPE OF

INVESTMENT...........................................................................32

FIGURE 4.7: FACING PROBLEM WITH

BANK..........................................................32

FIGURE 4.8: KNOWLEDGE OF FINANCIAL

STATEMENTS....................................33

FIGURE 4.9: ACCESS TO FINANCIAL

STATEMENTS..............................................33

FIGURE 4.10: ANALYSE AND INTERPRET FINANCIAL

STATEMENTS...............34

FIGURE 4.11: INFLUENCE OF FINANCIAL

STATEMENTS.....................................35

FIGURE 4.12: MANUAL OPERATING

PROCEDURES..............................................36

LIST OF TABLES
TABLE 1.1: TABLE OF GROWTH OF RCB’s IN
GHANA..........................................9

TABLE 4.1: AGE RANGE OF

RESPONDENTS............................................................26

10
TABLE 4.2: SEX OF
RESPONDENTS............................................................................27

TABLE 4.3: LEVEL OF

EDUCATION............................................................................28

TABLE 4.4: YEARS OF

INVESTING..............................................................................29

TABLE 4.5: REASON FOR INVESTING IN

BANK......................................................30

TABLE 4.6: TYPE OF

INVESTMENT.............................................................................31

CHAPTER ONE

1. Introduction

This research is aimed at finding the extent that investors in rural and
community banks who are expected to be mostly illiterates or semi-
literates understand financial statements of a bank and the extent that
investors perceive that their investment decision are informed by
financial statements of a bank in which they are investing. Our
purpose is also to address how management of the bank measures
their performance and how available this information is to the bank’s
investors.

1.1 Content and Motivation

Rural and community banks (RCBs) have a mission to increase the

provision of services in rural areas in a sustainable manner (Ghanaian
Times, September 2010). This should be to assist traders, farmers as
well as workers with loans to expand their business (Ghanaian Times,

11
September 2010). One of the central issues of development
economics that governments and policy makers are focusing attention
on is how to improve the socio-economic well being of the people and
thereby, reduce deprivation and misery. In Ghana, RCBs have been
established to play a major role in providing financial management
support, investment profiling and counselling to facilitate poverty
alleviation in the rural districts or communities they serve. The banks
major target groups are smallholder traders and framers (Owusu-
Frimpong, 2007).

Table 1.1 shows the number of RCBs that have been licensed over
time, grouped in five-year intervals, and their cumulative totals.
Clearly, the total has grown with time. Attention is however drawn to
the fact that in spite of the steady increase in the cumulative total,
twenty-three (23) RCBs have been closed down for not doing well,
reducing the number in business as of June, 2007 to one hundred and
twenty-two (122) out of a total of one hundred and forty-five (145)
that had been licensed.

Period Number added Cumulative total

1976 – 1980 20 20

1981 – 1985 86 106

1986 – 1990 16 122

1991 – 1995 3 125

1996 – 2000 9 134

2001 – 2005 8 142

2006 – 2007* 3 145

Note * up to mid June, 2007

12
 Table 1.1: Table of Growth of RCBs in Ghana: 1976 – 2007,
Source: Bank of Ghana (BoG) (various issues)

National financial reporting practices in transitional economies have

evolved as a response to many socio-economic domestic factors,
including the level of economic development, the legal and regulatory
system, educational and professional infrastructure, colonial heritage
and history and culture (UNCTAD, 2000; Saudagaran and Diga, 2003;
Kosmala-MacLullich et al., 2004; Sevic, 2004). These factors are likely
to have significant impacts on the utility of small company like rural
banks, financial information. Therefore, it is important to explore what
factors affect the uses of information and how and why small and
medium size company’s (SMCs) are able to provide the information.
Unfortunately, little has been known about these issues. A review of
the relevant literature has shown that much accounting research
focuses primarily on large listed companies rather than smaller ones
(John and Healeas, 2000; Collis, 2003) and is set in the context of
developed rather than developing countries (Hopper and Hoque, 2004;
Mirshekary and Saudagaran, 2005). Furthermore, most studies base
their inquiry on specific-user rather than multi-user groups which are
considered more appropriate for the general purpose of traditional
financial reporting (ASSC, 1975). Through focusing on a multi-user
perspective and developing a model of patterns of the perceptions of
users of small company financial reports in a developing economy, this
study makes a contribution to this under researched area.

Hence the aim of this research is to investigation into investor’s

perception of determining the performance of the bank and how much
knowledge they have about financial statements since most of them
are illiterates or semi-literates and also to investigate how

13
management of the bank measure their performance as compared to
theoretical accounting standards.

1.2 Research focus

The research is basically into investor knowledge of the financial

statements and how it relates to the bank’s performance. The
investigation will also try to determine if the banks performance
affects their reason to invest in the bank. The research goes further to
determine mangers means of measuring their performance and how
available that information is to investors. Primary data would be
collected using questionnaires and secondary date would be from
literature review.

1.3 Scope of the Thesis

This thesis would attempt to answer the following questions.

1) Investors, who are mostly semi-literate or illiterates’ knowledge

of the financial statements of the bank and the bank’s
performance.

2) The banks method of determining their performance.

3) The banks perception of investors’ knowledge of their financial

performance.

The thesis is organized into five chapters. Figure 1 shows the outline
of the thesis. Chapter one consist of the introduction of the research
project while chapter two is devoted to the review of the various
literature as a theoretical framework for the study.

Chapter three highlights on the methodology which is used for the

study. Chapter four focuses on the data analysis, presentation and
findings i.e. research findings. Lastly chapter five summarises

14
conclusions and make recommendations. At the end of the thesis, a
set of appendices are included that contain the questionnaires of the
survey forms used to collect primary data for this work.

Chapter1:
Introduction

Chapter2: Literature
Review

Chapter3: Methodology

Chapter4:Research Findings

Chapter5:Conclusion and
Recommendations

Figure 1.1: Outline of the Thesis

15
 CHAPTER TWO

2. Literature Review

This section is divided into three subsections to cover the three main
areas of the work, financial performance, rural and community banks
and investors perception. A profile of the rural bank under research is
discussed and to end chapter a summary of the chapter and
implication of the study is discussed.

2.1 Financial Statements and Performance

Financial statements are firm-issued accounting reports with past

performance information that a firm issues periodically (usually
quarterly and annually). Financial statements are important tools
through which investors, financial analysts and other interested
outside parties (such as creditors) obtain information about a
corporation. They are also useful for managers within the firm as a
source of information for corporate financial decision (Berk & DeMarzo,
2007, pg3). Companies normally produce four financial statements
that is balance sheet, the income statement, statement of cash flow
and the statement of shareholders’ equity to provide investors and
creditors with an overview of the firm’s financial performance. In most
countries, public companies are required by law to produce financial
statements. Private companies also prepare financial statements but
they usually do not have to disclose these reports to the public.

16
 2.1.1 Balance Sheet

The balance sheet lists the firm’s assets and liabilities, providing a
snapshot of the firms’ financial position at a given point in time. On
the balance sheet, which is a major component of the financial
statements, reside various items classified as assets, liabilities and
shareholder’s equity. Together, they comprise the composition of the
two characteristics of wealth – the use and source of capital – and are
the first accounting dimension. It is important to observe that from a
temporal perspective, data presented on the balance sheet are a
measurement at a given point it time. It reflects the financial status
quo of an enterprise, which we could also understand as the then
current summation of accounts that shape the value cycle (Vaassen,
2002, p.38). At the liability side, shareholders invested capital and
possibly, at later points, dividend was distributed back, reducing
residual interest or net equity. Meanwhile, management uses capital
to acquire semi-permanent assets as to enable the production of
goods or the delivery of services to customers. At the assets side, their
value is accounted for together with other probable future economic
benefits obtained or controlled by the enterprise because of past
transactions or events. All the time, accounts like debtors and
creditors (or their American counter parts: receivables and accounts
payable) increase or decrease following the dynamics’ of business,
similar trends we may observe with cash, the only “hard” monetary
measure of assets value at current “price”, and inventories. From a
management accounting perspective, we expect that a certain rate of
growth in income or assets be reflected in the magnitude and
composition of assets and liabilities as a whole, and other performance
measures (Walsh).

2.1.2 Income Statement

17
The income statement also called the profit and loss statement lists
the firms’ revenues and expenses over a period of time. The last item
of the income statement shows the firms’ net income, which is a
measure of its profitability during the period. The net income is also
referred to as the firms’ earnings (Berk & DeMarzo, 2007, pg.27).

The first two lines of the income statement list the revenues from
sales of products and the costs incurred to make and sell the products.
The third line is gross profit, the difference between the sales
revenues and the costs. The next group of items is operating
expenses. These are expenses from the ordinary course of running the
business that are not directly related to producing the goods or
services being sold. They include administrative expenses and
overhead, salaries, marketing costs and research and development
expenses. The third type of operating expense, depreciation and
amortization, is not an actual cash expense but represents an
estimate of the costs that arise from wear and tear or obsolescence of
the firm’s assets. The firms gross profit net of operating expenses is
called operating income. Other sources of income or expenses that
arise from activities that are not central part of a company’s business
are next included. For example cash flows from the firms’ financial
investments. After these adjustments for other sources of income or
expenses, the result is the firms’ earnings before interest and taxes
(EBIT). From the EBIT, interest paid on outstanding debt and taxes are
deducted to get net income earned by the firm for the period. Net
income is often reported on a per-share basis as the firm’s earnings
per share (EPS) which is computed by dividing net income by the total
number of shares outstanding.

The income statement links the balance sheets at the beginning and
the end of an accounting period. Thus, at the start of a new
accounting period, the balance sheet shows the opening financial

18
position. After an appropriate period, the income statement is
prepared to show the wealth generated over that period. A balance
sheet is then also prepared to reveal the new financial position at the
end of the period. This balance sheet will incorporate the changes in
wealth that have occurred since the pervious balance sheet was drawn
up (Atrill & Mclaney, 2008, pg. 72).

2.1.3 Cash Flow Statement

The income statement sets out the revenue and expenses, rather than
the cash receipts and cash payments, for the period. This means that
profit (or loss), which represents the difference between the revenue
and expenses for the period, may have little or no relation to the cash
generated for the period. The cash flow statement is a summary of the
cash receipts and payments over the period concerned. The statement
is basically an analysis of the business’s cash (cash equivalents)
movements for the period. The relationship between the three
statements is that the balance sheet reflects the combination of
assets (including cash) and claims (including the shareholders equity)
of the business at a particular point in time. The cash flow statement
and the income statement explain the changes over a period of two of
the items in the balance sheet. The cash flow statement explains the
changes to cash. The income statement explains changes to equity,
arising from trading. ( Atrill & Mclaney, 2008, pg 155,157, 159).

Standard cash flow statements have three parts. First, cash flows from
operating activities are the net inflow or outflow from trading
operations after tax and financing costs. It is equal to the sum of cash
receipts from trade receivables, and cash receipts from cash sales
where relevant, less the sums paid to buy inventories, to pay rent to
pay wages etc. From this are also deducted payments for interest on
the business’s borrowings, corporation tax and dividends paid. Next
item is the cash flows from investing activities which concerns cash

19
payments made to acquire additional non-current assets and with
cash receipts from the disposal of non-current assets. These non-
current assets will tend to be the usual items such as buildings and
machinery. They might also include loans made by the business or
shares in another company bought by the business. The net cash
flows from making new investments and/or disposing of existing ones
also appear here. This section also includes cash receipts arising from
financial investments (loans and equities) made outside the business.
These receipts are interest on loans made by the business and
dividends from shares in other companies that are owned by the
business. The last part of cash flow statements is the cash flows from
financing activities. This part of the statement is concerned with the
long-term financing of the business. Here we are considering
borrowings (other than very short-term) and finance from share
issues. This section also shows the net cash flows raising from and /or
paying back long-term finance (Artill & McLaney, 2008, pg 157, 159,
160, 161).

2.1.4 Financial Performance

In a study conducted by Collis and Jarvis (2006) on financial

information and the management of small private companies in the
U.K., the most useful sources of information are the periodic
management account (i.e. the balance sheet and income statement),
cash flow information and bank statements (of course bank statement
are another form of cash flow information but generated externally).
These sources of information are used by eight (80) per cent of
companies and this demonstrates the importance of controlling cash,
which previous research ( Bolton, 1971, Birly & Niktari, 1995, Jarvis et
al, 1996) suggest is critical to the success and survival of a small
business.

20
In the same research eight-seven (87) per cent of small companies’
prepared profit and loss accounts and seventy-eight (78) per cent,
balance sheet. These key financial statements allow management to
monitor profitability of the business as well as its net assets.
Confirming the usefulness of cash flow information, the analysis shows
that seventy-three (73) per cent use bank reconciliation statement
and more than fifty-five (55) percent use cash flow statements and
forecast. However, other competitive performance measures
perceived in literature such as ratio analysis, industry trends and inter-
firm comparison are not widely used. Collis and Jarvis (2002) then
states that this may indicate that small companies experience
problems in gaining access to appropriate benchmarks, but could also
be the results of competitors filing abbreviated accounts which
reduces the amount of information available for calculating ratio and
making comparism. In addition, as many small companies operate in
the service sector, they occupy niche markets and may be less
concerned with competition than those in other markets.

Melse (2004), reports that ratio analysis provides an insight into the
financial health of a firm by looking into it liquidity, solvability,
profitability, activity and capital and market structure. Jooste (2004)
investigates that many authors agree that cash flow information is a
better indicator of financial performance than traditional earnings.
Largay and Stickney (1980) and Lee (1982) show that profits were
increasing, W.T. Grant and Laker Airways had severe cash flow
problems prior to bankruptcy. Jooste (2004) further states that users
of financial statements around the world evaluate the financial
statements of companies to determine the liquidity, assets activity,
leverage, profitability and performance. Users of financial statements
use traditional balance sheet and income statements ratios for
performance evaluation. Therefore, along with traditional ratios,
operating cash flow is also important when evaluating a company’s

21
performance (Jooste, 2004). Various literature states that the primary
purpose of the cash flow statement is to assess a company’s liquidity,
solvency, viability and financial adaptability. According to Everingham
et al (2003) operating cash flow ratios are indicators of performance.
They determine the extent to which a company has generated
sufficient funds;

• To repay loans;

• To maintain operating capabilities;

• To pay dividend; and

• To make new investments without using external financing,

(Jooste, 2004).

Cash flow ratios can be used to answer questions on a company’s

performance since debt obligations are met with cash. Such an
analysis will result in adequate lines of credit, unrestricted cash
availability, debt maturity schedules with respect to financing
requirements and the willingness to issue common equity. It will allow
an analyst to examine a company’s financial health, and how the
company is managing its operating, investment and financing cash
flows (Palepu et al, 2000). A lack of cash flow data has caused
problems for investors and analysts in assessing a company’s
performance, liquidity, financial flexibility and operating capability
(Figlewicz and Zeller, 1991). Cash flow may be viewed as the lifeblood
of a company and the essence of its very existence (Rujoub et at,
1995). The cash flow statements offer measures to evaluate
performance. If cash flow information is useful but unused, the logical
conclusion is that analysts are not analysing available data properly
(Carslaw and Mills, 1991).

2.2 Rural and Community Banks

22
Rural and community banks (RCBs), offer loans and/or technical
assistance in business development to low-income community in
developing countries. Therefore, RCBs should be an effective
development agent and alleviate poverty (OECD, 1996). One of the
central issues of development economics that governments and policy
makers are focusing attention on is how to improve the socio-
economic well being of the people and thereby, reduce deprivation
and misery (Englama and Bamidele, 1997).

In Ghana, RCBs have been established to play a major role in

providing financial management support, investment profiling and
counselling to facilitate poverty alleviation in the rural districts or
communities they serve. The banks major target groups are
smallholder traders and farmers and they act as intermediary between
the government and cocoa producers by purchasing government
payment cheques from farmers. These components focus on
strengthening the operational effectiveness of the rural banks that
seed to promote women’s banking initiatives, promote growth to
reduce poverty and eliminate strict gender demarcation lines among
bank customers in Ghana (Owusu-Frimpong, 2008).

The origins of RCBs dates back to 1976 when the Bank of Ghana (BoG)
initiated a move to establish rural and community banks with the
expressed purpose of providing both commercial and developmental
banking activities to meet the needs of the rural areas. Primary, the
objectives of the rural banks are to:

• Extend and deepen rural financial intermediation to facilitate

the payments system and promote savings and investment
process;

23
 • Bring banking services to the doorstep of the rural population to
be able to monetise the rural economy and thereby, reduce the
size of money outside the banking system;

• Provide necessary institutional credit to the rural dwellers to

enable expansion of farming activities and other income
generating commercial ventures that would help to improve
their livelihood; and

• Act as instruments of economic development through provision

of commercial loans to the local councils and town development
committees that must support development of community
projects like building of markets, schools and health centres.
(Owusu-Ansah, 1999)

About sixty (60) per cent of Ghana’s population of twenty (20) million
are rural dwellers whose livelihood is dependent on agriculture and
often, are the worst affected by poverty. The financial sector structural
adjustment Programme has largely contributed to the revival of the
sector by strengthening the banks, improving the regulatory
framework and restructuring financially distressed banks through the
diffusion of new capital and management expertise. The rapid
transformation of Ghana’s banking industry has led to the
strengthening of rural banking institutions by developing, organising
and training communities to support capacity building in the rural
areas. Presently the financial system in Ghana is dominated by the
banking sector, in which all the banks are majoring in the retail
banking business, dealing mostly in short-term money instruments. In
addition to the high street banks, there are presently one hundred and
fifteen (115) rural banks with five hundred (500) branch network
(agencies) designed to serve farmers. The RCBs minimal market share
of 5.6 per cent might be due to staffing problems that had led to low

24
financial resource mobilisation, culminating in inadequate loanable
funds (Owusu-Frimpong, 2008).

The RCBs offer both financial and non-financial service to the

communities they serve. The financial services include lending,
savings and other banking services such as cheque clearing for cocoa
farmers. Non-financial services include supply of agricultural inputs to
farmers. The rural banks grants loans that are payable within 4 -12
months, and accept flexible payments on weekly, biweekly and
monthly bases. In some loan applications, the banks often require the
beneficiaries to be already involved in some economic activity and to
deposit about twenty-five (25) per cent of the intended amount before
the loan is approved. ( Owusu-Frimpong, 2008).

2.3 Evaluating the Financial Performance of RCBs

Aboagye and Otieku (2009), in their study measures financial

performance based on the function that RCBs perform as banks. They
claim, RCBs mobilize funds and make loans, which they expect to be
repaid with interest and on time. To continue in business, RCBs must
make enough money to cover their operational and financing costs,
and retain earnings to finance future operations so that the RCBs can
grow. Thus, they discuss financial performance along several
dimensions, namely

 Size of RCBs. As the real value of total assets increases over

time the more business it is doing or in position to do.

 Deposits mobilization. Savings are a stable source of funds for

financing loan portfolios and helping the economic growth of
local communities and of the economy as whole. They compute
the real value of deposits and deposits as proportions of total
assets.

25
  Loan portfolio. Granting of loans is a major function of RCBs.
But such loans must be paid back if the institutions are to
continue to be in business. Thus, an RCB whose loan portfolio
is of acceptable quality and growing must be doing good
business. They compute the real value of loans, loan portfolio
as a proportion of total assets, and quality of the loan portfolio
using the ratio of provision for loan losses and doubtful
accounts to gross loans.

 Profitability. RCBs are in business to make profits. All things

equal, higher profitability is preferred. They measure annual
profit/average total asset (return on assets).

 Expenses. RCBs are expected to encourage savings among

their clientele. It would help if they paid high interest on
savings. They compute the ratio of interest paid on savings to
savings mobilized (interest expense ratio). A higher value of
this ratio is preferred. A RCBs expenses may also be analyzed
by focusing on its efficiency (control over cost). They
investigated the ratio of RCBs non-interest expenses to the
sum of net interest income and all other income (the operating
expense ratio). For this ratio, the lower the better.

 Risk is uncertainty associated with the expected value of a

variable. Given historical data, one computes the standard
deviation of the historical means. Generally, lower volatility is
preferred.

2.4 Investors Perception

There are three objectives of financial reporting as described by the

Financial Accounting Standards Board in its Statement of Financial

26
Accounting Concepts No. 1 (FASB, 1978). The three objectives, in
abbreviated form, are:

1. Financial reporting should provide information that is useful to

present and potential investors and creditors and other users in
making rational investment, credit, and similar decisions.

2. Financial reporting should provide information to help present

and potential investors and creditors and other user in assessing
the amounts, timing, and uncertainty of prospective cash
receipts.

3. Financial reporting should provide information about the

economic resources of an enterprise, the claims to those
resources, and the effects of transaction, events, and
circumstances that change its resources and claims to those
resources.

These objectives are derived from the informational needs of external

users. External users, however, lack the authority to prescribe what
information they want and what format such desired information must
take (SFAC No. 1, 1978, para. 28). This lack of user participation in the
standard-setting process was noted by the General Accounting Office
(GAO) as late as September 1996 (GAO, AIMD-96-98). Therefore, users
must rely on the information communicated by management.
Currently financial statement information provided by management
consists of historical financial information. The second objective of
financial reporting (SFAC No. 1, 1978, paragraph 37), however,
indicates that financial reporting should provide information that will
be beneficial to users in determining the timing, amounts, and
uncertainty of prospective cash receipts. This emphasis on future cash
flows has led some to conclude that financial forecasts by

27
management would be desirable. This conclusion was recently
supported by the GAO (GAO, AIMD-96-98).

The FASB acknowledges in its objectives that the informational needs

of users should be considered in design of financial reporting systems.
The FASB also recognizes that there are many different types of users
of financial reports and that currently designed systems of reporting
must attempt to satisfy all. Johnson (1992), however, questions if
information needs of users do not differ by user class. Hendriksen
(1982) asks how we can be sure that current disclosure rules meet the
informational needs of users. Abdel-Khalik (1971) questions if the
informational needs of users are not dynamic and therefore subjects
to change over time. Recognizing the validity of these questions, as
well as many others, the Jenkins committee in 1994 (AICPA)
recommended numerous proposals to modify the current financial
reporting model. A number of research studies (Belkaoui, 1979; Kahl
and Belkaoui, 1981; Mattar, 1988; Wallace, 1988a,b; Gniewosz, 1990;
Epstein and Pava, 1993; Streuly, 1994; Abdulla, 1995; Bence et al.,
1995; Anderson and Epstein, 1995; Abu-Nassar and Rutherford, 1996;
Bartlett and Chandler, 1997; Alijarde, 1997; Naser and Nuseibeh,
2003; Naser et al., 2003) have investigated the usefulness and
understanding of corporate information to the users and found annual
report to be the primary source of information. Lee and Terrdie (1975)
and Wilton and Tabb (1978) found that investors considered the
income statement to the most important section in the annual report.
Day (1986) and Yap (1997) reported that cash flow statements have
become important sources of information for user. Epstein and Pava
(1993) reported that US investors considered the income statement
and the balance sheet more useful than the cash flow statement.
Anderson (1981) found that the users considered the income
statement, balance sheet and notes to the accounts as the most
important sections for making investment decisions. Sterling (1972)

28
indicated that the objective of financial reporting is to provide useful
information to the users. Zairi and Letza (1994) concluded that the
purpose of the annual report is to convey information, which is useful
to those who have an active interest in the organisations, mainly
shareholders. Buzby (1974) demonstrated that the annual report could
be adequate and readable if the information contained in it is
presented in an understandable manner and grouped and organised
appropriately. Similarly, Wolk et al. (1992) contended that even if
users of annual reports are assumed to be knowledgeable, the
information itself could have different degrees of comprehensibility.

The annual report contains various sections that provide user groups
with information to facilitate their decisions. To ensure that the
corporate message is communicated to various users of corporate
information, the company makes every effort to ensure a correct
selection of information (Neimark, 1992)

Studies reported for developing countries (Solas and Ibrahim, 1992 for
Jordan and Kuwait; Wallace, 1988a, b for Nigeria; Abu-Nassar and
Rutherford, 1996 for Jordan; Chow and Wong-Boren, 1987 for Mexico;
Hatif and Al-Zubaidi, 2000 for Iraq; and Naser and Nuseibeh, 2003 for
Saudi Arabia) gave mixed results. Similarities and differences were
observed between developed and developing countries. Users in
developing countries do not perceive themselves as suffering from
difficulties in understanding the information in the annual reports.

Daniels and Daniels (1991) concluded that the information contained

in financial statements is necessary and useful but not sufficient to
evaluate the financial condition of a company. Though user groups of
annual reports in developing countries feel that there has been some
improvement in reporting in recent years, they wish to receive more
information than is currently provided (Abu-Nassar and Rutherfordm
1996; Hatif and Al-Zubaidi, 2000; Naser and Nuseibeh, 2003). Dye and

29
Bowsher (1987) found that most users want an annual report to
contain other information which increases their understanding. Hay
and Antonio (1990) found that users of annual reports wanted highly
detailed disclosures. Anderson (1981) found that users desired
information on future prospects, company products, divisional
performance, the provision of management audit reports, and
publication of quarterly reports. Benston (1976) reported that financial
press and newspapers reports were considered to be the most
important source of information other than the annual report.

The rationale for the identification of users and uses of corporate

financial information is based on “decision-usefulness” theory
(Staubus, 1961, 1977). The theory, attempts to describe accounting as
a process of providing the relevant information to the relevant
decision makers (Gray et al., 1996). The development of decision-
usefulness theory can be traced to the middle of the twentieth century
when financial statements were criticized as of being of little use to
the user in making economic decisions (Edwards, 1989). The
usefulness of financial information was, therefore, estimated by how it
aids the users in making rational decisions and a user perspective of
the objective of financial reporting also make it easier to choose
accounting treatments. Despite some criticism (Puxty and Laughlin,
1983; Page, 1990) this has become fundamental to information
disclosure and its theoretical and practical implication play a
significant role in the history of financial accounting and standard
setting in developed countries (Staubus, 2000; Sharma and Iselin,
2003).

Decision usefulness theory was first adopted by the publication of the

Trueblood Report (AICPA, 1973) in the USA with the view that the
objective of financial statements is to provide information on which to

30
base economic decisions. The report clearly indicates the shift from
the stewardship function to a decision usefulness perspective.

In the UK, the Corporate Report (ASSC, 1975) was an early attempt to
discuss the decision usefulness perspective of financial reports. The
report identifies seven user groups of corporate financial reports,
including the equity investors, loan creditors, employees, analyst-
advisors, business contacts, the government and the public. The
report has influenced many later studies in the field. However, the
report was criticized as it was exclusive to large companies and the
uses of each user group were not explicitly discussed.

From the early 1980s, there has been increasing interest in the users’
needs and uses of financial information of smaller firms (Stanga and
Tiller, 1983; Page, 1984; Berry et al., 1987; Keasey and Watson, 1988;
Marriott and Marriott, 2000; Collis and Jarvis, 2002) and most of these
studies are located in developed countries. The key rationale for these
studies is the distinctive organizational and ownership structure of
SMEs and the environment in which they operate. Unlike large firms,
smaller companies have somewhat different objectives, motivations
and actions (Storey, 1994; Jarvis et al., 2000) and the separation of
ownership and control is not common (Carsberg et al., 1985; Marriott
and Marriott, 2000). As a consequence, there is little delegation of
control and the agency theory which is based on the relationship
between the external shareholders (the principal) and the
management (the agent) may not be considered appropriate. These
arguments lead to a fundamental issue considered as highly relevant
to small company financial reporting: “who should report what, to
whom, and why?” (Perks, 1993: cited in John and Healeas, 2000, p.
17).

It is interesting to note that since there is no statutory requirement for

public disclosure for small company financial information, the number

31
of users of small company financial reports is perceived to be limited
(Chittenden et al., 1990). However, it is surprising that the conclusions
on the main users and their uses of small company financial
statements are quite diverse. The issue is likely to cause
disagreements as to what information SMEs should provide to their
users. Some studies (Page, 1984; Barker and Noonan, 1996; Collis and
Javis, 2000) argue that the main use of accounts is for management
purposes by the directors of the companies. Page (1984) examines the
use of the reports of small independent companies and concluded that
tax authorities are also a main user of small company information.
However, he also argues that: “employees have personal contact with
the proprietors and the role of the analyst/advisor group is very
restricted where there is no public market for the company’s
securities” (p. 272). Despite research identifying owner-directors and
taxation authorities as the main users of the financial statements of
small companies, accounting standard setting bodies, such as the
IASB, focus on general purpose financial statements and exclude the
specific needs of these two key users. Instead the needs of the users
of the financial statements of large companies dominate the standard
setting debate, resulting in a rather confusing situation for small firms.
Some studies (Carsberg et at., 1985; Deakins and Hussain, 1994)
argue that financial reports play a critical role in lending decisions of
banks, which are the main source of external finance of small
companies. Jarvis (1996) noted that venture capitalists, equity
investors and employees are also discussed frequently in the literature
as main users of small company accounts. However, he also suggests
that business contacts, such as the trade creditors should be
considered as a main user group of the companies. The diversity of
the above findings means that to some extent, fundamental questions
about the users and their uses of small company financial information
remains unanswered.

32
Although the literature on a user perspective of financial reports has
been established in developed countries, very little seems to be known
about this issue in transitional countries. With the development of a
separate financial reporting standards for smaller entities in the UK
(ASB, 1997) and in the international arena (IASB, 2004), it is necessary
to address this issue in the transitional economy of Ghana.
Recognizing that financial reporting practices in transitional economies
have some unique features compared to mature market economies
(Bailey, 1995; Scheela and Nguyen, 2004), research in this area is
likely to contribute to the economic development of the country and
fill the existing gap identified in the literature.

2.5 Organizational Profile of Case Study (Atwima Mpomua

Rural Bank)

Atwima Mpomua Rural Bank limited was incorporated under the

companies code of 1963 (Act 339) on the 7th November, 1984. As in
the case of most business entities, the teething years witness some
problems. However, through well focus direction and planning, couples
with the well motivation staff and enviable customers, the bank can
now boast of six outlets located at Abuakwa, Mankranso, Bantama,
Suame Akropong and South Sunders with the head office at Toase, all
in the Ashanti Region of Ghana, from where the various departments
oversees the activities of the bank through the front liners at the
agencies. Presently, the bank is managed by eight able-bodies
directors and staff population of one hundred and twenty-five (125).
The bank has fully computerized it operations and is in the process of
networking of its agencies. The introduction of modern equipment and
technology into the banks activities have propelled and engineered in
all aspects in operations.

33
2.5.1 Vision

The bank’s short and medium term goals will be geared towards
deposits mobilization, customer care, growth and human resource
development, profitability, efficiency and increases in community
development assistance, to enable them attain their mission which
they have termed ‘journey to the top’. With motivation and training
packages for their staff through the establishment of staff
development policy, the networking of all agencies via the side area
network to improve efficiency, effectiveness and customer’s turn-out
time is expected to reduce from fifteen to ten (15 – 10) minutes. It is
also anticipated that payment of dividends will be tied to earning on a
share. With a well resourced internal audit department already in
place to ensure the safeguarding of the bank’s assets, monitoring of
proper accounts keeping and documentation of loans and advances
strict adherence to regulatory controls and development agenda to
support sanitation, education, health and environment issues will also
be well sustained during the period.

2.5.2 Mission

The mission of the bank is to provide affordable, customized and

quality financial products as services.

2.6 Summary of Chapter and Implication of study

Conclusively, this chapter reviews some scholar’s views on rural and

community banks in terms of measuring performance and the
importance of the various financial statements. The chapter discussed
the importance of the various financial statements. And deal with how
they are related to performance. Then goes on to discuss rural and

34
community banks and how their performance have been determined
from literature. Investor’s perception about using financial statements
from both developed and developing countries are then discussed and
then the organisational profile of the rural bank under investigation is
discussed.

In summary, the results from previous studies show that users of

financial statements generally regarded annual financial reports as
important sources of information, though each section was not
regarded as being of equal significance. Income statement data were
regarded as a primary information source with liquidity data being
largely ignored, or being regarded as “secondary material” when
analyzing corporate results. The results also reveal a necessity to
introduce some changes to the annual reporting that allow the
information to be more understandable and adequate for potential
users. The perception of various user groups of corporate annual
reports has been investigated in a number of studies. The vast
majority of these studies however covered developed economies and
the few on developing countries has been on the Middle East countries
like Kuwait, Iran, Jordan and Vietnam. There are little or no studies on
sub-Saharan African countries like Ghana. Majority of researcher on
investor perception assumes that investors have knowledge about
financial reporting or dealt with user groups who are known users of
financial reports. In sub-Saharan Africa, where illiteracy is very high,
the illiterate investor may base their investment decisions on entirely
different information then the literate investor in developing countries.
Hence, the main purpose of this study is to explore the perception of
semi and illiterate user group of financial statements in Ghana.

35
 CHAPTER THREE

3.0 Methodology

3.1 Introduction

This chapter presents an outline of the methods and techniques for

the design of instruments and the collection of data for the research.
This includes the research design, the population, sample, research
instruments, data collection procedures and the method of data
analysis.

3.2 Research Design

36
This study adopts a pure qualitative research method. The rationale
for the choice of a qualitative approach stems from the nature and
context of the study. Qualitative research is used when researchers
seek to understand the context of the research matter in terms of how
and why it occurs (Cassell and Symon, 1994) and when the research
phenomena is emergent rather than prefigured (Creswell, 2003).
These features are present in this study: it is an exploratory study
providing an in-depth investigation to supply evidence of the users’
perceptions and it also attempts to identify and conceptualize the
relationship between the emerging themes grounded in the data.
Other reasons for the choice of method are the unreliability of
economic data and the problems in administering surveys in transition
economies (Hopper and Hoque, 2004) which rendered alternative
quantitative methods impractical. The qualitative research design is in
the form of inductive naturalistic inquiry and is part of the
conceptualizing process, namely conceptual framing (Llewelyn, 2003)
or grounded theory (Glaser and Strauss, 1967; Strauss and Corbin,
1998).

3.3 Sample and Sample Technique

A total of one hundred and eighty (180) customers were selected

using the convenient sampling or non probability sampling for the
study. The reason is that, looking at the nature of work at the bank,
the researcher interview customers who were willing to answer the
questionnaire since some of the customers were feeling reluctant to
compromise with the researcher. The researcher therefore, went
round all the six branches/agencies to ascertain the needed
information.

3.4 Research Instrument

37
The research instrument designed for collection of the data for the
study was a questionnaire. This was designed by the researchers with
assistance from their supervisor. Some questions were designed on a
five point Likert scale of five (5) for totally agree to one (1) for totally
disagree. Other questions had a “Yes” or “No” answer, and others
were open ended for respondent to express personal views. This data
collection instrument was used because it is the best through which
accurate information could be elicited in a study of this kind where the
variable under investigation requires statement of facts and personal
opinions. Also in rural environment where both telecommunication and
postal systems are unreliable, this method was considered to be the
most effective in generating a high response and participation rates
and opportunity for feedback (Zikmund, 1994). Respondents had to
tick the appropriate column or select from the alternative answers and
also provide significant information through the few open ended
questions. The questionnaire for customers had nineteen (19) items
and eighteen (18) items for the supervising manager and the staff.

The questionnaires start with general questions regarding issues

relevant to the participants. The purpose of these questions is to allow
the participants to freely answer the question, raising their own ideas
and reduce the risk of response bias (Dicken, 1987; cited in Marriott
and Marriott, 1999; Bedard and Gendron, 2004). They were also
intended to gather important informations like the level of education
and profession of respondent (a very useful piece of information
peculiar to this study). Follow up question were then used to guide the
participants through major relevant themes arising from literature.
These themes are listed below as:

• General knowledge of financial statement

• Access to financial statements

38
 • Ability to analyze and interpret financial statements

• Knowledge of financial statement influencing investment

• Knowledge of financial statement relevant to investors.

The above themes are intended to measure the level of investors

knowledge of financial reports.

3.5 Data Collection Procedure

According to Yin (2003) the field of qualitative research has six forms
of sources of evidence for collection data. The six forms are
documentation, archival records, interviews, direct observation,
participant observation and physical artefacts’. Documentation is
important for almost every case study. Documents can be letters,
memoranda, agendas, newspapers, and articles in mass media or
community news letters. In case studies, documentation is used to
confirm argument evidence from other sources (Yin, 2003). General
information about the bank has been found at their web pages and in
printed materials such as annual reports. Interviews are a narrative
method of collecting data. The interview consists of two or more
participants that engage in a conversation that constitutes a learning
process (Blaxter et al, 2001). The purpose of the interview was to
show a clear picture of the current situation of the bank. To better
grasp the research purpose, interviews provides a more in-depth
insight into the research area. By interviewing the research is limited
to fewer informants with rich information sharing (Denscombe, 2003).
According to Yin (2003), the interview is the most important source
when it comes to obtaining information within a case study. The
questionnaires were personally distributed by the researchers. The
researcher wrote a permission letter to the Head office of Atwima

39
Mpomua Rural Bank and all of its branches so as to be permitted to be
given the necessary information for the study.

Upon arrival at the bank and its branches, the researchers first called
on the deputy manager who in turn introduced the researchers to the
entire staff and solicited their co-operation. The researcher then
administered the questionnaire to those who were willing to complete
them and waited for the respondents to complete them. The
researcher also went to some schools around the location of the banks
for the workers who have their accounts with the bank to respond to
the questionnaires. By this procedure the researchers were able to
retrieve all the one hundred and eighty (180) questionnaires. This data
collection procedure enabled the researchers to have personal
interaction with the respondents and to explain the significance of the
study to them and also some of the issues on which their
understanding were clouded. Also, the informal interactions offered
vital information which gave the researcher better insight into the
prevailing conditions. The researcher again solicited information from
the Deputy Supervising manager by way of interviews and also
answering some information guide questions which was of great help.

3.6 Problems Encountered During Data Collection

The researcher’s main problems encountered during the

administration of the questionnaires were due to some customers
showing unpreparedness to accept the questionnaires in spite of the
introduction from the bank official. Some did not extend their
maximum co-operation. Also, some of the teachers were not ready to
respond to the questionnaires on time despite the explanation of the
significance of the study.

3.7 Method of Data Analysis

40
A case study should start with a general analytical strategy that
provides the basis for what to analyze and why. Analyzing qualitative
data is about examining, categorizing, tabulating and recommending
the empirical evidence to address the initial propositions of the study.
The purpose of analyzing qualitative material is to make the material
more clear and distinct, making sure not to lose the extent of
information that the material includes (Yin, 2003).

There are different general analytical methods, relying on theoretical

proposition, thinking about rival explanation or developing a case
description. Yin (2003) says that without a general analytic strategy, a
case study analysis will be difficult to carry out. According to him the
first strategy, relying on theoretical proposition is the most preferred.
It means that you are following the theoretical propositions that lead
to your case study. The original objectives design of the case study
presumably was based on such propositions, which in return reflected
a set of research questions, review of the literature and new
hypotheses or propositions. The responses from the research were
tallied and tabulated according to the items on the various sections.
The results obtained were recorded and put in percentages using
tables and charts provided in each section. Analyses are presented in
a descriptive statistical format using the mean score. Discursion and
interpretations were then made.

41
 CHAPTER FOUR

4.0 Research Findings

4.1 Introduction

This part of the study is about the analysis and discussion of data
collected during the investigation from investors and management of
the rural bank under study. The study focused on the knowledge of
financial statement of the various types of investors in the bank and
how management treated them. The order below was followed for the
analysis of the data

42
4.2 Investors perception of bank performance

Investors who took part in the survey were asked to give information
about their age, gender, level of education and length of time
investing in the bank. Table 4.1 and Figure 4.1 below give descriptive
statistics for the age ranges of the respondents and the corresponding
numbers and percentages. In all, one hundred and eighty responded
to the questionnaire.

Age Frequency Percentage (%)

18-24 42 23

25-30 51 28

31-34 21 12

35-40 6 3

41-55 45 25

56+ 15 8

Total 180 100

Table 4.1: Age Range of Respondents

43
 Figure 4.1: Age of Respondents

Table 4.2 and Figure4.2 gives descriptive statistic for the sex of the
respondents. Sixty-two percent of the respondents were males and the
rest females.

Number Percentage (%)

Male 111 62

Female 69 38

Total 180 100

Table 4.2: Sex of Respondents

44
 Figure 4.2: Sex of Respondents

Table 4.3 and Figure 4.3 gives their level of education of respondents which show that
fifty-two percent had tertiary eduction, twenty-seven percent had seconday eduaction,
thirteen percent had middle school leaving certificate or junior high school and eight
percent had no formal education. This results surprises the researchers and does not
represent the views put forward in a study be Owusu-Frimpong (2008) which states that
rural banks major target groups are smallholder traders and farmers
and the banks act as intermediary between the government and cocoa
producers by purchasing government payment cheques from farmers,
who are expected to be illitrate or semi-illitrates investors of the bank since the bank is
located in a rural area. It may be due to the fact that the area happens to be a district
capital were most of the local governemt workers reside and also most of the teachers
within the district are located in that area and they happen to be the major investors of
the bank. This could also be due to the fact that most illitrates find it difficult to
understand the use of a study like this, hence do not find it necessary to get involved.
They also may be shying away from the researchers because of the dfficulty of reading
and writing. This is evident by the fact that alot of potencial respondents refused to fill
the questionnaires when approched by the researchers.

45
 Level of Education Number Percent (%)

Tertiary 93 52

Secondary 48 27

MCLS/JHS 24 13

None 15 8

Total 180 100

Table4.3: Level of Education

Figure 4.3: Level of Education

Fifty-three percent of respondent said they have been investing in the

bank for five years or less, whiles forty-seven said they have been
investing in the bank for more than five years. Table 4.4 and figure 4.4
gives statistical description of years of investing.

46
Years of Investing Number Percent (%)

5 years or less 96 53

More than 5 years 84 47

Total 180 100

Figure 4.4: Years of Investing

Figure 4.4: Years of Investing

Respondents also answered question on what influrnce thier decision to invest in the
bank and fifteen percent said performance of the bank was thier reason for investing in
the bank. Eighty-two percent said service delivery influrence their decision to invest in
the bank and three percent said physical structure of the bank influence their decision.
Table 4.5 and figure 4.5 gives further details statistical. This result is contrary to the
perception of the research that since the majority of the repondents indicated that they
have tertiary education and as such they would consider the performance of the bank, it

47
turns out that more customers had interest in the service delivery rather than performance
and physical structure.

Number Percent (%)

Performance 27 15

Service Delivery 147 82

Physical Structure 6 3

Total 180 100

Table 4.5: Reason for Investing in Bank

Figure 4.5: Reason for Investing in Bank

Respondents were also asked to state the kind of investment they

have in the bank. Table 4.6 and Figure 4.6 give statistical description
of the types of investment of investors. Thirty-five percent ( 35%) had
only saving accounts, forty-seven percent ( 47%) had only current
account, one percent ( 1%) had fixed deposit, fifteen percent ( 15%)
had savings and current accounts and two percent ( 2%) kept savings,
current and fixed deposit accounts.

48
Type of Investment Number Percent (%)

Savings 63 35

Current 84 47

Fixed Deposit 2 1

Savings and Current 27 15

Savings, Current and

Fixed Deposit 4 2

Total 180 100

Table 4.6: Type of Investment

Figure 4.6: Type of Investment

Respondents then answered the question if they faced problems

when making investment in the bank where a score of 1 was

49
 given for totally disagree and 5 for totally agree. The mean
score was 2.6 which meant, with an average score of 3,
respondents did not have problems when investing in the bank.
Figure 4.7 show the statistical description. This result is
consistent with Neimark’s (1992) studies where companies
make every effort to ensure that the corporate message is
communicated to various users of corporate information with a
correct selection of information to facilitate their decisions. It
also agrees with study by Wolk et al. (1992). They contended
that users of annual reports have different degrees of
comprehensibility even if they are assumed to be
knowledgeable. Hence for annual reports to be useful to users,
they must comprehend it.

Figure 4.7: Facing problems with bank

Sixty-eight percent of respondent said they did have knowledge of

financial statement but forty-three percent of customers said they did

50
not have access to financial statements. The annual report contains
various sections that provide user groups with information to facilitate
their decisions yet only forty-three percent of respondents had access
to financial statement. This result confirms some studies (Page, 1984;
Barker and Noonan, 1996; Collis and Javis, 2000) which argue that the
main use of accounts is for management purposes by the directors of
companies, meaning managers don’t see the need to make financial
information available to investors. It is also consistent with Chittenden
et al., (1990) whose studies interestingly noted that since there was
no statutory requirement for public disclosure of small company
financial information, the number of users of their financial reports is
perceived to be limited. Figures 4.8 and 4.9 give their statistical
description. It’s also consistent with Hay and Antonio’s (1990) studies,
where users of annual reports wanted highly detailed disclosures.
Anderson’s (1981) study is consistent with this result when his study
found users desiring more information about companies’ performance.

51
 Figure 4.8: Knowledge of Financial Statement

Figure 4.9: Access to Financial Statement

Respondent’s answers to their ability to analyse and interpret financial

statement gave an average score of 3.1 on the likert scale of one for
totally disagree and five for totally agree. This meant that on the
average investor in the bank could analyse and interpret financial
statements. This results supported various studies on financial
reporting in developing countries by Solas and Ibrahim, 1992 for
Jordan and Kuwait, Wallace, 1988a, b for Nigeria; Abu-Nassar and
Rutherford, 1996 for Jordan; Chow and Wong-Boren, 1987 for Mexico;
Hatif and Al-Zubaidi, 2000 for Iraq; and Naser and Nuseibeh, 2003 for
Saudi-Arabia which found that users in developing countries do not
perceive themselves as suffering from difficulties in understanding the
information in the annual reports. Figure 4.10 gives a graphical
representation of the results.

52
 Figure 4.10: Analyse and Interpret financial statement

Respondents answer to if their knowledge of financial statement can

influence their transaction with the bank gave a mean value of 3.9 on
the likert scale were one score for totally disagree and five for totally
agree. This could imply that investors wish they had more access to
the financial statements of the bank. This result supports studies by
Abu-Nassar and Rutherford, 1996; Hatif and Al-Zubaidi, 2000; Naser
and Nuseibeh, 2003 which concluded that though user groups of
annual reports in developing countries feel that there has been some
improvement in reporting in recent years but they wish to receive
more information than is currently provided. It is also in line with
Anderson’s (1981) studies which found that users considerer financial
information important for making investment decisions. It however
contradicts studies by Javis (1996) and Page (1984) who name venture
capitalist, equity investors’ employees and tax authorities as the only
users of small company information. Figure 4.11 gives a graphical
representation.

53
 Figure 4.11: Influence of Financial Statements

Respondents answer to if knowledge of financial statements of the

bank was relevant gave a high mean score of 4.1 on the Likert scale
implying that customers felt they needed to know how the bank was
performing so as to invest in the bank. This result support a number of
studies( Belkaoui, 1979; Kahl and Belkaoui, 1981; Mattar, 1988;
Wallace, 1988a,b; Gniewosz, 1990; Epstein and Pava, 1993; Streuly,
1994; Abdulla, 1995; Bence et al., 1995; Anderson and Epstein, 1995;
Abu-Nassar and Rutherford, 1996; Bartlett and Chandler, 1997;
Alijarde, 1997; Naser and Nuseibeh, 2003; Naser et al., 2003) which
have investigated the usefulness and understanding of corporate
information to the users and found annual report to be the primary
source of information. Other studies by Lee and Terrdie (1995), Wilton

54
and Tabb (1978), Day (1986), Yap (1997), Epstein and Pava (1993)
and Anderson (1981) which found various forms of financial statement
important to users also support this results. The result is also in line
with Zairi and Letza‘s (1994) study which concluded that the purpose
of the annual report is to convey information, which is useful to those
who have an active interest in the organisation, mainly shareholders.
It confirms studies by Daniels and Daniels (1991). Thiers concluded
that the information contained in financial statements is necessary
and useful. Sterling (1972) agrees with this result when he indicated
that the objective of financial reporting is to provide useful information
to the users.

Ten percent of respondent stated that the bank still uses manual
operating procedures. This result is supporting reports in the daily
graphic (Sept, 2010) which suggests the need to introduce modern
banking technology systems in the RCBs to make them more
competitive and financially self sustaining. Figure 4.12 show statistical
description of this result.

Figure 4.12: Manual Operating Procedures

55
4.3 Result of Interview with Management

The interview was conducted with the general manager who

presented us with the view of management of the rural bank.

He claimed the bank prepares financial statement monthly and

annually. He stated that the financial statements of the bank are
interpreted and that it helps management to do intra and inter-bank
comparism. This result is in contrast to a study that competitive
performance measures such as industry trends and inter-firm
comparism are not widely used in small companies (Jooste, 2004).

He stated that he agrees financial statements are the best tool for
evaluating the banks performance. These results are consistent with
studies conducted by Collis and Javis (2006) on financial information
and the management of small private companies in the U.K. were
most of the respondents stated that the most useful sources of
information are the various financial statements.

He stated also that the banks financial performance are calculated

using all the major financial statements. This result is consistent with
studies by Everingham et al (2003), Jooste (2003) that reveled the
importance of the various financial statements to the operational
health of a company.

The interview revealed that the bank assesses it performance using

profitability and liquidity ratio. Profitability and liquidity are calculated
using cash flow ratio making this results consistent with Jooste (2004),
Palepu et al (2000), Figlewicz and Zeller (1991) and various other
studies which supported the using of cash flow ratio to determine the
financial health of a company.

He also stated that financial statements do not actually serve as the

best tool for investors in evaluating a company’s performance. This

56
result agrees with Lee (1982) whose study on W.T. Grant and Laker
Airways showed that they had profits increasing on their financial
statements but had severe cash flow problems prior to bankruptcy.

The manager agreed that investors should have knowledge of financial

statements and that it should be available to investors but could not
decide if investors readily understood financial statements.

CHAPTER FIVE

5.1 Conclusion

The purpose of this thesis has been to investigate the knowledge and
understanding of financial statement of investors in a rural bank in
Ghana who are semi-illiterates and illiterates. Secondly, to investigate
how management perceive their investors understanding of financial
statement. Data gathered and observations from the analysis lead to
the following conclusion.

 The investors of the rural bank are mainly educated persons

with tertiary education, who consider service delivery of prior
importance to them.

 Investors have knowledge of financial statements. They could

also analysis and interpret financial statements, which they

57
 consider is very important for them in order to make
investments decisions in the bank. Having access to financial
statements of the bank is equally important to investors so as to
know how well the bank was performing.

 Management of the bank consider financial statement as the

best tool for evaluating performance and their performance
determined by evaluating their profitability and liquidity using
the major financial statements.

 Management believe that their investors should have knowledge

of financial statements though management believe that their
investors cannot rely only on financial statements to evaluate
the performance of a company. Management had no idea if their
investors understand and can analysis financial statement.

5.2 Recommendation

The findings from the research agrees that investors of the bank are
literates and know how to analyse and interpret financial statement
and hence management of the bank should make financial statements
readily available to them and it will likely increase their willingness to
invest more in the bank.

5.3 Proposal for further Research

An area for further research is to sample from several other rural

banks located across the nation and the observation compared to
what this study has gathered.

58
References:
• Atrill P., McLaney E., Accounting and Finance for non-specialists,

• Alattar J. M., Al-Khater K. (2007), An Empirical Investigation of

Users Views on Corporate Annual Report in Qatar, International
Journal of Commerce and Management, Vol. 17, No. 4, pg. 312 –
325

• Collis J., Jarvis R. (2002), Financial Information and the

Management of Small Private Companies, Journal of Small
Business and Enterprise Development, Vol. 9, No. 2, pp:100 -110

59
• Dang, D. S., Marriott, N., & Marriott, P. (2006), Users perceptions
and uses of Financial reports of small and medium companies
(SMCs) in transitional economies: Qualitative evidence from
Vietnam, Qualitative Research in Accounting and Management,
3(3), pg.

• Daily Graphic, Lower Pra Rural Bank Lauded, September 22,

2010, pg. 51

• Daily Graphic, Consider Merging with Strong Banks – BoG,

September 7, 2010, pg. 29

• Daily Graphic, Take Mergers and Acquisitions Seriously – ARB

Apex Bank advises rural banks, September 28, 2010, pg. 29

• Hartungi R. (2007), Understanding the Success Factor of Micro-

Finance Institution in a developing Country, International Journal
of Social Economics, Vol. 34, No. 6, pp:388 -401

• Hyung – Il J. (2008), WACC as the Touchstone performance

Indicator; The use of Financial – ratios as performance Indicators
– from operations to capital Investments, International Journal of
Contemporary Hospitality Management, Vol. 20, No. 6, pp:700
-710

• Jooste L. (2006), Cash Flow ratios as a yardstick for evaluating

financial performance in African businesses, Managerial Finance,
Vol. 32, No. 7, pp:569 -576

• Melse E. (2004), What color is your balance sheet? The

relevance and explanatory power of wealth accounts, Emerald
Group Publishing Limited, Vol. 12, No. 4,pp: 17 -32

• Naser K., Nuseibeh R., Al-Hussaini A. (2003), Users’ Perceptions

of Various aspects of Kuwaiti Corporate Reporting, Managerial
Auditing Journal, Vol. 18, No. 6/7, pg. 599 - 617

• Owusu-Frimpong N.(1999), Patronage behaviour of Ghanaian

bank Customers, Journal of Bank and Marketing, Vol.17, No.7,
pg. 335 - 341

• Satta T. A., Performance Evaluation of three small firms’

Financing Schemes in Tanzania, Journal of Accounting &
Organizational Changes, Vol. 2, No. 2, 2006, pp: 164 -180

• The Ghanaian Times, Citizen Rural Bank urges to reverse losses,

September 23, 2010, pg. 21

60
 • The Ghanaian Times, Rural Banks Record Growth in Assets and
Deposits, September 6, 2010, pg. 34

• The Ghanaian Times, Rural Banks Supervision Weak – UN

Survey, September 2, 2010, Back Page.

• Yin, R.K. (2003), Case study Research: Design and Methods, 3rd
Ed., Applied Social Research Method Series, Vol. 5, Sage
Publications

APPENDIX

Sample questionnaire for customers

61
TOPIC: THE RELEVANCE OF FINANCIAL STATEMENT AND ITS
IMPACT ON ORGANISATONAL PERFORMANCE: A CASE STUDY
OF ATWIMA MPONUA RURAL BANK

You have been selected from among many others to respond to the set of
questions below. Your responses are very necessary to enable the researcher
find out how financial statement affects the organizational performance of
Rural Banks. You would be contributing towards a great cause if you answer
the questions as honestly, objectively and thoroughly as possible. Be assured
that your answers will be treated with strict confidentiality as the purpose of
this study is purely academic.

1. Age range (i) 18 – 24 , (ii) 25 – 30 (iii) 31 – 34

(iv) 35 – 40 (v) 41 – 55 (vii) 56 and above.

2. Gender: (i) Male (ii) Female

3. Profession/occupation………………………………….

4. Educational background

(i) Tertiary (ii) Secondary (iii) MSLC/JHS (iv) none

5. For how long have you invested in Atwima Mponua Rural Bank?

(a) 5 years or less (b) More than 5 years

6. What influenced your decision in choosing to invest in this bank?

(a) Performance (b) Service delivery (c) Physical structure

7. If any other reason please

specify…………………………………………….

8. What types of accounts (s) do you maintain?

62
 (a) savings account (b) current account {c}fixed deposit account
(d) others (please specify)

9. What influence your choice of

investment…………………………………

10. People face problems when making investments in the bank.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree (e)Totally

Agree

11. Do you know what a financial statement of a bank is? Yes or

No

12. Have you ever had access to the bank financial statement before?
Yes/No

13. If yes, how did you come by this information?.........................

14. Every customer should be able to analyze and interpret financial

statement.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree

(e)TotallyAgree

15. If agree, can you analyse and interpret one?

16. Does your bank provide you with the financial statement? Yes or No

17. The knowledge of the financial statement can influence your investment
in

the bank.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree (e)Totally

Agree

63
18. The knowledge of a financial statement is relevant to every customer
of a bank .

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree (e)Totally

19. Does the bank still use the manual way of banking? Yes or No

Thanks for making time to fill this questionnaire. Your effort is very
much appreciate.

64
NAME OF SCHOOL: SCHOOL OF MANAGEMENT, BLEKINGE
INSTITUTE OF TECHNOLOGY

TOPIC: THE RELEVANCE OF FINANCIAL STATEMENT AND ITS

IMPACT ON ORGANISATION PERFORMANCE. A CASE STUDY OF
ATWIMA MPONUA RURAL BANK.

Questionnaire to Management.

Dear Sir/Madam.

Copy of questions are administered on the above topic. This questionnaire is

designed for academic work. Your participation is necessary for the success of
this work. All relevant information provided would be treated as confidential.
Thank you.

Instructions: please TICK the appropriate answer or give the response where
necessary.

1. In which branch of Atwima Mponua Rural Bank do you work?

……………………….

2. Rank…………………………Senior staff ( ) Junior staff ( )

3. Age…………………..

4. Gender male Female

5. Educational Background; Basic Secondary Tertiary others

(please specify………………………

6. In which section/department of Atwima Mponua Rural Bank are

you? ........................

65
7. How often are financial statements of the bank prepared?

(a) Monthly (b) Quartely (c) Semi-annually (d) Annually (e) Others

8. Does the interpretation of financial statement affect management

decisions ?Yes or No

9. If Yes why, if No why not...........................................................

10. Financial statements serve as a best tool for evaluating performance.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree (e)Totally

Agree

11. The operation of the company reflects the true nature of the financial
statement.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree (e)Totally

Agree

12. On which final account are the desired financial Performance

calculated?

(a)Income statement (b) balance sheet (c) statement of retained

earnings (d) cash flow statements (e) others (specify)
……………………..

13. Which of the following ratios are used in assessing the performance of
the company?

(a) Profitability and liquidity (b) activity ratio

(c) Gearing ratio (d) others (please specify)

14. Do financial statements actually serve as a best tool for evaluating

performance? Yes/No

15. Which type of Financial analysis does the company use in comparing
the financial Performance?...........................

(a) Trend analysis (b) ratio (c) vertical analysis (d) horizontal
analysis

16. Investors have knowledge of financial statement of company

66
 (a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree
(e)Totally Agree

17. Financial statements should always be available to investors.

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree

(e)Totally Agree

18. Financial statements are readily understood by investors

(a)Totally Disagree (b)Disagree (c)Cannot decide (d)Agree

(e)Totally Agree

THANKS FOR YOUR TIME

67