Usefulness of the annual report for investment decision making Essay

Usefulness of the annual report for investment decision making purposes - Essay Example Certain investors have gained knowledge in accountancy and they use the figures provided in annual reports before coming up with an investment decision. Others use information that is related to organization’s financial conditions and does not contain figures but only facts to make investment decisions. Annual reports and their structures have changed over time to facilitate both kinds of investors. Now annual reports contain information about profit and loss, cash flows and overview of the finances of organizations. The length of these reports has increased as the required number of details has grown. Annual reports contain statements provided by management (Bartlett 1997). All these kinds of information were not previously a part of annual reports. Investment decisions are not only based on analysis provided by management and directors of an organization; the profit and loss information provided through annual reports is superior while making investment decisions. These statements are highly important for those who are literate in accountancy. Individuals having literacy in accountancy are investment analysts who provide information to investors on how well a company has performed and how well it will perform in future, and through this analysis, investors make their investment de cisions. ... is characteristic of annual reports increased the uncertainty amongst investment decision makers because they had no idea how organizations would perform in future and what initiatives the organization would take to make the company operate successfully in future years. Due to lack of information about future activities, investment decision makers used to be dependant on old data and their confidence in their investment decision used to lack confidence in success. This led to the introduction of management’s statements within annual reports. In these statements management provides insights into what future steps the management is going to take to make the company successful in future. This information helped investors and investment decision makers make investments on the basis of future operations, and these investment decisions lacked uncertainty. For example, during 1996, a study conducted by Abrahamson and Amir (1996) proved that annual reports containing the presidentâ₠¬â„¢s letter are a useful insight for the investor trying to predict future performance of the organization. Similarly, a study conducted by Bryan (1997) states that the management of a company is required to disclose information about future operations through annual accounting reports of their organization, and these disclosures help investors in assessing whether the firm will make profit in future and align investment decisions accordingly. Information that profit and loss statements provide is quite limited, for example: Rogers and Grant (1997) argue that financial statements are limited to providing information regarding only one quarter of a company’s operational period. On the contrary, information provided by management gives insight into a longer period of time including past performance