Why Shareholder Wealth Maximization is Important in Business?

In modern finance, it is proven that shareholder wealth maximization is the superior goal of a firm and shareholders are the residual claimants; therefore maximizing shareholder returns usually implies that firms must also satisfy stakeholders such as customers, employees, suppliers, local communities, and the environment first. Also, a firm’s value can not be maximized if the management board or shareholders ignores the interest of its stakeholders. Thus, the main goal of a firm is to maximize shareholder wealth but it does not mean that management should disregard stakeholders.

To begin with, it is necessary to understand what is shareholder wealth and why maximizing shareholder wealth is a superior objective?… Read the rest

Value Added Statements – Definition, Advantages and Disadvantages

Meaning and Definition of  Value Added Statements

The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes.… Read the rest

Value Added – Concept, Definition and Uses

Meaning and Definitions of  Value Added

The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. To this direction inclusion of Value Added statement in financial reporting system is useful.… Read the rest

Audit Theories – Theories of Demand for Audit

Audit refers to an examination of the financial reports of a firm by an independent entity. The separation of business ownership and management in modern society has created a need for accountability; causing the role of audit to change as the needs of stakeholders’ change. Audit, in itself, caters to the relationship of accountability; independent from other parts of the firm to provide a true and fair view of the financial reports of an organisation. Whereas, the ‘value relevance’ refers to the auditors’ ability and responsibility to provide reasonable assurance that financial statements are free of material misstatement, either due to fraud or error; or both.… Read the rest

Activity-Based Costing for Small and Service Industries

Activity Based Costing (ABC) is an accounting method that assigns costs to activities according to their use of resources, rather than products or services. This enables resources and other related costs to be more accurately attributed to the products and the services which they use. It does not change or eliminate any costs, in the other way; it provides detailed information on how costs are consumed. The main benefits of Activity Based Costing are providing understanding into the fastest growing and least visible element of cost-overhead. We can also improve profitability by monitoring total life-cycle cost and performance so that we can improve the effectiveness of budgeting by identifying the cost of different service levels.… Read the rest

Importance of Audit Independence for Stakeholders

The importance of audit independence can be categorized into four reasons: Firstly, audit independence can hold the public confidence and avoid interest conflicts; Secondly, audit independence can help auditors to provide high quality financial report and avoid scandals like ‘Enron bomb’; Thirdly, the development of no-audit services make it more difficult but more important to maintain audit independence; Lastly, audit independence can improve the quality of audit and it can assist managers to make strategy formulations.

Stakeholders make economic decisions by taking advantage of financial reports. Whether those reports are related and reliable are questions. Audit can help to solve this problem.… Read the rest