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? Maximizing shareholder wealth is defined as maximizing purchasing power as well as the flow of dividends to shareholders through time and it is a long-term perspective. In addition, a very important point to explain why shareholder wealth maximization is superior objectiveContinue reading

Basic Concepts of Earnings Management

Over the past two decades there has been collapses in corporate sector affecting various companies including Enron, American International Group (AIG), HIH Insurance and National Bank of Fiji. Due to these collapses, the need for proper management of the earning or revenue generated by the company has become the very significant part as main objective of every company. Along with this objective, managers of the organization have different incentives to manage the earning of the company. Management of earnings means structuring the financial transactions and statements in the manner so as to have maximum benefit. It tries to mislead the users of the financial statements by presenting the earnings as budgeted or thought by the management instead of presenting the actual performance made by the company during the period. The different incentives for earnings management are – increased managerial remuneration, management buyout and managing the regulatory concerns imposed by different authorities.Continue reading

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. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of proprietary theory. Value added is now reported in the financial statements of companies in the formContinue reading

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. The Value Added concept is now a recognized part of the accountant’s repertoire. However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of performance of an enterprise. It is a basic measure because it indicatesContinue reading

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. Audit theories provide a framework for auditing, uncovers the laws that govern the audit process and the relationship between different parties of a firm, forming the basis of the role of audit. There are many theories which may explain demand for audit services inContinue reading

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. In addition, ABC costing does encourage continuous improvement and total quality control because control and planning are directed at the process level and it links the corporate strategy to operational decision making. By using ABCContinue reading