What is the rational for wealth maximization as a goal for a firm?
Wealth maximization is when businesses attempt to increase the value of the firm in order to increase the value of the shares from stockholders. This requires businesses to search for the highest possible amount of return on investments. This commonly results in changes in the prices of the company’s shares.
2. What are the key financial statements and why they are important?
The key financial statements are the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings. The income statement is the most important financial statement because it presents the operating results of the firm by listing the company’s revenues and expenses during each reporting period. The balance sheet presents information at a specific point in time ensuring that all assets equal total liabilities and equity. This carries critical information about liquidity and capitalization by listing assets, liabilities, and company equity. The statement of cash flows is important because it provides a useful comparison to the income statement when the amount of profit or loss does not reflect the cash flows by the listed cash inflows and cash outflows. The statement of retained earnings is important because it displays all of the company’s changes in equity or changes caused by certain profits or losses.
3. What is the purpose of ratio analysis?
The purpose of the ratio analysis is to compare line items in the financial statements to analyze the number of issues with an entity such as profitability or efficiency. It can be used over a large number of reporting periods to determine a trend line or it can be used as an industry comparison to calculate ratios with competitors in similar industries.
Accounting Tools. (2019). Wealth Maximization. Retrieved from https://www.accountingtools.com/articles/what-is-wealth-maximization.html
Hood, Eddy. (2014). The Four Basic Financial Statements. Retrieved from https://www.ignitespot.com/the-four-basic-financial-statements
Peavler, R. (2019). Financial Ratio Analysis Offers Valuable Business Insights. Retrieved from https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186