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Financial statements of a company - Essay Example
Author : feestcleora
Finance & Accounting
Pages 6 (1506 words)
The following research paper argues that the financial statements are prepared with an intrinsic objective of informing the shareholders regarding the stewardship capability of the managers along with the decision usefulness criteria…
Center of discussion in this paper is Stewardship as the ethical responsibility of the managers to effectively and honestly manage the resources of the firm. Managers therefore are considered as stewards of the firm however, managers are also considered as self-interested individuals who can pursue their own objectives too. Such tendency of the managers therefore requires that the shareholders must use company financial statements to ensure that the managers are performing their stewardship duty. Through techniques such as financial ratio analysis, shareholders can actually look into the overall performance of the managers and decide whether such performance is actually according to the ability of managers. If assessed performance is considered as below-par it may be concluded that the managers may not be fulfilling their responsibility. Agency Theory outlines that there may be conflict of interest between the shareholders and managers of the firm. The basic objective of managers is to ensure that they act in a manner which always results into an increase in the value for shareholders. This therefore requires that the managers must actively pursue the objective of maximizing shareholders wealth. This objective however, may be jeopardized as the managers may take actions which only result into their own benefits and may not entirely result into creation of value for the shareholders. For example, managers may make decisions to increase their compensation or earnings regardless of the fact that such actions may damage the overall shareholder interest in short or long run. ...