Question

1. Why is financial reporting important for investors, creditors and others?

2. What kind of ethical issues might managers face in dealing with confidential information?

3. How do you decompose Return on Assets into 2 components, and explain each of these 2 components.

Answer 1

1. Financial reporting is important because it gives the idea about financial health of the company and investors can decide whether the health is good and they can invest money in the company.

2. On one hand if they do not reveal confidential information they seem to violate principal agent relationship where agent is supposed to tell all the information to the owner or principal. On the other hand if they reveal the information competitors will come to know and jeopardise the activities thus leading to loss to principals.

3. Return on Assets=Net income/Sales*Sales/Assets=Net profit margin*Asset turnover..Net profit margin is the profitability indicating the net bottom line to the company for each dollar sales..Asset turnover indicates the efficiency of utilisation of assets.