1.What is the rational for wealth maximization as a goal for a firm? 2. What are the key financial statements and why they are important? 3. What is the purpose of ratio analysis? 4. What is the...

Solution:-
(A) Key financial statements and their importance:-
Financial statement is a summarized statement which represents the summary of all transactions
that has occurred during the period covered by the financial statement. It helps the stakeholders
to understand the financial parameters of the organization and take the appropriated decision.
There are basically three main types of financial statements i.e. Balance sheet, Statement of
operations (income statement) and cash flow statement.
1. Income statement
Income statement mainly tells us about the operating results of an organization. Income
statements are prepared on the accrual basis and accounts for all the revenue and expenses
incurred or earned during the period.
2. Balance sheet
Balance sheet represents various assets and liabilities that a company carries on a specified date.
All assets and liabilities must be included in the balance sheet in order to determine the accurate
position of the company. Balance sheet is always prepared after the finalization of the income
statement.
3. Cash flow statement
All the financial statement are prepared on accrual basis as per the current accounting standards,
whereas cash flow statement is prepared on the basis of cash flows and not accrual system of
accounting, this is the major difference between cash flow statement and other financial
statements. Statement of cash flow shown the net cash provided by different activities i.e. cash
flow from operations, cash flow from investing activities and cash flow from financing activities.
(B) What is the purpose of ratio analysis :-
Financial analysis is done in order to determine the financial strengths and weaknesses of an
organization. Financial analysis is done in various ways such as ratio analysis, horizontal
analysis, vertical analysis, comparing the results with the industry performance etc. Financial
analysis is very important from the point of view of all stakeholders.
Various Ratios are used by the managers and accountants for controlling the functioning of the
organization. These ratios are also known as accounting or financial ratios. These ratios play
very important role in the organization such as:-
Liquidity ratios:-
These...