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Corporate Finance Essay

976 words - 4 pages

As the unemployment rate in the United States stands at 10%, the highest it has been since 1992, the recession is on the precipice and poised to fall. It seems that in order to reduce that astronomical rate, a higher growth rate of Gross Domestic Product (GDP) is required for the country. The US already has the largest world economy, which is based on a market-oriented economy, therefore firms and private individuals make most of the decisions. Since value added is represented by the wealth created by a business entity's own and employees' efforts, the contribution of an entity is measured at the micro-economic level to the GDP, and perhaps a subsequent growth in the GDP (Arangies, et al, 2008). This could possibly help minimize the US unemployment problem.Profit is revenue from sales minus all the costs. Profit is also a subjective topic, so a VAS measures wealth, for a larger group of stakeholders, as a value added rather than profit, which is created for one group of stakeholders. It can improve the profit and loss account through rearrangement and a different focus. The Profit and Loss Statement does not provide any information showing the extent of the value or the wealth created by the company for a particular period. Contribution to the company by other stakeholders cannot be assessed through the Profit and Loss Statement. Hence, there is a need to modify the existing accounting and financial reporting system so that a business unit is able to give importance to judge its performance by indicating the value or wealth created by it. As concluded by Meek and Gray (1988), "as a supplemental disclosure, value added statement can redirect attention to certain wider implications of corporate activity" (p. 81).The financial statement of a firm tells a financial story of that firm, but doesn't tell the whole story of stability. Financial statements are backward looking, which may not paint an accurate picture of future performance, but they should compare these to firms in the same industry to get a more accurate portrait. Statements can also be misreported to make the firm appear profitable when in reality it is sinking. As we have seen over the last 10 years, several large firms have had fraudulent financial statements which resulted in large scale scandals by the CEO's and CFO's. One particular investment company had received a clean financial audit year after year because the financial statements were squeaky clean…too clean to be noticed. In reality, the statements were being fraudulently reported. The company was bankrupt and the owner ponzi-schemed away billions of dollars of investor's money. Those firms that have been charged or convicted of misrepresenting their finances are only a few of thousands of firms that are committed to accurately reporting financial information.Financial statements do not disclose certain assets that are not quantifiable yet are extremely important in producing cash flow and revenue. Human Capital is one...

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