Introduction
An analyst must have a clear understanding of the firm’s objectives to effectively measure its business performance and management. In most financial textbooks, the objective of a company is maximizing the value of the owner’s interest in the firm. For the investor-oriented firm (IOF), the firm’s value depends on earnings used to reward investors and to reinvest in productive assets that will generate future earnings.
The interdependence of a firm’s value and its earnings has led to the theory of profit maximization (Jacqueline Birt, Keryn Chalmers, Albie Brooks, Suzy Byrne, Judy Oliver, 2012). The firm seeks optimum current and future earnings. This ensures that the long-run return for investors is maximized through increased returns and the firm’s appreciating stock value.
To further illustrate the different functions between the cooperative and IOF, consider this example of a simplified income statement:
Sales
Less Cost of goods sold Less Operating expenses
— — — — — — — — — —— — — — — — — — —
Equals Gross Margin Equals Profits
Another concern facing cooperatives is the treatment of equity. Under most circumstances, equity is risk capital and usually considered permanent in IOFs. On the other hand, Cobia and Brewer claim that much of cooperative equity is temporary because cooperatives have an implied obligation to redeem it. However, the equity is not temporary but dynamic. Boards generally try to maintain an equity base, but those who use the cooperative and own that equity may change from year to year depending on the use of it.
From an analytical point of view by Martin et al. (2011), argued the most significant information in the equity section of the balance sheet relates to the composition of the capital accounts and to restrictions. The analyst must know how to reconstruct and to explain changes in the capital accounts,