Final answer:
A good working knowledge of financial statements is crucial for transparency and trust between company insiders and outside investors, ensuring informed decision-making in an environment of imperfect information. It also aids in corporate governance and personal finance management.
Step-by-step explanation:
Why is a good working knowledge of financial statements desirable?
Financial statements are essential for a variety of stakeholders including managers, investors, creditors, and even employees to understand a company’s financial health and prospects. For individuals running a firm, it helps in providing transparency and building trust with outside investors such as bondholders and shareholders. When information regarding a company's products, revenues, costs, and profits is readily available and understood, it reduces the information asymmetry between the firm's insiders and the market participants, fostering a willingness to invest capital.
This knowledge is also pivotal for effective corporate governance as shareholders, who often do not have the incentive or resources to nominate board members, rely on financial statements to evaluate company performance and management accountability. In environments of imperfect information, where not all market participants have equal access to company data, well-understood financial statements can be a leveling tool, ensuring that all parties are making informed decisions.
Lastly, a good grasp of financial statements is necessary for making personal financial decisions, such as budgeting, borrowing, and investing, which are essential for long-term wealth accumulation and planning for large expenditures, like post-secondary education or purchasing a home.