Financial Management
Fundamental Decisions in Financial Management
In financial management, there are three fundamental decisions, which are central to capital budgeting, capital structure and working capital management. Capital budgeting refers to the process of planning and managing the company's long-term investments. Capital structure refers to the particular mixture of long-term debt and equity a company utilizes to fund its functions. Working capital management refers to the company's short-term assets, which may include inventory, and its short-term liabilities (Parrino, Kidwell and Bates, 2011).
Pros and Cons of the three forms of business ownership
Sole Proprietorship
Advantages
It is easy to start and end a business
There is no sharing of profits
It does not involve any special taxes
Disadvantages
Available funds are limited to what the owner has
There are management issues
There are limited developments
Partnerships
Advantages
The business experiences more financial resources
There is shared management, which enhances growth of the business
Partnerships are likely to succeed when compared to sole proprietorships
Disadvantages
There is unlimited liability
There is division of profits
There are likelihoods of disagreements among partners
Corporations
Advantages
Corporations can raise substantial funds
It has a perpetual life
There is ease of change in ownership
Disadvantages
Corporations experience double taxations
Corporations involve extensive paperwork
There is difficulty of termination in corporations
Importance of ethics in business
Finance doe not teach people on ways of becoming rich, rather it teaches people how to become rich. On the other hand, ethics teaches people to be morally good in their activities. Therefore, when incorporated in the financial sense, it will teach businesspersons...
In business, ethics are important because they will influence how the parties will apply when making business decisions. In addition, business ethics will keep the parties to operate within legitimate approaches, which will result to increased sales because most consumers like dealing with honest businesspeople.
Risks of holding interests so low
Holding of interests so low, is a response from the federal government in an attempt to stabilize the economy and the overall financial system. In addition, keeping the interest rates so low will help households and business finance new spending and support the prices of assets. Moreover, the low interest rates were to assist the government narrow the deficits, by decreasing their borrowing prices. However, keeping the interest rates low has adverse effects. For instance, low rates of interest can result to extreme risk taking and asset bubbles. In addition, this can lead to delays in balance sheet repair and has the capacity to raise credit over the medium period (Parrino, Kidwell and Bates, 2011).
GAAP
Generally, Accepted Accounting Principles (GAAP) refers to a set of rules for financial accounting utilized in any given jurisdiction, commonly known as accounting standards or the standard accounting practice. They include the standards, conventions, and guidelines followed by auditors when recording, summarizing, and preparing financial statements. GAAP is essential because it helps in maintaining the consistency when reporting financial information and reduces the vulnerabilities to errors or frauds. In addition, GAAP helps in setting the standard for a firm and reduce the risk of tax issues and erroneous reporting of transactions.
Information contained on Income Statements and Balance Sheets
An income statement shows the revenue and expenses of a company over some period. In addition, the statement shows the company's net earnings or losses. It also reports the company's earnings per share. On the other hand, balance sheets provide detailed information concerning the company's assets, liabilities and shareholder's…
Reference
Parrino, R., Kidwell, S.D., & Bates, T. (2011). Fundamentals of corporate finance (2 ed).
Hoboken, NJ: Wiley Global Education
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