Financial Management Fundamental Decisions in Financial Management Essay

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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 how to become reach, but in morally accepted ways. In business, ethics are important because they will influence how the parties will apply when making business decisions.

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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….....

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