There are different conditions in which decisions are made. Managers sometimes have an almost perfect understanding of conditions surrounding a decision, but in other situations they may have little information about those conditions. So, the decision maker must know the conditions under which decisions are to be made. Generally, the decision maker makes decision under the condition of certainty, risk and uncertainty. 1. Certainty Certainty is a condition under which the manager is well informed about possible alternatives and their outcomes. There is only one outcome for each choice. When the outcomes are known and their consequences are certain, the problem of decision is to compute the optimum outcome. Similarly, if there are more than one alternative they are evaluated by conducting cost studies of each alternative and then choosing the one which optimizes the utility of the resources. The condition of certainty exists in case of routine decisions such Continue reading
Financial Management Concepts
Fixed Assets Accounting
Unless internal controls over plant and equipment are carefully designed many units of equipment are likely to be broken, discarded or stolen without any entry being made in the accounting records for their disposal. The assets accounts will then be overstated and depreciation programs for such missing unites of equipment will presumably continue. Consequently net income will be misstated because of the omission of losses on retirement of plant assets and because of erroneous depreciation charges. One important control devise which guards against failure to record the retirement of assets is the use of controlling accounts and subsidiary ledgers for plant and equipment. The general ledger ordinarily contains a serpent assets account and related depreciation accounts for each major classification of plant assets, such as land, buildings, office equipment and deal very equipment. For example the general ledger will contain the account office equipment and also the related accounts depreciation Continue reading
Demand and Supply of Capital for Investments
Demand for Capital The demand schedule for capital refers to the arrangement of the various proposed projects in a descending order according to their estimated rates of return together with required amounts of capital needed by the respective projects. Before analyzing the investments, the management must understand the nature of opportunities. Some investments are complimentary i.e. making one investment implies that another investment will be necessary. Some investments are mutually exclusive i.e. acceptance of one, implies rejection of others and some investments are independent. It is therefore necessary to identify the various opportunities of investments. Alternative investments can be ranked according to their relative profitability. It is also important to distinguish between cost reducing investment and revenue increasing investment. According to W.W. Haynes “any investment decision is profitable if it adds more to revenue than to cost or if it reduces cost more than the revenue.” An important element in Continue reading
How To Assess the Financial Health of a Company
To check the financial health of a business, you need to evaluate its financial performance, liquidity, solvency, profitability, and other key financial indicators. Below are some of the key areas to focus on when assessing the financial health of your business. Financial Statements The first step in evaluating the financial health of your business is to review your financial statements. The financial statements include the balance sheet, income statement, and cash flow statement. These statements provide a summary of your business’s financial activity and performance over a specific period. Balance Sheet: The balance sheet provides an overview of your business’s financial position at a specific point in time. It lists your assets, liabilities, and equity. You can use the balance sheet to evaluate your business’s liquidity and solvency. Income Statement: The income statement shows your business’s revenue, expenses, and net income over a specific period. You can use the income Continue reading
Leasing – Meaning, Types, Benefits and Limitations
Leasing is understood to be a financial instrument that permits an individual or the lessee to enjoy the utility of a physical asset without possessing it or without assuming ownership of the asset. Leasing can also be defined as an arrangement between two main parties namely: the lessor or the leasing company and the person or the lessee. The customer or the lessee can rent the asset from the company for a particular period of time. The rent for leasing are always predetermined and are due after a particular fixed intervals of time and the lessee assumes the ownership of the property for the entire lease period. There is no purchase option at the expiry of the lease period. Leasing applies to equipment’s that are expensive and bulky or large. Leasing has advantage of tax exemption since the individual avoids the per annum leasing charges; also there is the advantage of avoiding Continue reading
Assessment of Agency Theory
Agency theory refers to a contract whereby principals engage with agents to perform some act on their behalf. The act involved giving power to an agent for some decision-making. Everyone work on the feet of benefit that can be gained for oneself. That’s why it is strongly agreed that the agent, as a utility maximizer will not act in the best interest of the principal. Therefore, agents may cheat if they were not monitored by the principal, and the principal, on the other hand, must bear agency costs to avoid suffering loss. These agency costs include monitoring costs of an agent, bonding costs whereby the agent will try to show that they are not self-serving, and residual losses that are too costly to monitor. In general, agency cost is one of a type of internal cost incurred from or must be paid to, an agent acting on behalf of a Continue reading