Answer the questions related to fundamentals of finance - Research Paper Example

Fundamentals of Finance What are the three tensions every firm faces? Define each tension, give an example of each. Why is it so difficult for a firm to manage these tensions?When we consider strategic vision and objective of the firm, every firm faces conflicting objectives and trade off which needs to be carefully balanced. Theses tension can be characterized by the following three different but interdependent types:Short term vs long termThis tension can be described as a disturbance in equilibrium of maintaining balance between short term goals and long term vision.

This situation arises when a firm either has a skewed focus on either achieving short term goals which are not supported by high level long term strategic objective OR when long term goals are defined but the same are not simplified with short term strategy or execution. For example, a company which is forced to delay investments to achieve earning target is trapped in short term vision.Profitability vs growthThis tension can be described as a disturbance in equilibrium of maintaining balance between profitability & earning and growth & development of a firm.

For example, a company focused on boosting high margin by reducing costs may also have to compromise on research and development or other investment on technological advancement. This may result in loosing profitability in long term to competitor.Whole vs partsThis tension can be described as a disturbance in equilibrium of maintaining balance between creating companywide benefits and utilizing individual potential of the units to the optimum level. One example of a firm trapped in such tension can be an organization which is swinging its operation between centralization and decentralization of its operations.

The reason they are so difficult to manage is that all the tensions represents a tradeoff faced by the company and both sides of the tension are equally vital for the company.2. How do financial statements intended for the public differ from financial statements used internally?The purpose of the Financial Statements is to provide information about the financial position, performance and comparative financial trend of the firm to various stakeholders in order to facilitate them in economic decision making.

Internal financial statement, however, is prepared for internal management and managers. It facilitates them in financial analysis and making business decisions. Whereas, financial statements intended for public is used for external stakeholders such as investors, shareholders and regulators etc.The fundamental difference between the two is that financial statements for the public is standardized and regulated by the authorities and regulatory body. It has to comply with minimum international and local accounting standard.

Furthermore, the public statement is required to be audited and endorsed by the external auditors.On the other hand, there are not strict regulatory standards for internal statements and are used for internal decision making. It is purpose driven and can be designed and molded in accordance with decision making needs of the management. 3/ Why do some analysts consider the Cash flow statement as a more accurate reflection of a company’s financial position? Do you agree? Why or why not?Cash flow statement provides managers information regarding the liquidity position of a firm which facilitates them in execution of their short term operations.

It is important to gauge the ability of the firm to meet and pay its short term obligations. However, only cash flow statement does not provide the accurate financial position of the company as profitability, long term financial sustainability and other qualitative factors are also significant in order to understand the holistic financial position of the company 4/ What are the other important sections found in financial findings and what are the contents of each?The other sections of the financial finding are: Profit and loss statementIt is a financial statement that measures the company’s financial performance over a specified accounting period.

It provides details of revenues and expenses incurred by a company during a period and states the profit made. For example, total profit after tax of Google Inc for the period ending December, 2010 was USD 8.505 billion. Balance SheetBalance sheet stipulates details of assets, liabilities and shareholder’s equity at a specific point in time. Balance sheet reflects the basic accounting equation in which assets equals sum of liabilities and equity. For example, as per Google Inc balance sheet of 2010 it possesses asset worth of USD 57.

85 billion as of 31st December 2010.Cash flow statementIt provides aggregate data of all the cash flow in and out of the firm during a specific period. It provides total inflow of cash in a firm through ongoing operations and other investments and outflow of cash occurred through payment for business activities and investment during a period.Notes to the accountIt provides qualitative details to the number presented in the financial statements .Auditor’s reportIt is a summary of the financial findings by the independent auditors.

It contains disclaimer and endorsement that the accounts have been verified and prepared in accordance with the accounting standards.