The Difference between the Concept of Discounting and Compounding - Math Problem Example

The paper  “The Difference between the Concept of Discounting and Compounding”  is a useful example of a finance & accounting math problem. The concept of discounting and compounding are two terms commonly used by financial institutions when they are calculating the time value of money or loan rates. Allatt, (2001) defines discounting as the process by which the present value of any payments is determined using the rates called discounting rates. On the other hand, he looks at compounding as the methodology which is used to determine the future value of payment using compounding interest rates.

Explain the difference between the concept of ordinary annuity and annuity due
The concept of ordinary annuity and annuity due is commonly used in terms of mortgage or loan repayment points. An ordinary annuity is a payment that is made over a long period of time at an equal interval and the end of each period. While the annuity due is being paid at the beginning of each period (Cortavaria et al., 2002)

Question 3 B
The comprehensive income statement, balance sheet, and cash flow statement are the most important financial statements used by managers to make crucial decisions in the company. Such is also used by the external investors to measure the company's performance. Though they are prepared from the same source documents, they give different figures. For example, in our study of the income statement and the cash flow statement of the Commercial Property Growth Limited for the year ending 2010, there is a huge difference in the net income as the Comprehensive income statement shows a net income of ($ 428990, 000). This is a negative income while the cash flow statement shows a positive net inflow of $ 85,926,000. This difference is brought up by non-actual cash movements like depreciation included in the income statement while not reflected in the cash flow statement.

The same case applies to the AFT Corporation LTD which reports income for the year at (737,971,000) while cash inflow is 1,900,779 at the same period. This shows the sound management of cash in the two companies. The external users of these financial statements will use the liquidity ratio of the company to decide whether to invest in the company or not. The shareholders will also use them to know the dividends they are going to get by the end of the trading period and the management performance of the company. This aspect is very crucial for any investor who is the external user of the financial statement and it is a clear indication of the liquidity in the firm. Government agencies like revenue collectors will also use the same financial statement to determine the amount of tax to be charged to each firm.

The internal users like management will strengthen their weaknesses of poor cash flow management as too much cash in the business is not good while too little cash liquidity might lead the company to insolvency which is not a good state in any business. The audited result will give the shareholders the authority to question the company’s directors on the poor trends in the management as the directors are the core custodians of the shareholder's investment.

The remuneration of the directors is fixed in the annual general meeting and all other incentives. The directors are directly liable for any foolish decision they may make in the company hence showing the agency relationship between the directors and the shareholders.