Finance Principles: The Basics of Financial Management

Question I 

Ethics involves the moral values that regulate an individual’s conduct. My friend’s statement on disregarding ethics in business because there are policies that are developed to identify the rules of the game is not valid. However, it is essential for entrepreneurs to identify the wrong and rights practices in business. Examples of unethical practices in firms include theft of products, misuse of resources, misrepresented performance, and sexual harassment (Colin, 2019). Every organization must have ethical practices that govern the behaviors of employees. Thus, workers cannot focus on money or power after organizational success. Ethical behavior is beneficial to companies in different ways, including increasing customer and employee loyalty (Colin, 2019). Ethical conduct promotes employee retention and decreases workers turnover because more candidates apply for positions in the institution. Also, investors prefer organizations that uphold good ethical practices which raise the share value of companies due to an increase in investments (Colin, 2019). The businesses are prevented from situations such as takeovers due to lack of investors. 

Question 2 

The US GAAP consists of five characteristics that establish the foundation of accounting measures. The historical cost concept focuses on reporting the acquisition expenses of liabilities and assets besides the fair value. The principle is essential in offering reliable but not relevant data regarding the acquisition costs (Young & Beyersdorff, 2013) . Most corporations record their asset and liabilities using the fair market value. Besides, loans and financial assets are recorded in their market rate. Secondly, the revenue recognition concept involves recording the income of the firm after earning rather than receiving. The principle is critical in tracking the income of the company when collected, which can reduce errors (Young & Beyersdorff, 2013) . However, the accrual concept enhances the accuracy of the financial reports because the accountants report the losses regarding their probability or occurrence. The accrual principle is essential in facilitating the reporting of company losses for accurate presentation of economic transactions. 

Fourthly, the matching concept focuses on aligning the costs with the company’s earnings. The accountants report the expenses after the employees perform work, and the company sells the products to gain revenue. The matching principle is critical in assessing the actual profits and performance of the organization. The applications of the concept include depreciation and COGS (Young & Beyersdorff, 2013) . The fifth concept is the full disclosure, which focuses on presenting different types of financial transactions regarding the trade-off assessment. The disclosed data should be sufficient in establishing conclusions while maintaining reasonable expenses. The data is located at the notes or additional part of the reports (Young & Beyersdorff, 2013) . The principles are critical in regulating the reporting process of a company’s financial data. 

Question 3 

I would first define the time value of money as the perception that individuals portray a definite need for using products in a particular period. Also, TVM involves the concept that the available cash is valuable than a similar amount in the future due to the possible earning potential (Moyer & Moyer, 2012) . It is essential to tell my friend about the primary principle of finance which states that the available amount of money is significant as compared to the expected cash in the future which cannot earn interest (Moyer & Moyer, 2012) . The primary concepts of TVM are useful in solving life’s economic challenges. Therefore, I can advise my friend to invest the available money, which will increase through the interest rather than waiting for a similar amount of cash in the future. The method is critical in solving the present and future economic problems. If one increases the interest of the present sum of money, there is no need for borrowing, and it prevents financial constraints. 

Question 4 

The features of common stocks focus on possession claim, but those of preferred shares portray ownership interest in a company. In common stocks, the holder is responsible for possessing voting rights. Alternatively, the holder of preferred stocks has no authority of holding the privileges (Hermanson et al., 2018) . Secondly, the growth possibility of common stock is high, but preferred shares increase at a lower rate (Hermanson et al., 2018) . Also, common shares contain differential rights, while preferred stocks consist of exclusive privileges. The capital returns of common stocks are not guaranteed, but there is a guarantee for preferred dividends at a fixed amount (Hermanson et al., 2018) . The fifth difference is that ordinary shares are irredeemable while preferred stocks are redeemable. Besides, common shares cannot be converted, but a holder can convert preferred shares for profitability (Hermanson et al., 2018) . Preferred shares are excellent investments as compared to common stocks. 

Question 5 

The reviewed concepts have a positive effect on my money management skills. First, I perceive that the TVM principle is critical in enhancing my financial management ideas. I can invest the available money, which increases through interests rather than waiting in the future. Consequently, it will increase my economic security, and I will not waste cash on unnecessary activities such as watching movies, swimming and attending trips. I need to embrace ethical values of financial management to facilitate proper usage of money. I can incorporate moral values such as self-discipline to ensure I save money for investing. The accounting principles are critical in managing the finances of my future organization. I will apply the accounting standards to ensure that the financial reports are accurate for proper management of financial resources. From the reviews, it is advisable to invest in preferred stocks rather than ordinary shares. Preferred securities are redeemable and convertible, which reduces the financial losses on investments. 

References  

Collins, D. (2019). Business ethics: Best practices for designing and managing ethical organizations . Thousand Oaks, California: SAGE Publications. 

Hermanson, R. H., Edwards, J. D., Maher, M., & Donelan-Knox, K. (2018). Accounting principles: A business perspective . Suwanee, GA: 12 th Media Services. 

Moyer, R. C., & Moyer, R. C. (2012). Contemporary financial management . Mason, OH: South-Western, Cengage Learning. 

Young, E. ., & Beyersdorff, M. (2013). International GAAP 2013: Generally accepted accounting practice under International Financial Reporting Standards . Hoboken, N.J: John Wiley & Sons.