Question TwoExplain the difference between the concept of discounting and compoundingThe concept of discounting and compounding are two terms commonly used by financial institution when they are calculating 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. b. Explain the difference between the concept of ordinary annuity and annuity dueThe concept of ordinary annuity and annuity due are commonly used in terms of mortgage or loan repayment points.
Ordinary annuity is the payment which is made over a long period of time at equal interval and at 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 are also used by the external investors to measure the company 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 huge difference in the net income as the Comprehensive income statement show a net income of ($ 428990, 000). This is a negative income while in the cash flow statement shows a positive net inflow of $ 85,926,000.
This difference is brought up by non actual cash movement 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 on the company or not. The share holders will also use them to know the dividends they are going to get by the end of trading period and the management performance of the company.
This aspect is very crucial for any investor who is the external users 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 on 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 in 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 shareholders investment.