Question

By the use of relevant examples, differentiate between:

a. the investment decision and the finance decision.

b. current assets and non-current assets.

Answer 1

a. The primary goal of both Investment and financing decision is to maximize shareholder value.

Investment decisions revolve around how to best allocate capital to maximize their value.

Financing decision revolve around how to pay for Investment and expenses.

Investment decisions refer as Capital Budgeting Decision too. A company' s assets and resources are rare and must be put to their utmost utilisation.

Investment decisions relate to the careful selection of assets in which funds will be invested by the firms. The firm puts its funds in procuring fixed assets and current assets and when choice with respect to a fixed asset is known as Capital Budgeting Decision.

There are mainly two types of Investment decision-

- Buy a machinary for production. This is a long term investment decision because it will affect for the long term earnings of the firm.

- Short term investment like Investment done in working capital, inventories and debtors.

Financial Decision is to make wise decision about when, where and how should a business acquire fund. This is actually relate to the composition of various securities in the capital structure of the company. It is all about allocation of funds.

Example of Financial decision

- Finance raised from various long term sources of fund like; Equity shares, Preference Shares , Debentures, Bank Loan etc.

b. Difference between Current assets and Non current assets

Current assets known as short term assets too. The asset which can be converted into cash within a year in a easy manner is called Current assets. Like-Cash and Cash equivalents, account receivable and inventories.

Company needs Current assets to run its day to day operations and it is reported in Balance Sheet in market or Current Price.

Non Current assets,- They are long term investment and they have a useful life more than a year. They cannot be converted into cash easily.

Like; Land and Building, Plant and Machinary, Furniture and other heavy equipment.

They are reported on the balance sheet at a price a company paid for them.