Name:- Kaushal chopra (11803123)

G1
Subject :- Introduction of finance(civ225)

Q1Explain the concept of Risk return trade-off along with an example.

Ans
The risk-return trade-off states that the potential return rises with an increase in risk. Using
this principle, individuals associate low levels of uncertainty with low potential returns, and
high levels of uncertainty or risk with high potential returns. According to the risk-return
trade-off, invested money can render higher profits only if the investor will accept a higher
possibility of losses.

Description: For example1, Rohan faces a risk return trade off while making his decision to
invest. If he deposits all his money in a saving bank account, he will earn a low return i.e. the
interest rate paid by the bank, but all his money will be insured up to an amount of Rs 1 lakh
(currently the Deposit Insurance and Credit Guarantee Corporation in India provides
insurance up to Rs 1 lakh).
example 2)  $10,000 put on BTCS returned $300,000 in a month, but I had to be willing to
accept the possibility of losing the whole $10,000.Unfortunately the trade was in “le demo”
account, but it would be the same kind of situation as a live trade IF the shares were liquid
enough to sell back into the market.

*choose any one example*

2. How a company or any organization will be beneficial from the financial

system. Justify it.
Ans.
The large amount of managing money or cash, basically by huge private and government
entities or organization is said to be Finance.
5 reasons why Finance is important:-

 Without financial management business cannot exists

In today’s business economy, Small businesses and Entrepreneurship are more on rise that
means more positions for financial managers will continue to become much more
available. Without ineligible person responsible to manage the incoming and outgoing of
money a good business cannot exist.
As good business generates money, through this generated money paying bills for
materials, payment of salary for the employees in an organization are done. Good business
earnings happen by selling quality services or products. Managing financial aspects plays a
very vital role in progress of any good business.

 Adequate funds availability

Sufficient funds are necessary to meet daily expenses to purchase long term assets for the
company’s requirement accordingly; also funds should be there to deal with future
 unforeseen over costs which may arise. The company should know from where the funds
have to be raised and when it should be needed in emergency to deal the monetary crisis.

 Cash flow management system

In an organization, excess cash flow can also become difficult to manage. Having excess
amount of funds and not using it in a genuine much useful way is a greater waste of
resources. When an organization is having adequate funds they should put it in good
yielding investments by thinking very wisely. And also make sure that they have expansion
future plans and think about new ventures which will gain them huge profits to earn for the
long run.

 Always keeping long term goals

Having long term goals in life or business is a very important aspect to keep, once it is
done the responsibility has to be fulfilled as per the plan made at any cost to get fulfil the
targeted goals to achieve success. In any business entity, financial planning is a process of
engaging a proper financial plan to meet its financial goals in a specific time period.

To have long term financial goals in a business is a very important part, were by doing this
many upcoming financial crisis in future can be resolved without any hassle. It is always a
good idea to have an early well planning goal, especially in finance since investing on any
good options may earn high returns over the period of time to the company to gain
financial stability. So investing money with good thoughtful planning from now will make
easier to execute such long term goals.

 Financial Planning value and importance in a business

Financial planning creates immense value to the company, without this any of the business
entity cannot function properly. It is a major vital venture for all kinds of businesses
worldwide. It is done for an entire year to have control over financial activities of the
company. The bigger the company, the bigger will be the size of the team working on
financial planning and the greater skilled professionals needed.

 3.How finance is interlinked with accounts. What will be the effect if one fails?
Ans3:-
Accounting is concerned with recording of business transaction of a company and presenting
it in the form of profit and loss account to show the profit or loss of the company during a
year and also it involves preparation of balance sheet which reflects the financial position of
the company at a particular date.

Finance is a broader concept and it makes use of all the data which is presented in the
accounting like profit and loss, balance sheet, cash flow statement to make finance related
decision like how to raise money for future projects of the company, how to utilize the
resources of the company in order to efficiently and effectively produce the good so that
company makes profit.

Finance therefore is a future looking concept which makes use of past data in accounting to

make decision related to future. Without accounting data finance will find it difficult to
make above decisions and also accounting will not be effective if it is not used along with
finance.

The effect if one fails:-

1)  Businesses set themselves up for failure if they don’t keep up with their accounts payable
and accounts receivable. A company’s viability and productivity are severely impacted if
bills aren’t paid on time or unpaid customer accounts aren’t collected in a timely manner. If
this goes on long term, the consequences include racking up financial deficits and filing for
bankruptcy.
2)The analyst needs to bear in mind, therefore, that any ‘creative accounting’ will dishonestly
attempt to inflate reported profits, and in particular earnings per share, and also to report
profits at the expense of the balance sheet. This may result in profits being reported without
an equivalent amount of cash being generated. Cash is ultimately more important than profits,
since it is cash that pays interest and dividends. The lack of it causes companies to fail.