According to the flexibility factor, budgets are classified into: Fixed Budget This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned. Such budgets are preferred only where sales can be forecast with the greatest of accuracy which means, in turn, that the cost and expenses in relation to sales can Continue reading
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Audit Theories – Theories of Demand for Audit
Audit refers to an examination of the financial reports of a firm by an independent entity. The separation of business ownership and management in modern society has created a need for accountability; causing the role of audit to change as the needs of stakeholders’ change. Audit, in itself, caters to the relationship of accountability; independent from other parts of the firm to provide a true and fair view of the financial reports of an organisation. Whereas, the ‘value relevance’ refers to the auditors’ ability and responsibility to provide reasonable assurance that financial statements are free of material misstatement, either due to fraud or error; or both. Audit theories provide a framework for auditing, uncovers the laws that govern the audit process and the relationship between different parties of a firm, forming the basis of the role of audit. There are many theories which may explain demand for audit services in Continue reading
Lease Financing in Lessor’s View Point
In normal situations, the lease decision has been evaluated from the point of the lessee in terms of the lease or buy decision. However, the lessor also has to evaluate the lease decisions from the point of view of his return. The lessor is financing the assets out of the funds procured from different sources, and obviously there is a cost of all these funds to the lessor. So, the lessor will like to provide lease financing only if the return from the lease is at least equal to the overall cost of capital of the lessor. The lease decision for a lessor is in fact a capital budgeting decision, where the lessor invests the funds in expectation of the returns in the form of lease rentals. The lessor will accept the proposal for the lease financing only if the NPV of the decision is positive at the required rate Continue reading
What is Revenue Center?
Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as Continue reading
The Insurance Regulatory And Development Authority (IRDA)
Insurance Regulatory and Development Authority (IRDA) is regulatory and development authority under Government of India in order to protect the interests of the policyholders and to regulate, promote and ensure orderly growth of the insurance industry. It is basically a ten members’ team comprising of a Chairman, five full time members and four part-time members, all appointed by Government of India. This organization came into being in 1999 after the bill of IRDA was passed in the Indian parliament. The creation of IRDA has brought revolutionary changes in the Insurance sector. In the last 10 years of its establishment the insurance sector has seen tremendous growth. When IRDA came into being; the only players in the insurance industry were Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC), however in last decade 23 new players have emerged in the field of insurance. The IRDA also successfully Continue reading
Emergence/History of Derivatives
The history of derivatives is so vast and is interesting to know that derivatives dated back to 16th century. Like forward delivery contracts, where the asset is to be delivered on specific date and time for an agreed fixed rate existed in the ancient Greek and Rome times, where the emperors of that time entered into these kind of contracts to overcome the foreseen problems, like falling short of grains required at the times of masses. Interestingly they worked out and thus gave a pavement to the new way of trading between farmers and merchants. Due to the uncertainty of prices and supply merchants started entering into the futures contracts with the farmers which was termed as “to-arrive” contract which allowed trader and farmer to trade with lock – in price. This made sense as it was safe for both the farmers and traders, from the farmer’s point of view Continue reading