An accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. The main reason for developing a conceptual framework are that gives a framework for setting accounting standards, a basis for resolving accounting disputes and fundamental principles which then do not have to be repeated in accounting standards. Furthermore, Conceptual Framework can be categorized in terms of the distinctive function of management accounting within the management process in organizations. Moreover, the way in which the utility of the outcomes of the management accounting process can be tested. Conceptual Framework is a criteria which can be used to assess the value of the processes and work technologies used in management accounting and capabilities necessarily associated with the effectiveness of the management accounting function overall. Conceptual Framework plays an important role in Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Sensitivity Analysis and Scenario Analysis in Capital Budgeting
Capital Budgeting is the process by which a Business makes decision on whether to take up a project or not. This involves analysis of the amount of money which is required to invest in the project and the revenue that the project will generate. A business uses various techniques and analysis tools to determine the effects of the various projects. This may involve the calculation of the time taken for the undertaking to produce return to cover the initial contribution, or the amount of cash flow that will be produced from the undertaking totally in its entire span of period along with the amount of profit or loss generated from the same or the break even of the project can be calculated using the discount rate of the project. All the techniques and methods involve making assumptions and making estimations about the future performance of the project. The results derived Continue reading
Ploughing Back of Profits – Definition, Need, Advantages and Disadvantages
The ‘Ploughing Back of Profits‘ is a technique of financial management under which all profits of a company are not distributed amongst the shareholders as dividend, but a part of the profits is retained or reinvested in the company. This process of retaining profits year after year and their utilization in the business is also known as ploughing back of profits. It is actually an economical step, which a company takes, in the sense, that instead of distributing the entire earnings by way of dividend, it keeps a certain percentage of profit to be re-introduced into the business for its development. Such a phenomenon is also known as ‘Self-Financing’, ‘Internal Financing’, or ‘Inter- Financing’. A part of profits is ploughed back or re-employed into the business and is regarded as in ideal source of financing expansion and modernization schemes as there is no immediate pressure to pay a return on Continue reading
Determinants of Capital Structure
Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable. The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm changes over a period of time. The factors influencing the Continue reading
Weighted Average Cost of Capital (WACC)
A firm uses various sources of finance to finance its projects. Each source of finance will be having a specific cost. So in order to determine the overall cost of capital of the firm, the weighted average cost of individual sources of finance should be determined with the weights being the proportion of each type of capital used. The Weighted Average Cost of Capital (WACC) is defined as the weighted average of the cost of various sources of finance, weights being the book value or market values of each source of finance. If ko represents the weighted average cost of capital or overall cost of capital then, ko = wdkd + wpkp + wtkt + weke + wrkr where, ko = weighted average cost of capital kd = cost of debt kp = cost of preferred stock kt = cost of term Continue reading
Capital Sources for Business: Preference Shares
Preference shares are those which carry priority rights in regard to the payment of dividend and return of capital and at the same time are subject to certain limitations with regard to voting rights. The preference shareholders are entitled to receive the fixed rate of dividend out of the net profit of the company. Only after the payment of dividend at a fixed rate is made to the preference shareholders, the balance of profit will be used for paying dividend to ordinary shares. The rate of dividend on preference shares is mentioned in the prospectus. Similarly in the event of liquidation the assets remaining after payment of all debts of the company are first used for returning the capital contributed by the preference shareholders. Types of Preference Shares Cumulative and non-cumulative: In the case of cumulative preference shares, the unpaid dividend goes on accumulating until paid. The unpaid dividends Continue reading