Financial statements entail the end products which are prepared from the adjusted trial balance. Financial statements play an important role of communicating key accounting information concerning a business organization to those people who are interested in the business. The financial statements act as a model of a business enterprise by showing the business organization in financial terms. The major financial statements includes income statements or profit and loss account, the balance sheet or statement of financial position, the cash flow statement and changes in owner’s equity. The income statement or the profit and loss account summarizes the expenses and revenues that a business incurs in a particular accounting period. Income statement is an important financial statement as it enables people to determine as to whether the business has attained its profitability objectives or not. The balance sheet main purpose is to explain the position of a firm at a particular Continue reading
Business Finance Terms
Foreign Capital
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital. Forms of Foreign Capital Direct Entrepreneurial Investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad Continue reading
Accounts Payable – Meaning, Process, Advantages, and Disadvantages
Every business owner would like to have all sales on a cash basis, but that’s not always possible in a competitive marketplace. Sometimes, sellers need to offer sales on credit terms just to get customers to buy their products. Unfortunately, selling on delayed payment terms opens up an entirely new aspect of running a business: managing the extension of trade credit to customers. constitute a current or short term liability representing the buyer’s obligation to pay a certain amount on a date in the near future for value of goods or services received. They are short term deferments of cash payments that the buyer of goods and services is allowed by the seller. Payables is extended in connection with goods purchased for resale or for processing and resale, and hence excludes consumer credit provided to individuals for purchasing goods for ultimate use and installment credit provided for purchase of equipment Continue reading
Liquidity and Profitability Trade-Off
Differences Between Liquidity and Profitability The liquidity is the ability of a firm to pay its short term obligation for the continuous operation. A firm is considered normally financially solid and low risky which has huge cash in its balance sheet. The liquidity is not only measured by the cash balance but also by all kind of assets which can be converted to cash within one year without losing their value. It has primary importance for the survival of a firm both in short term and long term whereas the profitability has secondary important. The profitability measures the economic success of the firm irrespective to cash flow in the firm. It is often observed that a firm is very profitable in its books but it does not have sufficient cash and cash equivalent to pay its daily bills and due obligations. That is an illustration of classical poor liquidity management. Continue reading
Factoring of Receivables – Meaning and Mechanism
Raising short term and medium term debt by inviting and accepting deposits from the investing public has become an established practice with a large number of companies both in the private and public sectors. This is the outcome of the process of dis-intermediation that is taking place in Indian economy. Similarly, issuance of Commercial Paper by high net-worth Corporates enables them to raise short-term funds directly from investors at cheaper rates as compared to bank credit. In practice, however, commercial banks have been the major investors in Commercial Paper in India, implying thereby that bank credit flows to the corporate sector through the route of CPs. Inter-Corporate loans and investments enable the cash rich corporations to lend their surplus resources to those who need them for their working capital purpose. Factoring of receivables is a relatively recent innovation which enables corporates to convert their receivables into liquidity within a short Continue reading
Capital Asset Pricing Model (CAPM) – Definition, Formula and Calculation
The risk or variation in return of a security is caused by two types of factors. The first type of factors will affect the return of almost all securities in the market. Examples of such sources of risks are changes in the interest rates and inflation of the economy, movement of stock market index and exchange rate movement. The risk caused by such factors is known as systematic risk. Apart from systematic risk, the variation in return of a security is also caused by some other factors which are specific to a security, like a strike in a company or the caliber of the management of a company. The risk caused by such factors is known as unsystematic or specific risk. The unsystematic risk of a security can be diversified away by combining different securities into a portfolio. But systematic risk cannot be diversified away by the construction of a Continue reading