Purchase and sale of goods under a hire purchase system is different from cash sale and credit sale. In case of cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along with the goods. While in credit sale the payment is made in future. In these both cases the ownership and possession of goods pass on the buyer. However, hire purchase system is a special system of purchase and sale. In hire purchase system, the buyer acquires the property by promising to pay necessary installment payment of monthly, quarterly, half yearly or any other period. The period of payment has to be fixed while, signing the hire sell agreement. Though, the buyer acquires the asset under hire purchase system after signing the agreement, the title of ownership remains with vendor until the buyer squares up his/her entire liability. When the buyer pays the Continue reading
Business Finance Terms
Cost of Capital – Meaning, Significance and Components
Investment in capital projects needs funds. These funds are provided by the investors like equity shareholders, preference shareholders, debenture holders, etc in expectation of a minimum return from the firm. The minimum return expected by the investors depends upon the risk perception of the investor as well as on the risk-return characteristics of the firm. This minimum return expected by the investors, which in turn, is the cost of procuring funds for the firm, is termed as the cost of capital of the firm. Thus, the cost of capital of a firm is the minimum rate of return that it must earn on its investments in order to satisfy the expectation of the various categories of investors who have invested in the firm. A firm procures funds from various sources by issuing different securities to finance its projects. Each of these sources of finance entails cost to the firm. Since Continue reading
Concept of Secret Reserve
A reserve which maintained to strengthen the financial position of the business without disclosing it in the book is known as secret reserve. Secret reserve is hidden reserve which is not disclosed by the balance sheet. Secret reserve is also known as internal reserve. It is created by showing the figure of net profit less than actual. Its existence makes the financial position of the business better than what the balance sheet is disclosing. Generally, it is maintained by bank, Insurance and other financial institutions. A secret reserve is created in any of the following ways: High Value Of Goodwill: In the balance sheet if value of good will is shown nominal or how but infact its value is high reserve may be created. Shown More Bad Debts: If management has made excessive provisions for bad debts. Infact these are less than the reserves allocated. So keeping in view the 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
Financial Derivative Types: Swaps
Swap is yet another exciting trading instrument. In fact, it is a combination of forwards by two counter-parties. It is arranged to reap the benefits arising from the fluctuation in the market — either currency market or interest rate market or any other market for that matter. Features of Swap The following are the important features of swap: Basically a forward: A swap is nothing but a combination of forwards. So, it has all the properties of a forward contract discussed above. Double coincidence of wants: Swap requires that two parties with equal and opposite needs must come into contact with each other. As stated earlier, it is a combination of forwards by two counterparties with opposite but matching needs. For instance, the rate of interest differs from market to market and within the market itself. It varies from borrowers to borrowers due to the relative credit worthiness of borrowers. Continue reading
Asset Swaps
Unlike interest rate swaps and basis rate swaps discussed earlier, in which cash flows of debt obligation were changed, asset swaps are used to change the characteristics of an asset. For example, an investor with a ten year fixed Japanese yen bond may decide to enter into a currency swap to change his investment income into US dollar. The investor may feel that the Japanese yen will lose its value against the US dollar and would like to change his income into US dollar. Assume the current five year swap rate for US$ versus Japanese Yen to be 6.45-6.50%. The coupon rate of the investor’s bond is 7.00% and the bond has five years remaining. The investor can exchange his 50 bps Japanese Yen payments at the spot market as an extra income above LIBOR or have the dealer manage that risk as well. At the maturity date, the Continue reading