In business there are two types of stakeholders that’s: internal stakeholders and external stakeholders. Internal stakeholders mean those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. All shareholders want to see the use of their investment and thus asses the management through the financial statements. Because financial statements are very useful for businesses. Stakeholders of the company require the financial information for following reasons. To know how well the company is doing. To find company has earned more money than they spent. To get an idea about strategic and tactical plans of the management. To provide information to make decisions who make decisions about organisatoin. Avoid dissimulations and corruptions of the organisation. The usefulness of financial statements to different stakeholders is Continue reading
Financial Concepts
Advantages and Disadvantages of Historical Cost Accounting
The historical cost accounting values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.The historical cost accounting is the situation in which accountants record revenue, expenditure and asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money’s worth, received or paid to complete the transaction. Historical cost principle means that assets and liabilities are recorded at their actual historical cost. When an asset is written off, the loss is recorded as the historical cost of the asset less any accumulated depreciation. Typically, the asset would be fully depreciated and thus no loss recorded but this isn’t always the case. If the asset is sold the gain or loss is recorded as the amount received for the asset less the historical cost (net of any accumulated depreciation). In both cases, you’re using the historical cost Continue reading
Importance and Limitations of Financial Statements
Importance of Financial Statements Financial statements are the important sources of information to all the users of accounting information like; management, owners, debtors, creditors, employees, government agencies, financial analysts, etc. The following are the points which highlight the importance of financial statements: Financial statements are the summary of information relating to profitability, and resources owned by the firm. Financial statements provide the information which can be compared with those of other firms. Employees can use financial statements to demand for increment in salary and other benefits. Bankers and other financial institutions can use financial statements to make the lending decisions. Government bases on financial statements of the companies for the calculation of tax revenue from the firms. Financial statements can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc. Existing investors can use financial statements to assess how efficiently the firm is Continue reading
Conflicts between Managers and Shareholders
Agency theory portrayed the fundamental problems in an organization that is self-interested behavior. Self interested behavior was usually direct to an unfavorable effect on any organization which was by and large for the purpose of getting highest share holder wealth. Company managers could have personal objectives that compete with the owner’s objective of maximization of shareholder wealth. Since the shareholders approved managers to administer the firm’s assets, a possible difference of interest occurred between the two groups. Self-Interested Behavior Agency theory argued that, in imperfect capital and labor markets, managers were trying to find make best use of their own values without regard for corporate shareholders. Agents have the capability to manage their own self-interest comparatively more then the best interests of the firm because of asymmetric information (e.g., managers know better than shareholders either they are talented and capable of meeting the shareholders’ objectives and vagueness. Facts of self-interested Continue reading
Relationship Between Operating Leverage and Financial Risk
All strategic investment decisions are going to involve some degree of risk. Risk entails not only the profitable versus unprofitable dichotomy, but also the variability in earnings or losses emanating from an investment project. One dimension of the risk-management question is captured in the concept of operating leverage. Operating leverage is the degree of magnification of earnings or losses (expressed as cash flows or profits) set off by different levels of output. The magnification results from the variable cost versus fixed cost mix in an investment period. Generally the higher the level of fixed commitment in relation to variable costs, the greater is the leverage (and magnification). This, of course, is the central notion in the familiar break-even analysis, where concern is given not only to the break-even point, but also the levels of earnings or losses around it. Operating leverage is a double-edged sword, however. Like financial leverage, operating Continue reading
Debt Equity Ratio
Meaning of Debt Equity Ratio Capitalization of a company consists of funds raised by issuing various types of securities, i.e., ordinary shares, preference shares, debentures etc. To decide as to the ratio of various types of securities to total capitalization is a very difficult task but the decision in this important for the business to decide as to the ratio of ownership capital to the creditorship capital or loan capital. The ratio of borrowed capital to the owned capital may be called debt equity ratio. In other words, debt equity ratio is the ratio between borrowed capital on the one hand and owned capital on the other. Debt equity ratio is positively correlated with the capital gearing. If capital gearing in a company is high, debt equity ratio would also be high or vice versa. For example, if the total capital of Rs. 1,00,000 in a company consists of Rs. Continue reading