Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information 1. Relevance Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating the Continue reading
Financial Concepts
Stakeholder Capitalism Model
Stakeholder capitalism model says that company should make decisions by taking into account the interests of all the stakeholders in the firm. Stakeholders include all individuals or groups who can significantly affect the welfare of the firm in the aspects of not only the financial claimants, but also employees, management, customers, local community, supply chain members, local or national government and creditors. One of the important variables in this model is considering all stakeholders’ interest as they are people who support and sustain the company. In the stakeholder capitalism model, it is argued that firms should pay attention to all their supporters that can affect the firm. Managers and boards of directors of company have vital roles on making decisions that suit multiple competing and inconsistent constituent interests. However, there are different demands and interests from stakeholders. Customers want low prices, high quality, expensive service and so on. Employees want Continue reading
What is Profit Center?
When financial performance of a responsibility center is measured in terms of the organization’s profit, then it is called a profit center. In a profit center, performance is measured in terms of the numerical difference between revenues (outputs) and expenditure (inputs). A profit center is given the responsibility of earning profits. It is involved in the manufacture and sale of outputs, and it measures how well the center is doing economically. The profit center also determines the efficiency of the manager in charge of the center. Profit as a measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that often point to different directions. A profit center helps in motivating managers to perform well in areas they control and also encourages managers to take initiatives. The profit center helps the organization to make the best use of specialized market Continue reading
Types of Dividend Policies
The size and frequency of dividend payments are critical issues in company policy. Dividend policy affects the financial structure, the flow of funds, corporate liquidity, stock prices, and the morale of stockholders. The finance manager plays an important role in the dividend policy. The objective of dividend policy is to maximize shareholder’s return so that the value of his investment is maximized. Shareholders’ return consists of two components: dividends and capital gains. Dividend policies has a direct impact on these components; A Low payout ratio may produce higher share price because it accelerates earnings growth. Investors of growth companies will realize their return mostly in the form of capital gains. Dividend yield – dividend per share divided by the market price per share will be low for such companies. The impact of dividend policy on future capital gains is, however, complex. Capital gains occur in distant future, and therefore, are Continue reading
Standard Costing as a Control Mechanism
Standard costing is technique of cost planning and control, based on scientific analysis of elements of cost in terms of standard input / output norms and standard rates / price per unit of input. The following process is involved in setting and practicing standard cost. Establish standard cost, component-wise, for each output Measure the actual cost, component-wise, for each output Their comparison with the actual costs and the measurement of variances. The location of responsibility for the variances and the corrective action to be taken. The analysis of variances for ascertaining the reasons for the same. Establishment of a Standard Costing System The installation of Standard Costing System in a manufacturing concern involves the following steps: Standardization of Functions: All activities should be standardized and the technical processes of operations should also be susceptible to planning. Establishment of Cost Center Classification of Accounts: The different accounts can be codified and Continue reading
Installment Purchase System – Meaning and Concept
An installment purchase system is just like a credit purchase and hire purchase system of selling and buying goods. Like hire purchase, in installment purchase system an agreement is made between buyer and seller to purchase and sell of goods. The buyer makes certain down payment at the time of signing agreement and the balance is paying in installment over a period of time. An installment purchase system is a credit sale in which payments are made in installments over a period of time. In this system, the buyer gets the possession as well as ownership of the goods right at the time of signing the agreement. During the course of paying the installment, if the buyer makes default in paying the installment, the vendor cannot responses the goods. In that case, the vendor can sue the buyer for recovery of dues. Like in hire purchase even the paid installments Continue reading