Capital structure refers to the mixture of long term funds represented by equity share capital, preference share capital and long term debts. As a matter of fact, capital structure planning is one of the major tasks which involve determination of the right proportion of different securities. Each Corporate security has its own merits and demerits. Too much inclusion of any one kind of security in the capital structure of a company may prove unprofitable or subsequently risky. Therefore, a prudent financial decision should be taken after considering all the factors in view. Capital structure should always be made in the interest of equity shareholders because they are the ultimate owners of the company. However, the interest of other groups, including employees, customers, creditors, society and government should also be duly considered. In this way, efforts should be made to have capital structure most advantageous. Within the constraints, maximum use should Continue reading
Financial Concepts
Behavioral Aspects of Budgeting
Budgetary control relies greatly on the individuals of a corporation. The human aspect in the budgetary system can be very complicated since the budgetary process involves relationships between different people within the corporation which includes the chief executive officer, managers and staff. Some times budgets affect people’s behaviors and vice versa. Thus the behavioral aspects of budgeting are of vital significance and consist of many different areas that high attention must be paid. First and foremost, we need to know the factors affecting the behavioral aspects of budgeting, including: Budgets perceived by employees as being too difficult In situations that lack full participation of all levels in preparing for the budgets, the employees will perceive the budgets as being too difficult to follow. In addition, the punishment that comes along from failing to meet what this budgeted has a tendency to encourage staff’s attempts to beat the system. This greatly Continue reading
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
The Difference Between Agency Theory and Stewardship Theory
Agency Theory An agency correlation as a contractual set-up under which the business owner or the principal engaged a manager or the agent to execute some service on his behalf and may usually entail some decision making exclusively by the agent. The agency theory revolves on the basic proposition about humans, which deals with principals and agents as self-oriented focusing on exploiting their personal advantage. Agency theory described managers as opportunistic by seizing its optimum advantage for his appointment and role as the mover in the firm for its own benefit, at the expense of the principal. Both parties’ goal is to gain that personal advantage in every way possible with the least outlay and expenditure. These expenditures are defined as agency costs. This is the total of cash outflows made by the principal for its organization be it in budget proportions, auditing, or employee honorariums; the expenses incurred Continue reading
Cost Reconciliation Statement
A manufacturing concern may adopt either Integrated Accounting System or Non-Integral Accounting System. Under Integrated Accounting System, only one set of books is maintained to record both costing and financial transaction, therefore, under this system, both financial accounts and cost accounts give similar results. But in Non-Integral Accounting System, separate books are maintained for costing and financial transactions, which may exhibit different results i.e. profits or losses. In other words, when cost accounts and financial accounts are maintained independently by a concern, the profit or loss shown by the cost accounts may not agree with the profit or loss shown by the financial accounts. In this situation, it is needed to reconcile the profits or losses shown differently by cost accounts and financial account by preparing a statement called Cost Reconciliation Statement. A statement which is prepared for reconciling the profit between financial account and cost account is known as Continue reading
Advantages and Disadvantages of Accounting Standards
Accounting Standards In accounting, for every basis, identification and measurement of the elements of financial statement and the impact of the circumstances and financial status and work results should be defined in a form of standards. These standards are like the rules for accounting in any country. That is why they denote what should be mentioned in any company’s accounts. Moreover, they guarantee that certain cases, approaches and requirements are taken into account normally. In addition, they help people who are interested in investment to make decisions by ensuring that they get appropriate information needed. This is the idea behind accounting standards. When we talk about accounting standards, the main thing that comes under them is the accounting report. According to the International Accounting Standards Committee (IASC), accounting reports are documents filled out by brokers that give details and facts about a new client’s financial circumstances and investment objectives. The Continue reading