Financial Accounting and Management Accounting are two interrelated facets of the accounting system. They are not exclusive of each other; they are supplementary in nature. Financial accounting provides the basic structure for collecting data. The data collection structure is suitably modified or adjusted for accumulating information for management accounting purposes. In a broader sense, management accounting includes financial accounting. They differ in their emphasis and approaches. They are as follows: Financial accounting serves the interest of external users (i.e. investors etc.) while management accounting caters to the needs of internal users (i.e. management). Financial accounting is governed by the generally accepted accounting principles while management accounting has no set principles. Financial accounting presents historical information while management accounting represents predetermined as well as past information. Financial accounting is statutory while management accounting is optional. Financial accounting presents annual reports while management accounting reports are of both Continue reading
Financial Concepts
Shareholder Value Analysis (SVA)
Shareholder Value Analysis (SVA) is an approach to financial management, which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of funds. It’s lead by the principle that the management of a company should take into consideration the shareholder’s interest and advantages before meets any decision, set short-term or long-term objectives and decide company’s strategy as well. Shareholder Value Analysis is a characteristic substitute for trade business measurement, which has improved a lot by time passing. Due to the fact that company’s value is calculated based on the value returned to its shareholders, in the past had been criticized for being either short-term measured or only based in past figures. Shareholder Value Analysis takes a longer-term view and is about measuring and managing cash-flows over time. The shareholder value is calculated by estimating the total net value of the company and dividing Continue reading
Hedging with Derivatives – Futures Hedging, Forwards Hedging, and Swap Hedging
Futures Hedging A futures contract compels the buyer to purchase a particular quantity of assets within a certain period of time. The price of the purchase is agreed in the contract at the time of entering this contract. The asset that is to be purchased is referred to as the underlying asset and the time when this asset is purchased or sold is known as the expiry date or maturity date. While the major difference between a futures contract from an options contract is the obligation to purchase an asset, forward contracts also oblige the buyer to purchase the underlying asset. However, in contrast to forward contracts, futures contracts are drawn according to standardized forms and are more liquid since they are traded on secondary markets. Futures contracts provide more liquidity in comparison with forward contracts. A party that enters a futures agreement to purchase security may sell this right Continue reading
Objectives of Financial Management
Financial management is concerned with procurement and use of funds. Its main aim is to use business funds in such a way that the firm’s value / earnings are maximized. Financial management provides a frame work for selecting a proper course of action and deciding a viable commercial strategy. The main objective of a business is to maximize the owner’s economic welfare. This objective can be achieved by; Profit Maximization, and Wealth Maximization. 1. Profit Maximization Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a protection against risks which cannot be ensured. The accumulated profits enable a business to face Continue reading
Need for Financial Restructuring
Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy. Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion. Need Continue reading
Financial Analysis with the DuPont Model
The dynamic environment of the world today suggests that one should be apt enough to apply his skills immanent to a system and also external with respect to credit management function. These functions include financial planning, plausibility of a defined business strategy or whether a particular merger or acquisition is feasible or not. This has to be done in a rapid yet meaningful way so as to be of immediate need to a particular firm or investor. There are basically four major reasons for an effective financial statement analysis. These have been mentioned as follows: It is useful for long-run business viability so as to determine whether a firm would be able to provide adequate business return when compared to the amount of risks taken. This is essential for outside investors. It is also used by creditors so as to find out whether a potential buyer has the capability to Continue reading