Financial statements entail the end products which are prepared from the adjusted trial balance. Financial statements play an important role of communicating key accounting information concerning a business organization to those people who are interested in the business. The financial statements act as a model of a business enterprise by showing the business organization in financial terms. The major financial statements includes income statements or profit and loss account, the balance sheet or statement of financial position, the cash flow statement and changes in owner’s equity. The income statement or the profit and loss account summarizes the expenses and revenues that a business incurs in a particular accounting period. Income statement is an important financial statement as it enables people to determine as to whether the business has attained its profitability objectives or not. The balance sheet main purpose is to explain the position of a firm at a particular Continue reading
Financial Concepts
Earnings Management – Definitions, Reasons and Examples
Earnings Management (EM) is the term used to describe the process of manipulating earnings of the firm to meet management’s predetermined target. The flexibility of accounting standards may cause some variability in earnings to occur as a result of the accounting choices made by management. However, earnings management that falls outside the generally accepted accounting choice boundaries is clearly unethical. The intent behind the earnings management also contributes to the questionable ethics of the practice. Some managers use EM as a means of deceiving shareholders or other stakeholders of the organization, such as creating the appearance of higher earnings to increase compensation or to avoid default on a debt covenant. The intent to use EM to deceive stakeholders implies that it can be unethical, even if the earnings management remains within the boundaries of GAAP or IAS. Earnings management has been defined as management’s exploitation of accounting flexibility to meet Continue reading
Basics of Commodity Futures Markets
Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes agricultural products, metals, petroleum, financial instruments, foreign currencies and stock indexes. Trading has also being imitated in future contracts , enabling option buyers to participate in future market with known risks. In other words Futures markets have been described as continuous auction market and as a clearing house for the latest information about supply and demand. Participants in Future Market The following are the participant in future market which are as follows: Hedgers: Hedgers are individuals and firms that makes purchases and sales in the future market solely for the purpose of establishing a known price level —weeks or month in advance -for something Continue reading
Why Shareholder Wealth Maximization is Important in Business?
In modern finance, it is proven that shareholder wealth maximization is the superior goal of a firm and shareholders are the residual claimants; therefore maximizing shareholder returns usually implies that firms must also satisfy stakeholders such as customers, employees, suppliers, local communities, and the environment first. Also, a firm’s value can not be maximized if the management board or shareholders ignores the interest of its stakeholders. Thus, the main goal of a firm is to maximize shareholder wealth but it does not mean that management should disregard stakeholders. To begin with, it is necessary to understand what is shareholder wealth and why maximizing shareholder wealth is a superior objective? Maximizing shareholder wealth is defined as maximizing purchasing power as well as the flow of dividends to shareholders through time and it is a long-term perspective. In addition, a very important point to explain why shareholder wealth maximization is superior objective Continue reading
Forex Market or Foreign Exchange Market – History, Definition, Characteristics and Parties Involved
Foreign exchange refers to money denominated in the currency of another nation or group of nations. Foreign exchange can be cash, bank deposits or other short-term claims. But in the foreign exchange market as the network of major foreign exchange dealers engaged in high-volume trading, foreign exchange almost always take the form of an exchange of bank deposits of different national currency denominations. A Foreign exchange market or Forex market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent. Short History of the Foreign Exchange Market Foreign exchange markets mainly established to make easy cross border trade in which there is involvement of different currencies by governments, companies and individual investors. More ever these markets generally existed to supply for the international movement of capital and money, even the initial markets had speculators. Today, Continue reading
Cost Accounting – Definition, Objectives, Scope and Limitations
DEFINITION OF COST ACCOUNTING An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. The requirements of majority of them are satisfied by means of financial accounting. However, the management requires far more detailed information than what the conventional financial accounting can offer. The focus of the management lies not in the past but on the future. For a businessman who manufactures goods or renders services, cost accounting is a useful tool. It was developed on account of limitations of financial accounting and is the extension of financial accounting. The advent of factory system gave an impetus to the development of cost accounting. Cost Accounting is a method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. The Institute of Cost and Works Accountants, London defines Continue reading