The financial failure of a company can have a devastating effect on the all seven users of financial statements e.g. present and potential investors, customers, creditors, employees, lenders, general public etc. As a result, users of financial statements as indicated previously are interested in predicting not only whether a company will fail, but also when it will fail e.g. to avoid high profile corporate failures at Enron, Arthur Anderson, and WorldCom etc. Business failure is defined as the unfortunate circumstance of a firm’s inability to stay in the business. Business failure occurs when the total liabilities exceeds the total assets of a company, as total assets is consider a measure of productivity of a company assets. The main reasons for business failure are high interest rates, recession squeezed profits, heavy debt burdens, government regulations and the nature of operations can contribute to a firm’s financial distress. The traditional analysis of Continue reading
Financial Management Concepts
The Objective of Financial Reporting
The main objective of financial reporting is to provide financial information to current capital provides to make decisions. This information might also be useful to users who are not capital providers. The general purpose financial reporting develops superior reporting standards to help in the efficient functioning of economies and the efficient allocation of resources in capital markets. General purpose financial reporting focuses on an extensive range of users’ needs that lack the ability to obtain financial information needed from the entity. It should be broad enough to comprehend information for the various users. Therefore, the financial report is where they depend on to acquire information. Diverse users may require different information which might go beyond the scope of general purpose financial reporting. The financial reports are prepared from the entity’s perspective (deemed to have substance on its own, spate from that of its owners), instead of the entity’s capital providers. Continue reading
Calculation of Exchange Rates for Forward Contracts
When computing exchange rates for merchant transactions, the cover or the base rate at which the cover transaction can be undertaken in the Forex market is first computed, thereafter the profit margin as allowed by the Foreign Exchange Dealer’s Association of India (FEDAI) is taken and the rate rounded off as per FEDAI Rule. In case of forward contracts, the procedure is similar except that while computing the base rate, the forward margin has to be appropriately taken. The forward margin is the extent to which the forward rate for a currency differs from its spot rate against a second currency. The forward margin when it tends to make a currency cheaper is called a ‘Discount’ while if it makes it costlier it is called a ‘Premium.’ Obviously if one currency is getting cheaper in the forward against another, the second should be getting costlier against the first. Thus while Continue reading
Motives for Holding Cash – Cash Management Concepts
Cash is the medium of exchange on the common purchasing power and which is the most important component of working capital. It includes coins, currency, cheques held by the firm and the balances in its bank accounts. Sometimes near-cash items also are included.’ Cash is the basic input required to keep the firm running on a continuous basis. At the same time it is the ultimate output expected to be realized by selling goods and services. A firm should hold sufficient cash, neither more, not less. An excessive cash remains idle which simply increases the cost without contributing anything towards the profitability of the firm and in the opposite case, trading and/ or manufacturing operation will be disrupted. Not only that, it largely upholds, under given condition, the quantum of other ingredients of working capital, viz., inventories and debtors, that may be needed for a given scale and type of Continue reading
Management Accounting – Definition, Objectives, Scope and Limitations
DEFINITION OF MANAGEMENT ACCOUNTING Management accounting is not a specific system of accounting. It could be any form of accounting which enables a business to be conducted more effectively and efficiently. It is largely concerned with providing economic information to mangers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounting information is financial in nature but has been organized in a manner relating directly to the decision on hand. Management Accounting is comprised of two words ‘Management’ and ‘Accounting’. It means the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control of execution and appreciation of effectiveness. Management accounting is of recent origin. This was first used in 1950 by a team of accountants visiting Continue reading
Importance of Capital Investment Decisions
Investment decision otherwise known as capital budgeting decision is perhaps the most important decision taken by a Finance Manager. Whatever is the objective of the firm, whether profit maximization or wealth maximization, capital budgeting decision affects performance of the firm decisively. These investment decisions have the following implications for the firm. They define the strategic focus and direction of the business. The capital expenditure made in new investments may result in entry into new products, services or new markets. Capital budgeting decisions require large funds and generally have long repayment periods. The results of capital budgeting continue to impact the finances of the firm for many years. Due to long project life, assessment involves number of years of future events leading to difficulty and uncertainty regarding the accuracy of assessment. Capital budgeting decisions are mostly irreversible. They involve investment in plant and machinery or new soft wares or technology etc. Continue reading