The need and importance of the installation and the organisation of a good system of cost accounting are being increasingly realized presently all over the business versatility. The common experience of enthusiastic youths climbing the business – tree and falling mid-way without even collecting the leaves owes to the ignorance of he use installation and organisation of costing system, and to the infatuation that the profits could be earned without it. A good system is the key-point governing, the mechanism of an enterprise in the field of cost control, ascertainment of profitability, and managerial decision-making. Installation of a costing system is not an expense but an investment as the rewards are much greater than the expenses incurred. The cost system is for the business and not the business for a system of cost. Therefore, the system has to be so designed as to meet the specific needs of the enterprise. Continue reading
Financial Management Concepts
Market Value Added (MVA)
Economic Value Added (EVA) is aimed to be a measure of the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increase value of company while earning less than the cost of capital decreases the value. For listed companies, Stewart defined another measure that assesses if the company has created shareholder value or not. If the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. However, if market value is less than capital invested, the company has destroyed shareholder value. The difference between the company’s market value and book value is called Market Valued Added or MVA. From an investor’s point of view, Market Value Added (MVA) is the best final measure of a Company’s performance. Stewart states that MVA is a cumulative measure of corporate performance and Continue reading
Economic Value Added (EVA) and Shareholders Value Maximization
Almost in all books on financial management, the very first chapter introduces the fact that the goal of financial decisions is to maximize shareholder’s value. But why only shareholder’s value and what about others stakeholders like employees, customers, creditors? If one focuses on the shareholder value creation other stakeholder’s interests will automatically become the sub-goals and achieving these sub goals becomes crucial to the achievement of the overall goal i.e. shareholder value maximization. For example, the firm’s profit depends a lot on how the employees perform and to motivate them the firm needs to satisfy their needs and constantly upgrade their knowledge and skills by proper training. Similarly the firm would be required to pay its creditors on time so that they keep providing them credit whenever needed in the future and the credit availability does not hamper the operations of the firm. So a firm’s goal to maximize wealth Continue reading
Balance Sheet – Explanation, Components and Analysis
Balance sheet is one of the most significant financial statements. It indicates the financial condition or the state of affairs of a business at a particular moment of time. More specifically, balance sheet contains information about resources and obligations of a business entity and about its owners’ interests in the business at a particular point of time. Thus, the balance sheet of a firm prepared on 31st December 2011 reveals the firm’s financial position on this specific date. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period. Assets — Assets, representing economic resources, are the valuable possessions owned by the firm. These possessions should be capable of being measured in monetary terms. Assets Continue reading
Liquidity – Meaning, Fundamentals, and Effects
Working capital is a term of liquidation as per the accountants. For them it is more important to ascertain if the company would be in a position to pay off its liabilities using its cash flows than to what level of current and non-current resources it holds. The disparity between current assets and current liabilities is therefore considered to be more important than the volume of the investment either in current assets or current liabilities. The success of the management of working capital ultimately depends on the optimal level of liquidity held by the organization. Higher level of liquidity has a bearing on the profitability of the firm whereas lower liquidity level can affect the operations of the firm. There are many factors that contribute to the changes in the level of liquidity but the changes in the composition of the working capital elements is probably the most significant among Continue reading
Accounting Concepts for Preparing Financial Statements
Accounting concepts and conventions as used in accountancy are the rules and principles applied when recording economic events and in the preparation of financial statements, that all accountants abide by. Some of the fundamental accounting concepts that will be discussed are the accruals, matching, prudence, going concern and consistency concepts. Money measurement concept – Accounting normally deals with only those items that are capable of being expressed in monetary terms. Money has the advantage that it is a useful common denominator with which to express the wide variety of recourse’s held by a business. However, not all such resources are capable of being measured in monetary terms and so will be excluded from a balance sheet. The money measurement concept, thus, limits the scope of accounting reports. Historic cost concept – Assets are shown on the balance at a value that is based on their historic cost (that is, acquisition Continue reading