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
Financial Management Concepts
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
Importance of Capital Structure Planning
For the real growth of the company the financial manager of the company should plan an optimum capital structure for the company. The optimum capital structure is one that maximize the market value of the firm. In practice the determination of the optimum capital structure is a formidable task and the manager has to perform this task properly, so that the ultimate objective of the firm can be achieved. There are significant variations among industries and companies within an industry in terms of capital structure. Since a number of factors influence the capital structure decision of a company, the judgment of the person making the capital structure decisions play a crucial part. A totally theoretical model can’t adequately handle all those factors, which affects the capital structure decision in practice. These factors are highly psychological, complex and qualitative and do not always follow accepted theory, since capital markets are not Continue reading
The Importance of the Conceptual Framework for Accounting
An accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. The main reason for developing a conceptual framework are that gives a framework for setting accounting standards, a basis for resolving accounting disputes and fundamental principles which then do not have to be repeated in accounting standards. Furthermore, Conceptual Framework can be categorized in terms of the distinctive function of management accounting within the management process in organizations. Moreover, the way in which the utility of the outcomes of the management accounting process can be tested. Conceptual Framework is a criteria which can be used to assess the value of the processes and work technologies used in management accounting and capabilities necessarily associated with the effectiveness of the management accounting function overall. Conceptual Framework plays an important role in Continue reading
Significance of Capital Budgeting
The key function of the financial management is the selection of the most profitable assortment of capital investment and it is the most important area of decision-making of the financial manager because any action taken by the manger in this area affects the working and the profitability of the firm for many years to come. Significance of Capital Budgeting Decisions The significance of capital budgeting can be emphasized taking into consideration the very nature of the capital expenditure such as heavy investment in capital projects, long-term implications for the firm, irreversible decisions and complicates of the decision making. Its importance can be illustrated well on the following other grounds: 1. Indirect Forecast of Sales. The investment in fixed assets is related to future sales of the firm during the life time of the assets purchased. It shows the possibility of expanding the production facilities to cover additional sales shown in Continue reading