Dividend refers to the portion of net income paid out to shareholders. It is paid in cash and/or stock for making investment and bearing risk. Dividend decision of the firm is yet another crucial area of financial management as it affects shareholders wealth and value of the firm. The percentage of earning paid out in the form of cash dividend is known as dividend payout ratio. A company may retain some portion of its earnings to finance new investment. The percentage of retained in the firm is called retention ratio. Dividend policy is an integral part of the firm’s financing decision as it provides internal financing. Dividend policy is concerned with determining the proportion of firm’s earnings to be distributed in the form of cash dividend and the portion of earnings to be retained. A firm has three alternatives regarding the payment of cash dividends: It can distribute all of its earnings in Continue reading
Financial Management Concepts
Meaning of Capital Structure
Capital structure refers to the portfolio of different sources of capital employed by a business. It is the mix of capital. It is the portfolio of liabilities of business. It is the structure of long term liabilities of a business. Short term liabilities being fluctuating type, for structure analysis, which is some what long term in nature, are not considered for capital structure analysis. There is another concept viz., financial structure which studies the structure of whole of the liabilities of business including both short term and long term capital. In final analysis, capital structure analysis is considered with the equity and debt composition of capital of a business. The capital structure for a business should be planned. The debt-equity proposition, mix of equity sources, mix of debt sources and the like need to be planned. To plan capital structure, therefore, means determining the debt-equity proportion and mix of individual Continue reading
Bond Duration and Portfolio Immunization
Bond Duration Duration is a significant measurement of how sensitivity the change in price of a bond in the change of interest rate. It is broadly linked to the length of time before the bond is mature. Duration assists investors during the investment decision making process by expressing the relation between interest rate and price variables of the bond. Therefore, duration is useful measurement for investors because it protects investment from interest rate risk. When the duration of bond is lower that means investors can obtain the cash earlier and reinvest it at prevailing interest rate. As a result, the lower the duration of a bond, the lesser sensitive changes in the interest rate. Majority of investors are familiar with maturity which is the point of time when investors get back the principal of bond. However, duration is defined as the length of time before the maturity of the bond. Therefore, the Continue reading
The Performance Prism
The Performance Prism is a second generation performance measurement and management framework that has been developed by Neely, Adams and Kennerley to further aid organisations in their pursuit of measuring the overall performance of their operations. The creators of this model suggest that for organisations operating within almost any given industry, the most important aspect of management is to deliver on the expectations of the stakeholders associated with that organisation. The Performance Prism is designed to help with the complex relationships that organisations often possess with their various stakeholders within the context of its operating environment. It provides an innovative and holistic framework that directs management attention to what is important for long term success and viability and helps organisations to design, build, operate and refresh their performance measurement systems in a way that is relevant to the specific issues that they face within their given industry. This model attempts Continue reading
Qualitative Characteristics of Financial Statements
The financial statement should contain information “sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom it is addressed”. According to the sentence, it is means that the financial statement should contain useful and meaningful information which included quantity and quality so that the reader who we make the financial statement to the person knows and understand it. How we achieve the quality information? Actually there are four qualitative characteristics of financial statements. The four characteristics are understandability, relevance, reliability, and comparability. First, understandability is including taking into consideration users’ abilities, and aggregation and classification of information. Relevance is including having predictive value and confirmatory value. Next, Reliability is including faithful representation, being natural, free form material error, complete, and prudent. Comparability is including consistency and disclosure. All the characteristics are attributes that make the information provided in financial statements are useful to users. Understandability Continue reading
Cost Audit – Definitions, Objectives, Advantages and Limitations
Cost audit is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilization of material or labor or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.” The ICWAI defines cost audit as “system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries” From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctness Continue reading