The assets of a company can be financed either by increasing the owners’ claims or the creditors’ claims. The owners claim increase when the firm raises funds by issuing ordinary shares or by retaining earnings; the creditors’ claims increase by borrowing. The various means of financing represent the financial structure or capital structure of a company. The term capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid-up share capital, share premium and reserve and surplus (retained earnings). The company will have to plan its capital structure initially at the time of its promotion. Subsequently, whenever funds have to be raised finance investment, a capital structure decision is involved. Capital structure of a company refers to the mix of sources from where the long-term funds required in the business may be raised. A demand for raising funds generates a new capital structure a decision Continue reading
Financial Management Concepts
Catastrophe Bonds or CAT Bonds
Catastrophe Bonds (or CAT Bonds) are high-yield, risk-linked securities used to transfer explicitly to the capital markets major catastrophe exposures such as low probability disastrous losses due to hurricanes and earthquakes. It has a special condition that states that if the issuer (Insurance or Reinsurance Company) suffers a particular predefined catastrophe loss, then payment of interest and/or repayment of principal is either deferred or completely waived. These bonds were first introduced as a solution to problems resulting from traditional insurance market capacity constraints, excessive insurance premia, and insolvency risk due to catastrophic losses. Catastrophe Bonds or CAT Bonds are complex financial tools which transfer peril specific risks to the capital markets instead of an insurance company. The peril risk is transferred through a complex system of events which include creation of a special purpose vehicle by a sponsor, modeling event scenarios by qualified risk management firms, drafting of a bond Continue reading
Factors Affecting Dividend Policy
Dividend is the amount paid out to the shareholders out of the earnings for equity shareholders. That part of the total earnings, which is not paid out as dividend, is the retained earnings (RE), which is ploughed back or reinvested in the business. The higher the amount of dividend, the lower the retained earnings and vice versa. Retained profit increases the long-term capital base of the company and thus increases the potential of future earning capacity. On the other hand, the higher the dividend, the higher the earnings of the equity shareholders at present. The question is what is the trade-off between present earnings and higher future earnings; what is the optimum dividend policy. As in other matters, that dividend policy is optimum, which maximizes the net wealth of equity shareholders. The issue before dividend policy is to determine the best distribution of profit between dividend per share (DPS) and Continue reading
Functions of Finance Manager
The twin aspects, procurement and effective utilization of funds are crucial tasks faced by a finance manager. The financial manager is required to look into the financial implications of any decision in the firm. Thus all decisions involve management of funds under the purview of the finance manager. A large number of decisions involve substantial or material changes in value of funds procured or employed. The finance manager, has to manage funds in such a way so as to make their optimum utilization and to ensure their procurement in a way that the risk, cost and control are properly balanced under a given situation. He may not, be concerned with the decisions, that do not affect the basic financial management and structure. The nature of job of an accountant and finance manager is different, an accountant’s job is primarily to record the business transactions, prepare financial statements showing results Continue reading
Accounting Errors – Meaning, Causes and Types
The errors or mistakes which are committed in the journal, ledger and any other financial statements are known as accounting errors. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the book of accounts. These errors may be committed while recording the transactions in the journal and posting them in the ledger accounts. Such errors may be technically committed or committed due to lack of the knowledge of accounting principles and rules. Generally, accounting errors are unintentional. However, it may intentionally be committed so as to take some undue advantage. Accounting errors distort the true business results. Therefore, these errors must be properly located and rectified for ascertaining the true profit or loss and financial position of the business. Major Causes of Accounting Errors There can be several causes of accounting errors. The following are the important ones: Lack of Knowledge: Continue reading
Earnings Management – Meaning, Definition, Motives and Strategies
Over the past two decades there has been collapses in corporate sector affecting various companies including Enron, American International Group (AIG), HIH Insurance and National Bank of Fiji. Due to these collapses, the need for proper management of the earning or revenue generated by the company has become the very significant part as main objective of every company. Along with this objective, managers of the organization have different incentives to manage the earning of the company. Management of earnings means structuring the financial transactions and statements in the manner so as to have maximum benefit. It tries to mislead the users of the financial statements by presenting the earnings as budgeted or thought by the management instead of presenting the actual performance made by the company during the period. The different incentives for earnings management are – increased managerial remuneration, management buyout and managing the regulatory concerns imposed by different authorities. Continue reading