In the presence of globalization, financial statements have become the standard measurement in judging a company’s performance. Financial statements are an overall impression of the company which shows profitability, efficient utilization of assets, settlement of outstanding debts, management of equity, and liquidity position to make economic and business decisions by both internal and external users. The analysis of financial statements is the application of financial activities and additional facts of the business, the examination of historical, present, and possible results and monetary situation to make investing, financing, and commercial decisions. External decision makers of an organization are defined as potential shareholders, clients, creditors (banks), and tax authorities who need a financial record to give decisions about investment, approval of loan application, acquisition of products, and compliance with applicable tax laws and regulations. This article will assess the importance of financial statements to external users in addition to a qualitative factor. Continue reading
Financial Management Concepts
Definition of Budgetary Control
Budgetary control is the process of determining various budgeted figures for the enterprise for the future period and then comparing the budgeted figures with the actual performance for calculating variances, if any. It is a continuous process, which helps in planning and coordination. It provides a method of control too. The Institute of Cost and Management Accountants, England defines budgetary control as “the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision”. According to J.A.Scott, “it is the system of management control and accounting in which all operations are forecast and so far as possible planned ahead and the actual results compared with the forecast and planned ones”. Thus, budgetary control involves the following: Establishment of Continue reading
Capital Gearing and It’s Significance
Definition of Capital Gearing The most important factor which must be taken into account by the promoters while drafting the financial plan of a company is capital gearing. Gearing means the ration of different types of securities to total capitalization. The term, when applied to the capital of a company, means the ratio of equity share capital to the total capital and is known as capital gear ratio or capital gearing. J. Batty defines the term ‘capital gearing’ as “The relation of ordinary shares (equity shares) to preference share capital and loan capital is described as the capital gearing.” Thus the term capital gearing is used to indicate the relative proportion of fixed cost bearing securities such as preference shares and debentures to the ordinary share capital in the capital structure. Interest of equity share holders is represented by the amount of share capital plus retained earnings and undistributed profits. Continue reading
The Pros and Cons of Securitization
Securitization forces banks to compete with institutional investors and other financial institutions for the business of prime borrowers. In response, banks are beginning to provide borrowers with a range of fee-earning services that facilitate the sale of debt instruments to investors. For example, banks offer borrowers note-issuing or underwriting facilities instead of loans and agree to help borrowers sell their debt instruments to investors as and when needed. Banks may also agree to purchase only the unsold portion of the debt issue. Thus, securitization is moving banks away from performing traditional banking functions, such as extending credit in exchange for periodic interest payments. In addition, securitization provides the creditor with two significant benefits. Because the lender can choose whether to trade the notes or to hold them to maturity, the lender can better manage its credit limits and asset portfolio. The bank also earns a major part of its income Continue reading
Baumol’s Sales Revenue Maximization Model
Sales maximization model is an alternative model for profit maximization. This model is developed by Prof. Boumol, an American economist. This alternative goal has assumed greater significance in the context of the growth of Oligopolistic firms. Baumol’s sales revenue maximization model highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. It states that the goal of the firm is maximization of sales revenue subject to a minimum profit constraint. The minimum profit constraint is determined by the expectations of the share holders. This is because no company can displease the share holders. “Though businessmen are interested in the scale of their operations partly because they see some connection between scale and profits, I think management’s concern with the level of sales goes considerably further. In my dealings with them I have been struck with the importance the oligopolistic enterprises attach to the Continue reading
Behavioral Finance – Definition, Meaning, and Characteristics
Traditionally, economics and finance have focused on models that assume rationality. The behavioral insights have emerged from the application of insights from experimental psychology in finance and economics. Behavioral finance is relatively a new field which seeks to provide explanation for people’s economic decisions. It is a combination of behavioral and cognitive psychological theory with conventional economics and finance. Inability to maximize the expected utility (EU) of rational investors leads to growth of behavioral finance within the efficient market framework. Behavioral finance is an attempt to resolve inconsistency of Traditional Expected Utility Maximization of rational investors within efficient markets through explanation based on human behavior. For instance, Behavioral finance explains why and how markets might be inefficient. An underlying assumption of behavioral finance is that, the information structure and characteristics of market participants systematically influence the individual’s investment decisions as well as market outcomes. Investor, as a human being, processes Continue reading