Changing external business environment has resulted in further developments in the tools and techniques used for management accounting. Traditional management accounting techniques had certain limitations associated with them, for instance, absorption costing methods have been found to be inappropriate in the modern environment. Similarly, standard costing’ suitability with respect to its general philosophy and detailed operations has come under severe criticism. It is believed that traditional management accounting performance measures can produce the wrong type of response. As a response to the limitations of traditional accounting techniques, activity based approaches has gained significant repute. In the case of activity based approaches, the focus is on the activities that the business carries out as opposed to how the activities have traditionally been organised into separate functions. Activity based costing was thus developed because it was realized that older methods like absorption costing, which used labor hours as the basis for absorbing Continue reading
Financial Management Tools
Financial Analysis with the DuPont Model
The dynamic environment of the world today suggests that one should be apt enough to apply his skills immanent to a system and also external with respect to credit management function. These functions include financial planning, plausibility of a defined business strategy or whether a particular merger or acquisition is feasible or not. This has to be done in a rapid yet meaningful way so as to be of immediate need to a particular firm or investor. There are basically four major reasons for an effective financial statement analysis. These have been mentioned as follows: It is useful for long-run business viability so as to determine whether a firm would be able to provide adequate business return when compared to the amount of risks taken. This is essential for outside investors. It is also used by creditors so as to find out whether a potential buyer has the capability to Continue reading
Most Important Types of Budgets in Managerial Accounting
Definitively, a budget refers to forecast of company’s incomes and expenses anticipated for a given period of time. With a budget, an organization is able to analyze how much money they are making and spending, and they are able to figure the best way to channel it among various categories and departments. Budgeting depicts the entire process of analyzing and planning using a budget. Since budgets are vital tools for management and planning, the process of budgeting generally affects all types of organizations regardless of their size and composition. Many organizations participate in budgeting process with the view of determining the most cost effective and efficient strategies of making profits and intensifying its capital and asset base. In management, budgeting guides an organization to use its scarce resources in a way that exploits the existing business opportunities well. Good budgeting concepts integrate efficient business judgment and help the management to Continue reading
Limitations of Ratio Analysis
Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgement, it can provide useful insights into the firm’s operations. Limitations of Ratio Analysis 1. Accounting Information Different Accounting Policies The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit. Creative accounting The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting. Like the IAS 16 mentioned above, requires that if an asset is Continue reading
Value Added Statements – Definition, Advantages and Disadvantages
Meaning and Definition of Value Added Statements The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of proprietary theory. Value added is now reported in the financial statements of companies in the form Continue reading
Incremental Cash Flow Analysis
The most important and also the most difficult part of an investment analysis is to calculate the cash flow associated with the project; the cost of funding the project; the cash inflow during the life of the project; and the terminal, or ending value of the project. Shareholders are interested in how many additional rupees they will receive in future for the rupees they lay out today. Hence, what matters is not the project’s total cash flow per period, but the incremental cash flow for a variety of reasons. They include; Cannibalization: When a new product is introduced it may take away the sales of existing products. Cannibalization also occurs when a firm builds a plant overseas and winds up substituting foreign production for parent company exports. In this case company may lose exports because it is supplying from its overseas production center. To the extent that sales of a Continue reading