FINANCIAL MANAGEMENT

Financial Management:

“Financial Management deals with procurement of funds and their effective

utilization in the business”. (S.C. Kuchal)

Financial management can be defined “as an application of general managerial

principles to the area of financial decision-making” (Howard and Upton)

Financial management “is an area of financial decision-making, harmonizing

individual motives and enterprise goals (Weston and Brigham)

Financial management “is the operational activity of a business that is responsible

for obtaining and effectively utilizing the funds necessary for efficient operations.
(Joshep and Massie)

We can also define as it is concerned with the acquisition, financing and

management of asset with some overall goal in mind

Or the art and science of managing money

It is the Planning, directing, monitoring, organizing and controlling of the monetary

resources of an organization.

TYPES OF FINANCE:
 Private finance(Private Finance, which includes the Individual, Firms, Business or Corporate
Financial activities to meet the requirements)
 Public finance(Public Finance which concerns with revenue and disbursement of Government such
as Central Government, State Government and Semi-Government Financial matters)

Scope of Financial Management:

 Financial planning
 Securing capital funds
 Financial supervision
 Financial control
 Financial decisions
 Preparation of annual financial statements
 Estimation of financial performance
 Evaluation impact on new financing
 Miscellaneous functions
Investment decisions
Financing decision
Dividend decision
Working capital decisions

 Financial management in economics

 Financial management and accounting
 Financial management and mathematics
 Financial management and production management
  Financial management and marketing
 Financial management and human resource

1. Financial Management and Economics:

Economic concepts like micro and macroeconomics are directly applied with the
financial management approaches. Investment decisions, micro and macro
environmental factors are closely associated with the functions of financial
manager. Financial management also uses the economic equations like money
value discount factor, economic order quantity etc. Financial economics is one of
the emerging area, which provides immense opportunities to finance, and
economical areas.
2. Financial Management and Accounting

Accounting records includes the financial information of the business concern.

Hence, we can easily understand the relationship between the financial
management and accounting. In the olden periods, both financial management and
accounting are treated as a same discipline and then it has been merged as
Management Accounting because this part is very much helpful to finance manager
to take decisions. But nowadays financial management and accounting discipline
are separate and interrelated.

3. Financial Management And Mathematics

Modern approaches of the financial management applied large number of
mathematical and statistical tools and techniques. They are also called as
econometrics. Economic order quantity, discount factor, time value of money,
present value of money, cost of capital, capital structure theories, dividend theories,
ratio analysis and working capital analysis are used as mathematical and statistical
tools and techniques in the field of financial management.
4. Financial Management and Production Management
Production management is the operational part of the business concern,
which helps to multiple the money into profit. Profit of the concern depends
upon the production performance. Production performance needs finance,
because production department requires raw material, machinery,
wages, operating expenses etc. These expenditures are decided and
 estimated by the financial department and the finance manager allocates the
appropriate finance to production department. The financial manager must
be aware of the operational process and finance required for each process of
production activities.
5. Financial Management and Marketing
Produced goods are sold in the market with innovative and modern
approaches. For this, the marketing department needs finance to meet their
requirements. The financial manager or finance department is responsible to
allocate the adequate finance to the marketing department. Hence, marketing
and financial management are interrelated and depends on each other.
6. Financial Management and Human Resource
Financial management is also related with human resource department,
which provides manpower to all the functional areas of the management.
Financial manager should carefully evaluate the requirement of manpower to
each department and allocate the finance to the human resource department
as wages, salary, remuneration, commission, bonus, pension and other
monetary benefits to the human resource department. Hence, financial
management is directly related with human resource management.

Objectives:

 Profit maximization
 Wealth maximization

FUNCTIONS OF FINANCE MANAGER

1. Forecasting Financial Requirements

2. Acquiring Necessary Capital

3. Investment Decision

4. Cash Management

5. Interrelation with Other Departments

IMPORTANCE OF FINANCIAL MANAGEMENT

 Financial Planning
 Acquisition of Funds
 Proper Use of Funds
 Financial Decision
 Improve Profitability
 increase the Value of the Firm
 Promoting Savings

NATURE OF FINANCE FUNCTION

The finance function is the process of acquiring and utilizing funds of a business. Finance functions are related to
overall management of an organization. Finance function is concerned with the policy decisions such as like of
business, size of firm, type of equipment used, use of debt, liquidity position. These policy decisions determine the
size of the profitability and riskiness of the business of the firm. Prof. K.M.Upadhyay has outlined the nature of
finance function as follows:

i) In most of the organizations, financial operations are centralized. This results in economies.
ii) Finance functions are performed in all business firms, irrespective of their sizes / legal forms of
organization.
iii) They contribute to the survival and growth of the firm.
iv) Finance function is primarily involved with the data analysis for use in decision making.
v) Finance functions are concerned with the basic business activities of a firm, in addition to external
environmental factors which affect basic business activities, namely, production and marketing.
vi) Finance functions comprise control functions also
vii) The central focus of finance function is valuation of the firm.

GOALS OF FINANCE FUNCTION

Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern.
It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives
of the financial management. Objectives of Financial Management may be broadly divided into two parts such as:

1. Profit maximization

2. Wealth maximization
1. Profit Maximization

Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for the
purpose of earning profit. Profit is the measuring techniques to understand the business efficiency of the concern.
Profit maximization is also the traditional and narrow approach, which aims at, maximizes the profit of the
concern. Profit maximization consists of the following important features.

1. Profit maximization is also called as cashing per share maximization. It leads to maximize the business operation
for profit maximization.

2. Ultimate aim of the business concern is earning profit, hence, it considers all the possible ways to increase the
profitability of the concern.

3. Profit is the parameter of measuring the efficiency of the business concern. So it shows the entire position of the
business concern.

4. Profit maximization objectives help to reduce the risk of the business.

Favorable Arguments for Profit Maximization

The following important points are in support of the profit maximization objectives of the business concern:

(1) Main aim is earning profit.

(ii) Profit is the parameter of the business operation.

(iii) Profit reduces risk of the business concern.

(iv) Profit is the main source of finance.

(v) Profitability meets the social needs also.

Unfavorable Arguments for Profit Maximization

The following important points are against the objectives of profit maximization:

(1) Profit maximization leads to exploiting workers and consumers.

(ii) Profit maximization creates immoral practices such as corrupt practice, unfair trade practice, etc.

(iii) Profit maximization objectives leads to inequalities among the sake holders such as customers, suppliers, public
shareholders, etc.

Drawbacks of Profit Maximization

Profit maximization objective consists of certain drawback also:

(i) It is vague: In this objective, profit is not defined precisely or correctly. It creates some unnecessary opinion
regarding earning habits of the business concern.
(ii) It ignores the time value of money: Profit maximization does not consider the time value of money or the net
present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash
flow during a particular period.

(iii) It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or
external which will affect the overall operation of the business concern.

2. Wealth Maximization

Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the
field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who
are involved in the business concern. Wealth maximization is also known as value maximization or net present
worth maximization. This objective is an universally accepted concept in the field of business

Favorable Arguments for Wealth Maximization

(i) Wealth maximization is superior to the profit maximization because the main aim of the business concern under
this concept is to improve the value or wealth of the shareholders.

(ii) Wealth maximization considers the comparison of the value to cost associated with the business concern. Total
value detected from the total cost incurred for the business operation. It provides extract value of the business
concern.

(iii) Wealth maximization considers both time and risk of the business concern.

(iv) Wealth maximization provides efficient allocation of resources.

(v) It ensures the economic interest of the society.

Unfavorable Arguments for Wealth Maximization

(i) Wealth maximization leads to prescriptive idea of the business concern but it may not be suitable to present day
business activities.

(ii) Wealth maximization is nothing, it is also profit maximization, it is the indirect name of the profit maximization.

(iii) Wealth maximization creates ownership-management controversy.

(iv) Management alone enjoy certain benefits.

(v) The ultimate aim of the wealth maximization objectives is to maximize the profit.

(vi) Wealth maximization can be activated only with the help of the profitable position of the business concern.
 WEEK 3&4
 Time value of money
 Bond and their valuation

TIME VALUE OF MONEY:

The value of money is associated with time. The notion that money has a time
value is one of the most important concepts in finance and investment analysis.
Making decision today regarding future cash-flows requires understanding that the
value of money does not remain the same forever. A euro (crown, dollar) today is
worth less than a euro (crown, dollar) sometimes in the future. We can give two
essential reasons:

cash-flows arising at various points in time have different value relative to any
other point in time (inflation influence);

cash-flows in the future are uncertain; uncertainty issues from the nature of
forecasts of the timing and of when or what amount of cash-flows (i.e. receipt or
expenditures of money) there will be in the future

Interest:the money paid(earned) for the use of money

Simple Interest:the interest paid (earned) on only the original amount or principal
amount borrowed (lent)

Formula: SI=Po(i)(n)
The intrest earned on the principle amounts account at the bank. If this interest is
withdrawn at the end of period, the principal makes it possible to earn interest at
the given interest rate. You earn so called simple interest. It is simple because it
repeats itself in exactly the same way from one period to the next as long as you
take out the interest at the end of each period and the principal remains the same.
Compound Interest

Intrest paid (earned) on any previous interest earned, as well as on the principle
borrowed.

On the other hand, both the principal and the interest from our deposit can earn
interest. Earning interest on interest is called compounding because the balance at
any time is compounded of the principal, interest of principal and interest on
accumulated interest, i.e, interest on interest.

A=P(1+r/n)nt

Future Value: the value at some future time of a present amount of money or a
series of payments evaluated at a given interest rate

FVn=PV(1+i) n

Present Value: The current value of a future amount of money or a series of

payments evaluated at a given interest rate

PV=FV/(1+(i)(n))
 BONDS AND THEIR VALUATION
BOND:
A bond is a security that pays a stated amount of interest to the investor, period after period, until it is finally
retired by the issuing company

FACE VALUE:
The stated value of an asset. In the case of a bond, the face value is usually $1,000

COUPON RATE:
The stated rate of interest on a bond; the annual interest payment divided by the bond’s face value

CENSOL / PERPETUAL BOND:

A bond that never matures; a perpetuity in the form of a bond

FORMULA: V = I/KD

BONDS WITH FINITE MATURITY:

1. Non zero coupon bonds
V = [ I / (1+kd)t + MV / (1+kd)n]
Zero coupon bonds

V= MV / (1+kd) n

PREFFERED STOCK VALUATION:

V = Dp / K p

CAPM
It’s a model which describes the relationship between risk and expected return
in this model a security’s expected return is the risk free rate plus a premium based on the systematic risk of the
security

It was developed in 1960s

The capital asset pricing model (CAPM) is a measure that describes the relationship between the systematic risk of
a security or a portfolio and its expected return. The security market line (SML) uses the CAPM formula to display
the expected return of a security or portfolio.

The CAPM formula is the risk-free rate of return added to the beta of the security or portfolio multiplied by the
expected market return minus the risk-free rate of return:

Required Return=RFR+βstock/portfolio×(Rmarket−RFR)where:RFR=Risk-
free rate of returnβstock/portfolio=Beta coefficient for the stock or portfolioRmarket=Return expected from the m
arket\begin{aligned} &\text{Required Return} = \text{RFR} + \beta_\text{stock/portfolio} \times (
\text{R}_\text{market} - \text{RFR} ) \\ &\textbf{where:} \\ &\text{RFR} = \text{Risk-free rate of return} \\
&\beta_\text{stock/portfolio} = \text{Beta coefficient for the stock or portfolio} \\ &\text{R}_\text{market} =
\text{Return expected from the market} \\ \end{aligned}Required Return=RFR+βstock/portfolio×(Rmarket
−RFR)where:RFR=Risk-free rate of returnβstock/portfolio=Beta coefficient for the stock or portfolioRmarket
=Return expected from the market

This yields the expected return of the security. The beta of a security measures the systematic risk and its
sensitivity relative to changes in the market. A security with a beta of one has a perfect positive correlation with its
market. This indicates that when the market increases or decreases, the security increases or decreases in time
with the market. A security with a beta greater than 1 carries more systematic risk and volatility than the market,
and a security with a beta less than 1 carries less systematic risk and volatility than the market.

The security market line (SML) is a graphical representation of the CAPM formula. It plots the relationship between
the expected return and the beta, or systematic risk, associated with a security. The expected return of securities is
plotted on the y-axis and the beta of securities is plotted on the x-axis. The slope of the relationship plotted is
known as the market risk premium, the difference between the expected return of the market and the risk-free
rate of return, and it represents the risk-return tradeoff of a security or portfolio.

Together, the SML and CAPM formulas are useful in determining if a security being considered for an investment
offers a reasonable expected return for the amount of risk taken on. If a security’s expected return versus its beta
is plotted above the security market line, it is undervalued given the risk-return tradeoff. Conversely, if a security’s
expected return versus its systematic risk is plotted below the SML, it is overvalued because the investor would
accept a smaller return for the amount of systematic risk associated.

For example, suppose an analyst plots the SML. The risk-free rate is 1%, and the expected market return is 11%.
The beta of stock ABC is 2.2, meaning it carries more volatility and more systematic risk. The expected return of
stock ABC is 23%:

1%+(2.2×(11%−1%))=23%\begin{aligned} &1\% + ( 2.2 \times ( 11\% - 1\% ) ) = 23\% \\ \end{aligned}

1%+(2.2×(11%−1%))=23%

If the current return of stock ABC is 33%, it is undervalued, because investors expect a higher return given the same
amount of systematic risk. Conversely, say the expected return of stock XYZ is 11%, and the current return is 8%
and is below the SML. The stock is overvalued: Investors are accepting a lower return for the given amount of risk,
which is a bad risk-return tradeoff.

ASSUMPTIONS
First, we assume that capital markets are efficient in that investors are well informed, transactions costs are low,
there are negligible restrictions on investment, and no investor is large enough to affect the market price of a
stock. We also assume that investors are in general agreement about the likely performance of individual securities
and that their expectations are based on a common holding period, say one year. There are two types of
investment opportunities with which we will be concerned. The first is a risk-free security whose return over the
holding period is known with certainty. Frequently, the rate on short- to intermediate-term Treasury securities is
used as a surrogate for the risk-free rate. The second is the market portfolio of common stocks. It is represented by
all available common stocks and weighted according to their total aggregate market values outstanding. As the
market portfolio is a somewhat unwieldy thing with which to work, most people use a surrogate, such as the
Standard & Poor’s 500 Stock Price Index (S&P 500 Index). This broad-based, market-value-weighted index reflects
the performance of 500 major common stocks. Earlier we discussed the idea of unavoidable risk – risk that cannot
be avoided by efficient diversification. Because one cannot hold a more diversified portfolio than the market
portfolio, it represents the limit to attainable diversification. Thus all the risk associated with the market portfolio is
unavoidable, or systematic.

CHARACTERISTIC LINE
it is a line which shows the relationship between individual security return and the return on market portfolios,,,
the slope of this line is called beta

SECURITY MARKET LINE (SML)

A line that describes the relationship between the expected rate of return for individual securities and systematic
risk as measured by beta

PREPERATION FOR EXAMS:

EFFICIENT FINANCIAL MARKET:

a financial market where current prices fully reflect all available relevant information

THREE FORMS OF MARKET EFfiCIENCY

Eugene Fama, a pioneer in efficient markets research, has described three levels of market efficiency:
 1. Weak-form efficiency: Current prices fully reflect the historical sequence of prices.In short, knowing past
price patterns will not help you improve your forecast of future prices.
2. Semistrong-form efficiency : Current prices fully reflect all publicly available information, including such
things as annual reports and news items.
3. Strong-form efficiency: Current prices fully reflect all information, both public and private (i.e.,
information known only to insiders).

TECHNIQUES TO MEASURE BETA

THE PURE PLAY METHOD
In the pure play method, the company finds several single-product companies in the same line of business as the
project being evaluated and then averages those companies’ betas to determine the cost of capital for its own
project. For example, suppose Erie (which was discussed in Web Appendix 9A) found three existing singleproduct
firms that operate barges, and suppose also that Erie’s management believes its barge project would be subject to
the same risks as those firms. Erie could then determine the betas of those firms, average them, and use this
average beta as a proxy for the barge project’s beta.1 The pure play approach can only be used for major assets
such as whole divisions, and even then it is frequently difficult to implement because it is often impossible to find
pure play proxy firms. However, when IBM was considering going into personal computers, it was able to obtain
data on Apple Computer and several other essentially pure play personal computer companies. This is often the
case when a firm considers a major investment outside its primary field.

THE ACCOUNTING BETA METHOD

As noted above, it may be impossible to find single-product, publicly traded firms as required for the pure play
approach. If that is the case, we may want to use the accounting beta method. Betas normally are found as
described in Web Appendix 5A—by regressing the returns of a particular company’s stock against returns on a
stock market index. However, we could run a regression of the company’s accounting return on assets against the
average return on assets for a large sample of companies, such as those included in the S&P 400. Betas determined
in this way (that is, by using accounting data rather than stock market data) are called accounting betas.

FINANCIAL MARKETS
People and organizations wanting to borrow money are brought together with those having surplus funds in the
financial markets…

TYPES OF MARKETS

PHYSICAL ASSETS MARKETS:

Physical assets markets are those for products such as wheat , autos , real estate , computers ….
FINANCIAL ASSET MARKETS:
Deal with derivative securities whos values are derived from changes in prices of other assets,, a share of ford stock
is a pure financial asset while and option to buy ford shares is a derivative security whos value depends on price of
ford stock

SPOT MARKETS:
Are markets in which assets are bought or sold for on the spot delivery ,,,

Future markets are markets in which participants agree today to buy or sell an asset at some future date

MONEY MARKETS
The financial markets in which funds are borrowed or loaned for short periods

Capital markets are the markets for intermediate or ling term debt and coroporate stock

Primary markets are markets in which corporations rause capital by issuing new securities

Secondary markets are markets in which securities and other financial assets are traded among investors after
they have been issued by corporations

Private markets are markets in which transactions are worked out directly between two parties

Public markets are markets in which standardized contracts are traded on organized exchanges

BUSINESS RISK AND FINANCIAL RISK

BUSINESS RISK
The riskiness inherent in the firm’s operations if uses no debt

FACTORS EFFECTING:
 Demand variability
 Sales price variability
 Input cost variability
 Ability to adjust output prices for changes in input costs
 Ability to develop new products in a timely cost effective manner
 Foreign risk exposure
  The extent to which costs are fixed

OPERATING LEVERAGE
the extent to which fixed costs are used In a firm’s operations.

FINANCIAL RISK
An increase in stockholder’s risk over and above the firms basic business risk , resulting from the use of financial
leverage

Financial risk is the additional risk placed on the common stockholders as a result of the decision to finance with
debt. Conceptually, stockholders face a certain amount of risk that is inherent in the firm’s operations—this is its
business risk, defined as the uncertainty inherent in projections of future operating income. If a firm uses debt
(financial leverage), this concentrates the business risk on common stockholders. To illustrate, suppose 10 people
decide to form a corporation to build houses. There is a certain amount of business risk in the operation. If the firm
is capitalized only with common equity, and if each person buys 10 percent of the stock, then each investor shares
equally in the business risk. However, suppose the firm is capitalized with 50 percent debt and 50 percent equity,
with five of the investors putting up their capital as debt and the other five putting up their money as equity. The
debtholders will receive a fixed payment, and it will come before the stockholders receive anything. Also, if the
firm goes bankrupt, the debtholders must be paid off before the stockholders get anything. In this case, the five
investors who put up the equity will have to bear all of the business risk, so the common stock will be twice as risky
as it would have been had the firm been financed only with equity. Thus, the use of debt, or financial leverage,
concentrates the firm’s business risk on the stockholders.

CAPITAL STRUCTURE DECISIONS

Factors to consider before making capital structure decisions

Sales stability. A firm whose sales are relatively stable can safely take on more debt and incur higher fixed charges
than a company with unstable sales. Utility companies, because of their stable demand, have historically been able
to use more financial leverage than industrial firms.

2. Asset structure. Firms whose assets are suitable as security for loans tend to use debt rather heavily. General-
purpose assets that can be used by many businesses make good collateral, whereas special-purpose assets do not.
Thus, real estate companies are usually highly leveraged, whereas companies involved in technological research
are not.

3. Operating leverage. Other things the same, a firm with less operating leverage is better able to employ financial
leverage because it will have less business risk.

4. Growth rate. Other things the same, faster growing firms must rely more heavily on external capital. Further, the
flotation costs involved in selling common stock exceed those incurred when selling debt, which encourages rapidly
growing firms to rely more heavily on debt. At the same time, however, those firms often face higher uncertainty,
which tends to reduce their willingness to use debt.
5. Profitability. It is often observed that firms with very high rates of return on investment use relatively little debt.
Although there is no theoretical justification for this fact, one practical explanation is that very profitable firms such
as Intel, Microsoft, and Coca-Cola simply do not need to do much debt financing. Their high rates of return enable
them to do most of their financing with internally generated funds.

6. Taxes. Interest is a deductible expense, and deductions are most valuable to firms with high tax rates. Therefore,
the higher a firm’s tax rate, the greater the advantage of debt.

7. Control. The effect of debt versus stock on a management’s control position can influence capital structure. If
management currently has voting control (more than 50 percent of the stock) but is not in a position to buy any
more stock, it may choose debt for new financings. On the other hand, management may decide to use equity if
the firm’s financial situation is so weak that the use of debt might subject it to serious risk of default, because if the
firm goes into default, the managers will probably lose their jobs. However, if too little debt is used, management
runs the risk of a takeover. Thus, control considerations could lead to the use of either debt or equity because the
type of capital that best protects management will vary from situation to situation. In any event, if management is
at all insecure, it will consider the control situation. 8. Management attitudes. No one can prove that one capital
structure will lead to higher stock prices than another. Management, then, can exercise its own judgment about
the proper capital structure. Some managements tend to be more conservative than others, and thus use less debt
than an average firm in their industry, whereas aggressive managements use more debt in their quest for higher
profits. 9. Lender and rating agency attitudes. Regardless of managers’ own analyses of the proper leverage factors
for their firms, lenders’ and rating agencies’ attitudes frequently influence financial structure decisions.
Corporations often discuss their capital structures with lenders and rating agencies and give much weight to their
advice. For example, one large utility was recently told by Moody’s and Standard & Poor’s that its bonds would be
downgraded if it issued more bonds. This influenced its decision, and it financed its expansion with common
equity.

Market conditions. Conditions in the stock and bond markets undergo both long- and short-run changes that can
have an important bearing on a firm’s optimal capital structure. For example, during a recent credit crunch, the
junk bond market dried up, and there was simply no market at a “reasonable” interest rate for any new long-term
bonds rated below BBB. Therefore, low-rated companies in need of capital were forced to go to the stock market
or to the short-term debt market, regardless of their target capital structures. When conditions eased, however,
these companies sold long-term bonds to get their capital structures back on target. 11. The firm’s internal
condition. A firm’s own internal condition can also have a bearing on its target capital structure. For example,
suppose a firm has just successfully completed an R&D program, and it forecasts higher earnings in the immediate
future. However, the new earnings are not yet anticipated by investors, hence are not reflected in the stock price.
This company would not want to issue stock—it would prefer to finance with debt until the higher earnings
materialize and are reflected in the stock price. Then it could sell an issue of common stock, use the proceeds to
retire the debt, and return to its target capital structure. This point was discussed earlier in connection with
asymmetric information and signaling. 12. Financial flexibility. An astute corporate treasurer made this statement
to the authors:-

HOLDING PERIOD YIELD/ RETURN

 CHAPTER NAME: FINANCIAL STATEMENT
ANALYSIS
Financial statement analysis is the art of transforming data from financial statements into information that is useful
for informed decision making….

It involves the use of various financial statements. These statements do several things . first balance sheet
summarizes the assets , liabilities and owners equity of a business at a moment in time usually the end of a year or
quarter …..next the income statement summarizes the revenues and expenses of the firm over a particular period of
time again usually a year or a quarter

The balance sheet represents a snapshot of the firms financial position at a moment in time and the income statement
depicts a summary of the firms profitability over time
Chapter 2: Financial Statement Analysis

“Financial statements provide a summary of the accounting of a business

enterprise, the balance-sheet reflecting the assets, liabilities and capital as on a
certain data and the income statement showing the results of operations during a
certain period”

Financial statement analysis is largely a study of the relationship among the various
financial factors in a business as disclosed by a single set of statements and a study
of the trend of these factors as shown in a series of statements

Financial statements generally consist of two important statements:

(i) The income statement or profit and loss account.

(ii) Balance sheet or the position statement.

A part from that, the business concern also prepares some of the other parts of
statements, which are very useful to the internal purpose such as:

(i) Statement of changes in owner’s equity.

(ii) (ii) Statement of changes in financial position.

Types of Financial management analysis:

1. Based on Material Used

2. Based on Method of Operation

1:Based on material used:

 External Analysis
 Internal Analysis

2: Based on method of operation:

 Horizontal Analysis
 Vertical Analysis(static analysis)
Clitoris

Orgasim

TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

1: Comparative Statement Analysis

 Comparative Income Statement Analysis

 Comparative Position Statement Analysis

2. Trend Analysis

3. Common Size Analysis

4. Fund Flow Statement

5. Cash Flow Statement

6. Ratio Analysis

● Liquidity Ratio

● Activity Ratio

● Solvency Ratio

● Profitability Ratio

Du Point Analysis:
It is the extended form of return on equity it is the product of profit margin, asset
turnover and financial leverage

Return on capital=profit margin*asset turnover*financial leverage

Methods of inventory valuation

FIFO LIFO HIFO NIFO

ORDINARY STOCK ITS TYPES AND ORDINARY STOCK VALUATION SHARE

INVESTMENT PROCESS,,,NON DISCOUNTED APPRAISAL TECHNIQUES

OPERATING CASH FLOWS AND ELEMENTS

INVESTING CASH FLOWS AND ELEMENTS

FINANCING CASH FLOWS AND ELEMENTS

COMPUTE FREE CASH FLOWS

HOLDING PERIOD YIELD

MODIFIED IRR