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Financial Management
Financial Management means the efficient and effective
management of money (funds) in such a manner as to
accomplish the objectives of the organization.
Objectives of Organization
Profit Maximization
Earnings After Tax (or Net Profit After Tax) minus payable
dividends becomes Retained Earnings
Assets
In financial accounting, an asset is an economic resource.
Anything tangible or intangible that is capable of being
owned or controlled to produce value and that is held to have
positive economic value is considered an asset. Simply stated,
assets represent value of ownership that can be converted
into cash (although cash itself is also considered an asset).
Simply put, "an asset is something that puts money in your
pocket
Types of Assets
Two major asset classes are
a)tangible assets
b)intangible assets.
Tangible Assets
Tangible assets are those that have a physical substance.
Some of tangible assets are:
a) Land
Types of Assets
b) Building
c ) Plant & Machinery
d) Infrastructure
e) Furniture and Fixtures
f) Vehicles
Types of Assets
Intangible Assets
Intangible assets lack of physical substance and usually are
very hard to evaluate. However they can provide tremendous
value to an organization and contribute to its revenue
streams.
They include patents, copyrights, franchises, goodwill,
trademarks, trade names etc
Classification of Assets
Assets are further classified into
a) Fixed Assets
b) Current Assets
Fixed Assets
Fixed Assets are Long Term assets which provide benefit to
the organization over a sustained period of time. These Assets
are
Classification of Assets
acquired for running the operations of an undertaking and are
generally not meant for sale. The assets acquired for
consumption in process of production or provision of service
or for resale are called Operating Assets or Current Assets.
Some examples of Fixed Assets are Land, Building, Plant and
Machinery etc.
Equity Shares
Equity means equal. Equity share is a share that gives equal
rights to holders. Thus equity shareholders have to share the
rewards and
Types of Share Capital
risks associated with ownership of the company.
Equity Shareholders are owners of the company who have
control over the working of the company.
They are entitled to dividend which depends on the profits of
the company. The dividend rate depends on profits. More the
profit, more will be the dividend. If there are no profits, no
dividends will be paid.
Types of Share Capital
Preference Share Capital
Preference Share Capital gives certain advantages to its
holders on equity shareholders. Preference Shareholders
have privilege in two ways:
a) A preferential privilege in payment of a fixed dividend. The
fixed dividend may be in the form of Fixed rate or fixed
amount per share.
Types of Share Capital
b) Preferential right as to repayment of capital in case of
liquidation/ winding up of the company.
Capital
Internal
Internal sources of funds are available only on firms that
exist and are well established. Such sources are :
a) Retained Earnings
Retained Earnings are a important source of internal
financing. Retained Earnings are portion of earnings available
to equity shareholders which are ploughed back in the
company. Thus a
Capital
a part of earnings that are available to equity shareholders are
retained by the company to fund its operations.
The retained earnings, so accumulated, are classified under
the head RESERVES & SURPLUS in the Balance Sheet.
b) Depreciation
Depreciation is the distribution of cost of an
Capital
asset over the estimated useful life of an asset in a systematic
and a rational manner.
In other words depreciation is the allocation of Capital
Expenditure to various periods over which the capital
expenditure is expected to benefit the company.
This expenditure being a Non Cash Expenditure is
considered to be a internal source of finance.
Debt Capital
A debt is a liability on the undertaking. These funds are
raised to meet both long term and short term fund
requirements of the company.
Operating Lease
In case of operating lease the lessee gets to use the asset
for a limited period of time for the consideration of lease
rentals. This is best suited when the asset is required for
temporary use.
Lease Finance
Financial Lease
A financial lease is a means of financing capital asset. It is a
contract between the Financer ( Lessor) and the Customer(
Lessee) for the hire of a specific asset selected from the
manufacturer or vendor selected by lessee to suit the
requirement of the lessee.
The lessee has possession of the asset & uses the same on
payment of specified rentals etc
Lease Finance
while the lessor retains the ownership of the asset.
All the risks and rewards of ownership are normally
transferred to the lessee and the obligations are non
cancellable. The lessee is to bear the costs of insurance,
maintenance and other related costs,
A finance lease is a full payout, non cancellable agreement.
Short Term Sources of Funds
Short Term Funds are required to meet working capital
needs of the undertaking:
Some sources of such funds are:
a) Trade Credits
These refer to credits extended by supplier of goods or
services to their customers in the normal course of business.
Short Term Sources of Funds
Shareholders Funds
Share Capital
Reserves and Surplus
Non Current Liabilities
Long Term Borrowings
Long Term Liabilities
Long Term Provisions
Format of Balance Sheet ( Contd)
Current Liabilities
Short Term Borrowings
Current Maturities of Long Term Borrowings
Trade Payables
Other Current Liabilities
Short Term Provisions
TOTAL
Format Balance Sheet ( Contd)
ASSETS
Non Current Assets
Fixed Assets
Tangible Assets
Intangible Assets
Capital Work In Progress
Intangible Assets under Development
Non Current Investments
Long Term Loans and Advances
Other Non Current Assets
Format of Balance Sheet ( Contd)
Current Assets
Current Investments
Inventories
Trade Receivables
Cash and Bank Bal
Short Term Loans and Advances
Other Current Assets
TOTAL
Format of Profit & Loss Account
Income From Services & Products
Other Income
(A) Total Revenue
Expenses
(B) Cost of Goods Sold
(D) Gross Profit ( A-B)
(E) Employee Benefit Exp
Sales Admin & Other Exp
(F) Operating Profit ( D-E)
(EBIDTA)
Format of Profit & Loss Account (
Contd)
G. Depreciation & Amortization
H. Profit before Interest & Tax ( F-G)
( EBIT)
I . Finance Cost
J. Earning Before Tax ( H-I)
(EBT)
K. Taxation
L. Profit After Tax (J-K)
( Profit After Tax)
M. Dividends
N. Retained Earnings ( L-M)
Format of Cash Flow Statement
INFLOW
a) Opening Balance
b) Share Capital
c) Loans & Borrowings
d) Receipts From Customers
e) Other Incomes
Total
Format of Cash Flow Statement(
Contd)
OUTFLOW
a) Acquisition of Assets
b) Investments
c) Repayment of Loans
f) Payments to Vendors
g) Payment of Sales & Admin Exp
h) Interest and Other Finance Costs
i) Payment of Taxes
j) Dividends
Total Out Flow
Net Cash Balance ( Inflow- Outflow)
Cost ----Concepts
Cost is a sacrifice. It is the amount of resource given up in
exchange of some goods or Services.
Annual Budgets
Quarterly Review
Performance Budgeting
The concept of Performance Budgeting relates to greater
management efficiency.
Performance Budgeting technique is the process of
analyzing, identifying, simplifying, and crystallizing specific
performance objectives of a job to be achieved over a period
in the frame work of the organizational objectives .
Thus the purpose of performance budgeting is to focus
attention on work to be done, services to be rendered rather
than things to be spent for acquired.
Responsibility Accounting
Responsibility Accounting is a method of accounting in
which costs are identified with persons assigned to their
control rather than with products and functions.
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