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;
Posts Tagged: "Financial Concepts"
Credit Rating
Credit rating is a codified rating assigned to an issue by authorized credit rating agencies. These agencies have been promoted by well-established financial Institutions and reputed banks/finance companies. Credit rating is a relative ranking arrived at by a systematic analysis of the strengths and weaknesses of a company and debt instrument issued by the company, based on financial statements, project analysis, creditworthiness factors and future prospectus of the project and the company appraised at a point of time.
Objectives of Credit Rating
Credit rating aims to:
Thus, credit rating in financial services represent an exercise in faith building for the development of a healthy financial system.
Approaches to Credit Rating
As a technique for independent examination of the investment worth of financial securities as an input to investment decision-making, the process of credit rating usually involves use of one or more of (i) implicit judgmental approach and (ii) explicit judgmental approaches and (iii) statistical approach. While implicit judgmental follows beauty-contest approach wherein a broad range of factors concerning promoter, project, environment and instrument characteristics are considered ‘generally’.…
Read More »What is Profit Center?
Definition of Profit Center
Profit center is a responsibility center is measured in terms of profit, which is the difference between the revenues and expenses. Profit as a measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that often point to different directions.
A typical example of a profit center is a division of the company that produces and markets different products. The manager of this division will be responsible for the setting up of production policies and the price as also marketing strategies. Even though the division manager may propose the investments in the division the decisions are usually made by the top management.
Advantages of Profit Centers
Disadvantages of Profit Centers
What is Expense Center?
Expense centers are responsibility centers for which inputs, or expenses are measured in monetary terms, but for which outputs are not measured in monetary terms. There are two general types of expense centers:
- Engineered expense centers are expense centers in which all or most costs are engineered costs. Engineered costs are elements of cost for which the “right” or “proper “amount of costs that should be incurred can be estimated with a reasonable degree of reliability. Cost incurred in a factory for direct labor, direct material, components, supplies, and utilities are examples.
- Discretionary expense centers are expense centers in which all, or most, costs are discretionary. Discretionary costs/managed costs are those for which no such engineered estimate is feasible the amount of costs incurred depends on management’s judgment about the amount that is appropriate under the circumstances.
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What is Revenue Center?
Definition of Revenue Center
In a revenue center, outputs are measured in monetary terms, but no formal attempt is made to relate inputs (i.e. expenses or costs) to outputs. Revenue centers are, marketing organizations that do not have profit responsibility. Actual sales or orders booked are measured against budgets or quotas. Each revenue center is also an expense center in that the revenue center manager is held accountable for the expenses incurred directly within the unit. The primary measurement, however, is revenue. Revenue centers are not charged for the cost of the goods that they market. Consequently, they are not profit centers. Revenue centers do not typically have authority to set selling prices.…
Read More »Money Laundering
Money laundering is a process used by offenders who attempt to conceal the true origin and ownership of the proceeds; these proceeds are results of criminal activities. It allows them to maintain control over the proceeds and provide a legitimate cover for their source of income.
The laundering of the proceeds that result from criminal activity is done through the financial system. The people who are involved in such an action exploit the facilities of the financial institutions of the world. Such an action is done easily under these conditions of free movement of capital. Banks involved in such actions risk to lose their market reputation.
Money laundering is accomplished in three stages, involving numerous transactions of the launderers. Here they are:
- Placement – It means a physical disposal of cash proceeds got from illegal activity. Illegal activities like drug trafficking, extortion, generate very volumes of money. People involved in these activities cannot explain the origin and source of these funds to the authorities. There is a constant fear of getting caught. So the immediate requirement is to send this money to a different location using all available means. This stage is characterized by facilitating the process of inducting the criminal money into the legal financial system.
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