Accounting Methods Used in Financial Statement Preparation

First of all, what is the primary objective of financial statement? Financial statement is to provide information about financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions – stated by International Accounting Standards Board (IASB). For providing information of financial statement, there are two accounting methods for companies to report their financial statement. Cash accounting and accrual accounting both are the main method to prepare the financial statement. Cash basis accounting is a very basic form of accounting. Revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid. Preparing an income statement under the cash basis of accounting is prohibited under generally accepted accounting principles. For example, when a payment is received for the sales of product or services and the revenue is also recorded theContinue reading

Bank Decisions on Investment Borrowings

Assessment of the liquidity gap based on the forecasts is essentially one aspect of the liquidity management. The other major task of liquidity management is to manage this liquidity gap by adjusting the residual surplus/deficit balances. Considering the high costs associated with cash forecasting, it is essential that the benefits drawn by the bank from such forecasting should be substantially large to give some residual gains after meeting the forecasting costs. This objective can, however, be attained only if the bank makes prudent investment/borrowing decisions to manage the surplus/deficit. There are, however, a few factors which must be considered before deciding on the deployment of excess funds/borrowings for meeting the deficit which are given below: Deposit Withdrawals Credit Accommodation Profit fluctuation The liquidity level to be maintained by a bank should firstly, provide for deposits withdrawals and secondly to accommodate the increase in credit demands. While deposit withdrawals must beContinue reading

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: Provide superior information to the investors at a low cost; Provide a sound basis for proper risk-return structure; Subject borrowers to a healthy discipline, and Assist in the framing of public policy guidelines on institutional investment. 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 forContinue reading

Role of Financial Statements Analysis in Making Investment Decisions

One of the most important long-term decisions for any business is investment with the aim of making gains in the future. Investment decisions are concerned with the use of funds including buying, holding or selling and each decision could be vital to a firm. A careless decision may result in a long-term loss or even worse, bankruptcy. Therefore, an in-depth understanding and analysis is necessary for a high quality investment decision process. This is also even more critical to investors who invest in stock of company or shareholders. Financial statement analysis is critical in making effective stock investment decisions. By study the balance sheet, income statement, cash flow statement and statement of owners’ equity separately and combined, an analyst might have a good sense of a company’s overall financial picture; therefore, the investment decisions are likely to be reasonable and profitable. Financial Statements Analysis In order to understand the analysisContinue reading

Characteristics of Good Management Accounting Information

Management accounting information should comply with a various number of characteristics including verifiability, objectivity, timeliness, comparability, reliability, understandability and relevance if it is to be useful in planning, control and decision-making. The first characteristic of management accounting information are verifiability .Verifiability means observable to outsiders, in the context of a model of information. It refers to the ability of accountants to ensure that accounting information is what it purports to be. It also means that the selected method of measurement has been used without error or bias. The outsiders cannot see them and so references to those variables in a contract between the two parties cannot be enforced by outside authorities. An example of verifiability is that of two accountants looking at the same information like inventory valuation and coming to similar conclusions. Objectivity is also one of the characteristics that useful in planning and making decision. Accountant reliance onContinue reading

Financial Management Decisions

Financial Management is concerned with the acquisition and utilization of capital funds in meeting the financial needs and overall objectives of a business enterprise. Thus the primary function of finance is to acquire capital funds and put them for proper utilization, with which the firm’s objectives are fulfilled. The firm should be able to procure sufficient funds on reasonable terms and conditions and should exercise proper control in applying them in order to earn a good rate of return, which in turn allows the firm to reward the sources of funds reasonably, and leaves the firm with good surplus to grow further. These activities viz. financing, investing and dividend payment are not sequential they are performed simultaneously and continuously. Financial Management Decisions – Three Major Decisions in Financial Management The Financial Management can be broken down in to three major decisions or functions of finance. They are: (i) the investmentContinue reading