The principal agent problem refers to difficulties of motivating one party the agent to act for the best interest of the other party the principal. In a company, the owners of the assets (the stockholder) are the principals and the managers of the company are the agents. The stockholders of the company authorize the managers to manage and use their resources to make profit for the stockholders. The cause of the principal agent problem is that the information asymmetry between the principal and the agent and the principal and agent have different interests. Generally, the Agents are the managers of the resources and have more information than the principals. In a company, the managers of the company will have moreContinue reading
Financial Concepts
Financial Analysis – Meaning, Definition and Methods
Financial statements are the source of information that present the economic value of a company to the external users. Several articles and books has defined the Financial analysis as to combine financial statement, financial notes, with other information, to evaluated the past, current, and future performance and financial position of company for the purpose of making investment, credit, and other economics decision. Financial Analysis is concerned with risk factors that might affect the future performance of a certain company. Financial analysis is concerned with different aspects of the company, in general financial analysis deals with profitability (ability to generate profit from delivering good and services), cash- flow generating ability (ability to generate cash inflows exceed cash outflows), liquidity (the abilityContinue reading
Purposes of Cost Allocation
Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company. Cost allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the cost allocation. Efforts have been made over the years to improve the bases for cost allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hoursContinue reading
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 toContinue reading
Methods of Allocating Overhead Costs
Overhead cost is an ongoing expense of operating a business and is usually used to group expenses that are necessary to the continued functioning of the business, but cannot be immediately associated with the products/services being offered as in the costs do not directly generate profits. Overhead cost includes indirect product cost or indirect cost of responsibility center. Indirect product cost is known as manufacturing overhead whereas indirect cost of responsibility center is known as non-manufacturing cost. Manufacturing overhead is those manufacturing costs that are incurred to a variety of products. It cannot be traced to individual products like depreciation and insurance of manufacturing equipment, cost of occupying, managing and maintaining a production facility. Manufacturing overhead is the cost thatContinue reading
4 Important Profitability Ratios Every Business Must Calculate
While profitability ratios evaluate a business overall financial performance through appraising its capability to produce revenues in surplus of service costs as well as other expenses. There are at least four profitability ratios, which they are gross profit margin, as well net profit margin, besides return on assets, in addition to return on equity. These ratios are used to assess performance and, with other data, forecast prospect profitability. Along with that is the future viability in addition to the soundness, which will repay loans as well as credit, additionally pay interest along with dividends. Since profits are divided amongst shares, the profit per share indicates possible dividend. 1. Gross Profit Margin It demonstrates how well the business is efficiently producingContinue reading