Over the past two decades there has been collapses in corporate sector affecting various companies including Enron, American International Group (AIG), HIH Insurance and National Bank of Fiji. Due to these collapses, the need for proper management of the earning or revenue generated by the company has become the very significant part as main objective of every company. Along with this objective, managers of the organization have different incentives to manage the earning of the company. Management of earnings means structuring the financial transactions and statements in the manner so as to have maximum benefit. It tries to mislead the users of the financial statements by presenting the earnings as budgeted or thought by the management instead of presenting the actual performance made by the company during the period. The different incentives for earnings management are – increased managerial remuneration, management buyout and managing the regulatory concerns imposed by different authorities. Continue reading
Financial Management Concepts
Audit Risk – Definition, Formula and Models
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. In simple terms, audit risk is the risk that an auditor will issue an unqualified opinion when the financial statements contain material misstatement. ISA 200 states that auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit. (Auditing and Assurance Standard) AAS-6(Revised), “Risk Assessments and Internal Controls”, identifies the three components of audit risk i.e. inherent risk, control risk and detection risk. Audit Risk Model: AR = IR x CR x DR Where, AR= Audit risk (the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated) IR = Inherent risk (the risk that an assertion is susceptible to a material misstatement, assuming there Continue reading
Revenue Management – Meaning, Benefits, Scope and Future
The phenomena of revenue management gained importance in recent years due to variable and discriminatory pricing schemes offered by various companies to their customers. Revenue management applies the orderly analytics that predict the behavior of the consumer at micro level and augment the prices and availability of products to the customers thus enhancing the overall revenue for the company. The aim of devising revenue management techniques is to deliver the fine product or service to the appropriate customer at the precise price. Revenue management system is based on analyzing the customer’s perception of the value that the product would provide and make straight the availability, placement and price according to that perception. This discipline became the need of every business rapidly. There could be many reasons for this. Even a kid whose is out for selling orange juice will have to analyze and predict the appropriate weather and time for Continue reading
Value Added Statements – Definition, Advantages and Disadvantages
Meaning and Definition of  Value Added Statements The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of proprietary theory. Value added is now reported in the financial statements of companies in the form Continue reading
Value Added – Concept, Definition and Uses
Meaning and Definitions of  Value Added The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. To this direction inclusion of Value Added statement in financial reporting system is useful. The Value Added concept is now a recognized part of the accountant’s repertoire. However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of performance of an  enterprise. It is a basic measure because it indicates Continue reading
Budgetary Slack – Definition, Causes and Prevention Methods
Meaning and Definition of  Budgetary Slack In an organization when a manager is responsible for planning incomes and expenses for the a future period, they can plan income very low and expenses very high so that this amounts gets approved by senior management. The manager basically does this thing to be sure of meeting the budget with a very low income goal, the manager should be able to achieve it and go over it. With a very high expense budget the manager should be able to easily keep actual expenses within the Budget. If this happens the managers performance in the coming year will look very good, as it doesn’t really give management any idea of what the coming year will actually look like because it’s not realistic. And it doesn’t show the actual evaluation of the manager’s performance. So this is known as the Budgetary Slack. In other words, Continue reading