A business organization may be financially sound today but it may loose strength tomorrow because of losses. Therefore it is necessary to maintain a judicious balance between the owned capital and borrowed capital. The following ratios have been calculated to analyze the capital structure of a company. 1. Capital Gearing Ratio Capital Gearing Ratio of an organization measures the relationship between equity share capital to preference capital and loan capital. ‘Capital gearing’ refers to the ratio between the variable cost bearing capital and fixed cost bearing capital of the organization and helps to frame the capital structure of the organization. Capital gearing may be of three types: High Gearing Capital, which indicates the excess of interest bearing long-term finance over the equity funds; Low Gearing Capital, which indicates the excess of equity funds over the interest bearing long-term finance; and Evenly Geared, which indicates the equality between the interest bearingContinue reading
Financial Management Tools
Fixed Capital of Capital Requirements
The fixed capital of an industrial concern is invested in fixed assets like plant and machinery, land, buildings furniture, etc. These assets are not fixed in value; in fact, their value may record an increase of decrease in course of time. They are fixed in the sense that without them, the business of the concern cannot be carried on. This means that the fixed capital is used for meeting the permanent or long-term needs of the concern. While making an assessment of the fixed capital requirements, a list of the fixed assets needed by the concern will have to be prepared, say, by promoter. Having compiled a list of the fixed assets which will be required, it is not difficult to estimate the amount of funds required for the purpose. The prices of land are generally known, or can be easily ascertained. A contractor can be relied upon to giveContinue reading
Objectives and Scope of Internal Audit
Internal audit is and self-governing assessment function established by the management of an organisation for the review of the internal control system as a service to the organisation. It separately examines, evaluates and reports on the sufficiency of internal control as a involvement to the correct, economic and successful use of resources Scope of Internal Auditing The possibility of internal auditing currently embraces wider concepts of community governance: risk and power – recognizing that organize exists within an organization basically to manage risk and advance valuable governance . The most significant vary is that the internal auditors are estimated to modify their mindset: from faultfinders to advisers. Internal auditors should take care of the auditee as their consumer. As with a client, the internal auditor should obviously communicate with the auditee, engage management in the audit development process, consider organizational risks that are prospective areas of audit anxiety, work withContinue reading
Types of Costing Systems
Some costs are direct while others are indirect, direct costs can be identified to a specific products but indirect costs which are not identifiable to specific products, need to be allocated on some objective and rational basis for product costing and pricing which can be justifiable to customers. Costing systems are the systematic allocation of cost to products. It can be used for planning, decision making and control purpose as well. Budgeted figures are used for costing of products as actual prices are not known at time when prices are decided. Important Types of Costing Systems 1. Absorption Costing System Absorption costing system is the method of allocating overheads (Fixed and variable) to products based on pre-determined absorption rate. To find the pre-determined rate total budgeted overhead cost is divided by activity level. The basis on which costs are allocated are subjective and difficult to justify. Absorption costing system givesContinue reading
Statement of Cash Flows
The statement of cash flows is one of three very important financial reports that managers and investors look at when analyzing a company’s past or present financial status. The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business, but the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can actually be much more important than income, profits, assets, and liabilities put together, especially in the early stages of any company. The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the topContinue reading
Zero Based Budgeting
Traditional budgeting starts with previous year expenditure level as a base and then discussion is focused on certain “additions” or “cuts” to be made in the previous year spending. The top management finally gives its approval after hearing the arguments for and against the “additions and “cuts”. In Zero Based Budgeting (ZBB) reference, is not made to previous level of spending. A convincing case is made for each decision unit to justify the budget allotment for that unit during that period. Zero Based Budgeting differs from traditional budgeting on many points and following tire a few points of difference between the two systems of budgeting: Traditional Budgeting Vs Zero Based Budgeting Traditional budgeting is accounting-oriented and mainly lays its emphasis in previous year expenditure. Zero Based Budgeting is decision-oriented and makes all projects and programmes old and new to complete for scarce resources. In traditional budgeting, past expenditure forms theContinue reading