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
Financial Management Tools
Internal Check – Definition, Objectives, Advantages and Limitations
Internal check is an arrangement of duties of members of staff in such a manner than the work performed by one person is automatically and independently checked by the others. According to ‘F.R.M.De PAULA’, “Internal check means practically a continuous internal audit carried on by the staff it self, by means of which the work of each individual is independently checked by other members of the staff.” According to ‘D.R. DAVAR,’ “Internal check is a system or method introduced with defined instructions given to staff as to their sphere of work with a view to control and verification of their work and also maintenance of accurate records as the ultimate aim.” Objectives of Internal Check To exercise moral pressure over staff. To ensure that the accounting system produces reliable and adequate information. To provide protection to the resources of the business against fraud, carelessness and inefficiency. To distribute the workContinue reading
Cost Audit – Definitions, Objectives, Advantages and Limitations
Cost audit is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilization of material or labor or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.” The ICWAI defines cost audit as “system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries” From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctnessContinue reading
Financial Planning – Meaning, Objectives and Process
The financial planning refers to the projection of future financial course of action to be carried for efficient execution of operating plans and effective accomplishment of corporate objective. Financial planning begins with the preparation of strategic plans that in turn guides the formulation of operating plans and budgets. Financial planning provides road map for guiding, coordinating and controlling firm’s financial action in order to achieve the objectives. Therefore, a planning that spells out future course of action, budgets and capital expenditures required for execution of operating plans is known as financial planning. Objectives of the Financial Planning Most corporate organizations spend significant time and labor in preparing the financial plan as it enables a firm: To identify significant actions to be taken in various aspects of firm’s finance functions. To develop various options in the field of finance functions, which can be exercised as condition change. To state clearly theContinue 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
What is Trading on Equity?
The phrase trading on equity is a financial jargon which indicates the utilization of non-equity sources of funds in the capital structure of an enterprise. At a high debt-equity ratio, a firm may not be able to borrow funds at a cheaper rate of interest it may not able to borrow funds at all. This is so because creditors lose confidence in the company which has a high debt-equity ratio. How can creditors have confidence in the company which has only creditors and no equity stockholders? The company will, therefore, have to strive hard to regain a reasonable debt-equity ratio so that the expectations of the market may be satisfied. In fact, equity financing by way of a public sale of stock offers real value of a firm. Traditionally, it has served as a spearhead for expansion of resources and productive capacity involving risk. Merwin Waterman states that the termContinue reading