Tag: Classification

Market: Definition, Types, and Characteristics, with PPT
What does Market mean? A regular gathering of people for the purchase and sale of provisions, livestock, and other commodities. Market: Definition, Types, and Characteristics, with PPT. A market may be a region, which may be a district, state, country or even the whole world from which buyers and sellers are drawn and not any particular place where they assemble. Explanation of Market: Definition of Market, Types of Market, and Characteristics of Market, with PPT of Market.

The Concept of Market is explaining their points in Definition, Types, and Characteristics.

These consumers of the economy represent the consumption wheel; on the other, production wheel consisting of producers and manufacturers of goods and services rely on marketing to push their goods and services to those who are needing and willing to pay for.

This is the belt of marketing that connects these wheels of production and consumption for mutual benefits. That is, industrial and manufacturing activities have no meaning unless their output is exchanged for money or money’s worth mutually acceptable to both the buyers and sellers. That is, manufacturing and producing is one thing and marketing is another. Left to themselves, they serve no purpose.

That is why marketing is considered much more important than production as it gives a kick-start to the engine of the economy. As an introduction to the topic, there is detailed discussion as the topic suggests. The module ends with Module Based Questions and Module Based Case Studies.

The market, Marketing, and Marketing Management:

To understand the perfect meaning and status of marketing management in the present world, there is a need to understand the meaning and implications of the terms “market” and “marketing”. Hence, these three closely related terms are explained below.

What is the Market?

The term “markets” originated from the Latin word “Marcatus” having a verb “Mercari” implying “merchandise” “ware traffic” or “a place where business is conducted”. For a layman, the word “markets” stands for a place where goods and persons are physically present. For him, “market” is “market” who speaks of “the fish markets”, “mutton markets”, “meat markets”, “vegetable markets”, “fruit markets”, “grain markets”. For him, it is a congregation of buyers and sellers to transact a deal.

However, for us as the students of marketing, it means much more. In a broader sense, it is the whole of any region in which buyers and sellers are brought into contact with one another and by means of which the prices of the goods tend to be equalized easily and quickly.

#Meaning of Market:

In common parlance, by the markets meant a place where commodities are bought and sold at retail or wholesale prices. Thus, a market place is thought to be a place consisting of a number of big and small shops, stalls and even hawkers selling various types of goods. In Economics, however, the term “Markets” does not refer to a particular place as such but it refers to a market for a commodity or commodities.

It refers to an arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods. Further, it follows that for the existence of a market, buyers and sellers need not personally meet each other at a particular place. They may contact each other by any means such as a telephone or telex.

Thus, the term “Markets” is used in economics in a typical and specialized sense. It does not refer only to a fixed location. It refers to the whole area of operation of demand and supply. Further, it refers to the conditions and commercial relationships facilitating transactions between buyers and sellers. Therefore, a market signifies any arrangement in which the sale and purchase of goods take place.

The Concept of Market explain by basic PPT:

#Definitions of Market:

Cournot’s definition, the French economist Cournot defined a market thus:

“Economists understand by the [Market] not any particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality, easily and quickly.”

This definition of the market brings out the following essential points:
- A market may be a region, which may be a district, state, country or even the whole world from which buyers and sellers are drawn and not any particular place where they assemble.
- There must be business intercourse among the dealers, i.e., buyers and sellers. They must be in touch with one another so that they are aware of the prices offered or accepted by other buyers and sellers.
- The same price must rule for the same thing at the same time.
Some more Author’s by modern definitions of the market are as follows:

According to Jevons,

“Originally a market was a public place in a town where provision and other objects were exposed for sale, but the word has been generalized so as to mean anybody or persons, who are in intimate business relation and carry on the extensive transaction in any commodity.”

As Chapmen has said,

“The term market refers not necessarily to a place but always to commodity or commodities and the buyers and sellers of the same who are in direct competition with each other.”

According to Prof. Behham,

“We must, therefore, define a market as an area over which buyers and sellers are in such close touch with one another either directly or through dealers that the prices obtainable in one part of the market affect the prices in other parts.”

From the above definitions following facts may be noted:
- The existence of a commodity. For example, The markets for gold or silver, cotton, wheat, and rice etc. Thus, there will be as many markets as are commodities and if there be several types or variance of a commodity, then each type or variety will have a separate market of its own.
- That there be buyers and sellers who are in touch with one another either through post, telegraph, telephone or through middlemen.
- That there is perfect competition among buyers and sellers so that through such competition, the price of the commodity in question is influenced.
#Types of Market:

The seller sells goods and services to the buyer in exchange for money. There has to be more than one buyer and seller for the markets to be competitive. It refers to the whole area of operation of demand and supply. Learn and understand the four Key Indicators of Marketing Efficiency. Further, it refers to the conditions and commercial relationships facilitating transactions between buyers and sellers.

The following types below are:
- Physical Markets.
- Non Physical Markets/Virtual markets.
- Auction Markets.
- Knowledge Markets.
- The markets for Intermediate Goods.
- Black Markets, and.
- Financial Markets.
A set up where two or more parties engage in the exchange of goods, services and the information, as well as called a market. Ideally, a market is a place where two or more parties are involved in buying and selling. The two parties involved in a transaction are called seller and buyer.

Market: Definition, Types, and Characteristics, #Pixabay.

#Features/Characteristics of Market:

The essential features/characteristics of a market are as follows:
- Buyers and Sellers.
- Area.
- Perfect Competition.
- One commodity.
- One Price.
- The relationship between Buyers and Sellers.
- Perfect Knowledge of the Market.
- Sound Monetary System, and.
- Presence of Speculators.
Understand by classification of the market:

Consumer Market:
- These markets specialize in selling mass consumer durable and nondurable products and services devote a good deal of time in an attempt to establish a superior brand image.
- These items may be shoes, apparels, clothing, household items like television, sound system, washing machines, fans, on one hand and tea, coffee, tea powder, coffee powder, biscuits, bread spreads, dental cream, personal care beauty-aids, rice, wheat, oat, gourmet mixes and so on the other.
- Much of the brand’s strength rests on developing a superior product and packaging, ensuring its availability and backing with engaging communications and reliable service.
- This task of image building is really ticklish as the consumer market goes on changing its color over the period of time.
Business Market:
- This is a market of business buyers and sellers. Business buyers buy goods with a view to make or resell a product to others at a profit. Therefore, business marketers are to effectively demonstrate as to how their products will help the buyers in getting higher revenue or lower costs. Therefore, companies selling business goods and services often face well-trained and well informed professional buyers who are skills in evaluating competitive offerings.
- These markets deal in raw-materials, fabricated-parts, appliances, pieces of equipment, supplies, and services that become the part of end products of the business consumers.
- Advertising plays its due role. However, personal selling has the upper hand. Product price, quality, and business suppliers’ reputation have a significant role.
Global Market:

Global markets consist of buyers and sellers all over the world. The companies selling goods and services in the global markets place play global gain involving decisions and challenges.
- To be successful, they must decide as to which country to enter?
- How to enter each country?
- That is, as an exporter, license partner of a joint venture, contract manufacturer or only manufacturer, how to adapt their product and source features to each country?
- How to price their products in different countries?
- And, how to adapt their communications to different cultures of various countries?
These decisions are to be made in the face of differing requirements for buying, negotiating, owning, and disposing of property under different culture, language, and legal and political systems; and the foreign currency that is subject to fluctuations having its own implications. It is needless to say that these goods and services both consumer and industrial or business.
January 30, 2019
Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!
What does the Capital Market mean? The capital market is a market which deals in long-term loans. It supplies industry with fixed and working capital and finances medium-term and long-term borrowings of the central, state and local governments. The Capital Market functions through the stock exchange market. A stock exchange is a market which facilitates buying and selling of shares, stocks, bonds, securities, and debentures. The capital market deals in ordinary stock are shares and debentures of corporations, and bonds and securities of governments. So, what is the topic we are going to discuss; Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

Here are explained; Indian Capital Market: The Concept of Market understand by their Nature, Classification, Growth, and Development!

The capital market plays an important role in immobilizing saving and channel is in them into productive investments for the development of commerce and industry. It is not only a market for old securities and shares but also for new issues shares and securities. In fact, the capital market is related to the supply and demand for new capital, and the stock exchange facilitates such transactions.

Thus the capital market comprises the complex of institutions and mechanisms through which medium-term funds and long-term funds are pooled and made available to individuals, business and governments. It also encompasses the process by which securities already outstanding are transferred.

Nature of Indian Capital Market:

Like the money market, capital market in India is dichotomized into organized and unorganised components. The institution of the stock exchange is an important component of the capital market through which both new issues of securities are made and old issues of securities are purchased and sold. The former is called the “new issues market” and the latter is the “old issues market”. The stock exchange is, thus, a specialist market place to facilitate the exchanges of old securities. It is known as a “secondary market” for securities.

The stock exchange dealings for “listed” securities are made in an open auction market where buyers and sellers from all over the country meet. There is a well-defined code of bye-laws according to which these dealings take place and complete publicity is given to every transaction. As far as the primary market or new issues market is concerned, it is the public limited companies instead of a stock market that deals in “old issues” that raises funds through the issuance of shares, bonds, debentures, etc. However, to conduct this business, the services of specialized institutions like underwriters and stockbrokers, merchant banks are required.

The capital market in India is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for Govt. and semi-govt. securities. The industrial securities market refers to the market for equities and debentures of companies.

The industrial securities market is further divided into:
- New issues market, and.
- Old capital market.
Both markets are equally important but often the new issue market is much more important from the point of economic growth. Economic liberalization provides a strong stimulus to the security market. There is a tremendous growth in the number of issues, the amount raised, listed companies, listed stock, market turnover, and capitalization etc. Security market witnessed steep rising curve in the decades of 80s.

Many new financial instruments were introduced; new institutions like Stock Holding Corporation of India Ltd, National Stock Exchange, Over the Counter Exchange of India Ltd. etc. were created. Further, various steps were taken to protect the interests of investors and streamlining the trading mechanism. Computerization is done for faster settlement of transactions. Screen-based trading provides the full transparency of the transactions. After the abolition of the managing agency system in 1970, the importance of the capital market in India cannot be overemphasized.

The Indian capital market has now been a very vibrant and growing market. It is one of the leading capital markets in developing countries. We have the second largest number of listed companies (6500) in the world, next only to the USA have the largest number of exchanges in any country—23 Stock Exchanges. We have 15 million investors. And in the decade of 80s, the amount raised from the Indian capital market went up from Rs. 200 crores a year to Rs. 10,000 crores a year.

The Indian capital market is the market for long term loanable funds as distinct from money market which deals in short-term funds. It refers to the facilities and institutional arrangements for borrowing and lending “term funds”, medium term, and long term funds. In principal capital market loans are used by industries mainly for fixed investment. It does not deal in capital goods but is concerned with raising money capital or purpose of investment.

The Classification of Indian Capital Market:

The capital market in India includes the following institutions;
- Commercial Banks.
- Insurance Companies (LIC and GIC).
- Specialized financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc.
- Provident Fund Societies.
- Merchant Banking Agencies, and.
- Credit Guarantee Corporations.
Individuals who invest directly on their own insecurities are also suppliers of the fund to the capital market. Thus, like all the markets the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital market attempts to provide adequate capital at a reasonable rate of return for any business, or industrial proposition which offers a prospective high yield to make borrowing worthwhile.

The Indian capital market is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for government and semi-government securities, backed by the RBI. The securities traded in this market are stable in value and are much sought after by banks and other institutions. The industrial securities market refers to the market for shares and debentures of old and new companies. This market is further divided into the new issues market and old capital market meaning the stock exchange.

The new issue market refers to the raising of new capital in the form of shares and debentures, whereas the old capital market deals with securities already issued by companies. The capital market is also divided between the primary capital market and secondary capital market. The primary market refers to the new issue market, which relates to the issue of shares, preference shares, and debentures of non-government public limited companies and also to the realizing of fresh capital by government companies, and the issue of public sector bonds.

The secondary market, on the other hand, is the market for old and already issued securities. The secondary capital market is composed of industrial security market or the stock exchange in which industrial securities are bought and sold and the gilt-edged market in which the government and semi-government securities are traded.

The Growth of the Indian Capital Market:

The following growth below are;

Before Independence of Indian Capital Market:

Indian capital market was hardly existent in the pre-independence times. Agriculture was the mainstay of the economy but there was hardly any long term lending to the agricultural sector. Similarly, the growth of industrial securities market was very much hampered since there were very few companies and the number of securities traded in the stock exchanges was even smaller.

Indian capital market was dominated by the gilt-edged market for government and semi-government securities. Individual investors were very few in numbers and that too was limited to the affluent classes in the urban and rural areas. Last but not least, there were no specialized intermediaries and agencies to mobilize the savings of the public and channelize them to invest.

After Independence of Indian Capital Market:

Since independence, the Indian capital market has made widespread growth in all the areas as reflected by the increased volume of savings and investments. In 1951, the number of joint stock companies (which is a very important indicator of the growth of capital market) was 28,500 both public limited and private limited companies with a paid up capital of Rs. 775 crore, which in 1990 stood at 50,000 companies with a paid up capital of Rs. 20,000 crore. The rate of growth of investment has been phenomenal in recent years, in keeping with the accelerated tempo of development of the Indian economy under the impetus of the five-year plans.

Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development! Image credit from #Pixabay.

The Development of Indian Capital Market:

Here we detail about the eight developments in the Indian capital market.

Financial Intermediation:

The Indian capital market has grown due to the innovation of the mechanism of indirect financing. This innovation has enhanced the efficiency of the flow of funds from ultimate savers to ultimate users through newly established financial intermediaries like UTI, LIC, and GIC. The LIC has been mobilizing the savings of households to build a “life fund”.

It has been deploying a part of “life fund” to purchase the shares and debentures of the companies. Until 1991 UTI was amongst the top ten shareholders in one out of every three companies listed in the Stock Exchange in which it had a shareholding. Likewise, UTI has been mobilizing savings of households through the sale of “units” to invest in securities of “blue-chip” companies.

In short, financial intermediaries like LIC, UTI, and GIC have activated the growth process of the Indian capital market. It is evident from the rising intermediation ratio. The intermediation ratio is a ratio of the volume of financial instruments issued by the financial institutions, i.e., secondary securities to the volume of primary securities issued by non-financial corporate firms rose from 0.27 during 1951-56 to 0.37 during 1979-80 to 1981-82.

Underwriting of Securities:

The New Issue Market as a segment of the capital market can be activated through institutional arrangements for the underwriting of new issues of securities. During the pre-independence period, the volume of securities underwritten was quite minimal due to lack of an adequate institutional arrangement for the provision of underwriting. Stockbrokers and banks used to perform this function.

In recent years, the volume and amount of securities underwritten have tremendously increased owing to the increasing participation of specialized financial institutions like LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in underwriting activities. It is evident from the fact that the number of securities underwritten was only 55 percent in 1960-61, whereas at present it is about 99 percent.

Response to the Offer of Public Issues of Shares and Bonds:

Traditionally investors in India being risk-investors had been reluctant to invest in shares of public limited companies. Hence, industrial securities as a form of investment were not popular in India before 1951. However, since 1991 public response to corporate securities has been improving. But equity-cult has yet to be developed in rural areas.

It is important to point out that the public response to new issues of shares and bonds depends upon number of factors such as rates of return on industrial securities relative to rates of return on non-marketable financial assets and real assets, government’s monetary policy and fiscal policy and above all legal protection to investors in recent years.

All the above-mentioned factors have contributed to the growth of public response to the new issue of corporate securities. In short, growing response to public issues has strengthened the Indian capital market. It is evident from the fact that the number of shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

Merchant Banking:

The role of merchant banking in India’s capital market can be traced back to 1969 when Grind lays Bank established a special cell called the “Merchant Banking”. Since then all the commercial banks have set up the “Merchant Banking Division” to play an important role in the capital market. The merchant banking division of commercial banks advises the companies about economic viability, financial viability and technical feasibility of the project.

They conduct the initial ‘spade work” to find out the investment climate to advise the company whether the public issue floated would be fully subscribed or under-subscribed. The merchant banks in India act as the underwriter as well as the manager of new issues of securities. The Securities and Exchange Board of India (SEBI) regulates all merchant banks as far as their operations relating to issue activity are concerned. To sum up, the emergence of merchant banking has strengthened the institutional base of the Indian capital market.

Credit Rating Agencies:

Of late, credit rating agencies have emerged in the financial sectors. This is an important development for the growth of the Indian capital market. Investment Information and Credit Rating Agency of India (ICRA) rates bonds, debentures, preference shares, Corporate Debentures, and Commercial Papers.

As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit rating, it rates debt instruments of banks, financial institutions, and corporate firms. The credit assessment of companies issuing securities helps in the growth of New Issue Market segment of the capital market.

Mutual Funds:

Mutual funds companies are investment trust companies. Mutual funds schemes are designed to mobilize funds from individuals and institutional investors, who in exchange get units which Can be redeemed after a certain lock-in period, at their Net Asset Value (NAV). The mutual fund schemes provide tax benefits and buyback facility. The Unit Trust of India (UTI) can be regarded as the pioneer in the setting up of mutual funds in India. Of late, commercial banks have also launched in India mutual funds schemes.

Can-stock scheme of the Canara bank and LIC’s scheme, such as Dhanashree, Dhanaraksha, and Dhanariddhi are mutual funds schemes. Since mutual funds schemes help to mobilize small savings of the relatively smaller savers to invest in industrial securities, so these schemes contribute to the growth of the capital market. The total assets of mutual funds companies increased from Rs. 66,272 crore in 1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The investment of mutual funds in the secondary market influences the share prices in the stock exchange.

Stock Exchange Regulation Act:

The growth of capital market would not have been possible had the Government of India not legislated suitable laws to protect the investors and regulate the Stock Exchanges. Under this Act, only recognized stock exchanges are allowed to function. This Act has empowered the Government of India to inquire into the affairs of a Stock Exchange and regulate it’s working. into the affairs of a Stock Exchange and regulate it’s working.

The Government of India established the Securities and Exchange Board of India (SEBI) on April 12, 1988, through an through an extraordinary notification in the Gazette of India. In April 1992, SEBI was granted statutory recognition by passing an Act. Since 1991, SEBI has been evolving and implementing various measures and practices to infuse greater transparency in the capital market in the interest of investing public and orderly development of the securities market.

Liberalization Measures:

Foreign Institutional Investors (FII) have been allowed access to the Indian capital market. Investment norms for NRIs have been liberalized, so that NRIs and Overseas Corporate Bodies can buy shares and debentures, without prior permission of RBI. This was expected to internationalize the Indian capital market.

To sum up, the Indian capital market has registered an impressive growth since 1951. However, it is only since the mid-1980s that new institutions, new financial instruments, and new regularity measures have led to speedy growth of the capital market. The liberalization measures under the New Economic Policy (NEP) gave a further boost to the growth of the Indian capital market.
January 12, 2019
Goodwill Meaning, Definition, Classification, Features, Types
Goodwill – Meaning, Definition, Classification, Features, Types, and Accounting Concept (In Hindi). In other words, goodwill shows that a business has value beyond its actual physical assets and liabilities. Discover the meaning and significance of goodwill in business. Learn how it adds value beyond physical, identifiable assets and liabilities. Goodwill is a company’s value that exceeds its assets minus its liabilities. This value can create from the excellence of management, customer loyalty, brand recognition, favorable location, or even the quality of employees. The number of goods is the purchase price the business minus the fair market value of the tangible assets, the intangible assets that can identify, and the liabilities obtained in the purchase.

Here are explains; What is Goodwill? First Meaning, Definition, Classification, Features, Types, and finally their Accounting Concept.

The amount in the Goodwill account will adjust to a smaller amount if there is an impairment in the value of the acquired company as of a balance sheet date or accounting treatment. Goodwill in the world of business refers to the established reputation of a company as a quantifiable asset and calculate as part of its total value when it takes over or sale. It is the vague and somewhat subjective excess value of a commercial enterprise or asset over its net worth. It is a vital component for increasing a company’s customer base and retaining existing clients.

Meaning of Goodwill:

Meaning; that may describe as the aggregate of those intangible attributes of a business that contributes to its superior earning capacity over a normal return on investment. It may arise from such attributes as favorable locations, the ability, and skill of its employees and management, quality of its products and services, customer satisfaction, etc.

Definition of Goodwill:

Definition; it is an asset that has countless definitions. Accountants, Economists, Engineers, and the Courts have to define Goodwill in several ways from their respective angles. As such, they have suggested different methods for their nature and valuation. No doubt it is an intangible real asset and not a fictitious one. “It is perhaps the most intangible of intangibles.” It is a valuable asset if the concern is profitable; on the other hand, it is valueless if the concern is a losing one. Therefore, it can state that Goodwills the value of the representative firm, judged in respect of its earning capacity.

Some definitions of goodwill are:

UK Accounting Standard on Accounting for Goodwill,

“Goodwill is the difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets.”

Lord Eldon by,

“Goodwill is nothing more than the profitability that the old customers will resort to the old place.”

Dr. Canning by,

“Goodwill is the present value of a firm’s anticipated excess earnings.”

Prof. Dicksee by,

“When a man pays for goodwill he pays for something which places him in the position of being able to earn more money than he would be able to do by his own unaided efforts.”

Here, the word excess indicates some special hints as to its valuation which, perhaps, is equal to earnings attributable to the rate of return on tangible and intangible assets over the normal rate of return earns by the representative firms in the same industry. In short, the excess reveals the difference between the actual profits earns minus the normal rate of return on the capital employed.

Classification of Goodwill:

The following classification by P. D. Leake as:
1. Dog-Goodwills: Dogs are attaching to the persons and, hence, such customers lead to personal they which is not transferable,
2. Cat-Goodwills: Since cats prefer the person of the old home, similarly, such customers give rise to locality goodwills.
3. Rat-Goodwills: The other variety of customers has an attachment neither to the person nor to the place, which, in other words, is known as fugitive goodwills.
Other Classifications:

The following classifications below are:

1] Purchased/Acquired Goodwill:

Purchased goodwills arise when a firm purchases another firm and when payment makes more than net assets acquired for that purpose; such excess payment know as Purchase Goodwills. The same has also been corroborating by AS 10 (Accounting for Fixed-Assets).

2] Treatment of Purchased Goodwills as per AS 10 (Accounting for Fixed-Assets):

In general records in the books only when some consideration in money or money’s worth has been paying for it. Whenever a business is acquired for a price (payable either in cash or in shares) that is more than the value of the net assets of the business taken over the excess is termed Goodwill. It arises from business’s reputation, connections, trade name or reputation of an enterprise, or other intangible benefits enjoyed by an enterprise. As a matter of financial prudence, goodwill written off over a period. However, many enterprises do not write off goodwill and retain it as an asset.

3] Treatment of Purchased Goodwills as per AS 14 (Accounting for Amalgamation):

They arising on amalgamation represent a payment made in anticipation of future income and it is appropriate to treat it as an asset to amortize to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, however, made on a prudent basis. Accordingly, it is considered appropriate to amortize goodwill over a period not exceeding 5 years unless a somewhat longer period can justify.

4] Inherent/Latent Goodwill:

It is practically the reputation of a firm that has been acquiring by the business over some time. It is not purchased for cash consideration. That is why; it is not recording in the books of accounts like Purchase Goodwills. This types of goodwill depends on several factors, viz, supplying goods and services at a reasonable price to the society, etc. Accountants are not concerning about it.

5] Inherent/Internally Generated Tangible Assets — As per AS 26:

Internally generated goodwill should not recognize as an asset. In some cases, expenditure is incurring to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in this statement.

Such expenditure is often describing as contributing to internally generated them. Internally generated and factors affecting goodwill not recognizing as an asset because it is not an identifiable resource control by the enterprise that can measure reliably at cost.

The difference between the market value of an enterprise and the carrying amount of its identifiable net assets at any point in time may be due to a range of factors that affect the value of the enterprise. However, such a difference cannot consider representing the cost of intangible assets controlled by the enterprise.

The Features of Goodwill:

The following features below are:
- It is an intangible asset, it is non-visible, but it is not a fictitious asset.
- It cannot separate from the business and therefore cannot sell like other identifiable and separable assets, without disposing of the business as a whole.
- The value of goodwill has no relation to the amount invested or the cost incurred to build it.
- Valuation of goodwill is subjective and is highly dependent on the judgment of the valuer.
- It is subject to fluctuations. The value of goodwill is an intangible may fluctuate widely according to internal and external factors of the business.
Types of Goodwill:

It is generally of two types:
- Purchased, and.
- Non-Purchased or Inherent.
1] Purchased Goodwill:

Purchased goodwills arise when a business concern is purchased and the purchase consideration paid exceeds the fair value of the separable net assets acquired. The purchased goodwills show on the assets side of the Balance sheet. Para 36 of AS-10 “Accounting for fixed assets” states that only purchased goodwill should recognize in the books of accounts.

2] Non-Purchased Goodwill/Inherent Goodwill:

Inherent goodwills the value of the business over the fair value of its separable net assets. It is referred to as internally generated them and it arises over some time due to the good reputation of a business. The value of goodwill may be positive or negative. Positive goodwill arises when the value of the business as a whole is more than the fair value of its net assets. It is negative when the value of the business is less than the value of its net assets.

Goodwills for Accounting:

Accounting for goodwill, the various ways in which they can account for are as follows:
- Carry it as an asset and write it off over years through the profit and loss account.
- Write it off against profits or accumulated reserves immediately.
- Retain it as an asset with no write-off unless a permanent diminution in value becomes evident.
- Show it as a deduction from shareholders funds which may authorize carry forward indefinitely.
In this connection, it is important to state that they should recognize and recorded in business only when some consideration in money or money’s worth has been paying for it.

How Goodwill entry in the Accounting Book?

It is always paying for the future. A record of Goodwill in accounting makes only when it has a value. When a business is purchasing and an additional amount is paid more than the number of assets, then the additional amount calls goodwill. It treats as an asset and the payment made for it is a capital expenditure. It treats as an intangible asset and thus depreciation is not charging. The value of goodwill decreases and increases but the fluctuations are not recording in the books.

The presence of goodwill in the books is not necessarily a sign of prosperity. A prospective purchaser would agree to make any payment for the goodwill only when he is convinced that the profit likely to accrue to him from the acquired business would be more than the normal return expects in a business of a similar nature. This means that any such payment refers to the future differential earnings and is a premium to the vendor for relinquishing his right thereto in favor of the vendee.

The goodwill of a business is the intangible value to it, independent of its visible assets because the business is a well-established one having a good reputation. But at the same time, it is obvious that goodwill is inseparable from the business to which it adds value. The value of the goodwill of the business will, therefore, be the value that a reasonable and prudent buyer would give for the business as a going concern minus the value of the tangible assets.

Why Need for Valuation of Goodwill?

Valuation of goodwill may make due to any one of the following reasons:
1. In the case of a Sole-Proprietorship Firm:
- If the firm is selling to another person.
- It takes any person as a partner, and.
- It is converting into a company.
2. In the case of a Partnership Firm:
- If any new partner takes.
- Any old partner retires from the firm.
- There is no change in the profit-sharing ratio among the partners.
- If any partner dies.
- Different partnership firms are amalgamating.
- If any firm is selling, and.
- If any firm converts into a company.
3. In the case of a Company:
- If the goodwill has already been written-off in the past but the value of the same is to record further in the books of accounts.
- If an existing company is taking with or amalgamate with another existing company.
- The Stock Exchange Quotation of the value of shares of the company is not available to compute gift tax, wealth tax, etc., and.
- If the shares are valued based on intrinsic values, market value, or fair value methods.
December 15, 2018
Mode, Classification, Uses, Steps of Ratio Analysis
What is the Nature of Ratio Analysis? Ratio analysis is a technique of analysis and interpretation of financial statements. So, what we discussing is – Mode, Classification, Uses, Steps of Ratio Analysis. Also, it is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. Also, it is only a means of a better understanding of the financial strengths and weaknesses of a firm.

The Concept of Accounting explains Ratio Analysis in the points of Mode, Classification, Uses, Steps.

In this article discussing Ratio Analysis: First Mode of Ratio Analysis, then the second Classification of Ratio Analysis, the third Uses of Ratio Analysis and finally Steps of Ratio Analysis. How to Calculation of Ratio Analysis? The calculation of mere ratios does not serve any purpose unless several appropriate ratios are analyzed and interpreted.

Several ratios can calculate from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of the analysis. As well as, the ratios may use as a symptom like blood pressure, the pulse rate of the body temperature and their interpretation depends upon the caliber and competence of the analyst.

Mode of Ratio Analysis:

Ratios may express in any one or more of the following ways; Mode of ratio analysis can express as:
- Proportion.
- Rate or times, and.
- Percentage.
Each way of expression may have a distinct advantage over others. Also, the analyst will choose a particular mode or a combination suitable for a specific purpose.

Proportion:

In this type of expression, the amounts of two items are expressing in a common denominator. An example of this form of expression is the relationship between current assets and current liabilities as “2”: “1”.

Rate or Times or Coefficient:

In this type of expression, a quotient obtained by dividing one item by another is taken as a Unit of expression. An example of this form of expression is the cost of sales divided by average stock (say 8), thus 8 times is the ratio between the cost of sales and stock.

Percentage:

In this type of expression, a quotient obtained by dividing one item by another multiple by one hundred to show the relationship in terms of percentage. For example, the relationship between net profit and sales may express as say 25%.

The Classification of Ratio Analysis:

Ratios are classifying in several ways. Different approaches are used for classifying ratios. There is no uniformity in classification by different experts. They have adopted different standpoints for classifying ratios into various groups.

The following classification of ratio analysis is discussing below:

Ratios by Statements:

Under this method, ratios are classifying based on statements from which the information is obtained for calculating the ratios. The only statements which provide information are i.e., balance sheet and profit and loss account.

Users:

Under this classification, ratios are grouping based on the parties who are interested in making use of the ratios.

The following is the classification on this basis:
- Management.
- Creditors, and.
- Stockholders.
Relative Importance:

This classification is adopting by the British Institute of Management, where there are three types of ratios:

Primary Ratios:

They are also known as explanatory ratios which include:
- Return on capital employed.
- Assets turnover, and.
- Profit ratios.
Secondary Performance Ratios:
- Working capital turnover.
- Stock to current assets.
- Current assets to fixed assets.
- Stocks to fixed assets, and.
- Fixed assets to total assets.
Secondary Credit Ratios:
- Creditors turnover.
- Debtors turnover.
- Liquid ratio.
- The current ratio, and.
- Average collection period.
Growth Ratios:
- The growth rate in sales.
- The growth rate in net assets.
The above list is not exhaustive; other relevant ratios can add to each category.

Ratios by Purpose/Function:

The basis for classification under this head is the purpose for which the ratios are calculated. Generally, ratios are used to assess profitability, activity or operating efficiency and financial position of concern. Based on the purpose the ratios are classified as profitability ratios, turnover ratios and financial ratios or solvency ratios.

Uses of Ratio Analysis:

The ratio analysis is one of the most powerful tools of financial analysis. It uses as a device to analyze and interpret the financial health of the enterprise. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc. before making his conclusion regarding the illness and before giving his treatment, a financial analyst analyses the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise.

“A ratio knows as a symptom like blood pressure, the pulse rate or the temperature of an individual.”

It is with the help of ratios that the financial statements can analyze more clearly and decisions made from such analysis. The use of ratios is not confined to financial managers only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes.

The supplier of goods on credit, banks, financial institutions, investors, shareholders, and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm.

With the use of ratio analysis, one can measure the financial condition of a firm and can point out whether the condition is strong, good, questionable or poor. The conclusions can also draw as to whether the performance of the firm is improving or deteriorating.

Thus, ratios have wide applications and are of immense use today:

1. Managerial Uses of Ratio Analysis:

The following managerial uses below are:

Helps in decision-making:

Financial statements are preparing primarily for decision-making. But the information provided in financial statements is not an end in itself and no meaningful conclusion can draw from these statements alone. Also, ratio analysis helps in making decisions from the information provided in these financial statements.

Helps in financial forecasting and planning:

Ratio Analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for several years work as a guide for the future. Meaningful conclusions can draw for the future from these ratios. Thus, ratio analysis helps in forecasting and planning.

Helps in communicating:

The financial strength and weakness of a firm are communicating more easily and understandable by the use of ratios. Also, the information contained in the financial statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the value of the financial statements.

Helps in coordination:

Ratios even help in coordination which is of utmost importance in effective business management. Better communication of efficiency and weakness of enterprise results in better coordination in the enterprise.

Helps in Control:

Ratio analysis even helps in making effective control of the business. Standard ratios can base upon proforma financial statements and variances or deviations, if any, can find by comparing the actual with the standards to take corrective action at the right time. The weaknesses or otherwise, if any, come to the knowledge of the management which helps in effective control of the business.

Other Uses:

These are so many other uses of the ratio analysis. It is an essential part of budgetary control and standard costing. Ratios are of immense importance in the analysis and interpretation of financial statements as they bring the strength or weakness of a firm.

2. Utility to Shareholders/Investors:

An investor in the company will like to assess the financial position of the concern where he is going to invest. His first interest will be the security of his investment and then a return in the form of dividend or interest.

For the first purpose, he will try to asses the value of fixed assets and the loans raised against them. The investor will feel satisfied only if the concern has a sufficient amount of assets. Long-term solvency ratios will help him in assessing the financial position of the concern.

Profitability ratios, on the other hand, will be useful to determine profitability position. As well as, ratio analysis will be useful to the investor in making up his mind whether the present financial position of the concern warrants further investment or not.

3. Utility to Creditors:

The creditors or suppliers extend short-term credit to the concern. Also, they are interesting to know whether the financial position of the concern warrants their payments at a specified time or not. As well as, the concern pays the short-term creditor, out of its current assets.

If the current assets are quite sufficient to meet current liabilities then the creditor will not hesitate in extending credit facilities. Current and acid-test ratios will give an idea about the current financial position of the concern.

4. Utility to Employees:

The employees are also interested in the financial position of the concern especially profitability. Their wage increases the number of fringe benefits is related to the volume of profits earned by the concern.

The employees make use of information available in financial statements. Various profitability ratios relating to gross profit, operating profit, net profit, etc. enable employees to put forward their viewpoint for the increase of wages and other benefits.

5. Utility to Government:

The government is interested to know the overall strength of the industry. Various financial statements published by industrial units are using to calculate ratios for determining the short-term, long-term and overall financial position of the concerns. Profitability indexes can also prepare with the help of ratios.

The government may base its future policies based on industrial information available from various units. Also, the ratios may use as indicators of the overall financial strength of the public as well as the private sector, in the absence of reliable economic information, governmental plans and policies may not prove successful.

6. Tax Audit Requirements:

Section 44 AB was inserted in the Income Tax Act by the Finance Act, 1984. Under this section, every assessee engaged in any business and having the turnover or gross receipts exceeding Rs. 40 lakh requires to get the accounts audited by a chartered accountant and submit the tax audit report before the due date for filing the return of income under Section 139 (1). In the case of a professional, a similar report requires if the gross receipts exceed Rs 10 lakh.

Clause 32 of the Income Tax Act requires that the following accounting ratios should give:
- Gross Profit/Turnover.
- Net Profit/Turnover.
- Stock-in-trade/Turnover, and.
- Material Consumed/Finished Goods Produced.
Further, it is advisable to compare the accounting ratios for the year under consideration with the accounting ratios for the earlier two years so that the auditor can make necessary inquiries if there is any major variation in the accounting ratios.

The Steps in Ratio Analysis:

The following Steps in Ratio Analysis below are:

Selection of Relevant Information:

The first step in ratio analysis is to select relevant information from financial statements; and, also calculate appropriate ratios required for decision under consideration.

Comparison of Calculated Ratios:

To assess the relative meaning; also, the ratios calculated are comparing with the past ratios and industry ratios.

Interpretation and Reporting:

The third step in ratio analysis is to interpret the significance of various ratios, draw inferences and to write a report. Also, the report may recommend specific action in the matter of the decision situation or may present alternatives with comparative merits or it may just state the facts and interpretation.

Mode, Classification, Uses, Steps of Ratio Analysis. Image credit from #Pixabay.
October 29, 2018
Classification of Cost of Capital, and explain their Types

Cost of capital refers to the opportunity cost of making a specific investment. Classification of Cost of Capital, and explain their Types. Cost of capital consists of both the cost of debt and the cost of equity used for financing a business. It is the rate of return that could have earn by putting the same money into a different investment with equal risk. Cost of Capital, and explain their Types (With Calculations), PDF Download Full Explanations.

Financial Management in Classification of Cost of Capital and how to explain their Types.

The following points highlight the five types of costs including in the list of the cost of capital. They are 1. Explicit Cost and Implicit Cost, 2. Future Cost and Historical Cost, 3. Specific Cost, 4. Average Cost and Marginal Cost, and 5. Overall Cost or Composite or Combined Cost.

1. Explicit Cost and Implicit Cost:

The explicit cost of any sources of capital may define as the discount rate that equates the present value of the cash inflows. That is incremental to the taking of the financing opportunity with the present value of its incremental cash outflow. When a firm raises funds from different sources, it involves a series of cash flows. At its first stage, there is only a cash inflow by the amount raised which is followed by a series of cash outflows in the form of interest payments, repayment of principal or repayment of dividends.

2. Future Cost and Historical Cost:

Future Costs are the expected costs of funds for financing a particular project. They are very significant while making financial decisions. For instance, at the time of taking financial decisions about capital expenditure. A comparison is to make between the expected IRR and the expected cost of funds for financing the same, i.e. the relevant costs here are future costs.

3. Specific Cost:

The cost of each component of capital, viz., equity shares, preference shares, debentures, loans etc. are termed specific or component cost of capital which is the most appealing concept. While determining the average cost of capital. It requires consideration of the cost of specific methods for financing the projects.

4. Average Cost and Marginal Cost:

Average Cost:

The average cost of capital is the weighted average cost of each component of the funds invested by the firm for a particular project, i.e. percentage or proportionate cost of each element in the total investment. The weights are in proportion to the shares of each component of capital in the total capital structure or investment.

Marginal Cost:

According to the Terminology of Cost Accountancy, Marginal Cost is the amount at any given volume of output by which aggregate costs are changed if the volume of output is increasing or decreasing by one unit. The same principle is being followed by the cost of capital. That is, the marginal cost of capital may define as the cost of obtaining another rupee of new capital, and last.

5. Overall Cost or Composite or Combined Cost:

It may recall that the term ‘cost of capital’ has used to denote the overall composite cost of capital or weighted average of the cost of each specific type of fund, i.e., weighted average cost. In other words, when specific costs are combined in order to find out the overall cost of capital. It may define as the composite or weighted average cost of capital.

Classification of Cost of Capital, and explain their Types (With Calculations).

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September 2, 2018