Tag: Financial

  • Explanation of Financial Statements: Objectives, Importance, and Limitations

    Explanation of Financial Statements: Objectives, Importance, and Limitations

    Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analyzed and reported. Explanation of Financial Statements: Objectives, Importance, and Limitations – Keep study and learn. This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should be disclosed, how it should be disclosed, and which financial statement should prepare.

    Financial Statements explanation of each, Meaning of Financial Statements, Objectives of Financial Statements, Importance, and Limitations of Financial Statements.

    Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can draw from these statements alone.

    However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, common-size statements, trend analysis, schedule of changes in working capital, funds flow, cash flow analysis, and ratio analysis. Related learn Financial Accounting: Meaning, Nature, and Scope!

    Meaning of Financial Statements: 

    Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which shows the financial position of a business concern in an organized manner. We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts. For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared.

    The trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in the credit column. To find out the profit earned or loss sustained by the firm during a given period and its financial position at a given point in time is one of the purposes of accounting. For achieving this objective, financial statements are prepared by the business enterprise, which includes the income statement and positional statement.

    A firm communicates to the users through financial statements and reports.  The financial statements contain summarized information on the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management.  They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
    1. Statement of financial position (or Balance sheet): Balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date.  It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
    2. Income statement (or Profit and loss account): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management.  Financial statements are prepared from the accounting records maintained by the firm.

    These two basic financial statements viz:

    (i) Income Statement,  or Trading, and Profit & Loss Account and (ii) Positional Statement, or Balance Sheet portrays the operational efficiency and solvency of any business enterprise.

    The following formula summarizes what a balance sheet shows:

    ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

    A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholder’s equity.

    The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time. So, we can also say that the last step of the accounting cycle is the preparation of financial statements.

    The income statement is another term used for Trading and Profit & Loss Account. It determines the profit earned or loss sustained by the business enterprise during a period. In the large business organization, usually one account i.e., Trading and Profit & Loss Account is prepared for knowing gross profit, operating profit, and net profit.

    On the other hand, in small size organizations, this account is divided into two parts i.e. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared. The positional statement is another term used for the Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by the Balance Sheet.

    Objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • Reliable information about changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
    • Financial information that assists in estimating the earning potential of the enterprise.
    • Other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users

    Objective and Importance:

    The profitability of Business:

    Financial statements are required to ascertain whether the enterprise is earning the adequate profit and to know whether the profits have increased or decreased as compared to the previous years so that corrective steps can be taken well in advance.

    The Solvency of the Business:

    Financial statements help to analyze the position of the business as regards to the capacity of the entity to repay its short as well as long-term liabilities.

    The Growth of the Business:

    Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion about the growth of the business. For example, an increase in sales with a simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.

    Financial Strength of Business:

    Financial statements help the entity in determining the solvency of the business and help to answer various aspects viz., whether it is capable to purchase assets from its resources and/or whether the entity can repay its outside liabilities as and when they become due.

    Making Comparison and Selection of Appropriate Policy:

    To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt the sound business policy by making Intra firm comparison.

    Forecasting and Preparing Budgets:

    The financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these shortcomings. Financial statements help the management to make the forecast and prepare budgets.

    Communicating with Different Parties:

    Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.

    Limitations of Financial Statements:

    Manipulation or Window Dressing:

    Some business enterprises resort to manipulating the information contained in the financial statements to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing.

    Use of Diverse Procedures:

    There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under the straight-line method or written down value method. However, the results provided by comparing the financial statements of such business enterprises would be misleading.

    Qualitative Aspect Ignored:

    The financial statements incorporate the information which can be expressed in monetary terms. Thus, they fail to assimilate the transactions which cannot be converted into monetary terms. For example, a conflict between the marketing manager and sales manager cannot be recorded in the books of accounts due to its non-monetary nature, but it will certainly affect the functioning of the activities adversely and consequently, the profits may suffer.

    Historical:

    Financial statements are historical as they record past events and facts. Due to continuous changes in the demand of the product, policies of the firm or government, etc, analysis based on past information does not serve any useful purpose and gives the only post­mortem report.

    Price Level Changes:

    Figures contained in financial statements do not show the effects of changes in the price level, i.e. price index in one year may differ from the price index in other years. As a result, the misleading picture may be obtained by making a comparison of figures of the past year with current year figures.

    Subjectivity & Personal Bias:

    Conclusions drawn from the analysis of figures given in financial statements depend upon the personal ability and knowledge of an analyst. For example, the term ‘Net profit’ may be interpreted by an analyst as net profit before tax, while another analyst may take it as net profit after tax.

    Lack of Regular Data/Information:

    Analysis of financial statements of a single year has limited uses. The analysis assumes importance only when compared with financial statements, relating to different years or different firm.

    Financial statements are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first step in the accounting process but they are the end products of the accounting process which give concise accounting information of the accounting period after the accounting period is over. To know the profit or loss earned by a firm, Trading, and Profit and Loss Account is prepared. Balance Sheet will portray the financial condition of the firm on a particular date.

    Explanation of Financial Statements Objectives Importance and Limitations ilearnlot
    Explanation of Financial Statements: Objectives, Importance, and Limitations, Image Credit from ilearnlot.com.
  • Financial Reporting: Definition, Objectives, and Importance!

    Financial Reporting: Definition, Objectives, and Importance!

    Financial reporting is the financial result of an organization that releases it to the public. The Concept of the study Explains – Financial Reporting and their topics Definition, Objectives, and the Importance. This reporting is a key function of the controller, who may assist by the investor relations officer if an organization is publicly held. “Financial statements or financial reports” is a formal record of the financial activities and position of a business, person, or other entity.

    Explain and Learn, Financial Reporting: Definition, Objectives, and Importance. 

    A firm communicates to the users through financial statements and reports.  The financial statements contain summarized information on the firm’s financial affairs, organized systematically.

    The preparation of the financial statements is the responsibility of top management.  They should be prepared very carefully and contain as much information as possible. Financial Reporting: Definition, Objectives of Financial Reporting, and the Importance of Financial Reporting; Two basis financial statements prepared for external reporting to owners, investors, and creditors are:

    Balance sheet or statement of financial position:

    The balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting terminology, the balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date.  It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.

    Profit and loss account or income statement:

    The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information requires planning and controlling and therefore the financial accounting information presents in different statements and reports in such a way as to serve the internal needs of management.  Financial statements prepared from the accounting records maintained by the firm.

    The following Financial reporting typically encompasses below:
    • Financial statements, which include the income statement, balance sheet, and statement of cash flows
    • Accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework
    • Any financial information that the company chooses to post about itself on its website
    • Annual reports issued to shareholders
    • Any prospectus issued to potential investors concerning the issuance of securities by the organization
    If a business is publicly held, financial reporting also includes the following:
    • The quarterly Form 10-Q and annual Form 10-K, which are filed with the Securities and Exchange Commission
    • The annual report issued to shareholders, which could a strip-down version that calls a wrap report
    • Press releases containing financial information about the company
    • Earnings calls, during which management discusses the company’s financial results and other matters.

    The objectives of Financial Reporting:

    The main objective of financial reporting is to provide financial information to the current capital provides to make decisions. This information might also be useful to users who are not capital providers. The general purpose financial reporting develops superior reporting standards to help in the efficient functioning of economies and the efficient allocation of resources in capital markets.

    General-purpose financial reporting focuses on an extensive range of user’s needs that cannot obtain financial information needed from the entity. It should be broad enough to comprehend information for various users. Therefore, the financial report is where they depend on to acquire information. Diverse users may require different information which might go beyond the scope of general purpose financial reporting.

    The financial reports are prepared from the entity’s perspective (deemed to have substance on its own, spate from that of its owners), instead of the entity’s capital providers. An entity attains economic resources (its assets) from capital providers in exchange for claims to those resources (its liabilities and equity). Capital providers include;

    Equity investors: 

    Equity investors normally invest economic resources in an entity expecting to receive a return on, as well as a return of, the resources invested in. Hence, equity investors concern with the amount, timing, uncertainty of an entity’s future cash flows and the entity’s competence in generating those cash flows which affects the prices of their equity interests. Furthermore, they concern with the performance of directors and management of the entity in discharging their responsibility to make efficient and profitable use of the assets invested.

    Lenders: 

    Lenders usually expect to receive a return in the form of interest, repayments of borrowings, and increases in the prices of debt securities. The Lenders have similar interests as equity investors.

    Other creditors: 

    Other creditors provide resources because of their relationship with the entity, instead of a capital provider; no primary relationship.

    1. Employee – salary or compensation
    2. Suppliers – extended credit
    3. Customer – prepay for goods and services
    4. Managers – responsible for preparing financial reports

    Capital providers make decisions through useful information provided in financial reporting by the particular entity. Financial reporting usefulness in assessing cash flow prospects depends on the entity’s current cash resources and the ability to generate sufficient cash to reimburse its capital providers. Besides, financial reporting usefulness in assessing stewardship includes the management’s responsibilities to protect the entity’s economic resources (assets) from unfavorable effects.

    Management is also liable for safeguarding the assets of the entity which conforms to the laws, regulations and contractual provisions; thus, the importance of management’s performance in the decision usefulness. The general purpose of financial reporting limits to the information that does not reflect pertinent information from other sources that should consider by the users.

    Financial reporting information base on estimates, judgments, and models of the financial effects on an entity of transactions and other events in which, is only ideal for preparers and standard setters to strive. Achieving the framework’s vision of ideal financial reporting to the fullest will be difficult in the short term because of technical infeasibility and cost constraints.

    Financial reporting should include information about: the economic resources of an entity (assets), the claims of the entity are (liabilities and equity), the effects of transaction and any events or circumstances that can affect the entity’s resources and claims and provide useful information about the ability of entity to generate its cash flow and how well the entity meets its management responsibilities.

    The usefulness of financial reporting to the users:

    1. Provide useful information about the amount, timing, and uncertainty of future cash flow
    2. Identify the entity’s financial strengths and weaknesses (especially for capital providers)
    3. Indicate the potential of the entity’s cash flow for its economic resources and claims
    4. Identify the effectiveness of the entity’s management responsibilities
    5. Assess the availabilities of the entity’s nature and quantity of the resources for the use in its operation
    6. Estimate the values of the entity.

    The quantitative measures and other information regarding the changes in entity’s economic resources and claims in the financial report can help the users to assess the amount, timing, and uncertainty of its cash flow; and indicate the effectiveness of management responsibilities.

    Furthermore,

    The entity must provide a positive return on its economic resources to generate net cash inflows, and return the earning to its investors. Other information like the variability of returns, past financial performance, and management’s ability can use to assess the entity’s future financial performance.

    The information regarding the accrual accounting in financial reporting can better provide the users to assess the entity’s past financial performance and prospects in generating net cash inflows without obtaining additional capital from its investors.

    The entity’s cash flow performance in financial reporting assists the investors to understand the entity’s business model and operation by assessing how the entity obtains and spends cash. Information about its borrowing, repayment of borrowing, cash dividends and other distribution to investors, as well as the factors of entity’s liquidity and solvency, can also assist the investors to determine the entity’s cash flow accounting.

    Besides,

    Information about the changes in the entity’s resources and claims not resulting from financial performance may assist the investors to differentiate the changes that are results of the entity’s financial performance and those that are not.

    The information of management explanation should include in financial reporting to assist users for a better understanding of management decisions in any events and circumstances that have affected or may affect the entity’s financial performance. It is because the internal parties know about the entity’s performance than the external users.

    Financial Reporting Definition Objectives and Importance - ilearnlot
    Financial Reporting: Definition, Objectives, and Importance! Image credit from #Pixabay.

    Importance of Financial Reporting:

    The importance of financial reporting cannot overemphasize. It is required by every stakeholder for multiple reasons & purposes. The following points highlight why financial reporting framework is important:

    1. It helps an organization comply with various statues and regulatory requirements. The organizations are required to file financial statements with ROC, Government Agencies. In the case of listed companies, quarterly as well as annual results are required to file to stock exchanges and publish.
    2. It facilitates the statutory audit. The Statutory auditors are required to audit the financial statements of an organization to express their opinion.
    3. Financial Reports form the backbone for financial planning, analysis, benchmarking and decision making. These uses for the above purposes by various stakeholders.
    4. Financial reporting helps organizations to raise capital both domestic as well as overseas.
    5. Based on financials, the public in large can analyze the performance of the organization as well as its management.
    6. Forbidding, labor contracts, government supplies, etc., organizations require to furnish their financial reports & statements.

    The importance of financial statements lies in their utility to satisfy the varied interest of different categories of parties such as management, creditors, public, etc.

    In Management:

    An increase in the size and complexities of factors affecting the business operations necessitate a scientific and analytical approach in the management of modern business enterprises. The management team requires up to date, accurate and systematic financial information for the purposes.

    Financial statements help the management to understand the position, progress, and prospects of business vis-a-vis the industry. By providing the management with the causes of business results, they enable them to formulate appropriate policies and courses of action for the future.

    The management communicates only through these financial statements, their performance to various parties and justifies their activities and thereby their existence. A comparative analysis of financial statements reveals the trend in the progress and position of the enterprise; and, enables the management to make suitable changes in the policies to avert unfavorable situations.

    In the Shareholders:

    Management separate from ownership in the case of companies. Shareholders cannot, directly, take part in the day-to-day activities of the business. However, the results of these activities should be reported to shareholders at the annual general body meeting in the form of financial statements.

    These statements enable the shareholders to know about the efficiency and effectiveness of the management; and, also the earning capacity and financial strength of the company.

    By analyzing the financial statements, the prospective shareholders could ascertain the profit earning capacity, present position, and prospects of the company; and, decide about making their investments in this company. Published financial statements are the main source of information for prospective investors.

    In Lenders/Creditors:

    The financial statements serve as a useful guide for the present and future suppliers and probable lenders of a company. It is through a critical examination of the financial statements; that these groups can come to know about the liquidity, profitability and long-term solvency position of a company. This would help them to decide about their future course of action.

    In Labor:

    Workers are entitled to bonus depending upon the size of profit as disclosed by the audited profit and loss account. Thus, P & L a/c becomes greatly important to the workers. In wages negotiations also, the size of profits and profitability achieved are greatly relevant.

    In the Public:

    Business is a social entity. Various groups of society, though directly not connected with the business, are interested in knowing the position, progress, and prospects of a business enterprise. They are financial analysts, lawyers, trade associations, trade unions, the financial press, research scholars, and teachers, etc. It is only through these published financial statements; these people can analyze, judge and comment on the business enterprise.

    In the National Economy:

    The rise and growth of the corporate sector, to a great extent, influence the economic progress of a country. Unscrupulous and fraudulent corporate management shatter the confidence of the general public in joint-stock companies; which is essential for economic progress and retard the economic growth of the country.

    Financial Statements come to the rescue of the general public by providing information by which they can examine; and, assess the real worth of the company and avoid being cheated by unscrupulous persons. The law endeavors to raise the level of business morality by compelling the companies to prepare financial statements in a clear; and, systematic form and disclose material information.

    This has increased the confidence of the public in companies. Financial statements are also essential for the various regulatory bodies such as tax authorities, Registrar of companies, etc. They can judge whether the regulations are being strictly followed; and, also whether the regulations are producing the desired effect or not, by evaluating the financial statements. Read and share the given article (Financial Reporting: Definition, Objectives, and Importance) in Hindi.

  • Financial Services: Meaning, Features, and Scope

    Financial Services: Meaning, Features, and Scope

    Financial services can be defined as the products and services offered by institutions. The Concept of Financial Services is Explain – their Meaning, Definition, Functions, Characteristics or Features, and Scope. Like banks of various kinds for the facilitation of various financial transactions and other related activities in the world of finance like loans, insurance, credit cards, investment opportunities, and money management as well as providing information on the stock market and other issues like market trends.

    Explain and Learn, Financial Services: Meaning, Characteristics or Features, and Scope.

    Meaning of Financial Services is the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises.

    Their companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.

    Definition of Financial Services:

    Services and products provided to consumers; and businesses by financial institutions such as banks, insurance companies, brokerage firms, consumer finance companies, and investment companies all of which comprise the financial services industry.

    Facilities such as savings accounts, checking accounts, confirming, leasing, and money transfer, provided generally by banks, credit unions, and finance companies. Financial Services may simply define as services offered by financial and banking institutions like the loan, insurance, etc.

    The financial services concerns with the design and delivery of financial instruments and advisory services to individuals and businesses within the area of banking and related institutions, personal financial planning, investment, real assets, and insurance, etc.

    Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds, and some government-sponsored enterprises.

    Functions of Financial Services: 

    The following functions of financial services below are;

    • Facilitating transactions (exchange of goods and services) in the economy.
    • Mobilizing savings (for which the outlets would otherwise be much more limited).
    • Allocating capital funds (notably to finance productive investment).
    • Monitoring managers (so that the funds allocated will spend as envisaged).
    • Transforming risk (reducing it through aggregation and enabling it to carry by those more willing to bear it).

    Characteristics and Features of Financial Services:

    The following Characteristics and Features of Financial Services below are;

    1] Customer-Specific: 

    They are usually customer focused. The firms providing these services, study the needs of their customers in detail before deciding their financial strategy, giving due regard to costs, liquidity and maturity considerations. Financial services firms continuously remain in touch with their customers, so that they can design products that can cater to the specific needs of their customers.

    The providers of financial services constantly carry out market surveys so they can offer new products much ahead of need and impending legislation. Newer technologies are being used to introduce innovative, customer-friendly products and services which indicate that the concentration of the providers of financial services is on generating firm/customer-specific services.

    2] Intangibility: 

    In a highly competitive global environment, brand image is very crucial. Unless the financial institutions providing financial products; and services have a good image, enjoying the confidence of their clients, they may not be successful. Thus institutions have to focus on the quality and innovativeness of their services to build up their credibility.

    3] Concomitant: 

    Production of financial services and the supply of these services have to be concomitant. Both these functions i.e. production of new and innovative services and supplying of these services are to perform simultaneously.

    4] The tendency to Perish: 

    Unlike any other service, they do tend to perish and hence cannot be stored. They have to supply as required by the customers. Hence financial institutions have to ensure proper synchronization of demand and supply.

    5] People-Based Services: 

    Marketing of financial services has to be people-intensive and hence it’s subjected to the variability of performance or quality of service. The personnel in their organizations need to select based on their suitability and trained properly so that they can perform their activities efficiently and effectively.

    6] Market Dynamics: 

    The market dynamics depends to a great extent, on socioeconomic changes such as disposable income, the standard of living and educational changes related to the various classes of customers.

    Therefore, they have to constantly redefine and refine taking into consideration the market dynamics.

    The institutions providing their services, while evolving new services could be proactive in visualizing in advance what the market wants, or being reactive to the needs and wants of their customers.

    The Scope of Financial Services: 

    The following scope of Financial services, and cover a wide range of activities. They can broadly classify into two, namely:

    1] Traditional Activities: 

    Traditionally, the financial intermediaries have been rendering a wide range of services encompassing both capital and money market activities. They can group under two heads, viz.

    • Fund based activities and
    • Non-fund based activities.
    A. Fund based activities:

    The traditional services which come under fund based activities are the following:

    • Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary market activities).
    • Dealing with secondary market activities.
    • Participating in money market instruments like commercial papers, certificates of deposits, treasury bills, discounting of bills, etc.
    • Involving in equipment leasing, hire purchase, venture capital, seed capital, etc.
    • Dealing in foreign exchange market activities. Non-fund based activities
    B. Non-fund based activities: 

    Financial intermediaries provide services-based on non-fund activities also. This can calls “fee-based” activity. Today customers, whether individual or corporate, not satisfy mere provisions of finance. They expect more from their companies. Hence a wide variety of services, are being provided under this head.

    They include:
    • Managing the capital issue i.e. management of pre-issue and post-issue activities relating to the capital issued by the SEBI guidelines and thus enabling the promoters to market their issue.
    • Making arrangements for the placement of capital and debt instruments with investment institutions.
    • The arrangement of funds from financial institutions for the client’s project cost or his working capital requirements.
    • Assisting in the process of getting all Government and other clearances.

    2] Modern Activities: 

    Besides the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are like the non-fund based activities. Because of the importance, these activities have been in brief under the head “New-financial-products-and-services”. However, some of the modern services provided by them are given in brief hereunder.

    1. Rendering project advisory services right from the preparation of the project report until the raising of funds for starting the project with necessary Government approvals.
    2. Planning for M&A and assisting with their smooth carry out.
    3. Guiding corporate customers in capital restructuring.
    4. Acting as trustees to the debenture holders.
    5. Recommending suitable changes in the management structure and management style to achieve better results.
    6. Structuring the financial collaborations/joint ventures by identifying suitable joint venture partners and preparing joint venture agreements.
    7. Rehabilitating and restructuring sick companies through an appropriate scheme of reconstruction and facilitating the implementation of the scheme.
    More things…
    1. Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by using swaps and other derivative products.
    2. Managing in-portfolio of large Public Sector Corporations.
    3. Undertaking risk management services like insurance services, buy-back options, etc.
    4. Advising the clients on the questions of selecting the best source of funds taking into consideration the quantum of funds required, their cost, lending period, etc.
    5. Guiding the clients in the minimization of the cost of debt and the determination of the optimum debt-equity mix.
    6. Promoting credit rating agencies for rating companies that want to go public by the issue of the debt instrument.
    7. Undertaking services relating to the capital market, such as 1) Clearing services, 2) Registration and transfers, 3) Safe custody of securities, 4) Collection of income on securities.
    Financial Services Meaning Features and Scope
    Financial Services Meaning Features and Scope, Image credit from ilearnlot.com.
  • The Factors Influencing and Importance of Financial Decisions!

    The Factors Influencing and Importance of Financial Decisions!

    The Concept of Financial Decisions, The Factors Influencing Financial Decisions: 1. External Factors, and 2. Internal Factors, Fully Explain It by PDF and Free Download, and What is the Importance of Financial Decisions? Definition: The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions. Also learned, The Factors Influencing and Importance of Financial Decisions!

    Learn and Understand, The Factors Influencing and Importance of Financial Decisions! 

    The financing decision involves two sources from where the funds can be raised: using a company’s own money, such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc. The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.

    The Concept of Financial Decisions:

    Financial decisions refer to decisions concerning financial matters to a business concern. Decisions regarding the magnitude of funds to be invested to enable a firm to accomplish its ultimate goal, kind of assets to be acquired, the pattern of capitalization, pattern of distribution of firm’s income and similar other matters are included in financial decisions.

    These decisions are crucial for the well-being of a firm because they determine the firm’s ability to obtain plant and equipment when needed to carry the required amount of inventories and receivables, to avoid burdensome fixed charges when profits and sales decline and to avoid losing control of the company. Financial decisions are taken by a finance manager alone or in conjunction with his other executive colleagues of the enterprise. In principle, the finance manager is held responsible to handle all such problems as involve money matters.

    But in actual practice, he has to call on the expertise of those in other functional areas: marketing, production, accounting, and personnel to carry out his responsibilities wisely. For instance, the decision to acquire a capital asset is based on the expected net return from its use and on the associated risk. These cannot be given values by the finance manager alone. Instead, he must call on the expertise of those in charge of production and marketing.

    Similarly, the decision regarding allocation of funds as between different types of current assets cannot be taken by a finance manager in the vacuum. The policy decision in respect of receivables—whether to sell for credit, to what extent and on what terms is essentially financial matter and has to be handled by a finance manager. But at the operating level of carrying out the policies, sales may also be involved since decisions to tighten up or relax collection procedures may have repercussion on sales.

    Similarly, in respect of inventory, while determining types of goods to be carried in stock and their size are a basic part of the sales function, a decision regarding the quantum of funds to be invested in inventory is the primary responsibility of the finance manager since funds must be supplied to finance inventory.

    As against the above, the decision relating to the acquisition of funds for financing business activities is primarily a finance function. Likewise, the finance manager has to take a decision regarding the disposition of business income without consulting other executives since various factors involved in the decision affect the ability of a firm to raise funds. In sum, financial decisions are looked upon as cutting across functional, even disciplinary boundaries. It is in such an environment that a finance manager works as a part of total management.

    The Factors Influencing Financial Decisions:

    A finance manager has to exercise a great skill and prudence while taking financial decisions since they affect the financial health of an enterprise over a long period of time. It would, therefore, be in the fitness of things to take the decisions in the light of external and internal factors. We shall now give a brief account of the impact of these factors on financial decisions.

    External Factors:

    External factors refer to environmental factors within which a business enterprise has to operate. These factors are beyond the control and influence of the management. A wise management adopts policies that will be most suited to the present and prospective socio-economic and political conditions of the country.

    The following external factors enter into decision-making process:

    • The State of Economy.
    • Structure of Capital and Money Markets.
    • State Regulations.
    • Taxation Policy.
    • Requirements for Investors, and.
    • Lending Policy of Financial Institutions.
    Internal Factors:

    Internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital requirements, restrictions in debt agreements, control factor and attitude of the management.

    Within the economic and legal environment of the country finance manager must take the financial decision, keeping in mind the numerous characteristics of the firm.

    Impact of each of these factors upon financial decisions will now be discussed in the following lines.

    • Nature of Business.
    • Size of Business.
    • Expected Return, Cost, and Risk.
    • Asset Structure of the Firm.
    • Structure of Ownership.
    • Probabilities of Regular and Steady Earnings.
    • Age of the Firm.
    • Liquidity Position of the Firm and Its Working Capital Requirements.
    • Restrictions in Debt Agreements, and.
    • Management Attitude.

    Fully Explain It by PDF and Free Download:

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    What is the Importance of Financial Decisions?

    These decisions are relatively more important because of the following reasons:

    (1) Long-term Growth and Effect:

    These decisions are concerned with long-term assets. These assets are helpful in production. Profit is earned by selling the goods so produced. It can, therefore, be said the more correct these decisions are, the greater will be the growth of business in the long run. In addition to that, these affect the future possibilities of the business.

    (2) Large Amount of Funds Involved:

    Decisions regarding fixed assets are included in the preview of capital budgeting. A large amount of capital is invested in these assets. If these decisions turn out to be wrong, there occurs the heavy loss of capital which is a scarce resource.

    (3) Risk Involved:

    Capital budgeting decisions are full of risk. There are two reasons for it. First, these decisions refer to a long period, and as such expected profits for several years are to be anticipated. These estimates may turn out to be wrong. Second, because of the heavy investment involved, it is very difficult to change the decision once taken.

    (4) Irreversible Decisions:

    Nature of these decisions is such as cannot be changed so quickly. For instance, if soon after setting up a cotton mill, it is thought of changing it, then the old machinery and other fixed assets will have to be sold at the throwaway price. In doing so, the heavy loss will have to be incurred. Changing these decisions, therefore, is very difficult.

    The Factors Influencing and Importance of Financial Decisions - ilearnlot

  • Explain the importance of Financial Management!

    Question: Explain the importance of Financial Management in the present day Business World. 

    Answers: The importance/significance of financial management can be discussed/ explained from the following angles:  

    I – Importance to all types of organizations:
    1. Business organizations – Financial management is important to all types of the business organization i.e. Small size, medium size or a large size organization. As the size grows, financial decisions become more and more complex as the amount involves also is large.
    2. Charitable organization / nonprofit organization / Trust – In all those organizations, finance is a crucial aspect to be managed. A finance manager has to concentrate more on the collection of donations/ revenues etc and has to ensure that every rupee spent is justified and is towards achieving Goals of an organization. 
    3. Government / Govt. or public sector undertaking – In central/ state Govt, finance is a key/ important portfolio generally given to most capable or competent person. Preparation of budget, monitoring capital /revenue receipt and expenditure are key functions to be performed by the person in charge of finance. Similarly, in a Govt or public sector organization, financial controller or Chief finance officer has to play a key role in performing/ taking all three financial decisions i.e. raising of funds, investment of funds and distributing. 
    4. Other organizations- In all other organizations or even in a family finance is a key area to be looked in to seriously by a competent person so that things do not go out of gear.      
    II – Importance to all stakeholders:

    Financial Management is important to all stakeholders as explained below: 

    1. Shareholders – Shareholders are interested in getting optimum devidend and maximizing their wealth which is the basic objective of financial management.
    2. Investors/creditors – these stakeholders are interested in the safety of their funds, timely repayment of the principal amount as well as interest on the same. All these aspects are to be ensured by the person managing funds/ finance.
    3. Employees – They are interested in getting the timely payment of their salary/ wages, bonus, incentives and their retirement benefits which are possible only if funds are managed properly and organization is working in profit. 
    4. Customers – They are interested in quality products at reasonable rates which are possible only through efficient management of organization including management of funds. 
    5. Public – Public at large is interested in general public welfare activities under the corporate social responsibility and this aspect is possible only when organization earns the adequate profit. 
    6. Government – Govt is interested in timely payment of taxes and other revenues from the business world where again efficient finance manager has a definite role to play. 
    7. Management – Management is interested in overall image building, increase the market share, optimizing shareholders wealth and profit and all these aspects greatly depends upon the efficient management of financial resources.
    III – Importance of financial management to all deportments of a organization. 

    A large size company has many departments like (besides finance dept.)

    • Production/ Manufacturing Dept.
    • Marketing Dept.
    • Personnel Dept.
    • Material/ Inventory Dept.

    All these departments look for availability of adequate funds so that they could manage their individual responsibilities in an efficient manner. A lot of funds are required in production/manufacturing dept for ongoing / completing the production process as well as maintaining adequate stock to make available goods for the marketing dept for sale. Hence, finance department through efficient management of funds has to ensure that adequate funds are made available to all department and these departments at no stage starve for want of funds. Hence, efficient financial management is of utmost importance to all another department of the organization.

  • The similarity between Financial and Management Accounting!

    The similarity between Financial and Management Accounting!

    Financial and management accounting plays an important part in the accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information that management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise. Also learned, Creative Accounting, The similarity between Financial and Management Accounting!

    Learn, Explain The similarity between Financial and Management Accounting! 

    Management accounting is used primarily by those within a company or organization. Reports can generate for any period of time such as daily, weekly, or monthly. Reports are considering to be “future looking” and have forecasting value to those within the company. The main function of management accounting in the enterprise is to establish a variety of internal accounting control systems and provide internal management needs of a variety of data and information to improve operational efficiency and effectiveness.

    Financial accounting is used primarily by that outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. The reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.

    However, the reality is that financial and management accounting has been completely separated by an increasing number of companies, which according to their own accounting methods to double account the data at the aim of external reporting and internal management. It is hard to achieve information sharing between the two sets of data, resulting in the waste of resources and duplication of effort.

    Therefore, companies should integrate both accounting effectively together, and give full play to the function of the accounting information system to enable enterprises to obtain the dual needs of management and finance at the lowest financial cost.

    Similarities Between Financial and Management Accounting!

    What are the similarities? It is can be below are;

    Financial accounting:

    They focus on external services, but internal services are also including. The information which financial accounting provided on the funding, costs, profits, and other information is very important for business management. In particular, financial statements can comprehensive and reflect all aspects of the enterprise’s financial position and operating results. Study of the financial statements can grasp the overall situation of the enterprises, managers must first be aware of the overall situation, so that guide enterprises to continuously move forward.

    Therefore, managers must pay close attention, and be very concerned about the information providing by financial accounting. At the basis of the analysis of financial accounting, the plan could develop to enhance control and make a scientific decision, how to further improve management and increase economic efficiency could also study. So we can not say financial accounting is just the external services, not domestic services, we can only say that financial accounting focuses on external services.

    Management accounting:

    They focus on internal services, but it also contains external services. Investors and creditors concern about the enterprise’s financial position and operating results. To improve the enterprise’s financial position and operating results. Precondition can only base on strengthening internal management and improving. The work’s quality and effectiveness in the aspects of production and management. In this regard, management accounting contributes a lot to correct business decisions and the timely provision of useful information. At the same time, investors and creditors in their decision-making. Also, need to know several economic information provided by management accounting. Which has important reference value when they make the right judgments and policy decisions.

    Management accounting must obtain a variety of information from the different channels for planning and control of production and business activities. Such as financial information, statistics, business accounting information, and other relevant information. The most basic of which is financial information. Financial accounting has a fixed set of procedures and methods. Information will form according to some time production and business activities and their results through the registration books, weaving statements, etc. Which is not only for external use but also for internal use. Management accounting can develop base on financial information, making management accounting information to facilitate regulation, control, and decision making.

    The similarity between Financial and Management Accounting
    The similarity between Financial and Management Accounting, #Pixabay.
    Similarity:

    The functions of accounting are accounting and supervision. They have agreed to subordinate to the general requirements of a modern enterprise accounting. This means the users of accounting information provide relevant information, to achieve enterprise internal objectives and meet the requirements outside the enterprise. So the ultimate goal of accounting is the same.

    Both accounting is facing with self-improvement and development. They have to confront the reality of a common problem: how to use modern computer technology to collect, process, store, transmit, and report the accounting information; at the same time. They need to handle the demands of modern management properly according to the organization and implementation of accounting management.

  • What are the Goals of Financial Management?

    What are the Goals of Financial Management?

    The goals of financial management can be classified in many ways. Official goals, operative goals, and operational goals are one classification. Official goals are the general aims of the organization. Maximization of return on investment and market value per share may be termed as official goals of financial management. Operative goals indicate what the organization is really attempting to do. They focus and help in choice-making. Also Learned, Meaning, Definition, Features, and Scope of Financial Management!

    Learn, Explain What are the Goals of Financial Management?

    The expected return on investment, cost of capital, debt-equity norms, etc dong with time horizon are specified or their acceptable ranges/limits are static keeping in view the official goals. The operational goals of financial management are more directed quantitative and verifiable. The scale, mix, and timing of specific forms of finance details.

    The official, operative, and operational goals structure with a pyramidal shape, the official goals at the top (concerned with the top executives), operative goals at the middle (concerned with middle management), and operational goals at the base. The financial management goals can also be classified functionally. Return-related goals, solvency-related goals, liquidity-related goals, valuation-related goals, risk-related goals, cost-related goals, and so on.

    Return-related goals refer to the aims on minimum, average and, maximum returns. What should be the minimum return from a project to accept the same, what should be the average return the firm should settle for and what is the maximum return possible (for risk increases with return)? Similarly, goals as to solvency, liquidity, market value, etc., can be thought of you have to state to what extent the stated goal factor is important and be actively pursued/and the extent of the goal factor required; the minimum, average, and the maximum levels be specified.

    Profit Maximization:

    Profit maximization is a stated goal of financial management. It is the excess of revenue over expenses. Profit maximization is, therefore, maximizing revenue given the expenses, or minimizing expenses given the revenue, or a simultaneous maximization of revenue and minimization of expenses. Revenue maximization is possible through pricing and scale strategies.

    By increasing the selling price one may achieve revenue maximization, assuming demand does not fall by a commensurate scale. By increasing the quantity sold by exploiting the price-elasticity of the demand factor, revenue can maximize. Expenses minimization depends on the variability of costs with volume, cost consciousness, and market conditions for inputs. So, a mix of factors calls for profit maximization.

    Financial Management Objectives;

    This objective of financial management is a favored one for the following reasons:

    • Profit is a measure of business success. The higher the profit greater is the degree of success.
    • Profit is a measure of performance. Performance efficiency indicates by the quantum of profit.
    • Profit-making is essential for the growth and survival of any undertaking. Only profit-making businesses can think of tomorrow and beyond. It can only think of renewal and replacement of its equipment and can go for modernization and diversification. Profit is an engine doing away with the odds threatening the survival of the business.
    • Profit-making is the basic purpose of business. It accepts by society. A losing concern is a social burden. The sick business undertakings cause a heavy burden to all concerned, we know. So, the profit criterion brings to light operational inefficiency. You cannot conceal your inefficiency if profit makes the criterion of efficiency.
    • Profit-making is not a sin. The profit motive is a socially desirable goal, as long as your means are good.

    However, profit maximization is not very much favored. Certain limitations point out. First, the concept of profit is vague.

    Concepts of Profit;

    There are several concepts of profit like gross profit, profit before tax, profit after tax, net profit, divisible profit, and so on. So the reference to the profit has to be clear. Second, profit maximization in the long run or the short run is to state clearly.

    Long-run or short-run profit orientations differ in nature, emphasis, and strategies. Third, profit maximization does not consider the scale factors. The size of the business and level of profit has to be related. Otherwise, no sensible interpretation of performance or efficiency is possible. Fourth, profit has to be related to the time factor. Inflation eats up money value. A rupee today is worthier than tomorrow and the day after. The time value of money does not consider in profit maximization.

    Profitability Maximization:

    Profit as an absolute figure conveys less and conceals more. It must be related to either sales, capacity utilization, production, or capital invested. Profit when expressed about the above size or scale factors it acquires greater meaning. When so expressed, the relative profit knows as profitability. Profit per rupee sales, profit per unit production, profit per rupee investment, etc., are more specific. Hence, the superiority of this goal to the profit-maximization goal.

    Further profit per rupee investment or return on investment, (ROI) is a comprehensive measure. ROI = Return or Profit / Average Capital invested.

    Profit divided by sales measures the profit per rupee of sales and sales divided by investment measures the number of times the capital turns over. The former is an index of profit-earning capacity and the latter is an index of activeness of the business. Maximization of profitability (ROI) is possible through either the former or the latter or both.

    The favorable scores of this objective are the same as those of the profit maximization objective. The unfavorable scores of this objective again are the same as those of the profit maximization objective except one aspect. Profit maximization goal does not relate profit to any base. But profitability maximization relates profit to sales and/or investment. Hence it is a relative measure. So it is better than profit maximization goal on this score. But as other limitations continue, this objective to gets only a ‘qualified’ report as to its desirability.

    EPS Maximization:

    Maximization Earnings Per Share (EPS) involves maximizing earnings after tax gave the number of outstanding equity shares. This goal is similar to profitability maximization in respect of merits and demands. It is very specific both as to the type of profit and the base to which it compares. One disadvantage is that EPS maximization may lead to value depletion too because the effect of dividend policy on value totally discards.

    Liquidity Maximization:

    Liquidity refers to the ability of a business to honor its short-term liabilities as and when these become due. This ability depends on the ratio of current assets to current liabilities, the maturity patterns of currents assets and ‘the current liabilities, the composition of current assets, the quality of non-cash current assets; the relations with the short-term creditors; the relations with bankers and the like.

    A higher current ratio, a perfect match between the maturity of current assets and current liabilities, a well-balanced composition of current assets, healthy and ‘moving‘ current assets, i.e., those that can convert into liquid assets with much ease and no loss, understanding creditors and ready to help bankers would help to maintain a high-liquidity level for a business. All these are not easy to obtain and these involve costs and risks.

    How far is it a good goal? It is a good goal, though not a wholesome one. Every business has to generate sufficient liquidity to meet its day-to-day obligations. Last, the business would suffer. A liquidity-rich business can exploit some rare opportunities like buying inventory in large quantity when the price is lower, lend to the call money borrowers when the interest rate is high, retire short-term creditors taking advantage of cash discounts, and so on. So many benefits accrue. But, high liquidity might result in idle cash resources and this should avoid. Yes, excess liquidity and profitability move in the opposite directions, they are conflicting goals and have to balance.

    Solvency Maximization:

    Solvency is long run liquidity. Liquidity is short-run solvency. The business has to pursue the goal of solvency maximization. Solvency is the capacity of the business to meet all its long-term liabilities. The earning capacity of the business, the ratio of profit before interest and tax to interest, the ratio of cash flow to debt amortization, the equity-debt ratio and the proprietary ratio influence the solvency of a business. Higher the above ratios greater is the solvency and vice-versa.

    Is this a significant goal? Yes, Solvency is a guarantee for continued operation, which in turn is necessary for survival, growth, and expansion. Borrowed capital is a significant source of finance. Its cost is less; it gives tax leverage; So, equity earnings increase, so market valuation increases. So, wealth maximization enables through the borrowed capital. But to use borrowed capital, solvency management is essential. You have to decide the extent to which you can use debt capital and ensure that the cost of debt capital is minimum.

    Higher dependence and higher cost (higher than the ROI) would spell doom to the business. If the cost is less, (cost is the post-tax interest rate), and your earnings are stable, a higher debt may not be difficult for service. Solvency maximization is increasing your ability to service increasing debt and does not mean using less debt capital. Increasing the debt serviceability would require generating more and stable cash flows through the operations of the business. Ultimately, the nature of investments and business ventures influence solvency.

    Minimization of Risk:

    So far, maximization financial goals were dealt with. Now, if we turn the coin, the minimization goals come to light. Minimization of risk is one of the goals. Risk refers to fluctuation, instability, or variations in what we cherish to obtain. Variations in sales, profit, capacity utilization, liquidity, solvency, market value, and the like refer to risk. Business risk and financial risk are prominent among different risks. Business risk refers to variation in profitability while financial risk refers to variation in debt-servicing capacity.

    The business risk, alternatively, refers to variations in expected returns. Greater the variations, the greater the business risk. Risk minimization also does not mean taking any risk at all. It means minimizing risk given the return and given the risk of maximizing return. Risk reduction is possible by going in for a mix of risk-free and risky investments. A portfolio of investments with risky and risk-free investments could help reducing business risk. So, diversification of investments, as against concentration, helps in reducing business risk.

    Financial risks;

    Financial risk arises when you depend more on a high-geared capital structure and your cash flows and profits before interest and tax (PBIT) vary. To minimize financial risk, the quantum of debt capital limit to the serviceable level, which depends on the minimum level of PBIT and the cash flow. Of course, debt payment scheduling and rescheduling may help in financial risk reduction and the creditor must be agreeing to such schedules/reschedules. Here; too, a portfolio of debt capital can be thought of to reduce risk.

    Minimization of Cost of Capital:

    Minimization of cost of capital is a laudable goal of financial management. Capital is a scarce resource, a price has to pay to obtain the same. The minimum return expected by equity investors, the interest payable to debt capital providers, the discount for prompt payment of dues, etc., are the costs of different forms of capital. The different sources of capital – equity, preference share capital, long-term debt, short-term debt, and retained earnings, have different costs. In theory, equity is the costliest source. Preference share capital and retained earnings cost less than equity. The debt capital costs less, besides there is the tax advantage.

    So, to minimize the cost you have to use more debt and less of other forms of capital. Using more debt to reduce cost is however is beset with some problems, viz., you take heavy financial risk, create the charge on assets, and so on. Some even argue, that more debt means more risk of insolvency and bankruptcy cost arises. So, debt capital has, besides the actual cost, another dimension of cost – the hidden cost. So, minimizing the cost of capital means minimizing the total of actual and hidden costs.

    This is a good goal. Minimization of capital cost increases the value of the firm. If the overall cost of capital is less, the firm can take up even marginal projects and make good returns and serve society as well. But, it should avoid the temptation to fritter away scarce capital. Capital should direct into productive and profitable avenues only.

    Minimization of Dilution of Control:

    Control on the business affairs is, generally, the prerogative of the equity shareholders. As the Board holds substantial equity it wants to preserve its hold on the affairs of the business. The non-controlling shareholders too, in their financial pursuit, want no dilution of their enjoyment of fruits of equity ownership. A dilation takes place when you increase the capital base. By seeking debt capital control dilation minimize. Also, by a rights issue of equity dilation of control can minimize.

    It is evident, minimization of dilution of control is essentially a financing -mix decision and the latter’s relevance and significance had been already dealt with. But you cannot minimize dilution beyond a point, for providers of debt capital, directly or indirectly, affect business decisions. The convertibility clause is a shot in the arm for those creditors. Yes, controlling power has to be distributed.

    Wealth Maximization:

    Wealth maximization means maximization of the net worth of the business, i.e. the market valuation of a business. In other words, increasing the market valuation of equity share is what is pursued here. This objective is considered to be superior and wholesome. The pros and cons of this goal are analyzed below.

    Taking the positive side of this goal, we may mention that this objective takes into account the time value of money. The basic valuation model followed discounts the future earnings, i.e. the cash flows, at the firm’s cost of capital or the expected return. The discounted cash inflow and outflow are matched and the investment or project is taken up only when the former exceeds the latter.

    The term cash flow used here is capable of only one interpretation, unlike the term profit. Cash inflow refers to profit after interest and tax but before depreciation. Otherwise put, profit after tax and interest as increased by depreciation. Cash outflow is the investment. The salvage value of an investment, at its present value, can be reduced from investment or added to inflow. So, the cash flow concept used in wealth maximization is a very clear concept.

    Other things;

    This goal considers the risk factor in the financial decision, while the earlier two goals of financial management are silent as though risk factor is absent. The not only risk is there and it is increasing the level of return generally. So, by ignoring risk, you cannot maximize profit forever wealth maximization objective give credence to the whole scheme of financial evaluation by incorporating risk factor in the evaluation. This incorporation is done through enhanced discounting rate if need be.

    The cash flows for normal-risk projects are discounted at the firm’s cost of capital, whereas risky projects are discounted at a higher than the cost of the capital rate so that the discounted cash inflows are deflated, and the chance of taking up the project is reduced. Cash flows – inflows and outflows are matched. So, one is related to the other: i.e. there is the relativity criterion too. So, wealth maximization goal comes clear off all the limitations all the goals mentioned above. Hence, wealth maximization goal is considered a superior goal. This is accepted by all participants in the business system.

    Maximization of Economic Value Added:

    A modern concept of financial management goal is emerging now, called as maximization of economic value added (EVA). EVA = NGPAT – INTE, where, EVA is economic value added, NGPAT is net generating profit after tax but before interest and dividend and INTE is the cost of combined capital. INTE = Interest paid on debt capital plus fair remuneration on equity. EVA is simply put the excess of profit overall expenses, including expenses towards fair remuneration paid/payable on equity fund.

    What are the Goals of Financial Management - ilearnlot
    What are the Goals of Financial Management?
  • Financial Management: Definition, Features, and Scope

    Financial Management: Definition, Features, and Scope

    The present age is the age of industrialization. Large industries are being established in every country. This article explains about Financial Management and their important topics – meaning, definition, features, and scope. It is very necessary to arrange finance for building, plant and working capital, etc. for the established of these industries. How much of capital will require, from what sources this much of finance will collect and how will it invest, is the matter of financial management? Also, read and learn; Merchant Banking, read and share Financial Management in Hindi as well.

    Learn, Explain each topic of Financial Management: Definition, Features, and Scope!

    It is that managerial activity which concerns with the planning and controlling of the firm’s financial resources. It was a branch of economics until 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of knowledge of its own and draws heavily on economics for its theoretical concepts even today.

    In general financial management is the effective & efficient utilization of financial resources. It means creating balance among financial planning, procurement of funds, profit administration & sources of funds. What is the difference between Cost and Financial Accounting?

    Meaning of Financial Management:

    They mean planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to the financial resources of the enterprise.

    Definitions of Financial Management:

    According to Solomon,

    “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”

    According to J. L. Massie,

    “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”

    According to Weston & Brigham,

    “Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.”

    According to Howard & Upton,

    “Financial management is the application of the planning & control functions of the finance function.”

    According to J. F. Bradley,

    “Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”

    Main Features of Financial Management:

    Based on the above definitions, the following are the main characteristics or features of financial management:

    Analytical Thinking: 

    They under, financial problems are analyzing and consider. Study of the trend of actual figures makes and ratio analysis is done.

    Continuous Process: 

    Previously it was required rarely but now the financial manager remains busy throughout the year.

    The basis of Managerial Decisions: 

    All managerial decisions relating to finance take after considering the report prepared by the finance manager. It is the base of managerial decisions.

    Maintaining Balance between Risk and Profitability: 

    Larger the risk in the business larger is the expectation of profits. They maintain the balance between risk and profitability.

    Coordination between Process: 

    There is always coordination between various processed of the business.

    Centralized Nature: 

    It is of a centralized nature. Other activities can decentralize but there is only one department for financial management.

    Financial Management Definition Features and Scope - ilearnlot
    Financial Management: Definition, Features, and Scope.

    The Scope of Financial Management:

    Financial management, at present, does not confine to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. also emphasizes because they influenced the underwriting of securities & corporate promotion.

    Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies.

    The scope of financial management below are as under:

    Determining financial needs:

    A finance manager supposes to meet the financial needs of the enterprise. For this purpose, he should determine the financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets relates to types of industry.

    A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon the scale of operations. Larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardize the survival of a concern.

    Choosing the sources of funds:

    Several sources may be available for raising funds. A concern may resort to the issue of share capital and debentures. Financial institutions may request to provide long-term funds.

    The working capital needs may be met by getting cash credit or overdraft facilities from commercial bands. A finance manager has to be very careful & cautious in approaching different sources.

    Financial analysis and interpretation:

    The analysis & interpretation of financial statements is an important task of a finance manager. He expects to know about the profitability, liquidity position, short-term and long-term financial position of the concern.

    For this purpose, several ratios have to calculate. The interpretation of various ratios is also essential to reach certain conclusions Financial analysis and interpretation has become an important area of financial management.

    Cost-volume-profit analysis:

    This popularly knows as “CVP relationship”. For this purpose, fixed costs, variable costs, and semi-variable costs have to analyze. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according to the sales volume.

    Semi-variable costs are either fixed or variable in the short-term. The financial manager has to ensure that the income of the firm will cover its variable costs, for there is no point in being in business if this not accomplish.

    Moreover, a firm will have to generate an adequate income to cover its fixed costs as well. The financial manager has to find out the break-even point that is, the point at which the total costs are matching by total sales or total revenue.

    Working capital management:

    Working capital refers to that part of the firm’s capital which requires financing’s short-term or current assets such as cash, receivables, and inventories.

    It is essential to maintain the proper level of these assets. The finance manager requires to determine the quantum of such assets.

    Dividend policy:

    The dividend is the reward of the shareholders for investment makes by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing.

    These contradictory aims will have to reconcile in the interests of shareholders and the company. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it.

    Capital budgeting:

    Capital budgeting is the process of making investment decisions in capital expenditures. It is an item of expenditure on the benefits of which are expecting to receive over a period exceeding one year.

    It is expenditure for acquiring or improving the fixed assets, the benefits of which are expecting to receive over several years in the future. Capital budgeting decisions are vital to any organization. Any unsound investment decision may prove to be fatal for the very existence of the concern.

  • What is the Financial Intermediaries?

    With advances in computer technology, one can transfer money instantly, anywhere in the world, you can trade your funds across major stock exchanges online, you can use your credit card across the globe and so on. Lending and borrowing of money are made simple by financial institutions called financial intermediaries. Financial intermediaries such as commercial banks, credit unions, and brokerage funds carry out these transactions on your behalf. A financial intermediary is a financial institution that borrows from savers and lends to individuals or firms that need resources for investment. Also Learned, Functions of RBI, What is the Financial Intermediaries?

    Learn, Explain What is the Financial Intermediaries? Meaning and Definition!

    The investments made by financial intermediaries can be in loan and/or securities. The basic role of financial intermediaries is transforming financial assets that are less desirable for a large part of the public into another financial asset, which is preferred more by the public. This transformation involves at least four economical functions: providing maturity intermediation, risk reduction via diversifications, reducing the costs of contracting and information processing and providing a payment mechanism.

    Without financial intermediation, we must not have seen the revolution in financial services in the past couple of decades. Financial intermediation is responsible for the creation of institutional investors in the financial market. The modern world would not have been so modern without financial intermediaries. Financial intermediation has won savers confidence by protecting their asset while providing efficient services to help manage their asset.

    On contrary, with the pool of household savings from savers, they emerged as one large lender who can lend money to businesses and various other borrowers. Financial intermediaries are a vital part of our economic system and they help to maintain the constant flow of money in the economy.

    If there were no intermediaries, individual savers would have to directly purchase the securities of borrowers. There would have been incompatibility of the maturity needs of lenders and borrowers since most savers want to lend funds at short maturity, while borrowers want to borrow at longer maturities. It would have been difficult to match small amounts of individual savings to the larger loan amounts desired by borrowers.

    This would have cause borrowing more difficult and more tedious. Financial intermediaries perform an important function of maturity intermediation to make an investment from savers and money borrowing for borrowers seamless. Maturity intermediation involves a financial intermediary issuing liabilities against it that have maturity different from the assets it acquires with the fund raised.

    An example is a commercial bank that issues the certificate of deposit and invests in assets with a longer maturity than those liabilities. Maturity intermediation offers more choice concerning maturity for their investments to investors and reduces the cost of long-term borrowing for borrowers. Financial intermediaries issue their own debt claims to the saver in forms more attractive to savers, and in turn, lend to borrowers on terms satisfactory to the borrowers.

    Financial intermediaries bear risk on behalf of investors by investigating their savings across various sectors of business. They transform risk-by-risk spreading and risk pooling; they can spread risk across a range of institution. In turn, institutions can pool risk by spreading investment across firms and various projects. Diversification allows a financial intermediary to allocate assets and bear risk more efficiently.

    Financial intermediaries do risk screening, risk monitoring, and risk evaluation; it is more efficient for an institution to screen investment opportunity on behalf of individuals than for all individuals to screen the risk. It helps individual saver to save time and money and offers the low-risk investment opportunity.

    One of the common examples of this function is; a dollar deposited in a checking or savings account, it is not redeemed at less than a dollar but in turn, one get paid interest on it over the period of time. Therefore without financial intermediaries, it would really have been difficult for the individual investor to screen prospect borrower or investment opportunity, which would have discouraged individual savers from lending money and would have affected economical developments.

    Financial intermediaries provide a convenient and safe way to store finds and create standardized forms of securities. It also facilitates easy exchange of funds. Due to high volume, it is able to bear transaction and information search cost on behave of savers. Therefore, individual saver enjoys financial services that enable them to deposit and withdraw funds without negotiation whereas borrower avoids having to deal with individual investors.

    Since it has information available for both lenders and borrowers, it minimizes information cost for analyzing their data. Without financial intermediaries, lenders and borrowers would have to pay higher transactional and information costs. The modern world would not have been so efficient, aggressive and progressive without financial intermediation.

  • Difference between Cost and Financial Accounting

    Difference between Cost and Financial Accounting

    Cost Accounting and Financial Accounting Difference: Cost Accounting refers to that branch of accounting that deals with costs incurred in the production of units of an organization. A common question asked around, What is the Difference between Cost Accounting and Financial Accounting? On the other hand, financial accounting refers to the accounting concerned with recording financial data of an organization, to exhibit the exact position of the business. Also, take look at the difference between Cost and Management Accounting.

    Learn, Explain the Difference between Cost and Financial Accounting!

    Cost accounting generates information to keep a check on operations, to maximize profit and efficiency of the concern. On the other hand, Financial accounting ascertains the financial results, for the accounting period and the position of the assets and liabilities on the last day of the period. There is no comparison between these two because they are equally important for the users. This article presents you with the difference between cost accounting and financial accounting in tabular form.

    Definition of Cost Accounting:

    Cost Accounting is the field of accounting that uses to record, summarise, and report the cost information on a periodical basis. Its primary function is to ascertain and control costs. It helps the users of cost data to make decisions regarding the determination of selling price, controlling costs, projecting plans and actions, efficiency measurement of the labor, etc. also, Cost Accounting adds to the effectiveness of financial accounting by providing relevant information which ultimately results in the good decision-making process of the organization. It traces the cost incurred at each level of production, i.e. right from the input of the material till the output produced, every cost records.

    There are two types of Cost Accounting systems, they are:

    • Non – Integrated Accounting System: The accounting system in which a separate set of books is maintaining for cost information.
    • Integrated Accounting System: The accounting system in which cost and financial data are maintaining in a single set of books.

    Definition of Financial Accounting:

    Financial Accounting is the branch of accounting, which keeps the complete record of all monetary transactions of the entity and reports them at the end of the financial period in proper formats that increases the readability of the financial statements among its users. Also, The users of financial information are many i.e. from internal management to outside parties. Preparation of financial statements is the major objective of financial accounting in a specified manner for a particular accounting period of an entity.

    It includes an Income Statement, Balance Sheet, and Cash Flow Statement which helps in, tracing out the performance, profitability, and financial status of an organization during a period. Also, the information provided by financial accounting is useful in making comparisons between different organizations and analyzing the results thereof, on various parameters. In addition to this, the performance and profitability of various financial periods can also be compared easily.

    Comparison of Cost and Financial Accounting:

    Basis For Comparison Cost Accounting Financial Accounting
    Meaning: Cost Accounting is an accounting system, through which an organization keeps the track of various costs incurred in the business in production activities. Financial Accounting is an accounting system that captures the records of financial information about the business to show the correct financial position of the company on a particular date.
    Information type: Also, Records the information related to material, labor, and overhead, which are used in the production process. Records the information which are in monetary terms.
    Which type of cost is used for recording? Both historical and pre-determined cost Only historical cost.
    Users: Information provided by the cost accounting uses only by the internal management of the organization like employees, directors, managers, supervisors, etc. Also, Users of the information provided by financial accounting are internal and external parties like creditors, shareholders, customers, etc.
    Valuation of Stock: At cost Cost or Net Realizable Value, whichever is less.
    Mandatory: No, except for manufacturing firms it is mandatory. Yes for all firms.
    Time of Reporting: Details provided by cost accounting are frequently prepared and reported to the management. Financial statements are reported at the end of the accounting period, which is normally 1 year.
    Profit Analysis: Generally, the profit is analyzed for a particular product, job, batch, or process. Income, expenditure, and profit are analyzed together for a particular period of the whole entity.
    Purpose: Reducing and controlling costs. Also, Keeping a complete record of the financial transactions.
    Forecasting: The forecasting is possible through budgeting techniques. The forecasting is not at all possible.

    The upcoming discussion will update you on the difference between cost and financial accounting.

    The Difference in Cost Accounting:

    The following difference below are;

    • Cost Accounting explains the prin­ciples, techniques, and methods for ascertaining the cost and to find out the variance in comparison with the standard and enquire reasons for such variation.
    • The objective of cost accounting is to ascertain the cost and allocates the same in respective places.
    • It applies to the manufacturing and service industries.
    • Also, Cost accounting supplies necessary information’s to the management for decision-making purposes.
    • Stocks are valued as per cost price in cost accounting.
    • Cost accounting determines the profit or loss of each item of product, process, etc.
    • There is no particular period for ascertaining the cost of a product.
    • Also, Cost accounting is based on the concept of costing principles.
    • They include data based on facts and figures and also on some estimates.
    • Also, Cost accounting considers the requirements of Sec. 209(1) of the Companies Act.
    • Cost accounting control, material labor and overhead costs with the help of Standard costing, Budgetary control, etc.
    • Usually, cost accounting provides services to internal management.
    The Difference in Financial Accounting:

    The following difference below are;

    • Financial accounting maintains records for keeping accounts rela­ting to all monetary transactions.
    • The objective of financial accoun­ting is to maintain records and to prepare final accounts.
    • It is applicable in all cases.
    • Also, Financial accounting supplies information’s to the management relating to profit or loss and financial positions.
    • In financial accounting, stocks are valued as per cost price or market price whichever is lower.
    • Financial accounting shows the profit or loss of a firm as a whole at a particular date.
    • In Financial Accounting, accounts are prepared periodically, usually at the end of the period.
    • Also, Financial accounting bases on the concept of GAAP.
    • Financial accounting takes data based on facts and figures only.
    • They meet the requirements of the Companies Act 1956, Sales Tax, Income-Tax, etc.
    • Financial accounting does not have any tool to control the financial tran­saction of the business.
    • Also, Financial accounting provides information to the internal as well as external users of accounting information.

    The Main point of Differences Between Cost and Financial Accounting:

    Difference between Cost and Financial Accounting
    Difference between Cost and Financial Accounting

    The following are the major differences between cost accounting and financial accounting:

    • Cost Accounting aims at maintaining the cost records of an organization. Also, Financial Accounting aims at maintaining all the financial data of an organization.
    • Cost Accounting Records both verifiable and pre-decided costs. On the other hand, Financial Accounting records just chronicled costs.
    • Also, Clients of Cost Accounting are restricted to interior administration of the element; though clients of Financial Accounting are inside just as outside gatherings.
    • In cost, accounting stock qualities at cost while in financial accounting, the stock qualities at the lower of the two for example cost or net feasible worth.
    • Cost Accounting is obligatory just for the association which participates in assembling and creative exercises. Then again, Financial Accounting is obligatory for all associations, just as consistent with the arrangements of the Companies Act and Income Tax Act, is additionally an unquestionable requirement.
    • Also, cost Accounting data reports intermittently at continuous spans; yet financial accounting data reports after the fruition of the financial year for example for the most part one year.
    • Cost Accounting data decide benefit identified with a specific item, work, or cycle. Instead of Financial Accounting, which decides the benefit for the entire association made during a specific period.
    • Also, the motivation behind Cost Accounting is to control costs; yet the reason for financial accounting is to keep total records of the financial data, in light of which detailing should be possible toward the finish of the accounting time frame.