Financial Reporting

What does Financial Reporting mean? Financial reporting has a broader scope than just reporting information through income statements, balance sheets, authoritative pronouncements, and regulatory rules. It means reporting consists of not only monetary information but also non-monetary information. Financial reporting does not mean reporting information only through income statement (profit and loss account) and balance sheet. …

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Inventory Control System

What is an inventory control system? Inventory Control system is critical to business enterprise because of the importance of the inventory which is a major asset. It is through inventory that most of the operating activities take place. Therefore, there is a need to establish better control systems to safeguard the inventory, i.e., to prevent …

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Statement of changes in working capital

What is the statement of changes in working capital? Statement of changes in working capital is prepared by recording the changes in current assets and current liabilities during the accounting period. The working capital during the accounting period is bound to change due to increase or decrease in the current assets and current liabilities. Purpose …

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How to measure the acquisition cost of property, plant and equipment?

According to the FASB, “the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use.” In terms of property, plant, and equipment, this means that all the reasonable and necessary costs required to get the asset to its location and ready …

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Lower of Cost or Market (LCM) Theory

What is meant by Lower of cost or market? Lower of cost or market is a method of inventory pricing by which the inventory is priced at cost or market, whichever is lower. It is an application of conservatism in accounting. Explanation Under generally accepted accounting principles (GAAP), the presumption is that inventories will be …

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Perpetual Inventory System

What is a Perpetual Inventory System? – Definition: Perpetual inventory system is a method of accounting for inventory where transactions are recorded and reported as soon as they take place. Usually, in this inventory system, computerized systems and software are used to immediately record the sales and purchases. Explanation: Before advancements in technology, companies would …

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Sensitivity Analysis

What is Sensitivity Analysis? – Definition Sensitivity analysis involves examining what happens to a budget when changes are made in the assumption on which it is based. It is also known as ‘what-if’ analysis, and can be carried out using a spreadsheet or with manual calculations. Manual calculations are easier if they focus only on …

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Control Ratios

What are Control Ratios? Under the system of budgetary control, the actual performances are compared with budgeted performances so as to determine the deviations or variances. The deviations or variances may be favorable or unfavorable and may be expressed in terms of absolute figures or in terms of ratios. The ratios in terms of which …

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Methods of preparing cash budget

The following are three methods of preparing cash budget: (i) Receipt and Payment Method (ii) Adjusted Project and Loss Method (iii) Balance Sheet Method Receipt and Payment Method Here cash is received from cash sales, receipt from debtors, sale of fixed assets and investments, issue of shares and debentures. Both capital and revenue receipts are …

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Cash Management

Why a business needs cash management? Cash is important Current Asset for running a business. Cash is always needed for running a business enterprise on scientific lines. A reasonable cash balance is always preferred it should not be less than the demand nor more than the reasonable demand. The lesser quantity of cash then legitimate …

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Cost Audit

Definition of Cost Audit The term Cost Audit means the examination of books of account and vouchers to ascertain their accuracy. The exact calculation of the cost of a product is called Cost Audit. Meaning ‘Audit‘ may be described as a systematic examination of the books, vouchers and records of a business to enable the …

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Objectives and techniques of inventory management

Inventory is an important item of current Assets which also form an important element of firm’s working capital. The capable finance manager will follow proper balance of inventories needed for production schedule and this ultimately suits the interests of its valued customers. The management of inventories faces the following two basic problems. (a) Management of …

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Inventory Management

Definition Inventory Management refers to fixation of minimum and maximum limits, determining the size of inventory to be maintained. Consideration regarding issue prices, norms of receipts and inspection, determining the EOQ, providing proper store facilities and keeping an effective check on obsolescence are some of the considerations which are covered under inventory management. Inventories are …

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Procedure of Cost Audit

The Cost Auditor should keep in mind the object of Cost Audit while preparing the Plan of Cost Audit. He should distribute the work to his subordinates. He should have detailed knowledge about the organisation. The Cost Audit programme should be designed in such a way that the work should be finished within minimum period …

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Management Audit

What is Management Audit? In Management Audit the evaluation of managerial abilities and techniques is carried out. The various plans prepared by management, its policies, programs, procedures their Audit is management Audit. It is popularly known as operational management or efficiency Auditor. The Accounting kept for managerial purpose are called Management Accounting, similarly, the detailed …

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Need and Scope of Management Audit

The management of business at present becoming more and more complex. The use of specialised techniques such as operational research, statistical sampling, electronic data processing, production control etc. require the services of experts. The directors are not experts in every field of Management. If anything goes wrong then directors have to face the criticism. This …

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Relevance theory of dividend

What is the relevance theory of dividend? M. Gorden, John Linter, James Walter and Richardson are associated with the relevance theory of dividend. According to them, Dividend Policy has a positive impact on the firm’s position in the stock market. Higher Dividend will increase the value of stock whereas low dividend wise reverse. More and …

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Irrelevance Theory of Dividend

Theories of Dividend There are conflicting theories of dividend regarding impact of Dividend Decision on the valuation of the firm. As one school of thought feels that dividend decision does not affect the shareholders’ wealth and also the valuation of firm. While another thought feels Divided Decision materially affects the shareholders’ wealth and also the …

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procedure of Management Audit

Management Audit requires a review of all aspects of Management. One person cannot be an expert in every field of Management, so their should be a team to conduct Management audit. The team of auditors should include on account, an industrial engineer; an operations research specialist, a social scientist and so on. Each member should …

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Estimating working capital requirements

1. Estimating working capital requirement using operating cycle method: Problem: X Ltd Co. wants to know working capital by operating cycle methods when : Estimated Sales 20,000 units @ $5 P.U. Production and Sales will remain similar throughout the year. Production costs: M – 2.5 P.U., Labour 1.00 P.U. Overheads $17.500. Customers are given 60 …

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Working Capital

What is Working Capital?- Definition The term working capital refers to the portion of total capital which is used to run the business efficiently and regularly. It is also known as short term capital, circulating capital or liquid capital. or The current assets minus the current liabilities of an organization. It is also known as …

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Various aspects and role of financial planning in financial management

Aspects of Financial Planning 1. Amount of Capital to be raised. Financial planning anticipates the amount of capital required for the establishment of the enterprise and also for carrying out business operations. 2. Determining the form and proportionate amount of securities to be raised. The financial manager has to take decisions about the capital structure …

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What is Cost of Capital?

Introduction The cost of capital is very important factor in formulating firm’s capital structure. It is one of the cornerstones of the theory of financial management while deciding capital structure it is necessary to consider the cost of each source of capital and compare them to decide which source of capital is in the interest …

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Capitalization in business finance

Capitalization meanings: Capitalization refers to the amount of capital required by the business enterprise. The capital may be obtained: (a) by issue of equity and preference shares, (b) by issue of debentures, (c) by obtaining loans, and (d) by retained earning. Thus capitalization is the sum total of funds received through shares, bonds, loans and …

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Over-Capitalization

Definition and Explanation Over-capitalization is that aspect of a business enterprise, wherein long term funds (share capital, debentures and loans) exceed the amount of optimum capitalization. The company earns reasonably fair return on its investment in case of proper capitalization. In case of over-capitalization, the rate of return in lesser than the rate of return …

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Capital budgeting important problems and solutions

Problem 1 The cost of a project is $50,000 and it generates cash inflows of $20,000, $15,000, $25,000 and $10,000 in four years. Using present value index method, appraise profitability of the proposed investment assuming a 10% rate of discount. Solution Calculation of present value and profitability index Year Cash Inflows Present Value Factor Present …

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Capital budgeting evaluation methods/techniques

The techniques/methods of evaluation of capital budgeting proposals are as under: (i) Degree of urgency method. (ii) Pay-back period method. (iii) Unadjusted rate of return method. (iv) Present value method. (a) Time Adjusted Rate of Return method. (b) Net present value method. 1. Urgency Method As a matter of fact, urgency method does not suggest …

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Capital Budgeting

Capital budgeting tries to determine the capital investment requirements of the business, e.g., acquisition of machinery, building, etc. The plans of the business to modernize or go in for additions of long-term investment will influence the cash budget in the current year. Therefore, capital expenditure decisions must be anticipated in advance and integrated into the …

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Undercapitalization

What is undercapitalization? Under-capitalization is a situation, wherein the company has insufficient capital but large amount of secret reserve. There is generally appreciation in the value of land and building, plant, machinery, and goodwill etc. but the company does not show the appreciation in its books of accounts. These assets earn handsome earning and the …

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Fund flow statement practical problems and solutions

Question 1 Prepare fund  flow statement from the following: 1. Increase in working capital: $4,000 2. Net profit $10,750 before written off goodwill 3. Depreciation on fixed assets: $1,750 4. Dividend paid: $3,500 5. Goodwill written off $5,000 out of profits 6. $5,000 share capital was issued for cash 7. Machinery purchased for $10,000 Solution …

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What is Capital Structure? How to determine the capital structure?

Capital Structure While deciding the capital structure of the company the promoters will have to decide the proportion of capital to be raised by issue of shares and debentures. It should be noted that shareholders are paid dividend out of profit so they bear the risk involved in carrying out the business activities. According to …

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Difference between fund flow statement and balance sheet and income statement

Difference between Fund Flow Statement and Balance Sheet The main differences between fund flow statement and balance sheet are as under. Basis of difference Fund Flow Statement Balance Sheet Nature Fund flow statement is designed to show changes in financial position of an organization. Thus it is dynamic in nature. Balance sheet is to highlight …

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Fund flow statement

What is a Fund Flow Statement? A fund flow statement reveals the periodic increase or decrease of funds of a business enterprise. This statement is able to reveal the efficiency of the staff of financial management in generating funds from various sources and applying them efficiently for generating income without sacrificing the financial health of …

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Important accounting ratios and formulas

Below are the important accounting ratios and formulas: Test of liquidity Ratios to be computed: 1. Current ratio Formula: = Current Assets / Current liabilities 2. Quick or acid test or liquid ratio (for immediate solvency) Formula = (Liquid/Quick Assets) / Current liabilities 3. Absolute Liquid ratio Formula = Absolute liquid assets / Current liabilities …

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Various sources of raising funds for a business

Sources of Business Finance To meet long term, medium term and short term financial requirements, the company may adopt the following sources of fund raising derives. Methods for Raising Long Term Funds 1. Issue of shares. 2. Issue of Debentures. 3. Loan from specialized financial institutions. 4. Ploughing back of earnings (for existing companies) Methods …

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Raising funds by issuing shares

The capital of a company is divided into units, called shares. A company, to raise funds, can issue the following types of shares, namely, equity shares and preference shares. (a) Equity or ordinary shares A share which is not a preference share is an equity share. It means that if the shareholder is not entitled …

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Q.1. What is Ratio Analysis? Discuss Importance and limitations of Ratio Analysis.

Answer Meaning of ratio The term ratio analysis is used in quantitative relationship between two variables. The Ratios are needed for evaluating the financial statement. The use of ratios in the hands of financial experts works as a tool for evaluating different financial statements. Definitions of Ratio Analysis Following are some authentic definitions of Ratio …

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Marginal Costing

Marginal Costing definition Marginal costing refers to the method of costing which is concerned with changes in costs resulting from changes in the volume or range of output and sales. Increase or decrease in total costs which are brought about by an increase or decrease in the volume of production and sale is known as …

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Q. 2. Explain balance sheet ratios with examples

Answer The following are the important balance sheet ratios: Current Ratio Current ratio can be calculated as: Current ratio = Current assets / Current liabilities Current assets are: cash in hand, cash at bank, bills receivable, sundry debtors, inventories, work in progress and prepaid expenses. Current liabilities are: Bills payable, sundry creditors, sundry outstanding expenses. …

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