Fm Functions,Objectives,Balance Sheet, p&l Ac
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Transcript of Fm Functions,Objectives,Balance Sheet, p&l Ac
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FINA NCI ALMANAGEM EN T
Obj ecti ves andfuncti ons
Refer university reference
book page no 124-131
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book page no 124 131
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Financial management
The economic objectives of thebusiness are
Profitability Growth Survival
Efficient management of financeis required to achieve the aboveobjectives
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Financial management
Finance function is concernedwith the process of acquiring andefficiently utilizing the funds withthe objective of maximizing thevalue of the firm
Finance management involves theapplication of generalmanagement principles to thefinance function
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Financial management
Financial management deals withhow the corporation obtains thefunds and how it uses them
Refers the application of skills inthe manipulation, use and controlof funds
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Functio
ns
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2. Determining capitalstructure and source of funds .
The capital structure decidesthe blending of the owned and
borrowed funds in the totalfinancial requirements. The funds may be raised by
different types of securities,debentures, financialinstitutions or banks.
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3. INVES TM ENTDECISI ONS
Allocating funds betweendifferent components of
fixed and current assets. The return from business
operations should be highto meet the cost of risingfunds.
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4. Management of fixedassets
The investment in fixed assetslike land, building, machinery,equipment, furniture etcconstitute 60% to 80%.
Top management decision likeowning the assets, to hire, leaseit, make or buy components
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5. Working capitalmanagement
It is the life blood of theorganization
The important componentsof the working capital areinventories, receivables,and cash balances whichkeeps on circulating
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6.Control over financialactivities
Standard costing (actual Vs std) Budget control (capital, cash,
operating budgets)
Financial analysis (various financialratios)
Break even analysis (c-v-p- analysis)
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7.Management of earnings
Out of the total earnings for equityshare holders, how much should beretained in the business for
reinvestment dividend policies. Formulate dividend policy in such a
manner so as to formulate the value of the firm such as profitability, shareholders reactions, requirement of additional capital, investmentopportunities, accumulated profits etc.
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Routine financial functions
Del egated to subordi nat es Record keepin g
Custody and s afe guard ofdocuments.Manageme nt report ing
Control on cash
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OBJECTIVES
PROFIT MAXIMIZATION WEALTH MAXIMIZATION
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PROFIT MAXIMIZATION
Main aim of every economicactivity
Profit is a measure of efficiency
Protection against risk Essential for fulfilling socialgoals.
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Wealth maximization
Objective of the organization Firm should aim at maximizing its
current stock price.
Market price of the share serves as aperformance index or report card of itsprogress
When the share price is increased, theindividual share holder can use theincrease towards better utility
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Financial management andprofit maximization
Increase in revenue Controlling costs Minimizing risks
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Basics of financialaccounting
refer university book
page nos 165-169
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Financial accounting -meaning
Concerned with recordkeeping directed towards thepreparation of Profit and LossAccount and Balance Sheet.
It provides informationregarding profit and Lossaccount that enterprise ismaking and also financialposition on a particular date.
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Financia l accountin g -Limita tio ns
No clear idea of operating efficiency Weakness not spotted out by collecting
results
Not helpful in price fixation No data for comparison and decision
making
No control on costs, no analysis onlosses
Provides only historical information
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Basic concepts
Separate Entity Concept Going concern concept
Money measurement concept Dual aspect concept Accounting period concept Periodic matching concept Realization concept
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Separate Entity Concept Owner is treated as a separate person, ie
owner is different and business is different If the owner invests Rs 10,000 in the
business, the amount will be treated as
capital for the business and business has torepay that amount to the owner. If the owner takes Rs 2000/- from the
business, it will be treated as a withdrawalfrom his account, ie the business has repaidRs 2000/- to the owner, so net balance will beRs 8000/-on owners account.
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Going concern concept
Business will continuefor a very long period .Even if the owner dies,
the business continuesto live.
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Money measurement concept
All transactions will be recordedin the books of accounts, only if they are in terms of money.
Transactions which are not interms of money cannot berecorded. For eg- 5 trucks, 1000kgs of raw materials.
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Cost concept The assets are entered in the books at
the purchase (cost price) only. From the purchase price (cost price)
depreciation is deducted to find thebook value.
If the assets are shown on marketvalue, it may depend upon thesubjective views of the persons andmay lead to misleading results.
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Dual aspect concept This dual aspect (debit and credit) is
the foundation of accounting principle.(give and take) Every transaction has
two aspects- when you buy a book, youget the book (take) and pay money(give).
For instance, when there is increase inone asset, there is correspondingdecrease in other assets or increase inliabilities
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Accounting periodconcept
Life of the business (indefiniteperiod) will be divided intosmall segments, say a year.
Every small segment is calledan Accounting year.
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Matching concept
After deciding about the
accounting period, therevenues (income) arematched withexpenditures to find outprofit or loss.
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Realization concept. Revenue is considered only when the
ownership is transferred and the buyer becomes legally liable to pay.
For eg, a producer receives an order onJan 1 st and delivers goods on Feb 1 st and receives the payment on March 1 st .In this case, revenue is realized as ondate of delivery ie Feb 1 st when buyer becomes liable to pay
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FINANCIAL STATEMENTS
BALANCE SHEET (Refer Prasanna Chandras Financial
Management - page nos 41-48) PROFIT AND LOSS ACOUNT (Refer Prasanna Chandras
Financial Management - pagenos 48-52)
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Financial statements
The accountants prepares twoprincipal statements ie Balance sheetand Profit and loss statements toanswer the following questions to
Managers, shareholders, creditors What is the financial position of thefirm at a given point of time?
How was the firm performed financially
over a given period of time? What have been the sources and usesof cash over a given period of time?
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BALANCE SHEET
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Balance sheet Balance sheet shows the
assets of the firm and how the
assets are financed bydifferent types of capital. The assets are shown in one
side and the sources of theassets or liabilities aredisplayed on the other.
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Balance sheet The balance sheet shows the
financial condition of the
business at a given point of time. As per companies act, the
balance sheet can be either account form or the reportform
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Account formLIABILITIES ASSETSShare capital Fixed assets
Reserves andsurplus
Investments
Secured loans Current assets,loans and advances
Unsecured loans Miscellaneousexpenditure andlosses
Current liabilitiesand provisions
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Report form I SOURCES OF FUNDS 1 shareholders funds
a) share capitalb) reserves and surplus
2 Loans funds
a) secured loansb) unsecured loans
II APPLICATION OF FUNDS 1 fixed assets 2 investments
3 current assets, loans and advancesless current liabilities and provisionsnet current assets
4 Miscellaneous expenditure and losses
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Balance sheet of ABC Ltd ason 31 st March 2007
Liabilities 2006 2007 ASSETS 2006 2007
Share capitalEquity-150Prefer-0
150 150 Fixed assets 330 322
Reserves /surplus 112 106 investments 15 15
Secured loans (termloans, cash credit)
Unsecured loans( bank credit, inter-corporate deposits)
14369
13125
Current assets, loans,and advances( cash
&bank, debtors,inventories &advances)
234 156
Current liabilities andprovision
105 81
579 493 579 493
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Liabilities Liabilities represent what the business
owes to others. These constitutesource for assets for the firm throughborrowing.
These obligations must be settled infuture.
Liabilities may be classified into
current and long term liabilities
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Liabilities - classifications
Companies act classifiesliabilities as follows
Share capital Reserves and surplus Secured loans
Unsecured loans Current liabilities and provisions
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Share capital Divided into two-equity capital and
preference capital EQUITY CAPITAL- Contributions of
equity shareholders who aretheoretically the owners to the firm
Equity capital, being risk capital,carries no fixed rate of interest.
PREFERENCE CAPITAL- Contributionsof preference shareholders anddividend is payable on it is fixed.
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Types of capital Authorized capital- the amount of
capital that a company can potentiallyissue as per its memorandum
Issued capital The amount offered by the company to
the investors is called issued capital.
Subscribed capital The part of issued capital which hasbeen subscribed to by the investors iscalled subscribed capital
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Reserves and surplus
Reserves and surplus are Profits retained bythe firm
There are two kinds of reserves ie capitalreserves and revenue reserves
Revenue reserves represent accumulatedretained earnings from profits of business.
Capital reserves arise out of gains frompremium on issue on shares or gain inrevaluation of assets. A capital reservecannot be distributed as dividend
Reserves and surplus along with paid upcapital represent owners equity which is alsocalled share holders equity or net worth.
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Owners equity
Reserves and surplus along
with equity capitalrepresent owners equity .
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Secured loans
Borrowings of the firm againstwhich specific collateral havebeen provided.
Eg, debentures, loans from
financial institutions /commercial banks
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Unsecured loans Not secured by a charge on
the assets of the firm
Fixed deposits, loans andadvances from promoters,corporate borrowings andunsecured loans frombanks
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Current Liabilities andprovisions
CURRENT LIABILITIES include bills payable ie amounts due to
suppliers of goods and services bought
on credit sundry creditors, advancepayments received, interest accruedbut not due on loans
Also include loans which are repayablewithin a year from the date of balancesheet
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Provisions
Provisions include itemssuch as provision for taxes, provision for dividend, provident fund,
gratuity, superannuationand leave encashment
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Assets
Assets are classified as under Fixed assets
Investments Current assets, loans and
advances Miscellaneous expenditure
and losses
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FIXED ASSETS
Assets that produce benefits for morethan one year
May be tangible or intangible Land, building, plant, machinery,
furniture and computers are tangiblefixed asset.
Patents, copyrights, trademarks &goodwill are intangible fixed assets
Tangible fixed assets are reported inthe balance sheet at their net bookvalue, which is simply the gross valueless accumulated depreciation
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Investments Financial securities owned by the firm Divided into long term and current
investments
Long term - equity / preference shares,debentures of other companies, mostof which are likely associate andsubsidiary companies.
current short term holdings of units/shares, mutual funds to generateincome from short term cash surplus.
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Current assets, loans andadvances
Inventories (RM, work in process, finishedgoods, packing materials, stores and spares)
Sundry debtors (amount owned to the firm bycustomers who have bought goods and
services on credit and others.) Cash and bank balance (comprise cash onhand and balance with scheduled and non-scheduled banks)
Other current assets (interest oninvestments, dividends, deposits with govtauthorities)
Loans and advances- comprise of items suchas advances and loans to subsidiaries,
advances recoverable etc
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Profit andloss account
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Profit and loss account
Prepared to show the incomeor loss, the management hasgenerated over a period,usually one year
The purpose is to indicate
how successful the businessis
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Profit and loss account
A profitable company is agood company to invest in.
An unprofitable company willgo out of business Therefore, income statements
are carefully scrutinized by allinterested parties
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Profit and loss account
May be presented in
account form or reportform. Usually use report form
P&L A f ABC L d
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P&L Account of ABC Ltd ason 31/3/2007
2007 2006
Net sales 701 623
Cost of goods soldStocks 421
Wages/sal 68Other manu ex 63
552 475
Gross profit 149 148
Operating expensesDepreciation 30Gen admn 12Selling 18
60 49
Operating profit 89 99
Non-operating gain/loss - 6
Profit before interest and taxes 89 105
Interest and taxes 56 63
Profit after tax 34 42
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FACTORS P& L ACCOUNT NET SALES COST OF GOODS SOLD GROSS PROFIT OPERATING EXPENSES OPERATING PROFIT
NON-OPERATING SURPLUS/DEFICIT PROFIT BEFORE INTEREST AND TAX INTEREST PROFIT BEFORE TAX TAX PROFIT AFTER TAX PRIOR PERIOD ADJUSTMENTS AMOUNT AVAILABLE FOR APPROPRIATIONS APPROPRIATIONS BALANCE ACRRIED FORWARD
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Net sale
NET SALE IS DEFINED AS-
Sales-sales return-exciseduty. SALES= SUM OF INVOICE PRICE AND
SERVICES RENDERED DURING THE PERIOD
SALES RETURN= INVOICE VALUE OF GOODSRETURNED BY CUSTOMERS
ED= AMOUNT PAID TO EXCISE DEPT
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Cost of goods sold
Includes Direct material cost Direct labor costManufacturing overhead
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Gross profit
Is the differencebetween net sales and
cost of goods sold
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Operating expenses Expenses incurred for
running its business
General admn expenses Selling and distribution
Depreciation
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Non operating gains/losses
Arising from transactionsnot related to normal
operating activities Profit and losses from sale
of fixed assets andinvestments.
Restructuring expenses
P fit b f i t t d
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Profit before interest andtaxes(PBIT)
Earnings before interestand taxes
Operating profit of the firmplus non operating surplusless any non operatinglosses
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Interest and taxes
Interest for borrowingloans, debentures, working
capital loan etc Tax-income tax payable
and other taxes
FINANCE MANAGEMENT
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FINANCE MANAGEMENT-SYLABBUS
Financial mgmt objectives/functions
Uni ref 124/131 Allbranches
Time value of money chandra 161/182 Allbranches
Basic financial accounting (noproblems)
Uni ref 165/169 Allbranches
Profit and loss a/c chandra 48/52 Allbranches
Balance sheet (only introduction) chandra 41/58 Allbranches
Sources of indl finance, shares,debentures, public deposits, bankloans, financial institutions
chandra 461/475 All branchesexcept BT
Costing, elements of cost, cost NOTES Only For