Professional Documents
Culture Documents
in
Preference Share capital
Types Kind of Shares
1) Equity Share
2) Preference Share
a) Participating & Non Participating
b) Redeemable & Non Redeemable
c) Cumulative & Non Cumulative
d) Convertible and Non Convertible
Types of Preference Shares
1) On the basis of participating rights objectives of finance
management
a) Participating preference shares such as shareholders enjoy the
right to participate in the excess profits made by the unit over
& above fixed percentage.
b) Non Participating preference shares such share holders are
entitled to receive only the fixed % of dividend.
2) On the basis of redemption
a) Redeemable preference shares such share capital shall be
repayed back to the share holder after a specific period
mentioned in the contract
b) Irredeemable preference shares such share capital is payed
back only at the time of winding up of the company.
3) On the Basis of Accumulation
a) Cumulative preference shares such shareholders enjoy the
privilege of accumulating the dividend over the number of
www.mynotebook.in
years. If during a gun year a unit does not enjoy profits, then
the dividend can be carried forward to the next year.
b) Non Cumulative preference shares Such shareholders cannot
accumulate the dividend. If the unit suffers a loss during a year
then they have to forego their dividend for that year.
4) On the basis of convertibility
a) Convertible preference shares such shares enjoy the privilege
of getting converted into equity shares after a specific period,
such an option is left to the discretion of the preference
shareholder.
b) Non convertible shares such shares cannot change their
status & they would remain as preference share capital
throughout their life.
www.mynotebook.in
Reserves & Surplus
Every Company sets aside a certain sum of money as reserves & surplus out of
profits. Such an amount is called Revenue reserve which is meant for
emergency requirements.
Such reserves have a special benefits such as :a)
b)
c)
d)
e)
www.mynotebook.in
Borrowed Funds
A)
B)
C)
D)
E)
Debenture
Term Loans
Lease Contract
Hire Purchase
Subsidies
A) Debentures
a legal acknowledgement of debentures (borrowing) by a company to a
specific individual or an institution it contains a contract for the
repayment of the principle sum with interest at a stipulated time. It is a
part of a company borrowed funds.
Secured &
Unsecured
Bearer &
Refistered
Debentures
Reedemable
and
Irredeemable
Convertible
and Non
Convertible
Advantages :1)
2)
3)
4)
www.mynotebook.in
Types
A) On the Basis of registration
1) Bearer Debenture such debentures are highly negotiable & the holder
of a bearer debenture is entitled to receive the interest.
2) Registered Debentures in this case the company maintains an official
register to record the names of registered debenture holders. Such
debentures cannot be sold by mere delivery they have to follow the
registration procedure. The registered number alone can receive the
interest.
B) On the basis of redemption
1) Redeemable Debentures these are repayable after a short period
2) Irredeemable Debentures these are repaid only at the time of
winding up the company or after a long duration.
C) On the basis of security
1) Secured Debentures certain debentures are specifically issued inorder
to purchase certain properties. Such debentures are secured to the
extent of the value of that property in the event of winding up the m2o
obtained from the sale of that property would be used to repay such
debenture holders.
2) Unsecured Debentures such debenture holders only enjoy a general
claim over the properties (assets) of the company unlike the secure
debenture holders.
www.mynotebook.in
D) On the basis of convertibility
1) Convertible Debentures these debenture holders are gun the option to
convert their debentures into preference shares after a specific period.
2) Non Convertible Debentures such debenture holders cannot enjoy any
ownership status in the company.
www.mynotebook.in
Term Loans
A) Interest covenant: - this would indicate the rate of interest & the
mode of payment (half yearly , annual, etc.) During the borrowing
period.
B) Liability Covenant:- this condition would restrict the borrower from
increasing his liability through additional borrowing from other units.
If the borrower wishes to borrow from other units then he would be
required to get the permission of the original institution which
provided the term loans.
www.mynotebook.in
Term loans provide long term liquidity they facilitate research & innovation
activities. They support growth & diversification; they enhance the institutional
image in the market. This term loans are considered to be a valuable source of
finance
www.mynotebook.in
Lease Contract
Facilities like lease contracts, hire purchase agreements, deferred credits &
subsidies support the companies to utilize their available funds in the most
profitable manner.
Lease contract would enable a company to use a property without owning the
same. Since the lease rent would be a nominal amount a company can enjoy
the benefit of the property without blocking M2o to buy it. Thus a lease
becomes a source of finance. It is also referred to as off balance sheet
finance.
A lease agreement normally involves two parties namely the
a) lessor owner of the property
b) lessee user of the property
The lessor & the lessee enter into an agreement regarding
A) Type of lease contract
B) Amount of lease contract
C) Duration of lease contract
www.mynotebook.in
b) Sale & Lease back agreement the owner of a property may enter into a
contract with the buyer in the form of sale & lease back. Wherein the
seller will become the lessee & the buyer will become the lessor. This
enables location benefit of the unit without blocking his funds.
www.mynotebook.in
Hire Purchases
Hire Purchase
1) Right to own an asset
2) Down Payment needed
3)Hirer gets salvage benefit
4)Interest alone is tax
deductible
5)Interest alone is tax deductible
6)Small amounts
www.mynotebook.in
Subsidies
a)
b)
c)
d)
e)
f)
g)
Types
1) Cash subsidies the government support the farmers by paying a cash
subsidy & thus enable them to receive a fair price for their products.
2) Intrest Subsidies these are being paid to framers & small scale units to
enable them to get institutional loans.
3) Tax Subsidies these encourage the exports to earn more foreign
exchange & enjoy the benefit of lower rate taxation
4) Regulatory Subsidies these are associated with petroleum, cement &
power supply facilities. These ensure the availability of such products &
services to the weaker sections of the society
5) Procurement Subsidies such subsidies encourage import substitution &
the subsidy will enable the manufacturer to import material equipment
or technology to support import substitution activity.
These subsidies act as an internal source of finance to the general public.
www.mynotebook.in
Sources of Finance
1) Borrowed
2) Owned
a) Reserves and Surplus
b) Shared
1) Equity
2) Preference
Sources of finance refer to broad sources from where funds can be procured
by the financer manger.
1) Owned Sources
2) Borrowed Sources
Owned Sources comprise of a distinct elements
a) Share Capital
b) Reserves & surplus (ploughing back of profits)
A) Share Capital
As per companies act of 1956 a share means a share in the share capital
of a company & includes stock except where a distinction between stock
and share is expressed or implied.
- Share Capital is broadly classified into 2 categories
- Equity Share capital and Preference share capital
- Authorized, issued, subscribed, and called-up, paid-up classes of
share capital.
www.mynotebook.in
www.mynotebook.in
www.mynotebook.in
www.mynotebook.in
www.mynotebook.in
5) Basics for taxation financial data is used by the government for levying
corporate taxes.
6) Profit & wealth maximisation precedent financial management ensure
maximisation of profits in the short run & maximisation of wealth in the
long-run.
Inter relationship with other financial areas:A) Financial production management production as a field of activity
involves the purchase of raw materials. It also requires the acquisition of
equipments, recruitment of skilled workforce & the creation of adequate
infrastructure. Each one of these factors would require financial support.
Subsequently the production unit may have to dispose of the scrap
material or recycle the waste. This would again involve a financial
allocation. Activities like quality control, safety procedures, pollution
control measures & storage facilities would also require funds. Thus
every aspect of production is closely related with a financial
commitment. Besides the control of production cost can be achieved
only through efficient financial management.
B) Finance and Marketing The field of marketing covers a variety of
activities such as research, transportation, warehousing, insurance,
channel distribution, promotional activities. It includes research &
innovation, production improvement & withstanding competition. Each
one of the above activities would require a financial commitment.
Certain related activities like the appointment of agents, legal experts,
and financial consultants for global trade could also require a huge
financial commitment. Each one of the promotional techniques would
require a separate budgeting allocation. Thus sales promotion measures
may involve expenditure on gift items. Advertising would involve the
payment on creative & media charges. Direct marketing may require
extensive sales force training. Thus successful marketing would be the
outcome of sufficient funds allocated for marketing processes.
C) Finance and Advertising The term advertising is being popularly
referred to as any paid form of non personal communication & this
implies a financial commitment for promotional purposes. The two
www.mynotebook.in
broad categories of advertising are above the line & below the line
they have their own explicit & implicit cause. Normally, mass
communication through mass media involves a very heavy budget in
addition to media cost. Creative expenditure should also be incurred for
advertising purposes. Off late, the field of advertising has emerrged its
scope & has included consultancy & creative services. Such consultancy
may have to be paid a highly large salary. Thus finance has a direct
impact on advertising expenditure and advertising impact.
Finance
Finance is the provision of money at the time it is needed F.W. Paish
finance function is associated with the optimal administration of cash
& credit inflows & outflows of a unit during any given period of time
Howard Upton
1) Profit Maximization this is a commercial goal achieved through the
maximisation of the revenues by increasing sales of the unit.
2) Shareholders wealth maximisation if a company earns huge profits
then its reputation in the market increases. This goodwill increases
the market value of its shares. Such an increase in the market value
maximizes the wealth of its shareholders
3) Risk return trade off every financial decision involves a certain
degree of risk as well as a return. The finance manager has to achieve
a delicate balance between risk & return. He should achieve
maximum return with minimum risk.
4) Safety & Solvency the term safety refers to the investment of
companys funds in a judicious manner. Solvency refers to the ability
of a unit to meet its financial commitments to outsiders on time.
5) Economy finance manager should manage to procure borrowed
funds at low interest. Rates & thus reduce the cost of funds. He
should also ensure optimum usage of funds & avoid wasteful
expenditure.
www.mynotebook.in
www.mynotebook.in
Financial Decisions
1) Commercial
A) Procurement function
B) Investment
C) Dividend Distribution
2) Non Commercial
A) CSR
1) Commercial Decision
A) Procurement function decisions
1) Capitalisation decision the finance manger has to decide about
the volume of long term funds to be invested in the business.
2) Capital Gearing Decisions the ratio owned & borrowed funds
is also to be decided by the finance manager this ratio is referred
to as gearing ratio
3) Types of financial instruments decision the finance manager has
to decide about the difference types of shares & debentures to be
issued by the company & the terms & conditions of their issue.
www.mynotebook.in
Ratio Analysis
Financial Statements
Every unit records the financial transaction either in a horizontal format or in a
vertical format
Horizontal Format
The horizontal format also knows as the T shaped format. It comprises of 2
statements namely:1) Trading and Profit & loss account
2) Balance sheet
The trading & profit & loss account indicates the profit or loss made by the unit
during a given year.
The balance sheet indicates the financial status of the unit during a gun year
The balance sheet comprises of liabilities & assets Liabilities = what the firm
owes to share holders & outsiders.
Assets = what the firm owns over a period of time.
The Basic accounting equation is expressed as liabilities = assets
Vertical Format
This is the most modern way of presenting financial statements, it comprises of
income statement which indicates the profit or loss made during a given year.
A position statement indicates financial status of a unit as of a gun date.
Sources = methods through which funds have been raised.
Applications = methods in which funds have been used.
www.mynotebook.in
Assets Rs.
Fixed Assets
Investment
(Current assets loan and
advances)
Total
Net sales
Less cost of goods sold
Less operating expenses
Add operating income +
Operating Profit
Less non operating expenses
Add non- operating income
Net profit before taxation & reserves
Less tax
Net Profit after tax before reserves
Less reserves
Net profit (net income of the year)
Position statement of as on
Rs
Sources of funds
Owned Funds
A) Share Capital
B) Reserves & surplus
www.mynotebook.in
Borrowed Funds
A) Debentures
B) Term Loans
C) A B other Borrowings
Total sources of funds
---
Application of funds
1)
2)
3)
4)
www.mynotebook.in
Rs
www.mynotebook.in
Ratios
In Ratios involved the comparison of 2 details presented in the financial
statements in order to access various assets, liquidity etc. Such ratios maybe
prepared in pure as well as % form. Ratios are broadly classified into 3
categories:a) Balance sheet ratios
b) Profitability or income statement ratios
c) Inter statement ratios
www.mynotebook.in
Gross profit = net sales cost of goods sold
www.mynotebook.in
www.mynotebook.in
Costing
Definition
Cost refers to the amount of expenditure incurred in the production
of a product or creation of a service or completion of a contract. It
comprises of direct & indirect cost.
Incremental Cost cost centre means a location (factory), person
(mason), or equipment (computer) for which cost is ascertained.
Cost unit means the unit in which a production or service is measured
or expressed for commercial purposes. Eg- cloth in metres, paper in
ream, transport cost/ passenger
Indirect costs are the costs which cannot be identified with and
allocated to specific cost centres & hence it is apportioned to the cost
centres on a suitable basis.
Direct costs are costs which can be identified & allocated to specific
cost centres
Functions of costing / 5 As
1) Ascertain cost collect & determine the details of all expenses
relating to a particular production.
2) Analyse Costs classify the expenses under various heads such as
material, labour, etc.
3) Allocate costs: Charge the direct expenses to the production or
process or contract.
4) Apportion costs : distribute the indirect expenses to all products /
processes / contracts on a suitable basis
5) Absorb cost : The expenses of a department area absorbed by its
products
Advantages of costing
1) Costing benefits the owners/ managers through cost control
2)
3)
4)
5)
www.mynotebook.in
Behaviour
Fixed Cost
Variable Cost
Overheads
Semi variable
cost
Time
Historical Cost
Pred
determined cost
Standard Cost
Genera
Marginal Cost
Replacement Cost
Budgeted Cost
Notional imputed
cost
Sunk Cost
Controllable Cost
Uncontollable
cost
Relevant Cost
Irrelevant Cost
Discretionary Cost
Diffrential Cost
Shut Down cost
Classification on the basis of elements :Elements are broadly classified under 3 categories
1) Material
2) Labour
3) Overheads ( expenses)
Oppurtunity Cost
www.mynotebook.in
www.mynotebook.in
www.mynotebook.in
On the basis of time costs are classified under 2 broad categories mainly
historical costs & pre determine cost
Historical costs refers to expenditure incurred on the acquit ion of an asset
whose benefits are not expired in full. Eg : cost of machinery, furniture etc
which are still in use.
Pre determined cost also called future costs it is an estimation of the
expenditure to be incurred in future. Such an estimate can be classified into 2
categories:1) Standard cost refers to the ideal cost which can be incurred for
acquiring an asset procuring a service.
2) Budget Cost it refers to the cost which a unit can afford to spend in
procuring a service or purchasing an asset based on the available funds.
- General Classification
Marginal refers to expenditure incurred on the creation of an additional
(marginal) unit of production.
Opportunity Cost this refers to the cost & benefit incurred on account of
spending the m20 in the purchase of a specific asset or service by comparing
the cost & benefit of various options the management chooses a specific
investment. It is very useful in corporate decision making.
Replacement Cost refers to the expenditure incurred on replacing an asset
on a service at the prevailing market rates.
Notional/ imputed cost refers to expenses which exist merely for record
purpose. They are not recorded for the sake of tax concession & similar
benefits. Eg:- rent paid for running office from ones own house, etc.
Sunk Cost refers to expenditure incurred on an asset whose benefit has fully
expired eg:- cost of unused obsolete machinery, depreciation expenses, etc
www.mynotebook.in
Controllable costs this deals with certain items of expenditure which can be
totally influenced by the decision of a single individual eg: raw material cost
decided by production manager.
Uncontrollable costs these are general expenses over which no single
individual can exercise control. Eg : office rent, telephone charges, etc.
Relevant Costs these refer to the expenses which are highly essential &
crucial for taking a specific decision eg :- cost of sugarcane in sugar
manufacturing industry.
Irrelevant Cost refers to certain expenses which are relatively insignificant for
decision making purposes. Eg: type of lighting expenses incurred for sugar
manufacturer unit.
Discretionary Cost these are expenses of a secondary significance their
mostly luxuries 7 not necessities for running a unit. Eg: interior decoration, AC
etc. for running a factory, etc.
Differential Cost this refers to any increase or decrease in overall expenditure
on account of changing volume of operation. All variable costs are differential.
Shutdown Cost the expenditure which a unit has to incur even when no
productive activity is being carried out such as rent, security, maintenance, etc.
www.mynotebook.in
www.mynotebook.in
www.mynotebook.in
True value of money
Capital budgeting decisions are normally made targeting into account the
concept of time value of m2o. In a general sense m2o experience an increment
in value when it is invested I an asset. Such an increment in value occurs on
account of the interest factor earned by the investment. This increase in value
is referred to as the compounding value of m2o. However on account of
information over a period of time. Monet suffers a decrease in purchasing
power & gets discounted In real terms. Thus the present value of money may
be much more than future value of the same amount. Since any investment is
bound to result in future cash inflows(incomes). Their present value is
calculated & the purpose of evaluating investment proposals. Such an
evaluation is done with the help of annuity factor/discount factor which is
provided corresponding to greater rate of interest.
Investment appraisal Techniques:1) Technique which recognizes pay back of capital employed :- Pay back
period method
2) Technique which considers accounting profit:- Accounting rate of return
3) Technique which recognize time value of money :- Net present value of
method, Profitability index method internal rate of return method.
Discounted pay back method
www.mynotebook.in