fm functions,objectives,balance sheet, p&l ac

8/14/2019 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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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 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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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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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

fm functions,objectives,balance sheet, p&l ac

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