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  • Finance and Management – 39

    In the last blog we began looking at cost accounting and mentioned that at various points in time of the discussion series we might temporarily take detours to get other related concepts relevant to the discussion. In today’s blog we discuss the objectives of cost accounting.
    A source on the internet defined cost accounting as: “Cost accounting is an expanded phase of the general or financial accounting of a business concern which provides management promptly with the cost of producing or selling each article or of rendering a particular service”. 
    Thus, Cost accounting serves the following major objectives to achieve:

    • Determining the Selling Price
    • Controlling cost
    • Providing information for decision making
    • Ascertaining Costing Profits
    • Facilitating preparation of financial and other statements

    Since in our first blog we have mentioned that management relies heavily on decision making hence we would like to make specific mention that cost accounting would assist decision making by the manager in the following ways:

    • Determination of cost-volume-profit relationship
    • Make or buy decision
    • Shut down or continue operations at loss
    • Continuing with the existing machinery or replacing them by improved and economical machines.

    Read in Kannada:
    http://somanagement.blogspot.com/2011/10/blog-post_03.html

  • Finance and Management – 38

    As mentioned in the last message, we would continue our discussion with the cost accounting concepts, however at various stages; it would be necessary to get to other concepts of organization and processes etc to really make the understanding of cost accounting really useful.  In today’s blog we begin to understand the need for cost accounting.
    Management to a great extent as we defined earlier is all about decision making. All the various specializations in management are essentially knowledge enhancements that would ease the dilemma for a manager. We began with discussing general accounting to assist the manager make decisions and see if the accounting practice used is apt in scenarios. Today we move to a more relevant managerial tool in the financial world called – cost accounting. It is generally also called managerial accounting given its utility to managers in decision making. There are still certain differences between the two, but for all practical purpose we will go by the understanding that both these are same.
    Information about costs is very critical to a manager. The manager generally takes decisions only for the company he works for; there is no need for the information to be comparable to similar information from other organizations. The interest in the costs is primarily because the costs affect the price of the organizations’ offering to its customers and there by the profit that it realizes.
    We could continue this discussion in the next few blogs to clearly understand the concept.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/10/blog-post_65.html

  • ಹಣಕಾಸು ವ್ಯವಸ್ಥೆ ಮತ್ತು ನಿರ್ವಹಣೆ – ೨೮

    ಈ ಹಿಂದಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು Investment Allowance Reserve ಬಗ್ಗೆ ಅರಿತೆವು. ಇಂದಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು Appropriation ಬಗ್ಗೆ ಅರಿಯೋಣ.

    Appropriation ಸಾಮಾನ್ಯ ಅರ್ಥದಲ್ಲಿ ಹಣವನ್ನು ಒಂದು ಉದ್ದೇಶಕ್ಕೊಸ್ಕರ ಮೀಸಲಾಗಿ ತೆಗೆದಿಡುವುದು. ಕಂಪನಿಯು ಯಾವ ರೀತಿಯಲ್ಲಿ ಹಣವನ್ನು ಪಾಲು ಮಾಡಿಕೊಂಡಿದೆಯೋ ಅದು ಒಬ್ಬ ಹೂಡಿಕೆ ದಾರನಿಗೆ ಕಂಪನಿಯು ಹೇಗೆ ತನ್ನ ಹಣದ ವಿನಿಯೋಗವನ್ನು ನಿರ್ವಹಿಸುತ್ತಿದೆ ಎಂಬುದನ್ನು ಹೇಳುತ್ತದೆ.

    ಇದನ್ನೇ ಅಕೌಂಟ್ ನ ಭಾಷೆಯಲ್ಲಿ ಸಾಮಾನ್ಯ ಅಭ್ಯಾಸವಾದ, ಕಂಪನಿಯ ಲಾಭ & ನಷ್ಟದ ಖಾತೆಯ ಹಣವನ್ನು ವಿವಿಧ ರಿಸರ್ವ್ (generall reserve, contingency reserve etc.) ಗಳಿಗೆ ಹಂಚುವುದು. ಆದರೆ ಕಂಪನಿಯ ಡಿವಿಡೆಂಡ್ ಕೊಡುವುದು ಇದರಿಂದ ಬದಲಾಗದು. ಕಾರಣ, ಕಂಪನಿಯು ಡಿವಿಡೆಂಡ್ ನ್ನು ಇಂದಿನ ಅಥವಾ ಹಿಂದಿನ ಯಾವುದೇ ಲಾಭದಿಂದ ಖಾತೆಯ ಹೆಸರನ್ನು ಗಣನೆಗೆ ತೆಗೆದುಕೊಳ್ಳದೆ ಕೊಡಬಹುದು.

    ಕೆಲವು ದೇಶಗಳಲ್ಲಿ ಕೆಲವು ಪ್ರಕಾರದ ರಿಸರ್ವ್ ಗಳಿಗೆ ವರ್ಗಾಯಿಸುವುದನ್ನು ಕಡ್ಡಾಯಗೊಳಿಸಿರುವರು. ಈ ರಿಸರ್ವ್ ಗಳನ್ನೂ ಹಂಚಲು ಸಾಧ್ಯವಿಲ್ಲ

    ಆಂಗ್ಲ ಅಂಕಣ:

    http://somanagement.blogspot.com/2011/08/finance-and-management-28.html

  • The Polyester Prince – Hamish McDonald

    I had got hold of this book from Mumbai road side when I was doing my internship, but had never set reading it until the beginning of this year. And even after I began reading this, I had a lot of distractions which hadn’t let me complete the book earlier. Again the long weekends and frequent travels I have been doing off late have given me ample time to really spend time with my books, and that is how I got to complete this book.
    The book talks about he era of – Dhirubhai Ambani. One of the icons of Indian business. What I loved the most was not the narration, but the links I could see to the history of India post Independence. Having born in this country with rich traditions approximately 35 years after we had gained independence, I have for a long time missed knowing how this country functioned and operated before my birth. I had another agenda when I began reading this book which is about the life of another entrepreneur.
    This book has got me to realize not just the hardships Dhirubhai had to face, but also got me to realize how it was to live in an era of license raj. This book also gave me a peep into the importance of policitical back up for a business when its in a phase of scaline up.
    Over all an interestin read! You would enjoy it, if you are interested in the business-politico history of a country.

  • Message

    Over the last 37 blogs, we have understood some of the relevant concepts with respect to the financial statements. The next few blogs would be regarding the cost accounting which becomes very relevant to the manager in a dynamic environment.
    Wish to see your continued support in our effort.
    Read in Kannada:

  • Finance and Management – 37

    In the last blog, we began understanding the CFS. In today’s blog we continue with the attempt began.
    We learnt that generally cash flows could be classified as being from one of – operating, investing or financing activities. The relative proportion of the cash heads give a good insight into the functioning of the company. If the largest portion of the cash flow is from operations, it indicates that the operations are generating business and that there is enough money to buy new inventory. As an investor, he would be keen to see that the amount of cash available to the company should be plentiful to cover that future loan expense.
    One needs to remember that the final cash flow doesn’t always look healthy, it could be negative too!
    Is it always bad to have a negative cash flow? – Well one can really not decide this by just the numbers. One need to see if this negative cash flow is due to the company’s expansion plans. If it’s so, then it might be really better for company that this cash flow has taken place. So an investor needs to open up and look at the details before jumping into any take on the company’s cash flow.
    Read in Kannada:

  • Finance and Management – 36

    In the last blog, we looked at EBITDA. In today’s blog, we would begin with understanding the cash flow statements.
    The PnL account or Balance sheet can is limited in informing us about the ability of the firm towards giving us information about the operational financial issues. The best one for this understanding is the “Cash Flow Statement” (CFS). CFS is a financial statement that shows how changes in the balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. It reflects a firm’s liquidity.
    One can find the cash flow by looking at the 3 aspects which get in cash:
    • Operations
    • Investing
    • Financing
    Operations: Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.
    Investing: Changes in equipment, assets or investments relate to cash from investing.
    Financing: Changes in debt, loans or dividends are accounted for in cash from financing.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/10/blog-post_01.html

  • Finance and Management – 35

    In the earlier blog, we completed looking at the various heads in the PnL account. Today we try to understand a popular measure in the IT industry that is used to measure profitability – EBITDA.
    We know from the earlier blog that EBIT stands for “Earnings before Interest and Taxes”; that aspect of EBITDA remains same, we add to the list both depreciation and amortization. This is found to be a very convenient tool to measure the profitability of firm across companies as well as across industries. To calculate EBITDA, one takes the net income and adds to that the interest, tax, depreciation and amortization aspects back to it.
    There are both arguments for and against the use of EBITDA.
    The people not favoring the use of EBITDA argue that:
    1. Factoring the I, T, D and A as part of the measure can make even an unprofitable firm look fiscally healthy.
    2. It is easy to manipulate – fraudulent accounting practices can really make a company more attractive than it really is
    EBITDA finds favor amongst people since:
    1. Can be used as a shortcut to estimate the cash flow that could fund the long term debts
    2. Can also be used to compare companies against each other and against industry averages
    3. Is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more equal comparison
    2 very interesting metrics have been defined using EBITDA are:
    Measure of Debt’s payback period = Debt/EBITDA
    Interest coverage ratio = EBITDA /Interest Expense
    Read in Kannada:
    http://somanagement.blogspot.com/2011/10/blog-post.html

  • Finance and Management – 34

    In the last blog, we began looking at the different heads in the PnL account. In today’s blog we continue this attempt.
    Continuing from the way we could deduce what would be the operating income; how this income is generate directly from the operations of the company. But the cash put by the companies into the bank also generates interest. This needs to be captured as well – this is indicated by the title “Other Incomes“; in addition to this, when a onetime sale of some of the assets is done; this wouldn’t be capture anywhere else; this is classified into the title – “Extraordinary Income“.
    At this point we have all the income that the company has earned; this is called: “Earnings before Interest and Taxes” and has an acronym – “EBIT“. Clearly the names comes as we have not subtracted the interest and taxes that the company needs to pay.
    When the interest amount that is to be paid on borrowed amount is deducted from this earning, we get the Net profit before tax – NPBT, and once Tax is deducted we call it Net profit after tax – NPAT.
    The amount that is remaining is used partially to pay the dividends; if it was approved in the shareholder’s meeting else the remaining amount is all classified into the Retained Earnings head.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_9976.html

  • Finance and Management – 33

    In the last blog, we looked at why a corporate would be asked to pay taxes. In today’s blog let’s look at the P&L shown in this link a bit more closely and understand the way it is constructed.
    Simply put, Profit is defined as selling price – cost price. Now for a company, the revenue is generally got when its products/services are sold out. This is indicated as the title Sales. To get each of these products or services out, we would have spent a particular amount and this is indicated by the title, Cost of Goods Sold (COGS). So, profit definition would be re-written as

    Profit = Sales – COGS
    Now at this point, we still haven’t considered some of the concepts we learnt like – depreciation, amortization and taxes. So we cannot call this profit as the final profit we instead call in “Gross Profit“.
    Companies indulge in a lot of R&D activities, and these activities don’t necessarily get over in a year – a certain amount is spent on it each year. So this is indicated by the title – “General Operating Expenses (R&D)” in addition, for the patents and fixed assets, it is mandatory to have an amount paid of every year so we have to subtract these too from the profit. Once we remove these General operations expenditure and amortization we get what we call the “Operating Income”. Though they are not directly related to the product or service sold, these expenses are to be considered to really look at what would come to the company’s kitty – hence are called “Operating Income“.
    Now covering the remaining concepts on the P&L account would become an over doze today, hence we will leave the remaining for tomorrow’s blog.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_30.html