1Ans:-

Introduction to financial management

Financial Management can be defined as: The management of the finances of a business / organisation in order to achieve financial objectives Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to: Create wealth for the business Generate cash, and Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested There are three key elements to the process of financial management:

(1) Financial Planning Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions. (2) Financial Control Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as: Are assets being used efficiently? Are the businesses assets secure? Do management act in the best interest of shareholders and in accordance with business rules?

(3) Financial Decision-making The key aspects of financial decision-making relate to investment, financing and dividends: Investments must be financed in some way however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further. Accounting concepts and conventions In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting Conventions The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. The other conventions you will encounter in a set of accounts can be summarised as follows:

Monetary measurement

Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

Separate Entity

This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business.

Realisation

With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.

Materiality

An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts.

Accounting Concepts Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. Consistency Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.

Prudence

Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.

Matching "Accruals")

(or Income should be properly "matched" with the expenses of a given accounting period.

Key Characteristics of Accounting Information There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Criteria What it means for the preparation of accounting information

Understandability This implies the expression, with clarity, of accounting information

Relevance

This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)

Consistency

This implies consistent treatment of similar items and application of accounting policies

Comparability

This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

Objectivity

This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

2Ans:- We can divide accounting errors with following ways: 1. Errors of Principle In accounting, if accountant records any transaction against the rules of double entry system, then this mistake is called error of principle. For example, accountant takes all capital expenditures as revenue expenditures and passes the entry of machinery purchased in purchase account.

2. Clerical Errors We can separate clerical mistakes with following ways: a) Errors of Omission If accountant forgets to pass the journal entry of any transaction or if he records only one part of transaction, then these mistakes are called errors of omission. Accountant can also forget to post any journal entry in ledger accounts. b) Errors of Commission If accountant passes the wrong entry or posts wrong side of ledger accounts or writes wrong amount or calculates wrong total of any account, then these types of mistakes are called errors of commission. Some of errors of commission can easy find out by making trial balance but some errors of commission can not find out through trial balance. c) Compensating Errors Sometime we compensate one error with any other errors. For example we write Rs. 500 less in the credit side of sales account but same time we write less Rs. 500 in the debit side of purchase account. This is the error which can not be revealed through trial balance. 3Ans :- The financial statements of an organization made up at the end of an accounting period, usually the fiscal year. For a manufacturer, the final accounts consist of (1) manufacturing account, (2) trading account, (3) profit and loss account, and (4) profit and loss appropriation account. A commercial company's final accounts will include all of the above except the manufacturing account. Together, these accounts show the gross profit, net income, and distribution of net income figures of the company.

PERFORMA OF FINAL ACCOUNT TRADING ACCOUNT OF M/S......... for the year ending on............. PARTICULARS AMOUNT Rs. P. PARTICULARS AMOUNT Rs. P.

To Opening Stock To Purchases Less : Purchases Returns or Returns Outward (or Returns Cr. Bal) To Expenses incurred in bringing the goods to their present condition and location Wages, or Wages and Salaries or Productive Wages or Manufacturing Wages To Carriage, or Carriage Inward, or Carriage on Purchases or Freight Inward To Octroi To Dock Charges (Inward) To Customs Duty on imported goods

.................. By Sales .................. Goods Sold Less : Sales Returns .................. (or Returns .................. Inward) .................. (or Returns Dr. bal) .................. By Closing Stock By Gross .................. Loss Transferred to Profit and Loss A/c .................. .................. .................. .................. .................. .................. ..................

To Motive Power, Coal, Gas, Water and Oil, Grease, etc. Fuel, Heating and Lighting To Royalties based on Production To Gross Profit transferred to Profit and Loss Account .................. ..................

PROFIT AND LOSS ACCOUNT for the year ending on............. PARTICULARS To Gross Loss transferred (from Trading Account) To Salaries To Rent, Rates and Taxes To Printing & Stationery To Postage & Telegrams To Legal Charges To Telephone Exp. To Insurance Premium To Entertainment Exp. To Repairs an Renewals To Interest on Loan To Interest on Capital To Sundry Trade Expenses To Loss on Sale of Assets To Conveyance To Charity To Bank Charges To Office Expenses To Establishment Exp. To General Expenses To Loss in Exchange To Licence Fee To Brokerage To Electricity Exp. To Loss by Fire, Theft To Commission To Advertisement To Cartage outward To Export Duty To Discount AMOUNT PARTICULARS Rs. P. xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx By Gross Profit transferred from Trading Account By Rent from Tenants By Discount (Cr.) By Commission By Interest (Cr.) By Bad Debts Recovered By Apprentice Premium By Income from Investments By Dividends on Shares By Difference in exchange (Cr.) By Miscellaneous Income By Profit on Sale of Assets By Net Loss transferred to Capital Account AMOUNT Rs. P. xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

To To To To To To

Packing Expenses Traveling Exp. xxxx Bad Debts Audit Fees Depreciation Net Profit transferred to Capital Account

xxxx

xxxx

BALANCE SHEET OF.......... as at.............. LIABILITIES Capital Add: Net Profit .......... Add: Intt. On Capital .......... Less: Net Loss .......... Less: Drawings .......... Less: Int. on Drawings ........... Bank Overdraft Loans Sundry Creditors Bills Payable Tax Payable AMOUNT ASSETS RS. P. Goodwill Land and Buildings Plant and Machinery Motor Van Computer Books Furniture Closing Stock Debtors Investment Bills Receivable Cash at Bank Cash in Hand AMOUNT Rs. P. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........

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