Finance for Non-Finance People

List of figures xvii List of tables xix Preface xxi Acknowledgements xxvi Abbreviations xxviii PART I Introduction 1 1 Business organisations 3 Meaning of a business organisation 3 Types of business organisations 3 I. Private sector enterprise 4 II. Public sector enterprise 4 III. Joint sector enterprise 4 Types of private sector enterprises 5 1. Sole proprietorship 5 2. Joint Hindu family business 5 3. Partnership 5 4. Cooperative organisation 5 5. Joint stock company 5 6. One person company 7 Types of public sector enterprises 8 Departmental undertakings 8 Statutory corporations 9 Government companies 9 PART II Financial accounting and analysis 11 2 Fundamentals of accounting 13 Meaning of accounting 13 Branches of accounting 14 1. Financial accounting 14 2. Cost accounting 14 3. Management accounting 15 Objectives of accounting 15 Limitations of accounting 15 Accounting elements 16 Double-entry system of accounting 18 Basis of accounting 21 3 Accounting process 24 Accounting cycle 24 1. Recording in the ‘Journal’ 26 2. Classification into the ‘Ledger’ 28 3. Summarising in ‘Trial Balance’ 31 4 Accounting principles 33 Basic accounting principles 34 A. Accounting concepts 34 1. Business entity principle 34 2. Money measurement principle 35 3. Accounting period principle 35 4. Cost principle 36 5. Going concern principle 36 6. Matching principle 37 7. Revenue recognition principle 37 8. Dual aspect principle 37 B. Accounting conventions 38 1. Materiality 38 2. Full disclosure 38 3. Consistency 39 4. Conservatism 39 5 Financial statements 41 Financial statements 41 Statement of profit and loss 42 1. Revenue from operations (Turnover/sales) 43 2. Other income 43 3. Operating expenses 44 4. Finance costs/Non-operating expenses 45 5. Other expenses 45 6. Profit before tax/earnings before tax (PBT/EBT) 45 7. Income tax 45 8. Profit after tax (PAT) 45 Balance sheet 48 I Assets side of balance sheet 49 II Liabilities side of balance sheet 52 Depreciation accounting 55 Depreciation methods 56 1. Straight Line Method (SLM) 56 2. Written-Down-Value Method (WDV) 56 3. Other Depreciation Methods 57 Statement of cash flows 58 A. Steps to calculate CFO: 60 B. Steps to calculate CFI and CFF: 60 C. Final Step to prepare CFS: 60 Other disclosures in annual report 62 Components of a company’s annual report 62 6 Financial analysis 65 Financial analysis: The concept and process 66 1. Common-size analysis 66 2. Trend analysis 69 3. Ratio analysis 71 Ranking and weight based on the DuPont scores 77 Financial analysis of Maruti Suzuki and Tata Motors 78 Indian automobile sector 78 I Profitability analysis of Maruti Suzuki and Tata Motors 82 Operating efficiency analysis of Maruti Suzuki and Tata Motors 88 Liquidity analysis of Maruti Suzuki and Tata Motors 91 Solvency analysis of Maruti Suzuki and Tata Motors 94 Market analysis of Maruti Suzuki and Tata Motors 96 Corporate cases 98 I Indian telecom sector 99 II Indian banking sector 102 Global landscape 105 A. Apple Inc. (USA) 106 B. Unilever (UK) 107 PART III Cost accounting and management 109 7 Cost concepts and classification 111 Cost accounting 111 Significance of cost accounting 112 Cost! 112 Elements of cost 113 Cost unit 114 Cost centres 115 Process of costing 115 Cost classification 116 1. On the basis of traceability 116 2. On the basis of association 116 3. On the basis of nature 117 4. On the basis of controllability 117 5. On the basis of decision-making 118 Components of total cost 118 1. Prime cost 118 2. Factory cost 118 3. Office cost 118 4. Total cost/cost of sales 119 Cost sheet 119 Methods of costing 120 1. Job costing 120 2. Process costing 121 Techniques of costing 121 1. Budgetary control 121 2. Standard costing 122 3. Marginal costing 122 4. Absorption costing 122 8 Budgetary control 124 Budgeting 124 Budget 124 Budgetary control 125 Process of budgetary control 125 Types of budgets 126 A. On the basis of time 126 B. On the basis of functions 127 C. On the basis of flexibility 128 Essentials of good budgeting 130 Caselets of different budgets 131 1. Manufacturing overhead budget 131 2. Sales overhead budget 131 3. Cash budget 132 9 Marginal costing and managerial decision-making 135 Marginal cost 135 Marginal costing 136 Cost-Volume-Profit analysis (CVP analysis) 137 Tools of CVP analysis 137 (a) Contribution 137 (b) Contribution margin/P/V ratio 138 (c) Break-even point 138 (d) Margin of safety 140 Managerial decision-making 141 1. Pricing decisions 141 2. Key factor 143 3. Profit planning 144 4. Make or buy 145 5. Continue or discontinue? 147 6. Selection of the best method of production 148 PART IV Financial management 151 10 Nature of financial management 153 What is financial management? 153 Elements 153 Objectives of financial management 154 Functions of financial management 154 Financial management scenario in India 155 Financial management problems 156 11 Capital budgeting: Concept and application 158 Meaning of capital budgeting 158 Capital budgeting process 159 Capital budgeting projects 160 Indian realty sector 161 5. Sales growth 224 6. Business cycle 224 Types of working capital policy 225 1. Aggressive working capital policy 225 2. Conservative working capital policy 225 3. Matching working capital policy 226 Working capital management: The concept 227 Significance of working capital management 228 Working capital analysis of Nestle India and Dabur India 228 Indian FMCG sector 229 18 Dividend policy 232 Dividend policy: overview 232 Forms of dividends 233 Procedure for cash dividend payment 234 1. Recommendation by board of directors 234 2. Approval by the shareholders 234 3. Dividend – ‘interim dividend’ 235 4. Dividend to be deposited in a separate bank account 235 Determinants of dividend policy 235 A. External factors 235 B. Internal factors 236 Dividend policies: Types 237 I Constant dividend per share (DPS) policy 237 II Constant dividend payout policy 238 III Long-run residual dividend policy 238 IV Hybrid dividend policy 239 Dividend policy of HUL and Dabur India 239 Indian FMCG sector 239 PART V Financial markets 245 19 Financial System: Constituents and instruments 247 Financial markets: Overview 247 1 Based on the nature of securities 248 2 Based on the timing of issue 248 Financial Regulatory institutions 248 1. Reserve Bank of India (RBI) 249 2. Securities and Exchange Board of India (SEBI) 249 A. Markets based on types of securities 250 I. Money market 250 II. Capital market 252 B. Markets based on issue of securities 255 I. Primary market 255 II. Secondary market 256 C. Other markets 256 Derivatives market 257 20 Mutual funds 260 What are mutual funds? 260 Growth of mutual funds 261 Types of mutual funds 261 1. Based on structure 262 2. Based on investment objective 263 3. Based on special schemes 263 Importance of mutual funds 264 PART VI Tax planning 267 21 Direct taxation: Income tax 269 Indian tax structure: Overview 269 Revenue authority 270 Direct vs. indirect tax: Distinction 270 Basic terminologies under Income Tax Act, 1961 271 Income tax classification 274 A. Salaries [Sec. 15] 274 B. Income from house property [Sec. 22] 275 C. Profits and gains of business or profession [Sec. 28] 275 D. Capital gains [Sec. 45] 276 E. Income from other sources [Sec. 56] 276 Computation of tax liability 278 1. Individual Tax 279 2. Cooperative society tax 281 3. Partnership firm tax 282 4. Local authority tax 282 5. Corporate tax 282 Appendix I: Future/Compound value factor of a lump sum (FVIF/CVIF) of Re 1, FVIF(i, n) 288 Appendix II: Future/Compound value factor of an annuity (FVIFA/CVIFA) of Re 1, FVIFA(i, n) 290 Appendix III: Present value factor of a lump sum (PVIF) of Re 1, PVIF(i, n) 292 Appendix IV: Present value factor of an annuity (PVIFA) of Re 1, PVIFA(i, n) 294 Glossary 296 Index 310