Financial Management

FINANCIAL

MANAGEMENT

(FOR PRIVATE CIRCULATION ONLY)

Published by

Symbiosis Center for Distance Learning,

© Symbiosis Center for Distance Learning (SCDL)

in any form without prior permission of the publishers.

2005 Batch PROF. SATISH INAMDAR

PREFACE

Finance is the most basic and the most significant function in virtually every business activity. The success of business activity depends upon the success of its finance function. From academic point of view, finance is the subject which is considered to be one of the most technical ones, having a very wide scope and having constantly changing rules & regulations. This is the reason why a normal student attempts to keep himself away from the subject of finance. This aggravates the problems for the students. One cannot afford to ignore the function of finance. The ultimate evaluation of any business activity is profit-based evaluation and the term profit itself is the financial phenomenon. As such, one needs to get acquainted with the basics of finance, despite the hardships involved in the process.

My objective of writing this book is to introduce the basic principles of finance to a non-technical student in the simplest possible language. As such, I have deliberately avoided too much of quantitative or mathematical elaboration or explanation to any of the basic concepts or principles. I have attempted to explain the basic concepts with the help of examples and illustrations. Good numbers of problems have been incorporated for self-study.

I am thankful to Symbiosis Center for Distance Learning and Ms. Swati Chaudhary, Director, SCDL, in particular for providing me this opportunity to reach out to a very wide spectrum of readership.

Maximum efforts have been made to incorporate the latest status of the subject. Maximum care has been taken to make the text free of errors. Still, I don’t rule out the possibility of some omissions. I will be obliged if such omissions can be pointed out and intimated so that necessary modifications can be done in the subsequent editions.

Prof. Satish Inamdar

5, Brahma Residency, Bhusari Colony, Kothrud, Pune 411 038

Tel.: (020) 528 2058 / 528 5749 Email : [email protected]

ABOUT THE AUTHOR

Prof. Satish Inamdar is holding a Master’s Degree in Commerce and Bachelor’s Degree in Law. He is fellow Member of the Institute of Chartered Accountants of India, Graduate Member of The Institute of Cost & Works Accountants of India and Associate Member of The Institute of Company Secretaries of India. He is associated with the industry for the last two decades in various senior capacities. For the past fifteen years, he is associated with Symbiosis Institute of Business Management as a Faculty of Finance. He has conducted Management Development Programmes and Executive Development Programmes for various private sector and public sector organisations. He has authored three books on the subjects like Cost & Management Accounting and Financial Management. He is the Charter Member of Rotary Club of Pune, Kothrud.

Mrs. Swati Chaudhari

Director – SCDL

CONTENTS

Chapter TITLE Page

No. No.

1

Finance Function

1

–

Approaches to the term Finance

–

Scope of Finance Function

–

Goals/Objects of Finance Function

–

Organisation of Finance Function

–

The Fields of Finance

–

Finance Function in Relation with Other Functions

2

Forms of Business Organisation

15

–

Proprietory Firms, Partnership Firms,

Joint Stock Companies

–

Advantages and Disadvantages

3

Financial Statements

25

–

Nature of Financial Statements

–

Basic Concepts in Accounting

–

Structure of Financial Statements

–

Role played by Financial Statements

–

Limitation of Financial Statements

–

Analysis and Interpretation of Financial Statements

4

Interpretation of Financial Statements (Ratio Analysis)

45

–

Role of Ratio Analysis

–

Classification of Ratios

–

Illustrative problems with solutions

–

Problems for students to solve

5

Interpretation of Financial Statements

(Funds Flow / Cash Flow Statements)

145

–

Concept of Funds, Uses, Limitations

–

Construction of Funds Flow Statement

–

Cash Flow Statement

Chapter TITLE Page

No. No.

–

Illustrative Problems with Solutions

–

Problems for Students to Solve

6

Capitalisation

211

–

Importance

–

Theories of Capitalisation

–

Overcapitalisation - Causes, Effects, Remedies

–

Undercapitalisation - Causes, Effects, Remedies

7

Sources of Long Term and Medium Term Finance

225

–

Shares - Advantages, Disadvantages

–

Debentures - Advantages, Disadvantages

–

Term Loans, Features of Term Loans

–

Public Deposits

–

Lease Financing, Advantages, Types of Leases

–

Retained Earnings

8

Capital Structure

249

Part - I - Capital Structure

–

Goals/Principles of Capital Structure Management

–

Factors affecting Capital Structure - Internal, External

and General

Part - II - Cost of Capital

–

Concepts of Cost of Capital

–

Composite Cost of Capital

–

Illustration with Solutions

Part - III - Leverages

–

Operating Costs - Variable, Fixed, Semi-Variable

–

Leverages - Operating, Financial, Combined

Part - IV - Theories of Capital Structure

–

Capital Structure and Cost of Capital

–

Illustrative Problems with Solutions

–

Problems for Students to Solve

Chapter TITLE Page

No. No.

9

Capital Market

297

–

Capital Market in General

–

Intermediaries in Capital Market

–

Credit Rating, Methodology, Limitations

–

Venture Capital

10

Capital Budgeting

319

–

Importance of Capital Budgeting,

–

Process of Capital Budgeting - Evaluations, Selection,

Execution

–

Cash Flows, Time Value of Money

–

Illustration with Solutions

–

Relevance in Capital Budgeting Decisions

–

Techniques of Evaluation of Capital Expenditure

Proposals - Advantages, Disadvantages

–

Limitations of Capital Budgeting

–

Planning, Organisation and Control of Capital

Expenditure

–

Capital Rationing

–

Capital Budgeting and Risk

–

Illustrations with Solutions

Pay Back Period, NPV, ARR, IRR

–

Problems for Students to Solve

11

Working Capital Management

373

–

Working Capital - The Term

–

Principles of Working Capital Management

–

Factors affecting Working Capital Requirement

–

Financing of Working Capital Requirement

–

Control over Working Capital - Dahejia Committee,

Tandon Committee, Chhore Committee,

Marathe Committee, Nayak Committee and

Vaz Committee

Chapter TITLE Page

No. No.

–

Illustrative Problems with Solutions

–

Problems for Students to Solve

12

Management of Cash

415

–

Motives of Holding Cash

–

Estimation of Cash Requirement

–

Principles of Cash Management

–

Illustrative Problems with Solutions

–

Problems for Students to Solve

13

Management of Receivables

437

–

Object

–

Areas Covered - Credit Analysis, Credit Terms,

Financing Receivables, Credit Collection, Monitoring of

Receivables

–

Techniques available on Macro and Micro basis

–

Factoring, Bill Discounting, Advantages, Disadvantages

–

Illustrative Problems with Solutions

–

Problems for Students to Solve

14

Management of Inventory

463

–

Catagories of Inventory

–

Motives of Holding Inventory

–

Objects of Inventory Management

–

Techniques of Inventory Management

–

Inventory Levels, Calculation of Levels

–

Illustrations with Solutions

–

ABC Analysis

Chapter TITLE Page

No. No.

15

Dividend Policy

495

–

Factors determining the Dividend Policy

External and Internal

–

Choosing of Dividend Policy

–

Forms of Dividend Payment

–

Bonus Shares - Advantages, Disadvantages

Finance Function 1 A business is an activity which is carried on with the intention of earning the profits. If the operations of a typical manufacturing organisation are considered, it involves the purchasing of raw material, processing the same with the help of various factors of production like labour and machinery, manufacturing the final product and selling the finished product in the market to earn the profits. Thus, production, marketing and finance are the key operational areas in case are of a manufacturing organisation, out of which finance, is the most crucial one. This is so, as the functions of production and marketing are related with the function of finance. If the decisions relating to money or funds fail, it may result into the failure of the business organisation as a whole. Hence, it is utmost important to take the proper financial decisions and that too at a proper point of time. In practical situations, in order to overcome temporary financial problems, the organisations tend to take the hasty decisions which may prove to be fatal over a longer span of time.

APPROACHES TO THE TERM FINANCE

The concept of finance has changed markedly with the change in times and circumstances. The various views on the finance can be categorised as stated below.

(1) According to the first approach, the term finance was interpreted to mean the procurement of funds by corporate enterprises to meet their financing needs. The term ‘procurement’ was used in a broad sense to include the whole gamut of raising the funds externally. This approach towards finance was criticised on various grounds.

a. It is too narrow and restrictive in nature. Procurement of the funds is only one of the functions of finance and other functions are ignored by this approach.

b. It considers the financial problems only of corporate enterprises. In that sense, it ignores the financial problems of non-corporate entities like proprietary concerns, partnership firms etc.

Chapter 1

c. It considers only the basic and non-recurring problems relating to the business. Day-to-day financial problems of a normal company do not receive any attention. d. It concentrates only on long term financing. It means that the working capital

management is out of the purview of finance function.

(2) The second approach holds that finance is concerned with cash. As all the transactions are ultimately expressed in terms of cash, the term finance will be concerned with every activity of the enterprise. Thus, according to this approach, the finance function is concerned with all the functional areas of the business e.g., Production, Marketing, Purchasing, Personnel Administration, Research and Development and so on. Obviously this approach is too broad to be meaningful.

(3) The third approach, which is more balanced one and hence the acceptable one to the modern scholars, interprets the term finance as being concerned with procurement of funds and wise application of funds. This approach is supposed to be more acceptable as it gives equal weightage to both procurement of funds as well as utilisation of the funds. This approach is called the managerial approach to the term finance.

In the light of the above discussions, it will be worthwhile to note some of the definitions of the finance function given by some modern scholars.

R.C. Osborn : The finance function is the process of acquiring and utilising funds of a business.

Bonneville and Dewey : Financing consists of the raising, providing, managing of all the money, capital or funds of any kind to be used in connection with the business.

Prather and Wert : Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry.

SCOPE OF FINANCE FUNCTION

According to the modern approach, the function of finance is concerned with the following three types of decisions –

a. Financing Decisions b. Investment Decisions c. Dividend Policy Decisions FINANCING DECISIONS

Financing decisions are the decisions regarding the process of raising the funds. This function of finance is concerned with providing the answers to the various questions like –

Finance Function 3 a. What should be the amount of funds to be raised? In simple words, the amount of funds

to be raised by the organisation should not be more or less than what is required as both the situations involve the adverse consequences.

b. What are the various sources available to the organisation for raising the required amount of funds? For the purpose of raising the funds, the organisation can go for internal sources as well as external sources.

c. What should be the proportion in which the internal and external sources should be used by the organisation?

d. If the organisation, particularly the corporate form of organisation, wants to raise the funds from different sources, it is required to comply with various legal and procedural formalities. Earlier, these legal and procedural formalities were prescribed and regulated by Controller of Capital Issues (CCI). Since 1992, after the abolition of the office of CCI, these formalities are prescribed and regulated by Securities and Exchange Board of India (SEBI). Though the intention of this subject is not to consider the SEBI regulations and guidelines in details, relevant SEBI guidelines are discussed at the appropriate places.

e. During the last decade of the twentieth century, lot of changes have taken place in the capital market, which refers to the market available to the companies to raise the long term requirement of funds. The question arises what is the nature of capital market operations? What kinds of changes have taken place recently affecting the capital market in the country?

INVESTMENT DECISIONS

Investment Decisions are the decisions regarding the application of funds raised by the organisation. The investment decisions relate to the selection of the assets in which the funds should be invested.

The assets in which the funds can be invested are basically of two types –

a. Fixed Assets – Fixed Assets indicate the infrastructural facilities and properties required by the organisation. Fixed Assets are the assets which bring the returns to the organisation over a longer span of time. The investment decisions in these types of assets are technically referred to as “Capital Budgeting Decisions.” Capital Budgeting decisions are concerned with the answers to the questions like –

1. How the fixed assets or proposals or projects should be selected to make the investment in? What are the various methods available to evaluate the investment proposals in the fixed assets?

2. How the decisions regarding the investment in fixed assets or proposals or projects should be made in the situations of risk and uncertainty?

b. Current Assets – Current Assets are the assets which get generated during the course of operations and are capable of getting converted in the form of cash or getting utilized within a short span of time of one year. Current Assets keep on changing the form and shape very frequently. The investment decisions in these types of assets are technically referred to as “Working Capital Management.” Working Capital Management decisions are concerned with the answers to the questions like –

1. What is the meaning of working capital management? What are the objectives of working capital management?

2. Why the need for working capital arises?

3. What are the factors affecting the requirement of working capital? 4. How to quantify the requirement of working capital?

5. What are the sources available for financing the requirement of working capital? 6. Working capital management is concerned with the management of current assets

on overall basis as well as on individual basis. In practical situations, current assets may be found in the form of cash and bank balances, receivables and inventory. Working capital management is concerned with the management of these individual components of current assets as well.

DIVIDEND POLICY DECISIONS

Profits earned by the organisation belong to the owners of the organisation. In case of the corporate form of organisation, shareholders are the owners and they are entitled to receive the profits in the form of dividend. However, there is no specific law or statute which specifies as to how much amount of profits should be distributed by way of dividend and how much amount of profits should be retained in the business. The alternatives available to the organisation to distribute the profits in the form of dividend on one hand and retention of profits in the business, have reciprocal relationship with each other. If the dividends paid are higher, retained profits are less and vice versa. If the organisation pays higher dividends, shareholders are very happy as they get more recurring income and the company may be able to gain the confidence of the shareholders. However, the organisation can be in financial problems as payment of dividend results into the withdrawal of profits from the business. On the other hand, if the organisation pays less dividends, the organisation may be in a favourable situation. However, the shareholders are likely to be offended. As such, the organisation is required to take the decisions regarding the payment of dividend in such a way that neither the shareholders are offended nor the organization is in financial problems. As such, dividend policy decisions are

Finance Function 5 the strategic financial decisions and are concerned with the answers to the questions like –

1. What are the forms in which the dividends can be paid to the shareholders?

2. What are the legal and procedural formalities to be completed while paying the dividend in different forms.

GOALS/OBJECTS OF FINANCE FUNCTION : Profit Maximization :

As a basic principle, any business activity aims at earning the profits. According to this principle, all the functions of the business will have the profit as the main objective. Similarly, the finance function will also have the profits as the main objective. But this was only a traditional belief. Now, profit cannot be the sole and only goal or objective of the finance function, due to the following problems connected with this objective.

(1) The term profit is a ambiguous concept which isn’t having precise connotation. E.g. Profits can be long term or short term. Profits can be before tax or after tax and so on. If profit maximization is accepted as the goal of finance function, the next question that arises is “Which types of profits should be maximized?”

(2) The profits always go hand in hand with risks. The more profitable ventures necessarily involve more amount of risk. The owners of the business will not like to earn more and more profits by accepting more risk. If the profit maximization is accepted as the goal of finance function, it totally ignores the risk factor.

(3) Profit maximization as the goal of financial function ignores the time pattern of returns. Consider the following two proposals A and B which involve the same amount of returns.

A (Rs.) B (Rs.)

Year I 70,000 –

Year II 20,000 –

Year III 10,000 1,00,000

1,00,000 1,00,000

Both the proposals A and B involve same amount of profits and hence ideally should be treated on par. But it will not be proper as proposal A involves higher amount returns in the earlier years, while proposal B involves the returns in the later years. It makes proposal A more profitable ultimately, as the returns received earlier are more valuable than the returns received later. The objective of profit maximization doesn’t differentiate between the returns received earlier and the returns received later.

(4) Profit maximization as the objective doesn’t take into consideration the social considerations as well as the obligations to various interests of workers, consumers, society etc., and the ethical trade practices. If these factors are ignored, the organisation can’t survive for long. Profit maximization at the cost of social and moral obligations is a short-sighted policy.

As such, profit maximization can’t be a prime objective of the finance function. The objective has to be one having more broad a base, which is more precise, which considers risk factor and time value of money and which give consideration to social and ethical elements also. The alternative is in the form of wealth maximization as the objective of the finance function.

Wealth Maximization :

Due to the limitations attached with the profit maximization as an objective of the finance function, it is no more accepted as the basic objective. As against it, it is now accepted that the objective of the business should be to maximize its wealth and value of the shares of the company. This object can also be stated as maximization of value.

The value of an asset is judged not in terms of its cost but in terms of the benefit it produces. Similarly the value of a course of action is judged in terms of the benefits it produces less the cost of undertaking it. The benefits can be measured in terms of stream of future expected cash flows, but they must take into consideration not only their magnitude but also the extent of uncertainty.

Thus, wealth maximization goal as a decision criteria suggests that, any financial action which creates wealth or which has discounted stream of future benefits exceeding its cost, is desirable and should be accepted and that which does not satisfy this test should be rejected.

The goal of wealth maximization is supposed to be superior to the goal of profit maximization due to following reasons :

(1) It uses the concept of future expected cash flows rather than the ambiguous term of profits. As such, measurement of benefits in terms of cash flows avoids ambiguity.

(2) It considers time value of money. It recognises that the cash flows generated earlier are more valuable than those generated later. That is why while computing value of total benefits, the cash flows are discounted at a certain discounting rate. At the same time, it recognises the concept of risk also, by making necessary adjustments in discounting rate. As such, cash flows of a project involving higher risk are discounted at a higher discounting rate and vice versa.

Thus, the discounting rate used to discount future cash flows reflects the concepts of both time and risk.

Finance Function 7 Due to the above reasons, the wealth maximization is considered to be superior to profit maximization as an objective or goal of finance function. However, it should be noted that wealth maximization goal is only an extension of profit maximization goal. If the time period is too short and risk element is minimum, both wealth maximization and profit maximization will mean the same thing.

Organization of Finance Function :

At the outset, it must be cleared that there is no standard pattern for the organization of finance function. It varies from the enterprise to enterprise and its characteristics also vary in terms of nature, size, convention etc. In smaller concerns, where the operations are relatively less complicated and simple, there may not be separate executive to look after finance function. In fact, the proprietor or partners only will be looking after all the functional areas like production, marketing, finance etc.

In bigger concerns, the execution of finance function becomes a specialised task and may be handled by an executive who may be in the form of Treasurer, Finance Controller, Finance Manager, Vice-President (Finance) and so on. He is generally given the charge of credit and collection accounting, investment and audit departments. He is responsible for preparing annual financial reports. He reports directly to the President and Board of Directors.

Secondly, it should be noted that generally the organization of finance function is centralised one, unlike other business functions. Board of Directors takes the main financial decisions. Board of Directors may delegate the powers to the executive committee, comprising of managing director, other one or two directors and finance officer of the company. This executive committee takes all the financial decisions. Routine financial matters may be delegated to lower level officers. The reasons for finance function being a highly centralised function are very obvious.

(1) Financial decisions are the most crucial ones on which survival or failure of the organisation depends.

(2) Financial decisions affect the solvency position of the organisation and a wrong decision in this area may land the organisation into crisis.

(3) The organisation may gain economies of centralization in the form of reduced cost of raising the funds, acquisition of fixed assets at the competitive prices etc.

Though there is no standard pattern for organization of finance function, in general terms, the organization of finance function takes the following form.

Board of Directors

Executive Committee

Vice President Vice President Vice President (Production) (Finance) (Marketing)

Finance Controller Treasurer

(1) Accounting and Costing (1) Receivables management (2) Annual Reporting (2) Taxes and Insurance (3) Internal Auditing (3) Cost management

(4) Budgeting (4) Securities

(5) Statistics and Finance (5) Banking Relations (6) Record Keeping (6) Real Estates

(7) Dividend Distribution

DUTIES AND RESPONSIBILITIES OF FINANCE EXECUTIVE :

On the basis of the scope of the finance function, which has already been discussed, the various duties and responsibilities which a finance executive has to fulfil can be classified as below :

(1) Recurring Duties : (2) Non-recurring Duties : Recurring Duties :

(a) Deciding the Financial Needs : In case of a newly started or growing concern, the basic duty of the finance executive is to prepare the financial plan for the company. Financial plan decides in advance the quantum of funds required, their duration, etc. The funds may be needed by the company for initial promotional expenditure, fixed capital, working capital or for dividend distribution. The finance executive should assess this need of funds properly.

(b) Raising the Funds Required : The finance executive has to choose the sources of funds to fulfil financial needs. The sources may be in the form of issue of shares, debentures, borrowing from financial institutions or general public, lease financing etc. The finance executive has also to decide the proportion in which the various sources should be raised. For this, he may have to keep in mind basic three principles of cost, risk and control. If the company decides to go in for issue of securities say in the form of shares

Finance Function 9 or debentures, he has to arrange for the underwriting or listing of the same. If the company decides to go in for borrowed capital, he has to negotiate with the lenders of the funds.

(c) Allocation of funds : The financial executive has to ensure proper allocation of funds. He can allocate the funds basically for two purposes.

(i) Fixed Assets Management : He has to decide in which fixed assets the company should invest the funds. He has to ensure that the fixed assets acquired or to be acquired satisfy the present as well as future needs of the company. He has to ensure that the funds invested in the fixed assets justify the investments in terms of the expected cash flows generated by them in future. If there are more than one proposals for making the investments in fixed assets, the finance executive has to decide in which proposal, the company should invest the funds. For this purpose, he may be required to take the help of various techniques of capital budgeting to evaluate the various proposals, e.g. Pay Back Period, Net Present Value, Internal Rate of Return, Profitability Index etc. If the outright purchases of fixed assets is not useful, the finance executive has to ensure that in order to facilitate the replacement of fixed assets after their economic life is over, proper depreciation policies are formulated. The wrong policies in the area of providing for the depreciation may result into over-capitalisation or under-capitalisation.

(ii) Working Capital Management : The finance executive has to ensure that sufficient funds are made available for investing in current assets as it is the life-blood of the business activity. Non-availability of funds to invest in current assets in the form of say cash, receivable, inventory etc. may halt the business operations. At the same time he has to ensure that there is no blocking of funds in the current assets, as it may prove to be costly in terms of cost of these funds and also in terms of opportunity cost of their use. Thus, the finance manager has to ensure that investments in the current assets is minimum without affecting the operations of the company.

(d) Allocation of Income : Allocation of the income of the company is the exclusive responsibility of the finance executive. For this purpose, basically the income may be distributed among the shareholders by way of dividend or it may be retained in the business for future purpose like expansion. Decision in this regard may be taken in the light of financial position, present and future cash requirements, preferences of the shareholders etc.

(e) Control of Funds : The finance executive is responsible to control the use of funds committed in the business so as to ensure that cash is flowing as per the plan and if there is any deviation between estimates and plans, proper corrective action may be taken in the light of financial position of the company. For this purpose, he may be required to supervise the cash receipts and disbursements, ensure the safety of cash balances, expediate receipts and delay the payments wherever possible etc.

(f) Evaluation of Performance : The financial executive may be required to evaluate and interpret the financial statements, financial position and operations of the company. For this purpose, he may be required to ensure that proper books and records are maintained in proper way so that whatever data is required of this purpose is available in time. For the evaluation and interpretation of the financial statements, financial executive may use the techniques like ratio analysis, funds flow statement etc.

(g) Corporate Taxation : As the company is a separate legal entity, it is subjected to the various direct and indirect taxes like income tax, wealth tax, excise and customs duty, sales tax etc. The finance executive may be expected to deal with the various tax planning and tax saving devices in order to minimize the tax liability.

(h) Other Duties : In addition to all the above duties the financial executive may be required to prepare annual accounts, prepare and present financial reports to top management, carrying out internal audit, get done statutory and tax audit, safeguarding securities and assets of company by properly insuring them etc.

Non-recurring Duties :

The non-recurring duties of the finance executive may involve preparation of financial plan at the time of company promotion, financial readjustments in times of liquidity crisis, valuation of the enterprise at the time of acquisition and merger thereof etc.

THE FIELDS OF FINANCE

There can be various fields in which the finance function may operate. In each field, finance executive deals with the management of money and claims against money. The distinctions arise due to variety of problems and variety of objects. The various fields of finance can be stated as below.

(1) Business Finance : The term business and hence business finance is a very broad term. It covers all the activities carried on with the intention of earning profits. Thus, business finance covers the study of finance function in the area of business which includes both trade as well as industry.

(2) Corporation Finance : Corporation finance is a part of business finance and deals with the financial practices, policies and problems of corporate enterprises or companies to describe in simple words. The corporation finance studies the financial operations carried on by a corporate enterprise from the stage of its inception to the stage of its growth and expansion.

Finance Function 1 1 (3) International Finance : International finance is the study of flow of funds between

individuals and organisations beyond national boundaries and developing the methods to handle these funds more effectively. This study may become crucial as it involves exchange of currencies and also as the governments of either of the nations may have close watch and control on these transactions involving foreign currencies.

(4) Public Finance : It deals with the financial matters of the Governments. It becomes crucial as the Governments deal with huge sums of money which can be raised through the sources like taxes or other methods and are required to be utilised within the statutory and other limitations. Further, the Government does not operate with objectives similar to that of the private organisations i.e. earning the profits is not the intention with which the Governments operate, but they operate with the intention of accomplishing social or economic objectives.

(5) Private Finance : It deals with the financial matters of non-government organisations. FINANCE FUNCTION IN RELATION WITH OTHER FUNCTIONS

Other than finance, every business generally operates in three main functional areas viz. Production, Marketing and Personnel. All these functions are closely related to finance function due to the simplest reason that for executing these functions, funds are required which is the area covered by finance function.

E.g. To produce good quality of finished goods, the business needs good infrastructural facilities like building, machineries etc., a regular flow of production facilities like quality, raw material, work in progress, consumable stores, quality control equipments, good maintenance facilities etc. All these activities need the investment to be made either in terms of fixed capital and/or working capital, which is the area of finance function. To market the finished goods properly in market, the business has to have proper investment in the finished goods to guarantee regular flow of goods in the market. It may be required to have good distribution systems which may call for investment in terms of fixed assets or labour force. All these activities need the investments to be made either in terms of fixed capital and/or working capital which is the area of finance function. The personnel function deals with the availability of proper kinds of labourers at proper time, training them properly and fixing their job responsibilities. All these activities need funds e.g. to pay salaries, wages and other facilities to workers, funds are needed, to provide training facilities to workers, it may be necessary to invest in some fixed assets like building or equipments etc.

To conclude, it may be stated that all the functions or activities of the business are ultimately related to finance. The success of the business depends on how best all these functions can be coordinated.

QUESTIONS

1. Describe the scope and importance of the finance function in the management of a corporation.

2. Explain the meaning, nature and scope of Business Finance.

3. Explain the organizational frame work of finance function. State the relation of finance function to other functions of a business enterprise.

4. What are the duties discharged by the financial executives in a large business organization?

5. (a) Explain the traditional and modern concept of finance function.

(b) State the relation of finance function to other functions of a business enterprise.

6. Describe the organizational structure of finance department of a large business concern.

7. How is finance function organized in business firms?

Explain the internal structure of finance department in medium and large business enterprises with suitable chart.

Finance Function 1 3 NOTES

The finance function of the organisation is greatly affected by the forms of organisation. In practical circumstances, we come across basically three forms of business organisations.

a. Proprietary Firms b. Partnership Firms c. Joint Stock Companies PROPRIETARY FIRMS

In this case, only one person is the owner of the business who is called as the “Proprietor” and the same person is the manager. All the profits earned by the business belong to the proprietor and he is liable for the losses and liabilities of the business.

Advantages :

a. Proprietary Firm is the easiest and most economical form of business organisation to form and operate. Not many of the government regulations are applicable to the Proprietary Firms.

b. This form of organisation is very suitable where the size of the business is small and the complexities involved in the business are comparatively less. However, if the size of the business increases or the complexities in the business operations grow, this form may prove to be insufficient.

Disadvantages :

a. This form of organisation does not have any legal status. The proprietary firms exist due to the existence of the proprietor. If the proprietor ceases to be in existence, the firm ceases to be in existence.

b. As only one person is the owner and the manager, the capacity of the business to raise the funds and to cope up with the complex business operations is comparatively limited.

Chapter 2

Financial Management

1 6

c. Proprietary firm is always an unlimited liability organisation. In the sense, if the assets of the firm are insufficient to meet its liabilities, personal property of the proprietor is always at stake.

d. The income of the proprietary firm is clubbed with the individual income of the proprietor. As such, effective rate of income tax which the proprietor may be required to pay is likely to be higher.

e. It is not possible to transfer the ownership of the business to somebody else without affecting the basic constitution of the business.

PARTNERSHIP FIRMS

In this case, more than two persons but less than twenty persons come together and form a partnership firm. Each of these partners is the owner of the business in the proportion decided among themselves. Partnership is a contract among the partners and the relationship among the partners is governed on the basis of terms and conditions laid down in an official and written document called as “partnership deed” or “partnership agreement”.

Advantages

a. This form of organisation is also reasonably easy and economical to form and operate. b. As resources of more than one person are pooled together, capacity of the business to

handle more complex business operations or operations requiring more amount of funds is better as compared to the proprietary firms.

c. The tax structure applicable to the partnership firms is fairly reasonable. At present, profit of the partnership firm is taxed at a flat rate of 35%. While calculating the profit of the partnership firm, following amounts can be claimed by the firm as the allowable expenditure.

i. The firm can pay interest on capital to the partners on the amount of capital introduced by them in the business but the rate of interest can not exceed 12% per annum. This interest on capital can be paid by the firm to all the partners.

ii. The firm can remunerate the partners in the form of salary, bonus, commission etc. provided that the partners are “working partners”. A working partner is a partner who is capable of participating in the day-to-day affairs of the firm by virtue of experience or qualifications. However, the firm cannot remunerate the partners to any extent it wants. The maximum amount of remuneration which the firm can pay to all the working partners taken together is prescribed in Income Tax Act, 1961. Section 44AA of the said Act provides that the maximum amount of remuneration which the firm can pay to its working partners gets decided on the basis of its “book profits” which means the amount of profits as per its profitability statement after calculating

the interest on capital paid to the partners. After deciding the amount of book profit, the remuneration is decided as below :

If the firm is carrying on a profession :

a. On the first Rs. 1,00,000 of the book profit or in case of a loss, Rs. 50,000 or 90% of the book profit whichever is more.

b. On the next Rs. 1,00,000 of the book profit, at the rate of 60%. c. On the balance amount of book profit, at the rate of 40%. In case of any other firm :

a. On the first Rs. 75,000 of the book profit or in case of a loss, Rs. 50,000 or 90% of the book profit whichever is more.

b. On the next Rs. 75,000 of the book profit, at the rate of 60%. c. On the balance amount of book profit, at the rate of 40%.

However, it should be remembered that the amount of interest on capital paid by the firm and the remuneration paid to the partners is taxable in the hands of individual partners.

After charging the above amounts, the balance amount of profits are transferred to the capital account of the partners which is referred to as “share of profit” and this share of profit is not taxable in the hands of individual partners.

d. Not many of the government regulations are applicable to the partnership firms.

Disadvantages

a. This form of organisation also does not have any legal status. The partnership firms exist due to the existence of the partners. If the partners cease to be in existence, the firm ceases to be in existence. The retirement or death of a partner leads to the dissolution of the partnership firm.

b. The capacity of the business to raise the funds and to cope up with the complex business operations is comparatively limited though it is more than that of the proprietary firms.

c. Partnership firm is also an unlimited liability organisation. In the sense, if the assets of the firm are insufficient to meet its liabilities, personal property of the partners is always at stake.

d. It is not possible to transfer the ownership of the business to somebody else without affecting the basic constitution of the business.

Financial Management

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JOINT STOCK COMPANIES

Joint stock companies has become a major form of organisation in the recent past. This form of organisation can raise large amount of funds as the resources of larger number of people can be pooled together. In this case, the total requirement of funds of the organisation is split into smaller units, each of such units being called as a ‘share’. Each such share carries a denomination value which is called as ‘face value’ or ‘nominal value’. An individual can participate in the capital requirement of an organisation by purchasing the shares of the company and he becomes the part owner of the company to the extent of his shareholding in the overall amount of capital of the company. Such shareholder can exercise his ownership rights through the voting rights offered to him. The joint stock companies have the following characteristic features. 1. All the joint stock companies have a legal entity separate from their owner viz. shareholders. They gain the legal status by being registered under Companies Act, 1956, which governs and regulates the operations of all joint stock companies in India. As legal entities, the joint stock companies can own assets, incur liabilities, enter into contracts, sue and be sued. The shareholders of the company cannot be held liable for the actions of the company.

2. Generally all joint stock companies are limited liability organisations and the liability of the members i.e. shareholders is limited to the extent of amount of shares they undertake to purchase. E.g. If Mr. A undertakes to purchase 100 shares of a company of Rs. 100 each, his liability ceases once he pays Rs. 10,000 to the company. His personal property is never in danger despite the losses and liabilities incurred by the company.

3. Segregation of ownership and management is a typical feature of joint stock companies. In case of the companies, shareholders are the owners. However, due to large number of shareholders and their wide geographical spread, it may not be possible for the shareholders to exercise their ownership rights by participating in the day-to-day affairs of the company. As such, the shareholders appoint their representatives (viz. directors) to manage the day-to-day affairs of the company. In case of joint stock companies, shareholders are the owners while directors/board of directors are the managers. 4. Transferability of shares is a feature of a joint stock company. A shareholder can transfer

his ownership rights in the company by transferring his shares to some other person. In case of public limited companies, shares are freely transferable and such transfer can be greatly facilitated if the shares are listed on the stock exchange. In case of private limited companies, there may be some restrictions on the transfer of shares.

5. Being an artificial legal person, the company enjoys a perpetual existence. The company can die only a legal death, after complying with the prescribed legal formalities. There is a very famous case under the Companies Act, where during the war, all the members of a private company, while in meeting, were killed by a bomb. But the company survived.

6. A company is an artificial legal person which does not have a body like a natural person and hence it cannot sign any documents. However, being a legal personality, it is bound only by those documents which bear its signature. Hence, as a substitute to the signature, the law provides for the use of common seal. Any document having the common seal and witnessed by at least two directors is binding on the company legally.

Advantages :

1. The capacity of the corporate organisations to raise the funds is comparatively high. As the number of persons contributing to the requirement of funds is large, it is possible to raise large amount of funds.

2. As the company has a separate legal entity, apart from its owners viz. shareholders, the personal property of the shareholders is generally not in danger.

3. Transferability of shares is a facility available to the shareholders. If the shareholders want to release their investment in shares, they can transfer their shares to any other person. However, it should be remembered that in case of private limited companies, the shares are not freely transferable.

Disadvantages :

1. The company form of organisation are subjected to elaborate legal and procedural formalities to be completed not only for the purpose of formation but also for the regular operation. The basic applicable law in this connection is in the form of Companies Act, 1956. However, it should be noted that in case of private limited companies, these formalities are less rigorous in nature.

2. Double Taxation is a typical characteristic feature of a company form of organization. The profits earned by the company are taxed in the hands of company first and when the same profits are distributed to the shareholders in the form of dividend, the same are taxed in the hands of shareholders again. This amounts to the payment of tax by both the company as well as the shareholders on the same amount of profits.

As the company form of organisation is the most frequently found form of organisation, for the future discussion in the following chapters, we will refer the business organisation to be a “company”.

In practical situations, we come across basically two types of limited liability companies : a. Private Limited Company

Financial Management

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PRIVATE LIMITED COMPANY

In non-technical language, operations of a private limited company affect the fate of smaller number of people. As such, Companies Act, 1956 is very liberal towards the private limited companies. Private Limited Company is entitled to many privileges/exemptions from the various provisions of the Companies Act, 1956. A private limited company is characterised by the following features.

a. Minimum number of shareholders is 2 and the maximum number is 50.

b. A private limited company cannot approach public in general for subscribing to the shares/ debentures of the company. Similarly, a private limited company cannot invite or accept deposits from public in general other than its shareholders, directors or their relatives. The funds required by the company are required to be collected through the private circulation only.

c. In case of a private limited company, right of the shareholders to transfer the shares is restricted. These restrictions are usually in two forms :

i. that the shares to be transferred should be offered to the existing members on priority basis and if the existing members do not want to take up those share, they can be transferred to anybody else.

ii. that the directors will have the power to refuse to register the transfer of shares provided that such power should be exercised by the directors in good faith and in the interest of the company.

d. A private limited company needs to have a minimum paid-up share capital of Rs. 1 Lakhs or any higher amount as may be prescribed.

PUBLIC LIMITED COMPANY

In non-technical language, a public limited company affects the fate of larger number of people. As such, operations of a public limited companies are subjected to a close control in the form of compliance to the various provisions of Companies Act, 1956. A public limited company is characterised by the following features :

a. Minimum number of shareholders is 7 and there is no restriction on the maximum number of shareholders.

b. Public limited company can freely approach public in general for subscribing to the shares and/or debentures of the company.

c. The shareholders of a public limited company can freely transfer their shares to any other person. As such, shares of only a public limited company can be listed on the stock exchange.

d. A public limited company needs to have a minimum paid-up share capital of Rs. 5 Lakhs or any higher amount as may be prescribed.

QUESTIONS

1. Critically evaluate the following forms of business organisations. (a) Proprietory Firms

(b) Partnership Firms

(c) Joint Stock Companies

2. Write short notes on the following (a) Taxation of Partnership Firms (b) Types of Companies

Financial Management

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Financial Management

2 4

Financial Statements 2 5

Chapter 3

FINANCIAL STATEMENTS

Financial statements of an organisation is the basis of data required for financial decision making. As such, correct understanding of the structure of financial statements and also of the tools available for the interpretation of financial statements is a must before one talks of any of the further discussions on financial management.

NATURE OF FINANCIAL STATEMENTS

Any organisation doing the business, whether it is manufacturing activity or trading activity or service activity, is interested in knowing basically two facts about the business.

a. Where the business stands at any given point of time in financial terms.

b. What is the result of operations carried out by the business organisation during a specific period.

In order to answer these two questions, the organisation carries out the process of recording various transactions in a defined set of records, technically referred to as “accounting”, which effectively result into the preparation of what are called as financial statements. These financial statements are basically in two forms.

a. First financial statement is Balance Sheet. This is the answer to the first question viz. Where the business stands in financial terms. Balance Sheet informs about the various sources used by the organisation to raise the funds which technically result into what are referred to as “liabilities” and the way these sources are used which technically result into the creation of “assets”. Sometimes, Balance Sheet is also referred to as “Statement of Sources and Application of funds”. Effectively, Balance Sheet is a listing of various assets and liabilities of the organisation at any given point of time. Technically, Balance Sheet is a position statement in the sense it refers to a particular date. As such, Balance Sheet is referred to as “Balance Sheet as on ——— or “Balance Sheet as at ———.

b. Second financial statement is Profitability Statement. In technical language, it is referred to as “Profit & Loss Account”. This is the answer to the second question viz. What is the result of operations of the business during the specific period i.e. whether the operations have resulted into a profit or loss and by what amount. Technically, Profitability Statement is a period statement in the sense it refers to a particular period . This may be a month, a quarter, a half year or a year depending upon the organisation and the purpose for which it is prepared. As such, Profitability Statement is referred to as “Profit and Loss Account for the year ending on ———.

Basic principles behind the preparation of Financial Statements

BASIC CONCEPTS IN ACCOUNTING

The theory and practice of accounting is based upon certain basic assumptions which are referred to variously as concepts, principles, conventions and rules. For the convenience purpose, we will term them as ‘concepts’. The various concepts which form the basic of theory and practice of accounting can be discussed as below.

(1) Business Entity Concept :

According to this concept, the business is assumed to be a distinct entity from the persons who own the business E.g. If there is a partnership concern carrying the name of M/s. X, where Mr. A and Mr. B are partners, from accounting point of view, M/s. X is supposed to be a separate entity from Mr. A or Mr. B. The financial statements prepared on the basis of accounting records relate to the business i.e. M/s. X and not to Mr. A or Mr. B individually. It should be noted in this connection that the business entity concept has nothing to do with the legal entity of the business. It applies to both corporate organisation (which by itself is a legal entity separate from the owners) as well as non-corporate organisation. (which is not a legal entity separate from the owners.)

(2) Money Measurement Concept :

According to this concept, only those transactions and facts find the place in the process of accounting and hence on financial statements which can be expressed in terms of money. As such, all those transactions and facts which cannot be expressed in terms of money (e.g. Morale and motivation of the workers, goodwill of the organisation in the market etc.) are not within the purview of accounting though they may be having direct or indirect bearing on the business. This principle imposes severe restrictions on the kind of information available from the financial statements. In fact, it is one of the major drawbacks of financial statements.

Financial Statements 2 7 (3) Cost Concept :

According to this concept, the assets acquired by a business are recorded at their cost of acquisition and this cost is considered for all the subsequent accounting purposes say charging of depreciation. This concept does not take into consideration the current market prices of the various assets.

(4) Going Concern Concept :

According to this concept it is assumed that the business entity is going to be in business for an indefinitely long period of time and is not likely to close down its business in a shorter period of time. This concept affects the valuation of assets and liabilities. As such, the assets are shown on the Balance Sheet at cost less depreciation and not at the current market price or realisable value. If the assets are to be disclosed at the correct value in the Balance Sheet, the current market price will be most suitable. However, as the business is likely to be a going concern in future and as the assets are not likely to be sold in the market in the near future, they are disclosed at cost less depreciation.

(5) Conservation Concept :

This concept is usually expressed as – “Anticipate all the future losses and expenses, however do not anticipate the future incomes and profits.” This principle is applicable to current assets generally and hence the current assets are valued at cost or market price whichever is lower. The valuation of non-current assets is made at cost (as per the cost concept.)

(6) Dual Aspect Concept :

According to this concept, every business transaction has two aspects, however the basic relationship between assets and liabilities i.e. assets are equal to liabilities, remains the same e.g. If Mr. A starts the business by introducing the capital of Rs. 50,000 the assets and liabilities structure will be as below :

Liabilities Rs. Assets Rs.

Capital 50,000 Cash 50,000

Now, if Mr. A uses the cash to purchase the material worth Rs. 40,000, the assets and liabilities structure will change as below :

Liabilities Rs. Assets Rs.

Capital 50,000 Stock in trade 40,000

Cash 10,000

If Mr. A sells the above material worth Rs. 40,000 for Rs. 45,000, on credit basis, the assets and liabilities structure will change as below :

Liabilities Rs. Assets Rs.

Capital 55,000 Receivables 45,000

Cash 10,000

55,000 55,000

(7) Accounting Period Concept :

According to this concept, eventhough a business is likely to be a going concern over a longer period of time, in order to facilitate the preparation of financial statements periodically, the future time is divided into shorter segment, each one of them being in the form of Accounting Period. Income is computed according to this accounting period (by preparing profitability statement) and financial position is assessed at the end of such accounting period (by preparing Balance Sheet). It may be noted that the length of accounting period may depend upon various factors like characteristics of the business, tax considerations, statutory requirements and so on.

(8) Matching Concept :

According to this concept, in order to calculate the profit for the accounting period in a correct manner, the expenses and costs incurred during that period, whether paid or not, should be matched with the revenues generated during that period.

(9) Materiality Concept :

According to this concept, while accounting for the various transactions, only those which are having material impact on profitability or financial position of the organisation will be considered, ignoring the insignificant ones. E.g. If an organisation purchases some postage stamps some of which remain non-used at the end of the accounting period, according to matching concept, the cost of such non-used stamps should not be treated as an item of expenditure. However, as its impact on profitability is likely to be negligible, the cost of non-used stamps may be ignored treating the cost of purchase of stamps as an expenditure. Now which transactions should be treated as material ones is a subjective concept and depends upon the judgement and knowledge of the accountant.

(10) Consistency Concept :

According to this concept, whatever accounting policies and procedures are adopted, they should be adopted consistently from one period to another to enable the comparison between two different sets of financial statements. If there is any change in the accounting policies and procedures, this fact coupled with its effect on profitability should be disclosed specifically.

Financial Statements 2 9 STRUCTURE OF FINANCIAL STATEMENTS

As there is no specific law applicable to the preparation of financial statements of a non-corporate organisations like proprietary firms or partnership firms, these organisations can prepare their financial statements in whatever structure they want. However, in case of a corporate organisation, in simple language a company form of organisation, there is a uniform law applicable to these types of organisations viz. Companies Act, 1956. As such, a company form of organisation is required to prepare and present its financial statements in accordance with the provisions of Companies Act, 1956, to be more specific as per the provisions of Schedule VI of the Companies Act, 1956. The underlying presumption of the Schedule VI provisions is that it is through the financial statements that the companies communicate with the various outsiders. As such, it is required that the financial statements should be as transparent and as informative as possible. Hence, Schedule VI lays down various disclosure requirements which the companies are required to follow while preparing their financial statements.

Schedule VI of the Companies Act, 1956 is subdivided into four parts :

Part I deals with the format of the Balance Sheet.

Part II deals with the Profit and Loss Account.

Part III deals with notes forming part of the Profit and Loss Account and the Balance Sheet. The last reporting requirement to Part IV was inserted recently with effect from 15th May 1995 which deals with Balance Sheet abstract and the company’s general business profile.

Part I : Structure of Balance Sheet :

As stated above, Part I of Schedule VI deals with Balance Sheet. It lays down both the vertical as well as horizontal form of preparing the Balance Sheet, though in normal circumstances we come across vertical form of Balance Sheet.

Following items appear in the Balance Sheet.

Liabilities Assets

a. Share Capital a. Fixed Assets b. Reserves & Surplus b. Investments

c. Secured Loans c. Current Assets, Loans & Advances

d. Unsecured Loans d. Miscellaneous Expenditure to the extent not written off or adjusted.

e. Current Liabilities & e. Profit & Loss Account debit Balance. Provisions

In addition to the above items of assets and liabilities, the various contingent liabilities are required to be disclosed by way of a foot-note.

LIABILITIES SIDE Share Capital :

The share capital is required to be disclosed under the following headings a. Authorised : ... shares of Rs... each

b. Issued : ... Shares of Rs. ...each c. Subscribed : ... shares of Rs. ... each d. Called up : ... shares of Rs. ... each e. Less : Calls Unpaid

f. Add : Forfeited Shares (Amount originally paid up) Notes :

a. The details of issued and subscribed capital should be given after distinguishing between the different classes of shares. It should be noted that in the Indian circumstances, the company can issue only two types of shares i.e. Equity Shares and Preference Shares. In case of preference shares, details of different classes of preference shares should be given. Similarly, in case of redeemable or convertible preference shares, the terms of redemption on conversion should be given.

b. If the shares are allotted as fully paid shares pursuant to a contract without payments being received in cash, the details of the same should be given.

c. If the shares are allotted as fully paid bonus shares, details of the same should be given alongwith the sources from which the bonus shares are issued i.e. capitalisation of profits or reserves, share premium etc. Similarly, the details of bonus shares held by i) directors and ii) others should be given.

d. It is provided that any profit on the reissue of forfeited shares should be transferred to capital reserve.

Reserves and Surplus :

Reserves indicate that portion of the earnings, receipt or other surplus of the company (whether capital or revenue) appropriated by the management for a general or specific purpose other than provisions for depreciation or for a known liability. The reserves can be primarily of two types. i) Capital Reserve and ii) Revenue Reserve. Capital Reserve is that reserve which can not be distributed by way of dividend. Revenue Reserve is any other reserve than the capital reserve.

Financial Statements 3 1 The reserves are required to be classified as below :

a. Capital Reserve

b. Capital Redemption Reserve (As per the provisions of Section 80 of the Companies Act, 1956, this reserve is created for the redemption of redeemable preference shares). c. Share Premium Account

d. Other reserves specifying the nature of each reserve and the amount in respect thereof. Less : Debit balance in Profit & Loss Account, if any.

e. Surplus i.e. balance in Profit & Loss Account after providing for proposed allocations viz. dividend, bonus shares or reserves.

f. Proposed additions to reserves. g. Sinking fund

Notes :

a. Additions and deductions since the last balance sheet is required to be given under each head of reserves and surplus.

b. In case of the share premium account, the details of the utilisation of the balance in share premium account should be given. It should be noted that as per the provisions of Section 78 of the Companies Act, 1956, the amount lying to the credit of share premium account can be used for :

1. For issuing fully paid bonus shares. 2. To write off preliminary expenses.

3. To write off the balance of commission/discount allowed/paid while issuing shares/ debentures.

4. To provide for premium payable on the redemption of preference shares.

c. The word “fund” is generally used interchangeably with the word “reserve fund”. The word fund indicates that there is a specific investment against such reserves.

d. Debit balance in Profit and Loss Account should be deducted from the unspecified reserves. If there are no unspecified reserves, such debit balance should be shown on assets side.

Secured Loans :

Loans borrowed by the company, secured wholly or partly, against the assets of the company are stated as secured loans.

Secured Loans are classified as below : a. Debentures

b. Loans and Advances from Banks c. Loans and Advances from Subsidiaries d. Other Loans and Advances

Notes :

a. In case of debentures, the terms of redemption or conversion, if any, should be specified together with the earliest date of redemption or conversion.

b. Nature of security should be specified.

c. Interest accrued and due on secured loans should be included under the appropriate sub-head under secured loans.

d. Loans taken from directors and managers should be shown separately.

e. If the loans are guaranteed by director or manager, it is required to mention the guarantee and the amount of loan under each head.

Unsecured Loans

Unsecured Loans are those loans which are not secured against the security of any of the assets of the company. Unsecured portion of the partly secured loans should be shown under unsecured loans.

Unsecured Loans are classified as below : a. Fixed Deposits

b. Loans and Advances from Subsidiaries c. Short Term Loans and Advances

i) from Subsidiaries ii) from others

d. Other Loans and Advances i) from subsidiaries ii) from others

Financial Statements 3 3 Notes :

a. Interest accrued and due on secured loans should be included under the appropriate sub-head under unsecured loans.

b. Loans taken from directors and managers should be shown separately.

c. If the loans are guaranteed by director or manager, it is required to mention the guarantee and the amount of loan under each head.

d. Short term loans and advances are those which are due for repayment within one year from the date of balance sheet.

e. Inter-corporate unsecured deposits and Commercial Papers fall under this head.

Current Liabilities and Provisions :

The Guidance Note issued by The Institute of Chartered Accountants of India on Terms used in Financial Statements defines “Current Liability” as liability including loans, deposits and bank overdraft which falls due for payment in a relatively short time, normally not more than 12 months.

Current Liabilities and Provisions are classified as below : A. Current Liabilities :

a. Acceptance : This includes the bills payable including the promissory notes issued by the Company.

b. Sundry Creditors for goods purchased or services received c. Subsidiary Companies

d. Advance received and unexpired discount e. Unclaimed dividend

f. Other liabilities, if any.

g. Interest accrued but not due on loans

B. Provisions :

a. Provision for Taxation b. Proposed Dividend

c. Provision for contingencies

d. Provision for Provident Fund Scheme

e. Provision for insurance, pension and other similar staff benefit schemes f. Other provisions