Finance for Non-Finance People

This book makes sense of the finance world from a non-finance perspective. It introduces, explains and demystifies essential ideas of business finance to those who do not have a financial background or training.

Autorentext

Sandeep Goel is a Professor of Accounting and Finance and Corporate Governance at the Management Development Institute (MDI) Gurgaon, India. He holds three decades of rich industry and academic experience, and is an accomplished Forensic Accounting, Fraud Risk Management and Corporate Governance professional.

Inhalt

List of figures xv

List of tables xvii

About the Author 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

12 Time value of money 165

What is time value of money? 165

Methods of valuation 166

A. Compounding 'future value' (FV) 166

B. Discounting 'present value' (PV) 169

13 Estimation of cash flows for capital expenditures 173

Cash flows estimation 173

1. Relevant cash flows 174

2. Incremental cash flows 175

14 Capital budgeting appraisal methods 181

I Non-discounted cash flow techniques 182

1. PBP 182

2. ARR 183

II DCF techniques 184

1. Discounted PBP 184

2. NPV 185

3. PI/Benefit-cost ratio (B/C ratio) 187

4. IRR 188

Case: Indian Cloth Mills Ltd. 190

15 Cost of capital 196

What is cost of capital? 196

Classification of costs 197

Computation of cost of capital 197

I Computation of specific costs 197

Beta coefficient and its application 200

Categories of beta 201

II Assigning weights to specific costs 202

III Multiplication of specific costs with weights to get total cost 203

16 Capital structure planning 205

Capital structure defined 206

Types of business finance 206

1. Long-term finance 206

2. Medium-term finance 206

3. Short-term finance 207

Instruments of finance 207

1. Shares 208

2. Retained earnings 208

3. Debentures 208

4. Institutional finance 208

5. Public deposits 208

6. Bank finance 208

Factors affecting capital structure 209

1. Profitability 209

2. Liquidity 209

3. Cost of raising capital 209

4. Stability of enterprise 209

5. Control 209

6. Flexibility of financial structure 209

7. Capital market conditions 210

8. Legal requirements 210

Concept of leverage 210

Leverage ratio 210

Factors determining financial leverage 211

Capital structure analysis of UltraTech Cement and Shree Cement 212

Indian cement industry 213

17 Working capital management 217

Meaning of working capital 217

Concept of working capital 219

1. Gross working capital 219

2. Net working capital 220

Constituents of working capital 220

A. Current assets 220

B. Current liabilities 221

Estimation of working capital 221

Types of working capital 223

*1. Permanent wo…