Financial management Financial management is that managerial activity which is concerned with the planning and controlling of a firms

s financial resources. The financial goal of the firm should be the maximization of owners economic welfare as reflected in the market value of shares.

Objective of Financial Management Investment decision

Involves allocation of capital to investment proposals whose benefits are to be realized in future. The decision also includes reallocation of capital when an asset no longer justifies the capital committed to it. The uncertainty associated with the future benefits makes the investment proposals risky. Hence, while making an investment decision, considerable amount of attention should be given to the risk associated with the various investment proposals and the required rate of return attainable from them. Finance Decision

Pertains to the determination of the best financing mix or capital structure (i.e. the mix or combination of longterm finances like debt and equity used by the firm) for the selected investment proposal. The optimal capital structure can be arrived at by studying the effect of changes in the capital structure on the total valuation of the firm. The capital structure that maximizes the market price per share would reflect the best financing mix for the firm. Dividend Decision

involves determining the percentage of earnings that should be paid to the stockholders (also known as dividend payout ratio) which in turn shows the amount of earnings retained by the firm for investing in profitable avenues. The dividend policy of the firm is very significant because of the unambiguous relationship that exists between the dividends paid and the equity returns. The objective of maximizing the shareholders wealth should be kept in mind while making a decision about the payment of dividends to the shareholders.

Functions of a finance manager Mobilization of funds:

The finance manager should consider the various alternatives available through which funds can be acquired to meet the firms investment needs. This is also referred to as financing or capital structure decision. The finance manager should decide the optimum mix of debt and equity that will maximize the shareholders wealth and minimize the cost of capital. To explore profitable avenues for investment:

This function of allocation or commitment of capital funds to long-term assets is referred to as capital budgeting. Apart from this, the finance manager should also take a decision about recommitting funds when an asset becomes less productive or non-profitable. Working Capital Management:

Management of current assets is also a major function of the finance manager. Investment in current assets affects the firms profitability, liquidity and risk . The decision related to current assets requires a trade-off between liquidity and profitability. Hence a decision about the level of current assets should be taken by keeping in view various factors like size of the firm, impact on production, marketing and other functional areas. Dividend policy decision

The dividend policy framed by the finance manager has a major impact on the shareholders value. He should consider the stability of dividends and the mode of payment of dividends (i.e. cash dividends, bonus shares or stock split).

INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONAL AREAS Marketing Finance: With respect to pricing of the product, sales promotion, choice of product mix, distribution of goods, extension of credit to the customers etc. have a major impact on the profitability of the firm. Production-Finance Interface: In a manufacturing organization, the Production Manager has to take decisions about the level of investment in raw materials, equipment, work-in-process and other factors of production. These decisions have financial implications and thus should be taken in such a way that they are in consonance with the objective of maximization of the shareholders wealth. HR-Finance Interface: The recruitment and promotion of employees and payment of wages and other benefits involve the use of funds. The HR policies should be decided and designed keeping in view the funds available to the organization. Linkage with activities of the top management: The Top management which is responsible for goal setting and strategic planning takes the input for these decisions from the various financial reports and the decisions are based upon the availability and accessibility of financial resources.

FORMS OF ORGANISATION A firm is an ownership organization which combines the factors of production (men, materials and machines) in a plant for the purpose of producing goods or services and selling them at profit TYPES OF OWNERSHIP Private enterprise Individual ownership Partnership Joint stock Co. a) Private Ltd Co. b) Public Ltd Co. Co-operative Producers co-op society Consumers co-op society Housing co-op society Credit co-op society Public sector Govt dept Govt Co.

Individual ownership Individual supplies the entire capital Organises and manages the business himself and takes the entire risk. Takes all decision and any profits or loss are entirely his. It is owned, managed and controlled by only one man hence it is known as one man business

Advantages Simple and easy Least legal formalities Quick decision and prompt action Quality production Better labor relationship Small capital Flexibility

Disadvantages Limited capital Unlimited liability Small Income Cannot compete with big business Short life Division of labor is not possible No economies of large scale

Partnership Organization Is usually formed to combine capital, labor and varied specialized skills or abilities. 2-20 person can form partnership.

According to Indian Partnership Act 1932, Partnership is defined as the relation between 2 or more person who have agreed to share profit of a business, carried on by all or any of them acting for all The deed is duly stamped and sealed document containing the terms of contract is also registered in a court of law. Thus a partnership deed enjoys legal status and it serves as a legal evidence in future to settle any dispute or difference. The partnership deed should have the following details: Name of the firm

Nature of business Date of starting partnership Duration of partnership Rate of interest on capital invested Money contributed by each partner Share of profit and loss Provision for arbitration for settling the dispute that may arise in future Aim of partnership as well as the manner in which it can be dissolved

The partners will have to prepare a statement which will have the following particulars: Name of the firm Place of business-principal place and branches if any Name and addresses of all partners Date of joining the firm in case of every partner Duration if any The statement should be duly dated and signed by all partners. It is required to be submitted to the Registrar of company along with necessary registration fees. Types of Partner General partners Limited partners Active or Managing partner Sleeping or silent partner. Nominal partner Minor partner

Advantages Easy formation More capital Diverse talent Less possibility of error of judgement Prompt decision Large economics Personal factors Division of labor

Simple dissolution Caution and sound approach

Disadvantages Unlimited liability Short life Insufficient capital Disagreement Less secrecy Non transfer of partnership No direct relation between efforts and rewards Lack of public confidence

Joint Stock Company With the introduction of factory system, large scale organization and mass scale production came into being. This resulted in the evolution of joint stock company. The companies are formed and registered under the Indian Companies Act 1956.

A company is an artificial person having an independent legal entity and a perpetual succession with a distinctive name and a common seal having a common capital divided into shares of fixed value which are transferable and carry limited liability Formation of Joint stock company A Promoter prepares the scheme of business along with six other members (min 7 reqd). They then prepare the following documents. Memorandum of Association Articles of Association List of persons who have consented to be Directors along with their written consent A declaration by an advocate to the effect that all the requirements of the Act have been met. Name and address of promoters

A joint stock company is legal business owned by the shareholders having limited liability and managed by an elected Board of Directors Characteristics of Joint stock co. A company is created by registering or incorporating an association of persons under the company act It has separate legal existence as distinct from its members Artificial personality enabling it to exercise certain legal powers

Perpetual life and a very stable existence It has a common seal on which its name is engraved and this acts as its signature. It is affixed on all important legal documents and contracts. There is a complete separation of ownership from management. Liability of shareholders is limited Lower tax liability Easy transferability of shares Wide distribution of risk of loss Large membership

Types of Joint stock company Private Limited company This type of co. can be formed by 2 or more members. The maximum nos. of members is limited to 50. The co. is registered under the Indian Co. Act 1956. Transfer of shares is limited to members and general public cannot purchase shares. In this system, person who wants to take the advantage of limited liability and at the same time keep business as private; forms the private limited co. Most of the middle sized industries are run in this manner The co. need not circulate the Balance sheet,

P &L a/c among its members but it should hold its annual general meeting and place such financial statement in the meeting

A pvt ltd co enjoys a separate legal status, continuity of life, benefit of limited liability ,larger capital raising power, business secrecy to certain extent and above all number of priviliges and exemption as per Companies Act

Public limited co. Membership is open to general public. Such companies can advertise to offer its shares to general public. Public limited co are subjected to greater control and supervision of the Govt. This control is necessary to protect the interest of the shareholders and the members of the public

Advantages of Joint Stock Co. Economies of large scale Limited liability Huge capital Share transferable Democratic Permanent existence Legal control Risk spread out Mobilization of scarce savings

DisAdvantages of Joint Stock Co. Dishonest directors may exploit the shareholders Legal complexities It is democratic in theory only Delay in decisions Favoritisms Difficult labor relations Lack of initiative and personal interest and may lead to inefficiency and wastefulness Concentration of economic power and wealth in few hands Misuse of internal information

Co-operative Organizations Defn: Cooperative is a form of organization, wherein persons irrespective of caste,creed and religion voluntarily associate together, as human beings on the basis of equality for the fulfilment of their common economic interest A cooperative society is a voluntary association of economically weak persons who work for the achievement of their common economic objective on the basis of equality and mutual service

Members pay fees or buy shares and profits are periodically redistributed to them. Since each member has only one vote, this avoids concentration of control in few hands.

Characteristics of cooperative organization Voluntary organization Open membership Economic and democratic management Profit is not important Spirit of co-operation Unity Common interest Co-operative status: Registered under separate legislation. It gives separate legal status and certain exemption and privileges under the act. Formation: Application is submitted to the registrar of co-operative societies. The application should include name and address of society, its aim and objective, particulars of share capital etc. The application should be signed by at least 10 members. The application should accompany copies of Bye laws i.e rules and regulation governing the internal organization and management of the society. The registrar after the scrutiny of the application if satisfied with the soundness will issue a certificate of registration. Once the society is duly registered, it can admit new members and also issue its shares.

Types of co-operative society Producers Co-opt Consumers Co-opt Housing Co-opt Credit Co-opt Co-opt farming

Advantages Protects the interest of weaker section Elimination of middlemen Services Motive Democratic Nature

Sense of cooperation Helps socially neglected class

Disadvantages: Lack of coordination Chance of undue advantage Favourtism Limited capital Inefficient mangement Political influence

Public sector Govt. Department: Eg : railways, posts and telegraph, telecommunication etc. Characteristics : Financed out of govt budget Revenue goes to public exchequer Rules and regulation of govt are applicable Under direct control of a ministry Employees treated as govt servants

Advantages Economic, social and political objectives of govt are fulfilled Suitable for public utility services Consumers interest are safeguarded Govt can afford to wait for long time to realize profit.

Disadvantages Red tapism Major modification and innovation are difficult to incorporate Officers are discouraged from taking quick decision Lack of initiative due to seniority based promotions

Govt Co. Its is joint stock co under companies act with the govt share not less than 51%

It is created by an executive decision and not a legislative decision and managed by elected board of directors which may include private individuals . Board of directors repot to the concerned ministry and its annual report is reqd to be place every year on the table of parliament . Its day to day working is free from govt interference.

Advantages Easy to form Company directors are free to take decisions They try to satisfy their customers otherwise they might lose to their competitors

Disadvantages Misuse of excessive freedom Accountability is inadequate Since the directors are appointed by the govt, they spend more time pleasing their political masters

TAXATION LAWS IN INDIA India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc. Since 1991 tax system in India has under gone a radical change, in line with liberal economic policy and WTO commitments of the country. Some of the changes are: Reduction in customs and excise duties Lowering corporate Tax

Widening of the tax base and toning up the tax administration Direct Taxes: If the taxpayer bears its incidence and is not able to pass on the burden, such tax is direct tax. Example: - Income Tax, Wealth Tax, Gift Tax Corporate Income Tax etc. Indirect Tax : If the taxpayer is just a conduit and every stage the tax-incidence is passed on till it finally reaches the consumer, who really bear the brunt of it, such tax is indirect tax. Example: - Excise Duty, Customs Duty, Sales Tax etc.

CENTRAL SALES TAX According to the article 265 of the constitution of India no tax of any nature can be levied or collected by the central or State Governments except by the authority of law. The constitution of India vide entry no. 54 of the state list, gave power to the state legislature to levy sales tax on sale or purchase of goods other than newspapers, which takes place within the state. However, at that time the parliament was not empowered to levy any type of sales tax. Therefore, only state legislature enacted state sales tax laws in their respective state for levy of sales tax on sale or purchase of goods other than newspapers. Although, the State Government were empowered to levy and collect tax on sales made within its own territory but there was no specific provisions of levying tax on sale and purchase having interstate composition. As a result, same goods came to be taxed by several states on the ground that one or more ingredient of sale was present in their state. This led to multiple levy of tax.. Therefore central sales tax Act 1956 was enacted by the Parliament and received the assent of the president on 21.12.1956. Imposition of tax became effective from 01.07.1957 It extends to the whole of India. Every dealer who makes an inter-state sale must be a registered dealer and a certificate of registration has to be displayed at all places of his business.

There is no exemption limit of turnover for the levy of central sales tax Under this act, the goods have been classified as: Declared goods or goods of special importance in inter -state trade or commerce and Other goods. The rates of tax on declared goods are lower as compared to the rate of tax on goods in the second category. The tax is levied under this act by the Central Government but, it is Collected by that state government from where the goods were sold.

The tax thus collected is given to the same state government which collected the tax.

In case of union Territories the tax collected is deposited in the consolidated fund of India. The rules regarding submission of returns, payment of tax, appeals etc. are not given in the act. For this purpose, the rules followed by a state in respect of its own sales tax law shall be followed for purpose of this act also.

Even though the central sales tax has been framed by the central government but, the state governments are allowed to frame such rules, subject to such notification and alteration as it deem fit.

REGISTRATION OF DEALERS According to Section 7, registration of dealer can be done in any of the two ways-

1. Compulsory registration 2. Voluntary registration

COMPULSORY REGISTRATION SECTION 7 (1) Every dealer who is liable to pay Central sales tax should make an application for registration under the Act. to appropriate authority in his state. If a dealer does not get himself registered, he would be subject to penalty under section 10 which is imprisonment which may extend to six months or fine or both and in case of continuing offence, a fine of Rs. 50 per day till the default continues.

VOLUNTARY REGISTRATION SECTION 7(2) Under following circumstances any dealer can voluntarily apply for registration even though he is not liable to pay tax under central sales tax Act. 1. If he is registered under sales tax law of state but, is not liable to pay tax under central sales tax Act 2. If there is no sales tax Act in a state or any part of it, any dealer having a place of business in that state or part there of. 3. If he deals in a tax-free goods in a state. The dealer can apply for registration at any time and ,if he does not apply for registration no penalty will be imposed upon him. Advantages of Registration A registered dealer has to pay actual sales Tax @ 4% only on goods purchased by him for manufacture or resale and, he buys the same against Form C. otherwise, he will be charged @ 10%. Subsequent sales in the course of movement of goods by transfer of documents of title to goods will be exempted from central sales-tax if, registered dealer effecting sales is able to produce Form E-I or E-II.

VALUE ADDED TAX (VAT) The recent biggest change in the tax system in India is the introduction of value added tax (VAT) from April 2005. VAT is not new for our country because over the years the traders have been paying an excise duty which is nothing but a central VAT on production. In the state, the state government charges sales tax on the sale of goods and also many other charges like octroi, electricity tax, motor vehicle tax, entertainment tax and many more. Different state government charges different rates of tax. While in order to attract industries and promote trade some state government give tax concessions. By introducing VAT at state level, all different rates of sales tax will become uniform throughout the India. Definition VAT is a tax paid at each point of exchange of goods where value is added starting from production till final consumption. Difference between VAT and sales tax. In case of VAT consumer pays tax on the value of product only once while in case of sales tax he pays tax on some parts of the product more than once For instance, a car manufacturer may produce some parts, import some parts, and buys some other parts.

On the parts purchased he has to pay sales tax. When the car is sold to the final consumer, then consumer has to pay sales tax on the car which also includes tax on the parts on which sales tax has been already paid by the seller. Thus consumer is paying tax more than once. But, under VAT every buyer has to pay tax. After adding value to it, the seller charges VAT from the consumer and after filing VAT return the seller can deduct the amount of VAT he has paid to the seller and pays the difference between the VAT he has charged from the consumer and the VAT he has paid to the seller, to the government

Incidence of VAT Every business already registered for sales tax is automatically registered for VAT on 1 April 2005. If annual turnover is less than Rs. 5 lakhs then no need to register for VAT. Businesses with a turnover of between Rs. 5 and 50 lakhs have two options 1. Register for VAT 2. Pay tax at the small percentage of turnover also called as composition scheme under this dealer will not be entitled to claim refund of VAT he has paid to the supplier.

Service tax Service tax comes under powers of Entry 97 of List I of Seventh Schedule to Constitution of India. Service tax was introduced w.e.f. 1-7-1994 and its scope is being expanded every year. Service tax is not payable if service is provided in J&K or if provided outside India. Service tax is imposed under section 66 of Finance Act, 1994, which is the charging section [There is no separate Service Tax Act as such]. Service provided or to be provided is taxable event. Thus, service tax is payable when advance is received. Service tax is payable under Finance Act, 1994; on about 117 taxable services as defined in section 65(105) of Finance Act, 1994. Service requires two parties Service tax cannot be levied on value of goods. Service tax and Vat are mutually exclusive.

Excise duty The excise duty is levied in pursuance of Entry 45 of the Central List in Government of India Act,1935 as adopted by entry 84 of List I of the seventh Schedule of the Constitution of India. Charging section is Section 3 of the Central Excises and Salt Act,1944. Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers. As incidence of excise duty arises on production or manufacture of goods, the law does not require the sale of goods from place of manufacture, as a mandatory requirement. Normally, duty is payable on 'removal' of goods

The Central Excise Act, 1944 provide that every person who produces or manufactures any 'excisable goods', or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in rules or under any other law. No excisable goods, on which any duty is payable, shall be 'removed' without payment of duty from any place, where they are produced or manufactured, or from a warehouse, unless otherwise provided. The word 'removal' cannot be necessarily equated with sale. The removal may be for:Sale Transfer to depot etc. Captive consumption Transfer to another unit Free distribution

Thus, it can be seen that duty becomes payable irrespective of whether the removal is for sale or for some other purpose.

Concept of Return When an asset is bought, the gain (or loss) from that investment is called the return on investment. It is the major factor that motivates an investor to invest in an asset.

Assessing the return of an asset is important because of the following reasons: It facilitates comparison between various alternatives. It helps in analyzing the past performance. It helps in forecasting the future returns.

Components of Return Return usually has two components The income component or yield: The cash that the investor receives while he owns an investment is called the income component.

For e.g. the dividend that the equity-holders get when they own a companys shares constitutes the income component. The component of dividend yield is measured as Dt / Pt-1 where Dt is the dividend paid on the stock during the year and Pt-1 is the price of the stock at the beginning of the year.

(Note: In case of bonds or debenture, Dt will represent coupon payments). The capital gain (or loss): The value of the asset that an investor has will often change; and depending upon the increase (or decrease) in the value of an asset there will be a capital gain (or loss). The Capital gain yield is measured as (pt-pt-1)/pt-1 , where Pt is the price of the stock at the end of the year. The component of dividend yield is measured as Dt / Pt-1 The Capital gain yield is measured as (pt-pt-1)/pt-1 ,

The total percentage return is measured as the sum of the dividend yield and the capital gain yield Hence the total (percentage) return on an investment is given by Dt + (pt-pt-1)/pt-1 . Probability and rate of return: The future returns are characterized by uncertainty. Whenever the probabilities associated with various possible returns are known, then the expected return can be computed as the weighted average of the various returns, the weights being the probabilities associated with the returns. Expected rate of return

Concept of Risk Risk can be defined as the variability in the actual return emanating from a project in future over its working life, in relation to the estimated return that was forecasted at the time of selecting the project. The greater the variability between the actual and estimated return, the more risky is the project. The financial decisions of the firm are inter-related and jointly affect the market value of its shares by influencing the return and risk of the firm. The relationship between return and risk can be simply expressed as:

Return = Risk-free rate + Risk premium A proper balance between return and risk should be maintained to maximize the market value of a firms shares. Such a balance is called risk-return trade off.

The finance manager, in a bid to maximize the shareholders wealth should strive to maximize returns in relation to the given risk and should seek courses of actions that avoid unnecessary risks. Sources of Risk The various sources from which a risk can arise are: Interest rate risk Market rate risk Inflation risk Business risk Financial risk

Interest rate risk: Variability in securitys return due to changes in the level of interest rates. The price of a security moves inversely to the changes in interest rates. Hence if there is a rise in the interest rate, the price of the security will fall. Market rate risk: Variability in the securitys return due to fluctuations in the securities market. This risk arises as a result of factors that affect the entire economy, e.g recession, war etc

Inflation risk: The reduction in the purchasing power of money due to rise in inflation is referred to as inflation risk. Inflation risk directly affects the interest rate risk as the interest rates increase with rise in inflation. Business risk: It is the risk of doing business in a particular industry or environment. This risk is unique in nature and arises as a result of uncertainties associated with a company or an industry. Financial risk: It is the risk arising due to the use of debt financing (i.e. financial leverage). It can also be defined as the variability in the return on equity and earnings per share of the firm due to increase in financial leverage. Liquidity risk: It is the risk associated with the secondary market in which the security is traded. Securities like treasury bills which can be sold without a significant price concession are considered to be more liquid.

Measurement of risk : The degree of uncertainty involved can be analyzed using , a behavioral and a quantitative /statistical point of view. The behavioral view of risk can be obtained by using sensitivity analysis (Range). The statistical view of risk can be obtained by using Probability analysis ( Standard deviation & coefficient of variation)

Range (R) It can be computed as the difference between the highest possible return and the lowest possible return. It is not a popular measure of risk as it is based on two extreme values which can (may) misrepresent the actual risk involved.

Standard deviation: Standard deviation is an absolute measure of deviation. It is defined as the square root of the mean deviations where the deviation is the difference between an outcome and the expected mean value of all outcomes. Let ki be the rate of return associated with the ith possible outcome and Pi be the corresponding probability and be the mean return, then the standard deviation for the security can be computed as:

Pi ( Ki K )2
i 1

The greater the standard deviation of a probability distribution, the greater is the dispersion or the variability of the outcomes around the expected (mean) value Coefficient of variation: Coefficient of variation is a relative measure of dispersion. It is useful in situations where the projects, whose risks are to be compared, involve different outlays. It is calculated as the ratio of the standard deviation of a distribution to its mean.

Coefficient of Variation (CV)

The higher the coefficient of variation, greater is the risk. Concept of a Portfolio The group of assets such as stocks and bonds held by an investor is termed as a portfolio. Generally, investors prefer to invest in a portfolio rather than a single security as the risk involved in a portfolio is less than that involved in an individual asset due to the phenomenon of diversification. Diversification is a strategy designed to reduce risk by spreading the portfolio across different or diverse investments. The basic goal in diversification is to capture a high return by investing in different stocks while avoiding as much risk as possible The principle of diversification tells that spreading an investment across many assets will eliminate some of the risks, but not all. There is a minimum level of risk that cannot be eliminated by diversification, which is referred to as nondiversifiable risk. Assumptions of the Portfolio Theory: It is based on the assumption that investors are risk-averse. The returns of the securities are normally distributed.

Portfolio Return: Each stock in a portfolio has its own expected return and risk. The return (actual or expected) of a portfolio is a weighted average of the returns of the individual securities, where the weights represent the proportion of the individual securities in the portfolio.

kp where, kp is the return on the portfolio. ki is the return of the ith security in the portfolio. wi is the proportion of the ith security in the portfolio. Portfolio risk: The risk (as measured by standard deviation) of the portfolio is not a simple weighted average of the risk of the individual securities in it The overall portfolios risk will include the interactive risk of an asset relative to the others, measured by the covariance of returns. The co variance , in turn depends on the correlation between return on assets in the portfolio.

The total risk of a portfolio of a portfolio made up of two assets is given by

p = variance of returns of the portfolio w1 = fraction of total portfolio invested in asset 1 w2 = fraction of total portfolio invested in asset 1 1= S D of asset 1 2 = S D of asset 2 12 = coefficient of correlation between the returns of two assets Risks Affecting a Portfolio The total risk in the case of an individual security can be divided into two parts: Diversifiable risk or unsystematic risk: It affects a single asset or only a small group of assets. This risk arises from the uncertainties which are unique to individual securities and which are diversifiable if a large number of securities are combined to form well-diversified portfolios. Examples of unsystematic risks: Workers declare strike in a company. The R&D expert of a company leaves. The company is not able to obtain adequate quantity of raw material from the supplier.

Non-Diversifiable or systematic risk: It influences a large number of assets, each to a greater or lesser extent. This risk arises on account of economy-wide uncertainties and the tendency of the securities to move together with changes in the market. It is also referred to as market risk. This part of the risk cannot be reduced through diversification..

Examples of Systematic risk: The Reserve Bank of India introduces a restrictive credit policy. The corporate tax is increased. The inflation rate increases.

Beta: A measure of systematic risk Beta measures the relative risk associated with an individual portfolio as measured in relation to the risk of the market portfolio. The Market Portfolio represents the most diversified portfolio of risky assets an investor could buy since it includes all risky assets. The expected return and the risk premium on an asset depend only on its systematic risk. Since assets with larger betas have greater systematic risks, they will have greater expected returns =Non diversifiable risk of assets or portfolio Risk of market portfolio If Beta is greater than 1, it indicates that the stock is more risky when compared to the market portfolio. If Beta=1 then it indicates average risk. If beta is less than 1, then it indicates that the security is less risky than the market portfolio The Trial Balance is a statement of ledger account balances as on a particular date (instance). Final Accounting is done towards the end of the accounting period. The trial balance that we consider in the preparation of final accounts is the one that is prepared towards the end of the accounting period i.e. on the last day of the accounting period.

Transactions after the Trial Balance Date There might be a number of accounting transactions which might not have been taken into consideration by the time the Trial Balance has been prepared.

Some of the reasons for the presence of such transactions are 1.Transactions which do not occur in the normal course of business 2.Transactions which have to be recorded only towards the end 3. Transactions relating to Error Rectifications

What are Adjustments? The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period. The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period.

Trial Balance of M/s Azaya Traders" as on 30th June 2006.

Particulars

L/F

Debit Amount Credit Amount (in Rs) (in Rs)

Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery

86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 1,78,300 62,500 3,44,700 37,980 42,780 2,68,000 15,48,700 2,56,000 4,80,000

Total

23,77,680

23,77,680

Adjustments The following additional information is available

1) A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. 2) Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.

Dr

Trading and Profit & Loss a/c Cr

Particulars To Opening Stock To Purchases To Wages (+) Salary (Tr) To Carriage Inwards To Gross Profit

Amount (in Rs)

Amount Particulars (in Rs) 86,000 By Sales 11,36,000

Amount Amount (in Rs) (in Rs) 15,48,700

18,000 43,000

61,000 26,900 2,38,800

15,48,700 To Salaries () Tr. to Wages To Trading Charges Carriage Outwards To Comission To Net Profit 1,53,000 43,000 By Gross Profit 1,10,000 By Rent Received 64,000 52,500 42,780 1,47,820

15,48,700 2,38,800 1,78,300

4,17,100

4,17,100

Liabilities Capital (+) Net Profit Bank (Overdraft) Creditors (+) Due to M/s Ramsay

Amount

Amount Assets

Amount Amount

3,44,700 1,47,820 2,68,000 2,00,000

Cash 4,92,520 Debtors Machinery 37,980 4,68,000 (+) New Machine

4,80,000 2,00,000

62,500 2,56,000 6,80,000

9,98,500

9,98,500