Accounting & Finance

Dr.A.K.Panigrahi
 Accounting
Accounting is the process of recording,
classifying and summarizing the
information that is of financial character.
Its a systematic and scientific recording
system. It is double entry recording system,
which is totally based on basic accounting
equation, that is, Asset = Liabilities +
Capital.
The accounting information system is a set of
input, processing and output procedures
designed to provide the financial information
required by stakeholders of a business.
The inputs are the source documents that evidence the
financial transactions of the business. Source documents are
typically invoices, receipts, deposit slips, cheques, authorized
memos.
The process used in the accounting information system is
double-entry bookkeeping. This ensures that transactions are
recorded in journals in chronological order and posted to
ledgers that sort the transactions into account type order.
The accounting process then delivers outputs in the form of
financial statements that give a view of the financial position
and performance of the business. The three key financial
statements are the Income Statement, Balance Sheet and
Cash Flow Statement.
 Users of Accounting Information - Internal
& External
Accounting information helps users to make better financial decisions. Users
of financial information may be both internal and external to the
organization.
Internal users (Primary Users) of accounting information include the
following:
Management: for analyzing the organization's performance and position and
taking appropriate measures to improve the company results.
Employees: for assessing company's profitability and its consequence on
their future remuneration and job security.
Owners: for analyzing the viability and profitability of their investment and
determining any future course of action.
Accounting information is presented to internal users usually in the form of
management accounts, budgets, forecasts and financial statements.
 External users (Secondary Users) of accounting information include the
following:
Creditors: for determining the credit worthiness of the organization. Terms
of credit are set by creditors according to the assessment of their customers'
financial health. Creditors include suppliers as well as lenders of finance
such as banks.
Tax Authourities: for determining the credibility of the tax returns filed on
behalf of the company.
Investors: for analyzing the feasibility of investing in the company.
Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to the company.
Customers: for assessing the financial position of its suppliers which is
necessary for them to maintain a stable source of supply in the long term.
Regulatory Authorities: for ensuring that the company's disclosure of
accounting information is in accordance with the rules and regulations set
in order to protect the interests of the stakeholders who rely on such
information in forming their decisions.
 FINANCE
1. Finance is the life-blood of business. Without finance
neither any business can be started nor successfully run .

2. Finance is needed to promote or establish business,

acquire fixed assets, make necessary investigations,
develop product keep man and machines at work
,encourage management to make progress and create
values.

3. Finance is the managerial activity which is concerned

with planning and controlling of the firms Financial
Resources.
 Accounting & Finance
Accounting and finance both are different
subjects or field; however they both are closely
related to each other. While accounting is
concerned with recording of business
transaction of a company and presenting it in
the form of profit and loss account to show the
profit or loss of the company during a year and
also it involves preparation of balance sheet
which reflects the financial position of the
company at a particular date.
 Accounting & Finance
Finance is a broader concept and it makes use of all the data which
is presented in the accounting like profit and loss, balance sheet,
cash flow statement to make finance related decision like how to
raise money for future projects of the company, how to utilize the
resources of the company in order to efficiently and effectively
produce the good so that company makes profit.
Finance therefore is a future looking concept which makes use of
past data in accounting to make decision related to future. Without
accounting data finance will find it difficult to make above
decisions and also accounting will not be effective if it is not used
along with finance.
 What is Financial
Management?

Concerns the acquisition,

financing, and management of
assets with some overall goal in
mind.
 Definition
Financial management is the ways and
means of managing money. i.e. the
determination, acquisition, allocation and
utilization of financial sources usually with
the aim of achieving some particular goals
or objectives.
Financial management is the application of
planning and control function of the finance
function- Howard and Upton
 NATURE AND SCOPE OF
FINANCIAL MANAGEMENT
The nature of financial decisions would be
clear when we try to understand the
operation of a firm. At the very outset, the
promoters makes an appraisal of various
investment proposals and selects one or
more of them ,depending upon the net
benefits derived from each as well as on the
availability of funds.
FINANCIAL DECISION PROCESS
1. Selection of investment proposals ,known as the
investment decision.
2. Determination of working capital
requirements, known as the working capital
decision.
3. Raising of funds to finance the assets, known
as the financing decision.
4. Allocation of profit for dividend payment,
known as the dividend decision.
 What is Finance?

Accounting is the language of business.

Finance uses accounting information together
with other information to make decisions that
affect the market value of the firm.

There are three primary decision areas that

are of concern.
 Investment Decisions
Most important of the three decisions.

What is the optimal firm size?

What specific assets should be acquired?
What assets (if any) should be reduced or
eliminated?
 : Investment decisions
What assets should the company hold? This
determines the left-hand side of the balance sheet.
these decision are concerned with the effective
utilization of funds in one activity or the other. The
investment decision can be classified under two
groups-
(i) Long term investment decision
(ii) Short term investment decision
The former are referred to as the capital budgeting
and the latter as working capital management.
 Financing Decisions

Determine how the assets (LHS of balance

sheet) will be financed (RHS of balance sheet).

What is the best type of financing?

What is the best financing mix?
What is the best dividend policy (e.g.,
dividend-payout ratio)?
How will the funds be physically acquired?
 Financing decision
How should the company pay for the investments
it makes? This determines the right-hand side of
the balance sheet. it is also known as capital
structure decision. It involves the choosing the
best source of raising funds and deciding optimal
mix of various source of finance.
A company can not depend upon only one source
of finance ,hence a varied financial structure is
developed. but before using any particular source
of capital ,its relative cost of capital ,degree of risk
and control etc should be thoroughly examined by
the financial manager. the major source of long-
term capital as shares and debentures.
 DIVIDEND DECISION
Dividend decisions - What should be done
with the profits of the business? The
dividend decision is concerned with
determining how much part of the earning
should be distributed among the share
holders by way of dividend and how much
should be retained in the business for
meeting the future needs of funds internally.
 Asset Management
Decisions
How do we manage existing assets efficiently?
Financial Manager has varying degrees of
operating responsibility over assets.
Greater emphasis on Current Asset Management
(Working Capital Management) than fixed asset
management.
 Importance of Finance in
Modern World

Financial Problems
Wealth Maximization Goal
Allocation of Funds
Maximizing Earnings
Cost of Present & Future Funds
Allocation of Earnings
 Conflicting Goal of Management
Structural Changes
-Mergers, Reorganization, Consolidation,
Liquidation, Collaboration & Internal
Restructuring.
 The Financial Manager
The financial manager plays a big role in the
management structure of a company.
The main responsibilities of the financial manager are
in planning, acquiring, controlling and utilising funds
in ways that maximise the efficiency of the
orgainsations operation.
In most companies the financial manager occupies a
specialist position in the organisation and plays a
significant role in the planning and decision making
processes of the business.

25
 FUNCTIONS OF A FINANCE MANAGER

To explore profitable avenues for investment.

Mobilization of funds
To ensure proper deployment of funds and control over
the use of funds
To achieve the right balance between risk and return.
To decide the optimal dividend payout ratio
To ensure that the liquidity of assets is maintained.

26
 The Finance Function
The finance function is concerned with three areas:
1. Financing decisions the cost between alternative
sources of funds and their cost;
2. Investing decisions the choice between different
assets to buy;
3. Dividend policy decisions the choice between
reinvesting profits in the business and distributing
those profits to owners.

27
 Role of finance/financial
manager
Responsibilities of finance manager
Business forecasting
Determination of financial objectives, financial
polices and operational procedures
Estimation of the capital requirements of the
business
Designing the capital structure
Determination of the proper sources of finance
 Continued.
Investment decision
Ensuring supply of required funds
Controlling the use of funds
Profit planning
Disposal of surplus or profit, or dividend
decision
Management of working capital
Helping in valuation decisions
Continued.
Wealth maximization
Legal responsibilities
Designing suitable system of providing
information
Keeping track of stock exchange quotations
Co-ordination of the activities of
subordinates
 Factors influencing financial
decision
These factors are divided into two parts-
1.Micro economic factor
2.Macro economic factor

Micro economic factor- micro economic factor is

related to the internal condition of the firm-
(a) Nature and size of the firm
(b) Level of risk and stability in earnings
(c) Liquidity position
(d) Asset structure and pattern of ownership
(e) Attitude of the management
 Macro economic factor
These are the Environmental factor-
1. The state of the economy
2. Governmental policy
 What is the Goal of
the Firm?

Maximization of
Shareholder Wealth!
Value creation occurs when we
maximize the share price for current
shareholders.
 Objectives of financial management

The objective of financial management are

considered usually at two levels at macro
level and micro level. three primary
objectives are commonly explained as the
Objective of financial management-
1. Maximization of profits
2. Maximization of return
3. Maximization of wealth
 Maximization of profits
Profit earning is the main aim of every
economic activity. Profit maximization
simply means maximizing the income of the
firm . Economist are of the view that profits
can be maximized when the difference of
total revenue over total cost is maximum, or
in other words total revenue is greater than
the total cost.
 Maximization of return

Some authorities on financial management

conclude that maximization of return
provide a basic guideline by which financial
decision should be evaluated .
 Maximization of wealth
According to prof. Solomon Ezra of stand ford
university , the ultimate goal of financial
management should be the maximization of the
owners wealth. The value of corporate wealth may
be interpreted in terms of the value of the
companys total assets. The finance should
attempt to maximize the value of the enterprise to
its shareholders. Value is represented by the
market price of the companys common stock.
Thank You

38