FINANCIAL MANAGEMENT

IN
GENERAL
BY
DR. [Link]
PROFESSOR,
DR. MCR HRD INSTITUTE
What is Management ?

 Money
 Men
 Materials
 Machines
Why Financial Management ?

 Timely Supply of Money

 Economical Rate of Interest
 Effective use of Finances
 Realize ROI
Objectives of Financial Management
 Profit Maximization
 Wealth Maximization
𝑨𝟏 𝑨𝟐 𝑨𝒏
W= 𝟏+𝑲 𝟏 +
𝟏+𝑲 𝟐 +…...+
𝟏+𝑲 𝒏
-C

Here:

W=Wealth, K= Cost of Capital,

C= Initial investment /cash outflow
A1,A2,…,An = Streams of Annual cash inflow
Ex: Each of the following Projects requires 10 lakhs
The following are the Profits at the end of each year in lakhs. Which
Project you prefer and Why? Rank them.
Projects
Profit A B C
1st Year 1,00,000/- 5,00,000/- 3,00,000/-
2nd Year 3,00,000/- 4,00,000/- 4,00,000/-
3rd Year 4,00,000/- 3,00,000/- 5,00,000/-
4th Year 5,00,000/- 1,00,000/- 1,00,000/-
Total (Rs.) 13,00,000/- 13,00,000/- 13,00,000/-
 Functions of Financial Management
Investing Decision RETURN
R

Financing Decision
O Market
value of
Dividend Decision the firm

I Working Capital
Decision
RISK
Accounting Information for
Decision Making
Accounting
Vs
Financial Management
 Accounting
&
Users of Accounting
Information
 Steps in Accounting Process
1. Understand Accounting Principles
2. Write Journal Entries
3. Ledger Posting
4. Balancing the Ledger
5. Subsidiary Books
6. Prepare trail Balance
7. Financial Statements
 Accounting Concepts
 Business Entity Concept
 Going Concern Concept
 Money Measurement Concept
 Cost Concept
 Accounting Period Concept
Continued
 Dual Aspect Concept
 Matching Concept
 Realization Concept
 Balance Sheet Equation
Concept
 Accounting Conventions
1. Disclosure
2. Materiality
3. Consistency
4. Conservatism
GAAP Vs IFRS
 Branches of Accounting
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
 Classification of Accounts

Personal Accounts Impersonal Accounts

Real A/C Nominal A/C

Debit the Receiver Debit What Comes in
Credit the Giver Credit What Goes Out

Debit all Expenses & Losses

Credit all Income & Gains
 Self Check
 Land  Goods
 Gopi  Salary
 Cash  Machinery
 Furniture
 Stationary
 Tele-Phone Bill
 Inventory
 Tele-Phone
 JOURNAL FORMAT
1 2 3 5
Cr
Date Particulars L.F
Amount
Rs
 LEDGER FORMAT
Dr Cr

Date Particulars J.F Amount Date Particulars J.F Amount

Rs Rs
 FORMAT OF PURCHASE /SALES BOOK
1 2 3 4 5
Date Particulars J.F Details Amount
Rs Rs
Debit Note
Credit Note
 Practical Problems
2014 Rs
April 1 Mishra Commenced business with 1,50,000/-
cash
1 Purchased a motor truck 50,000/-
2 Purchased goods from Ahmed 20,000/-
3 Sold goods 1,000/-
4 Returned goods to Ahmed 500/-
7 Sold goods to Chand 2,500/-
8 Chand returned goods 100/-
11 Cash purchases 5,000/-
14 Purchased postage stamps 50/-
Continued…
 Rs

16 Paid for advertising 500/-

20 Paid office expenses 40/-
25 Drew cash for personal use 1,000/-
26 Cash sales 800/-
27 Paid insurance premium 200/-
30 Paid rent 1,000/-
30 Paid salaries 5,000/-
 JOURNAL ENTRIES
April Dr Cr
Cash A/C Dr 1,50,000
1
To Capital 1,50,000

(Being Capital Introduced)

1 Motor Truck A/C Dr 50,000

To Cash 50,000

(MT Purchased)
2 Purchases A/C Dr 20,000

To Ahammed 20,000

(Credit Purchases)

Continued…
April Dr Cr
Cash A/C Dr 1000

3 To Sales 1000

(Cash Sales)

Ahammed A/C Dr 500

4 To Purchase Returns 500

(Purchase Returns)

Chand A/C Dr 2,500

7 To Sales 2,500

(Being Credit Sale)

Continued…
April Dr Cr
8 Sales Returns A/C Dr 100

To Chand A/C 100

(Chand Returned Goods)

11 Purchases A/C Dr 5000

To Cash 5000

(Being Cash Purchases)

14 Postal Stamps A/C Dr 50

To Cash 50

(Postage Spent)

Continued…
April Dr Cr
16 Advertising A/C Dr 500

To Cash 500

(Being Spent on Advertising)

20 Office Expenses Dr 40

To Cash 40

(Office Expenses)
25 Drawing A/C Dr 1000

To Cash 1000

(Cash With Drawn for Personal)

Continued…
April Dr Cr
26 Cash A/C Dr 800

To Sale 800

(Cash Sales)

27 Insurance Premium A/C Dr 200

To Cash 200

(Premium Paid)

30 Rent A/C Dr 1000

To Cash 1000

(Rent Paid)

30 Salaries A/C Dr 5000

To Cash 5000

(Salaries Paid)
 LEDGER ACCOUNTS
CASH ACCOUNT

Date Particulars JF Amount Date Particulars JF Amount

To Capital - 1,50,000/- By Moto r Truck - 50,000/-

‘’ Sales - 1,000/- ‘’ Purchases - 5,000/-
‘’ Sales - 800/- ‘’ Postal - 5,000/-
‘’ Advertising - 500/-
‘’ Office
- 40/-
Expenses
‘’ Drawing - 1,000/-
‘’ Premium - 200/-
‘’ Rent - 1,000/-
‘’ Salaries - 5,000/-
‘’ Balance C/D - 89,010/-
1,51,800/- 1,51,800/-
Balance B/D 89,010
 CAPITAL ACCOUNT

Date Particulars Amount Date Particulars Amount

To Balance C/D 1,50,000/- By Cash 1,50,000/-

1,50,000/- 1,50,000/-

Balance B/D 1,50,000/-

 CAPITAL ACCOUNT

Date Particulars Amount Date Particulars Amount

To Balance C/D 1,50,000/- By Cash 1,50,000/-

1,50,000/- 1,50,000/-

Balance B/D 1,50,000/-

 SALARIES ACCOUNT
Date Particulars Amount Date Particulars Amount
To Balance B/D 5,000/- By Balance 5,000/-
C/D
5,000/- 5,000/-

Balance B/D 5,000/-

PURCHASES ACCOUNT

Date Particulars Amount Date Particulars Amount

To Ahammed 20,000/- By Balance C/D 25,000/-
5,000/- -
25,000/- 25,000/-

Balance B/D 25,000/-

 SALES ACCOUNT

Date Particulars Amount Date Particulars Amount

To Balance C/D 4,300/- By Cash 1,000/-
- Chand 2,500/-
- Cash 800/-
4,300/- 4,300/-

Balance B/D 4,300/-

PURCHASE RETURNS

Date Particulars Amount Date Particulars Amount

To Balance C/D 500/- To Ahammed 500/-

500/- 500/-

Balance B/D 500/-

 SALES RETURNS

Date Particulars Amount Date Particulars Amount

To Chand 100/- By Balance 100/-
C/D
100/- 100/-

Balance B/D 100/-

AHAMMED ACCOUNT

Date Particulars Amount Date Particulars Amount

Purchases 500/- By Purchase 20,000/-
Returns 19,500/-

Balance C/D 20,000/- 20,000/-

Balance B/D 19,500/-

 CHAND ACCOUNT

Date Particulars Amount Date Particulars Amount

Sales Returns 100/-
To Sales 2,500/-
Balance C/D 2,400/-

2,500/- 2,500/-

Balance B/D 2,400/-

RENT ACCOUNT
Date Particulars Amount Date Particulars Amount

Cash 1000/- Balance C/D 1000/-

1000/- 1000/-

Balance B/D 1000/-

 MOTOR TRUCK ACCOUNT
Date Particulars Amount Date Particulars Amount
Cash 50,000/- Balance C/D 50,000/-

50,000/- 50,000/-

Balance B/D 50,000/-

POSTAGE ACCOUNT

Date Particulars Amount Date Particulars Amount

Cash 50/- Balance C/D 50/-

50/- 50/-

Balance B/D 50/-

 ADVERTISING ACCOUNT

Date Particulars Amount Date Particulars Amount

Cash 500/- Balance C/D 500/-

500/- 500/-

Balance B/D 500/-

OFFICE EXPENSES ACCOUNT

Date Particulars Amount Date Particulars Amount

Cash 40/- Balance C/D 40/-

40/- 40/-

Balance B/D 40/-

 DRAWINGS ACCOUNT

Date Particulars Amount Date Particulars Amount

Cash 1000/- Balance C/D 1000/-

1000/- 1000/-

Balance B/D 1000/-

PREMIUM ACCOUNT

Date Particulars Amount Date Particulars Amount

Cash 200/- Balance C/D 200/-

200/- 200/-

Balance B/D 200/-

 TRIAL BALANCE
Name of Account Dr. Cr.
Rs. Rs.
Cash 89,010/- -
Capital - -
Motor Truck 50,000/- 1,50,000/-
Purchases 25,000/- -
Sales - 4,300/-
Purchase Returns - 500/-
Sales Returns 100/- -
Ahammed - 19,500/-
Chand 2,400/- -
Postage 50/- -
Advertising 500/- -
Continued…
 Name of Account Dr. Cr.
Rs. Rs.
Office Expenses 40/- -
Drawings 1,000/- -
Insurance 200/- -
Rent 1,000/- -
Salaries 5,000/- -

1,74,300/- 1,74,300/-
 TRADING ACCOUNT
Date Particulars Amount Date Particulars Amount
To Purchase 25,000/- By Sales 4,300/-
(-) Returns 500/- (-) Returns 100/-

24,500/- 4,200/-

Gross Loss 20,300/-

24,500/- 24,500/-
 P & L ACCOUNT

Date Particulars Amount Date Particulars Amount

Gross Loss 20,300/- Net Loss 27,090/-
Post 50/- -
Advertising 500/- -
Office Expenses 40/- -
Insurance 200/- -
Rent 1000/- -
Salaries 5000/- -
27,090/- 27,090/-
 BALANCE SHEET
As on April 30th

Date Particulars Amount Date Particulars Amount

Capital 1,50,000/- Cash 89,010/-
(-) Drawings 1,000/-
(-) Net loss 27,090/-
1,21,910/- Motor Truck 50,000/-

Ahammed 19,500/-
Chand 2,400/-

1,41,410/- 1,41,410/-
Adjustment Entries
 FINANCIAL STATEMENT ANALYSIS
 Comparative Statement
 Common Size Statement
 Trend Analysis
 Ratio Analysis
 Cash Flow & Fund Flow Statements
 RATIO ANALYSIS

A. Capital Structure Ratios

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
I. Debt- Equity Ratio =
𝑆ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑖𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
II. Debt- Equity Ratio =
𝑆ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑖𝑒𝑠

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

III. Debt- Total Capital Ratio =
𝑃𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
IV. Debt- Total Assets Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Coverage Ratios

𝑬𝑩𝑰𝑫𝑻
I. Interest coverage ratio =
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕

𝑷𝑨𝑻
II. Dividend Coverage Ratio =
𝑷𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝑫𝒊𝒗𝒊𝒅𝒆𝒅
B. Liquidity Ratios
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
I. Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−(𝑆𝑡𝑜𝑐𝑘+𝑃𝑟𝑒𝑝𝑎𝑖𝑑)
II. Quick Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−(𝑆𝑡𝑜𝑐𝑘+𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝑒𝑥𝑝+𝐷𝑒𝑏𝑡𝑜𝑟𝑠)

III. Cash Position Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

IV. Stock Turnover Ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
 12𝑚 𝑜𝑟 365 𝑑𝑎𝑦𝑠
V. Stock holding Period =
𝑆𝑇𝑅

𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
VI. Debtors Turnover Ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑏𝑡𝑜𝑟𝑠

12𝑚 𝑜𝑟 365 𝑑𝑎𝑦𝑠

VII. Debt Collection Period =
𝐷𝑇𝑅

𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
[Link] Turnover Ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

12𝑚 𝑜𝑟 365 𝑑𝑎𝑦𝑠

IX. Credit Payment Period =
𝐶𝑇𝑅
C. Profitability Ratios
𝐺𝑃
I. GP Ratio = X 100
𝑆𝑎𝑙𝑒𝑠

𝐸𝐵𝐼𝑇
II. Operating Profit Ratio =
𝑆𝑎𝑙𝑒𝑠

𝑃𝐴𝑇
III. Net Profit Ratio =
𝑆𝑎𝑙𝑒𝑠

𝑁𝑃
IV. ROA =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 𝑁𝑃
V. ROCE=
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝑁𝑃−𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
VI. EPS=
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑖𝑑 𝑡𝑜 𝐸.𝑆

VII. DPS =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

𝐷𝑃𝑆
[Link] – Pay out Ratio=
𝐸𝑃𝑆

𝐸𝑃𝑆
IX. Earnings Yield=
𝑀𝑃𝑆
 𝐷𝑃𝑆
X. Dividend Yield=
𝑀𝑃𝑆

𝑀𝑃𝑆
XI. Price Earning Ratio=
𝐸𝑃𝑆

𝑁𝑃 𝑆𝑎𝑙𝑒𝑠
XII. Earning Power= 𝑋
𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑁𝑃
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

ROI= (Net Profit Percentage) X (Investment Turnover)

Sales ÷ Total Assets

Example:
Trading Account of SONY Ltd.
To Opening By Sales 26,00,000/-
2,00,000/-
Stock
(-) Returns 1,00,000/-
Purchases 10,00,000/-
25,00,000/-
(-) Returns 1,00,000/-
9,00,000/- Closing Stock 3,00,000/-

Wages 3,00,000/-

Coal 2,00,000/-

Gross Profit 12,00,000/-

28,00,000/- 28,00,000/-
 P & L Account
for the Year
To Salaries 2,00,000/- By Gross Profit 12,00,000/-
Administrative ex 1,00,000/-

Rent 50,000/-

Electricity 25,000/-
Postage 25,000/-

Telephone Bill 25,000/-

Selling Expenses 10,000/-

Travel Expenses 15,000/-

Depreciation 1,00,000/-

Interest 50,000/-

Tax 1,00,000/-

Net profit 5,00,000/-

12,00,000/- 12,00,000/-
 Balance Sheet of SONY Ltd.
As on 31.12.2013
Capital + Liabilities Assets

Equity Shares
10,000 @ 100 10,00,000/- Fixed Assets 10,00,000/-
each
9% Preference
5,00,000/- Investment 5,00,000/-
Shares
Reserves 4,00,000/- Good Will 4,00,000/-
Profit 5,00,000/- Stock 3,00,000/-
10% Debentures 5,00,000/- Debtor 5,00,000/-

Bank Over Draft 2,00,000/- Bills Receivable 2,50,000/-

Creditors 2,50,000/- Prepaid Expenses 1,00,000/-

Bills Payable 1,75,000/- Cash 2,00,000/-

5,00,000/-
O/S Expenses 2,25,000/- Preliminary Expenses

37,50,000/-
37,50,000/-
I. An Amount of Rs.1,00,000/- Paid
towards equity dividend

II. The market price of the shares is 150/-

Calculate Relevant Ratio

Cost Classification & Decision Making

What is Cost ?
 Fixed – Semi Fixed
Variable – Semi Variable
Direct – Indirect
Product – Period
Controllable – Non controllable
Imputed Cost – Out of Pocket
Historical – Hypothetical
Opportunity – Capital Cost
Relevant Cost – Irrelevant Cost
 Material = Direct + Indirect
+ + +
Labour = Direct + Indirect
+ + +
Other Exp = Direct + Indirect

=
=
=

Total Cost = Prime Cost + Overhead

 Cost Sheet
Particulars Cost per Ton Total Cost
Direct Materials :
Opening Stock of Raw Material XXX
Add. Purchase of Raw Material XXX Rs. Rs.

XXXX
Less: Closing Stock of Raw Materials XXX
XX XXX
Cost of Material consumed
XX XXX
Direct Labour
XX XXX
Direct or Chargeable Expenses
(a) Prime cost XX XXX
Works overhead or Factory overhead XX XX
(b) Works cost
XX XXX
Office and Administration overhead
XX XXX
(c) Cost of Production
XXX XXX
Selling and Distribution Overhead
XX XXX
(d) Cost of Sales
Profit XXX XXXX
XXX XXX
(e) Selling Price
XXX XXXX
 Cost Volume Profit Analysis
1. Sales – Variable Cost = Contribution
2. Fixed cost + Profit / Loss = Contribution
3. Sales – Variable cost = Fixed cost + Profit/Loss
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒐𝒇𝒊𝒕
4. P/V Ratio = 𝒐𝒓
𝑺𝒂𝒍𝒆𝒔 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑺𝒂𝒍𝒆𝒔

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏
5. Sales =
𝑷/𝑽 𝑹𝒂𝒕𝒊𝒐

6. Contribution = P/V Ratio X Sales

 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕
7. BEP= 𝒐𝒓
𝑷/𝑽 𝑹𝒂𝒕𝒊𝒐 𝑼𝒏𝒊𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏

8. Margin of Safety = Actual Sales – BEP Sales

 Example:
A Street Hawker runs a Tea Stall. The Expenditure likely to be incurred is as below.
Sl. No Item Rupees
1. The Tea Powder per Cup 3/-
2. Sugar per Cup 2/-
3. Disposable Cup 1/-
4. The Selling Price per Cup 10/-
5. The Fixed Cost 400/-
Calculate :
1 P/V Ratio
2 BEP Sales
3 Sales to earn profit of Rs.500/-
4 Profit at Sales of Rs.3000/-
5 New BEP if the selling price goes up by 10%
BUDGETS