Finance for Non-Finance People

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.

• List of figures xvList of tables xviiAbout the Author xixPreface xxiAcknowledgements xxviAbbreviations xxviiiPART IIntroduction 11 Business organisations 3Meaning of a business organisation 3Types of business organisations 3I. Private sector enterprise 4II. Public sector enterprise 4III. Joint sector enterprise 4Types of private sector enterprises 51. Sole proprietorship 52. Joint Hindu family business 53. Partnership 54. Cooperative organisation 55. Joint stock company 56. One person company 7Types of public sector enterprises 8Departmental undertakings 8Statutory corporations 9Government companies 9PART IIFinancial accounting and analysis 112 Fundamentals of accounting 13Meaning of accounting 13Branches of accounting 141. Financial accounting 142. Cost accounting 143. Management accounting 15Objectives of accounting 15Limitations of accounting 15Accounting elements 16Double-entry system of accounting 18Basis of accounting 213 Accounting process 24Accounting cycle 241. Recording in the ‘Journal’ 262. Classification into the ‘Ledger’ 283. Summarising in ‘Trial Balance’ 314 Accounting principles 33Basic accounting principles 34A. Accounting concepts 341. Business entity principle 342. Money measurement principle 353. Accounting period principle 354. Cost principle 365. Going concern principle 366. Matching principle 377. Revenue recognition principle 378. Dual aspect principle 37B. Accounting conventions 381. Materiality 382. Full disclosure 383. Consistency 394. Conservatism 395 Financial statements 41Financial statements 41Statement of profit and loss 421. Revenue from operations (Turnover/sales) 432. Other income 433. Operating expenses 444. Finance costs/Non-operating expenses 455. Other expenses 456. Profit before tax/earnings before tax (PBT/EBT) 457. Income tax 458. Profit after tax (PAT) 45Balance sheet 48I Assets side of balance sheet 49II Liabilities side of balance sheet 52Depreciation accounting 55Depreciation methods 561. Straight Line Method (SLM) 562. Written-Down-Value Method (WDV) 563. Other Depreciation Methods 57Statement of cash flows 58A. Steps to calculate CFO: 60B. Steps to calculate CFI and CFF: 60C. Final Step to prepare CFS: 60Other disclosures in annual report 62Components of a company’s annual report 626 Financial analysis 65Financial analysis: The concept and process 661. Common-size analysis 662. Trend analysis 693. Ratio analysis 71Ranking and weight based on the DuPont scores 77Financial analysis of Maruti Suzuki and Tata Motors 78Indian automobile sector 78I Profitability analysis of Maruti Suzuki and Tata Motors 82Operating efficiency analysis of Maruti Suzuki and TataMotors 88Liquidity analysis of Maruti Suzuki and Tata Motors 91Solvency analysis of Maruti Suzuki and Tata Motors 94Market analysis of Maruti Suzuki and Tata Motors 96Corporate cases 98I Indian telecom sector 99II Indian banking sector 102Global landscape 105A. Apple Inc. (USA) 106B. Unilever (UK) 107PART IIICost accounting and management 1097 Cost concepts and classification 111Cost accounting 111Significance of cost accounting 112Cost! 112Elements of cost 113Cost unit 114Cost centres 115Process of costing 115Cost classification 1161. On the basis of traceability 1162. On the basis of association 1163. On the basis of nature 1174. On the basis of controllability 1175. On the basis of decision-making 118Components of total cost 1181. Prime cost 1182. Factory cost 1183. Office cost 1184. Total cost/cost of sales 119Cost sheet 119Methods of costing 1201. Job costing 1202. Process costing 121Techniques of costing 1211. Budgetary control 1212. Standard costing 1223. Marginal costing 1224. Absorption costing 1228 Budgetary control 124Budgeting 124Budget 124Budgetary control 125Process of budgetary control 125Types of budgets 126A. On the basis of time 126B. On the basis of functions 127C. On the basis of flexibility 128Essentials of good budgeting 130Caselets of different budgets 1311. Manufacturing overhead budget 1312. Sales overhead budget 1313. Cash budget 1329 Marginal costing and managerial decision-making 135Marginal cost 135Marginal costing 136Cost-Volume-Profit analysis (CVP analysis) 137Tools of CVP analysis 137(a) Contribution 137(b) Contribution margin/P/V ratio 138(c) Break-even point 138(d) Margin of safety 140Managerial decision-making 1411. Pricing decisions 1412. Key factor 1433. Profit planning 1444. Make or buy 1455. Continue or discontinue? 1476. Selection of the best method of production 148PART IVFinancial management 15110 Nature of financial management 153What is financial management? 153Elements 153Objectives of financial management 154Functions of financial management 154Financial management scenario in India 155Financial management problems 15611 Capital budgeting: Concept and application 158Meaning of capital budgeting 158Capital budgeting process 159Capital budgeting projects 160Indian realty sector 16112 Time value of money 165What is time value of money? 165Methods of valuation 166A. Compounding – ‘future value’ (FV) 166B. Discounting – ‘present value’ (PV) 16913 Estimation of cash flows for capital expenditures 173Cash flows estimation 1731. Relevant cash flows 1742. Incremental cash flows 17514 Capital budgeting appraisal methods 181I Non-discounted cash flow techniques 1821. PBP 1822. ARR 183II DCF techniques 1841. Discounted PBP 1842. NPV 1853. PI/Benefit-cost ratio (B/C ratio) 1874. IRR 188Case: Indian Cloth Mills Ltd. 19015 Cost of capital 196What is cost of capital? 196Classification of costs 197Computation of cost of capital 197I Computation of specific costs 197Beta coefficient and its application 200Categories of beta 201II Assigning weights to specific costs 202III Multiplication of specific costs with weights to get total cost 20316 Capital structure planning 205Capital structure defined 206Types of business finance 2061. Long-term finance 2062. Medium-term finance 2063. Short-term finance 207Instruments of finance 2071. Shares 2082. Retained earnings 2083. Debentures 2084. Institutional finance 2085. Public deposits 2086. Bank finance 208Factors affecting capital structure 2091. Profitability 2092. Liquidity 2093. Cost of raising capital 2094. Stability of enterprise 2095. Control 2096. Flexibility of financial structure 2097. Capital market conditions 2108. Legal requirements 210Concept of leverage 210Leverage ratio 210Factors determining financial leverage 211Capital structure analysis of UltraTech Cement and Shree Cement 212Indian cement industry 21317 Working capital management 217Meaning of working capital 217Concept of working capital 2191. Gross working capital 2192. Net working capital 220Constituents of working capital 220A. Current assets 220B. Current liabilities 221Estimation of working capital 221Types of working capital 2231. Permanent working capital 2232. Temporary working capital 223Determinants of working capital 2241. Nature and size of business 2242. Manufacturing cycle 2243. Production policy 2244. Firm’s credit policy 2245. Sales growth 2246. Business cycle 224Types of working capital policy 2251. Aggressive working capital policy 2252. Conservative working capital policy 2253. Matching working capital policy 226Working capital management: The concept 227Significance of working capital management 228Working capital analysis of Nestle India and DaburIndia 228Indian FMCG sector 22918 Dividend policy 232Dividend policy: Overview 232Forms of dividends 233Procedure for cash dividend payment 2341. Recommendation by board of directors 2342. Approval by the shareholders 2343. Dividend – ‘interim dividend’ 2354. Dividend to be deposited in a separate bank account 235Determinants of dividend policy 235A. External factors 235B. Internal factors 236Dividend policies: Types 237I Constant dividend per share (DPS) policy 237II Constant dividend payout policy 238III Long-run residual dividend policy 238IV Hybrid dividend policy 239Dividend policy of HUL and Dabur India 239Indian FMCG sector 239PART VFinancial markets 24519 Financial System: Constituents and instruments 247Financial markets: Overview 2471 Based on the nature of securities 2482 Based on the timing of issue 248Financial Regulatory institutions 2481. Reserve Bank of India (RBI) 2492. Securities and Exchange Board of India (SEBI) 249A. Markets based on types of securities 250I. Money market 250II. Capital market 252B. Markets based on issue of securities 255I. Primary market 255II. Secondary market 256C. Other markets 256Derivatives market 25720 Mutual funds 260What are mutual funds? 260Growth of mutual funds 261Types of mutual funds 2611. Based on structure 2622. Based on investment objective 2633. Based on special schemes 263Importance of mutual funds 264PART VITax planning 26721 Income tax 269Indian tax structure: Overview 269Revenue authority 270Direct vs. indirect tax: Distinction 270Basic terminologies under Income Tax Act, 1961 271Income tax classification 274A. Salaries [Sec. 15] 274B. Income from house property [Sec. 22] 275C. Profits and gains of business or profession [Sec. 28] 275D. Capital gains [Sec. 45] 276E. Income from other sources [Sec. 56] 276Computation of tax liability 2781. Individual Tax 2792. Cooperative society tax 2813. Partnership firm tax 2824. Local authority tax 2825. Corporate tax 282Appendix I: Future/Compound value factor of a lump sum (FVIF/CVIF) of Re 1, FVIF(i, n) 288Appendix II: Future/Compound value factor of an annuity (FVIFA/CVIFA) of Re 1, FVIFA(i, n) 290Appendix III: Present value factor of a lump sum (PVIF) of Re 1, PVIF(i, n) 292Appendix IV: Present value factor of an annuity (PVIFA) of Re 1, PVIFA(i, n) 294Glossary 296Index 310