Saturday, January 17, 2009

Syllabus for MBA IInd Semester

MBA 021 : BUSINESS ENVIRONMENT
Max. Hours : 40
UNIT- I (8 Sessions)
The concept of Business Environment, significance and nature. Environment Scanning: meaning, nature and scope, the process of environmental scanning, Interaction between internal and external environments, basic philosophies of Capitalism and Socialism with their variants. Concepts of Mixed Economy.
UNIT-II (8 Sessions)
Overview of Political, Socio-cultural, Legal, Technological and Global environment. An introduction to MRTP, FEMA, SEBI Act, Consumer Protection Act; The changing dimensions of these laws and their impact on business.
UNIT-III (12 Sessions)
Philosophy and strategy of planning in India; Industrial Policy in recent years; Policy with regard to small scale industries; the monetary policy and fiscal policy, Stock Exchange-BSE-NSE. Depository system in India (Options, Futures and Derivatives)
RBI-Role and functions, banking structure reforms; Narasimhan Committee Recommendations, Financial Sector reforms.
UNIT-IV (12 Sessions)
E-Banking in India-objectives, trends and practical uses-Recent technological developments in Indian Banking (ATM, Debit and Credit Cards, EMI, EFT)
Consumerism, Social Responsibility of business enterprises, New Economic Policy, Globalisation, EXIM policy, FDI policy, Multinational Corporation (MNCs) and Transnational Corporations (TNCs), Global Competitiveness.
Suggested Readings:
1. Mishra S K & Puri V K - Economic Environment of Business (Himalaya Publishing House, 3rd Edition).
2. Paul Justin - Business Environment Text and Cases (Tata Mc Graw Hill).
3. Shaikh & Saleem - Business Environment (Pearson, 1st Edition)
4. Suresh Bedi - Business Environment (Excel Books, 1st Edition).
5. Francis Cherunilam – Business Environment, Text and Cases (Himalaya Publishing House, 8th Edition).
17
MBA 022 : BUSINESS LAWS
Max. Hours : 40
UNIT 1 (10 SESSIONS)
Contract Act, 1872
Definition of a Contract and its essentials, Formation of a valid Contract - Offer and Acceptance, Consideration, Capacity to Contract, Free consent, Legality of object, Discharge of a Contract by performance, Impossibility and Frustration, Breach, Damages for breach of a contract, Quasi contracts, Contract of Indemnity and Guarantee, Bailment and Pledge, Agency.
UNIT II (12 SESSIONS)
Partnership Act, 1932
Definition of Partnership and its essentials, Rights and Duties of Partners : Types of Partners, Minor as a partner, Doctrine of Implied Authority, Registration of Firms, Dissolution of firms.
Sale of Good Act, 1930
Definition of a Contract of Sale, Conditions and Warranties, Passing of Property, Right of Unpaid Seller against the Goods, Remedies for Breach.
UNIT III (10 SESSIONS)
Negotiable Instrument Act, 1881
Definition and characteristics, Kinds of negotiable instruments, Promissory Note, Bill of Exchange and Cheques, Holder and Holder in due course, Negotiation, Presentment, Discharge from Liability, Noting and Protest, Presumption, Crossing of Cheques, Bouncing of Cheques.
Companies Act, 1956
Nature and Definition of a Company, Registration and Incorporation, Memorandum of Association, Articles of Association, Prospectus, Kinds of Companies, Directors: Their powers and duties, Meetings, Winding up.
UNIT IV (8 SESSIONS)
Consumer Protection Act, 1956
Aims and Objects of the Act, Redressal Machinery under the act, Procedure for complaints under the act, Remedies, Appeals, Enforcement of orders and Penalties.
The Information Technology Act, 2000
Definition, Digital Signature, Electronic Governance, Attribution, Acknowledgment and Dispatch of Electronic Records, Sense Electronic Records and Sense Digital Signatures, Regulation of Certifying Authorities, Digital Signature Certificates, Duties of Subscribers, Penalties and Offences.
Suggested Readings -
1. Gulshan J.J. - Business Law Including Company Law (New Age International Publisher, 13th Edition)
2. Kuchhal M.C. - Business Law (Vikas Publication, 4th Edition)
3. Avtar Singh - Principles of Mercantile Law (Eastern Book Company, 7th Edition).
4. Relevant Acts
18
MBA 023 : RESEARCH METHODOLOGY
Max. Hours : 40
UNIT I (16 Sessions)
Introduction: Concept of Research and Its Application in Various Functions of Management, Types of Research, Types of Business Problems Encountered by the Researcher, Problems and Precautions to the Researchers.
Process of Research: Steps Involved in Research Process. Research Design : Various Methods of Research Design.
UNIT II (8 Sessions)
Collection of Data: Concept of Sample, Sample Size and Sampling Procedure, Various Types of Sampling Techniques, Determination and Selection of Sample Member,
Types of Data: Secondary and Primary, Various Methods of Collection and Data, Preparation of Questionnaire and Schedule, Types of Questions, Sequencing of Questions, Check Questions, Length of Questionnaire, Precautions in Preparation of Questionnaire and Collection of Data.
UNIT III (10 Sessions)
Analysis of Data: Coding, Editing and Tabulation of Data, Various Kinds of Charts and Diagrams Used in Data Analysis: Bar and Pie Diagrams and their Significance, Use of SPSS in Data Analysis, Application and Analysis of Variance (ANOVA). Measurement and Central Tendency, Measure of Dispersion and their Advantages.
UNIT IV (6 Sessions)
Report Preparation: Types and Layout of Research Report, Precautions in Preparing the Research Report.
Bibliography and Annexure in the Report : Their Significance, Drawing Conclusions, Suggestions and Recommendations to the Concerned Persons.
Suggested Readings:
1. Cooper and Schindler - Business Research Methods (Tata Mc Graw Hill, 9th Edition)
2. Saunders - Research Methods for Business students (Pearson Education, 2nd Edition, 2007)
3. Panneer Selvam - Research Methodology (Prentice Hall of India, Edition 2008)
4. Gravetter - Research Method for Behavourial Sciences (Cengage Learning)
5. Beri G.C - Marketing Research (Tata Mc Graw Hill, 4th Edition)
6. Kothari C R – Research Methodology Methods & Techniques (New Age International Publishers, 2nd Edition, 2004)
19
MBA 024 : OPERATIONS RESEARCH
Max. Hours : 40
Unit I (6 Sessions)
Operations Research:- Uses, Scope and Applications of Operation Research in managerial decision-making.
Decision-making environments:- Decision-making under certainty, uncertainty and risk situations; Decision tree approach and its applications.
Unit II (16 Sessions)
Linear programming: Mathematical formulations of LP Models for product-mix problems; graphical and simplex method of solving LP problems; sensitivity analysis; duality.
Transportation problem: Various methods of finding Initial basic feasible solution and optimal solution.
Assignment model: Algorithm and its applications.
Unit III (6 Sessions)
Game Theory: Concept of game; Two-person zero-sum game; Pure and Mixed Strategy Games; Saddle Point; Odds Method; Dominance Method and Graphical Method for solving Mixed Strategy Game.
Sequencing Problem: Johnsons Algorithm for n Jobs and Two machines, n Jobs and Three Machines, Two jobs and m - Machines Problems.
Unit IV (12 Sessions)
Queuing Theory: Characteristics of M/M/I Queue model; Application of Poisson and Exponential distribution in estimating arrival rate and service rate; Applications of Queue model for better service to the customers.
Replacement Problem: Replacement of assets that deteriorate with time, replacement of assets which fail suddenly.
Project Management: Rules for drawing the network diagram, Applications of CPM and PERT techniques in Project planning and control; Crashing of operations.
SUGGESTED READINGS:
1) Vohra - Quantitative Techniques in Management (Tata McGraw-Hill, 2nd edition), 2003.
2) Kothari - Quantitative Techniques (Vikas 1996, 3rd Edition).
3) Taha Hamdy - Operations Research - An Introduction (Prentice-Hall, 7th edition)
4) Sharma J K - Operations Research (Pearson, 3rd Edition)
5) Kapoor V.K. - Operations Research (S. Chand, 4th Edition)
20
MBA 025 : PRODUCTION & OPERATIONS MANAGEMENT
Max. Hours : 40
Unit –I (10 sessions)
Operations Management – An overview, Definition of production and operations management, Production Cycle, Classification of operations, Responsibilities of Operations Manager, New Product Development, Product Design, Plant Location, Layout Planning.
Unit –II (10 sessions)
Forecasting as a planning tool, Forecasting types and methods, Exponential smoothening, Measurement of errors, Monitoring and Controlling forecasting models, Box- Jenkins Method. Productivity and Work study, Method study, Work Measurement.
Unit-III (10 sessions)
Production Planning techniques, Routing Decisions, Line of Balance, Scheduling types & principles, master production schedule, Inventory Management – Objectives, Factors, Process, Inventory control techniques- ABC, VED, EOQ, SED,FSN analysis.
Unit-IV (10 sessions)
Basic concepts of quality, dimensions of quality, Juran’s quality trilogy, Deming’s 14 principles, PDCA cycle, Quality circles, Quality improvement and cost reduction- 7QC tools and 7 new QC tools, ISO 9000-2000 clauses, coverage QS 9000 clauses, coverage. Six Sigma, Total Productive Maintenance (TPM).
SUGGESTED READINGS
1) Adam Jr Everetl E. R J – Production and Operations Management (Prentice-Hall, 2000, 5th Edition)
2) Chary - Production and Operations Management (Tata McGraw-Hill, 1997, 9th Edition)
3) Hill T- Operations Management (Palgrave, 2000)
4) Johnston R et al – Cases in Operations Management (Pitman, 1993)
5) McGregor D – Operations Management (McGraw-Hill, 1960)
6) Morton - Production and Operations Management (Vikas)
7) Haleem A- Production and Operations Management (Galgotia books, 2004)
8) Bedi Kanishka - Production & Operations Management (Oxford University Press, 2nd Edition)
21
MBA 026 : COST & MANAGEMENT ACCOUNTING
Max. Hours : 40
Unit I (8 Sessions)
Introduction: Accounting for Management, Role of Cost in decision making, Comparison of Management Accounting and Cost Accounting, types of cost, cost concepts, Elements of cost - Materials, Labour and overheads and their Allocation and Apportionment, preparation of Cost Sheet, Methods of Costing, Reconciliation of Cost and Financial Accounting.
Unit II (10 Sessions)
Marginal Costing: Marginal Costing versus Absorption Costing, Cost-Volume-Profit Analysis and P/V Ratio Analysis and their implications, Concept and uses of Contribution & Breakeven Point and their analysis for various types of decision-making like single product pricing, multi product pricing, replacement, sales etc. Differential Costing and Incremental Costing: Concept, uses and applications, Methods of calculation of these costs and their role in management decision making like sales, replacement, buying etc.
Unit III (10 Sessions)
Budgeting: Concept of Budget, Budgeting and Budgetary Control, Types of Budget, Static and Flexible Budgeting, Preparation of Cash Budget, Sales Budget, Production Budget, Materials Budget, Capital Expenditure Budget and Master Budget, Advantages and Limitations of Budgetary Control. Standard Costing: Concept of standard costs, establishing various cost standards, calculation of Material Variance, Labour Variance, and Overhead Variance, and its applications and implications.
Unit IV (12 Sessions)
Responsibility Accounting & Transfer Pricing: Concept and various approaches to Responsibility Accounting, concept of investment center, cost center, profit center and responsibility center and its managerial implications, Transfer Pricing : concept, types & importance ; Neo Concepts for Decision Making: Activity Based Costing, Cost Management, Value Chain Analysis, Target Costing & Life Cycle Costing : concept, strategies and applications of each.
SUGGESTED READINGS:
1) Horngren et al - Introduction to Management Accounting (Pearson, 2002, 12th edition)
2) Khan and Jain - Management Accounting (Tata McGraw-Hill, 2000, 3rd Ed.)
3) Pandey I M - Management Accounting (Vikas, 2004, 3rd Ed.)
4) Bhattacharyya S K and Dearden J - Accounting for Management (Vikas, 1987, 8th Ed.)
5) Sahaf M A - Management Accounting: Principles and Practice (Vikas, 2000, 1st Ed.)
6) Ravi M. Kishor – Cost & Management Accounting (Taxmann, 1st Ed.)
7) Ravi M. Kishor – Advanced Management Accounting (Taxmann, 1st Ed.)
8) Arora M N – Cost and Management Accounting (Vikas, 8th Ed.)
22
MBA 027 : FINANCIAL MANAGEMENT
Max. Hours : 40
Unit I (10 Sessions)
Introduction: Concept of Finance, scope and objectives of finance, Profit maximization vs. Wealth maximization, Functions of Finance Manager in Modern Age, Financial decision areas, Time Value of Money, Risk and Return Analysis.
Unit II (8 Sessions)
Investment Decision: Appraisal of project; Concept, Process & Techniques of Capital Budgeting and its applications; Risk and Uncertainty in Capital Budgeting; Leverage Analysis – financial, operating and combined leverage alongwith implications; EBIT-EPS Analysis & Indifference Points.
Unit III (10 Sessions)
Financing Decision: Long-term sources of finance, potentiality of equity shares, preference shares, debentures and bonds as sources of long-term finance; Concept and Approaches of capital structure decision : NI, NOI, Traditional and Modigliani Miller Approach; Cost of Capital : Cost of equity, preference shares, debentures and retained earnings, weighted average cost of capital and implications.
Unit IV (12 Sessions)
Dividend Decision: Concept of retained earnings and plough back of profits, Relevance and Irrelevance Theories of dividend decision : Walter’s Model, Gordon’s Model and Modigliani Miller Model; Factors affecting dividend decision. Overview of Working Capital Decision: Concept, components, factors affecting working capital requirement, Working Capital Management: Management of cash, inventory and receivables; Introduction to Working Capital Financing.
SUGGESTED READINGS:
1) Pandey I M - Financial Management (Vikas, 2004, 9th Ed.)
2) Van Horne - Financial Management and Policy (Pearson Education, 2003, 12th Ed.)
3) Knott G - Financial Management (Palgrave, 2004)
4) Khan and Jain - Financial Management (Tata McGraw Hill, 3rd Ed.)
5) Prasanna Chandra - Fundamentals of Financial Management (TMH, 2004)
6) R P Rustagi - Financial Management (Galgotia, 2000, 2nd revised ed.)
7) Lawrence J. Gitman - Principles of Managerial Finance (Pearson Education, 2004)
8) Ravi M. Kishor - Financial Management (Taxmann, 1st Ed.).
9) Damodaran – Corporate Finance –Theory & Practice (Wiley, 1st Ed.)
23
MBA 028 : MANAGING HUMAN RESOURCES
Max. Hours : 40
UNIT I (12 Sessions)
Human Resources Management (HRM) : Meaning, Nature and Scope, Difference between HRM and Personnel Management, HRM functions and objectives, Evolution of HRM environment – external and internal.
Human Resources Development in India: evolution and principles of HRD, HRD Vs. Personnel functions, Role of HR managers.
Strategic Human Resource Management : Nature of Strategies and Strategic Management, Strategic Management Process – Environmental Scanning, Strategy Formulation, implementation and evaluation.
UNIT II (8 Sessions)
Human Resources planning: Definition, purposes, processes and limiting factors; Human Resources Information system (HRIS): HR accounting and audit, Job Analysis – Job Description, Job Specification.
The systematic approach to recruitment: recruitment policy, recruitment procedures, recruitment methods and evaluation.
The systematic approach to selection: the selection procedure, the design of application form, selection methods, the offer of employment, and evaluation of process.
UNIT III (10 Sessions)
Training and Development: Purpose, Methods and issues of training and management development programmes.
Performance Appraisal: Definition, Purpose of appraisal, Procedures and Techniques including 360 degree Performance Appraisal, Job Evaluation.
Compensation Administration: Nature and Objectives of compensation, components of pay structure in India, Wage Policy in India – Minimum Wage, Fair Wage and Living Wage.
Incentive Payments : Meaning and Definition, Prerequisites for an effective incentive system, Types and Scope of incentive scheme, Incentive Schemes in Indian Industries, Fringe Benefits.
UNIT IV (10 Sessions)
Discipline and Grievance Procedures: Definition, Disciplinary Procedure, Grievance Handling Procedure.
Industrial Relations: Nature, importance and approaches of Industrial Relations.
Promotion, Transfer and Separation: Promotion – purpose, principles and types; Transfer – reason, principles and types; Separation – lay-off, resignation, dismissal, retrenchment, Voluntary Retirement Scheme.
Suggestion Readings :
1. Aswathappa K - Human Resource and Personnel Management (Tata McGraw Hill, 5th Ed.).
2. Rao VSP – Human Resource Management, Text and Cases (Excel Books, 2nd Ed.),
3. Ivansevich – Human Resource Management (Tata McGraw Hill, 10th Ed.)
4. Dessler – Human Resource Management (Prentice Hall, 10th Ed.)
5. Bernardi – Human Resource Management (Tata McGraw Hill, 4th Ed.)

The Satyam Scandal

Satyam Systems, a global IT company based in India, has just been added to a notorious list of companies involved in fraudulent financial activities, one that includes such names as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings and Kidder Peabody. Satyam's CEO, Ramalingam Raju, took responsibility for broad accounting improprieties that overstated the company's revenues and profits and reported a cash holding of approximately $1.04 billion that simply did not exist.
This leads one to ask a simple question: How does this keep happening?

Behind the Satyam scandal

India vowed to strengthen laws to prevent corporate fraud after Satyam Computer, the country’s fourth-largest software company, shocked investors by revealing profits had been falsely inflated for years.Chairman Ramalinga Raju resigned on Wednesday after revealing India’s biggest corporate scandal in memory, sending the company’s shares plunging nearly 80%.The following is an overview of how the fraud escaped detection for so long and what compelled a soft-spoken man born into a family of farmers to risk all.Q: How did Satyam escape detection?A: On the face of it, New York-listed Satyam did everything by the rulebook, with an international firm auditing its books, declaration of accounts in accordance with Indian and U.S. standards, and the requisite number of independent directors with excellent credentials, including a Harvard business school professor and a former federal cabinet secretary.Mr. Raju, in his now famous 5-page letter outlining the deception, said no other board member—past or present—was aware of the financial irregularities.Regulators were blindsided, and analysts and experts say there are “systemic flaws” in accounting and audit practices.About $1 billion, or 94% of the cash, on the company’s books was fictitious, Mr. Raju said. Manipulation of the cash flow may be a reason why the fraud was undetected.“Companies have manipulated P&L (profit and loss) accounts before, but cash flow is the Holy Grail—you don’t tamper with it,” said Saurabh Mukherjea, an analyst at UK-based research firm Noble Group.“Auditors generally assume if there is cash, things are OK. But there are plenty of accounting and governance loopholes.”India also lacks a culture of dissent, with shareholders and independent directors reluctant to question company founders.Q: What was the motive?A: India’s $50-billion information technology industry—the poster child for India’s economic liberalization and rapid growth—expanded at a scorching pace on the back of outsourcing demand from Western firms.At the height of the boom, top software firms Tata Consultancy Services, Infosys Technologies, Wipro and Satyam consistently reported annual 50% increases in profits every quarter.Pressure to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run on the stock market have all been cited as reasons why Satyam cooked the books.Some news reports say Mr. Raju was an aggressive investor in failed dotcoms, and the family also put money in real estate.Mr. Raju, in his letter, said he had “not benefited in financial terms” as a result of the inflated accounts.Q: Are there other Satyams out there?A: Most certainly, say analysts and industry experts.While there has been a plea from chief executives across the board against painting all of corporate India with the same brush, Noble Group estimates at least a fifth of the top 500 listed companies practice “creative accounting.”“At its most innocent it is not illegal, but account manipulation is very pervasive,” said Mr. Mukherjea.Q: What needs to be done to prevent another Satyam?A: Tighter rules for accounting and corporate governance, including appointment of independent directors by selection committees, and greater oversight from regulatory and government authorities.Noble Group also suggests separation of audit and consultancy functions at companies—as is the case in the U.S.—and quicker publication of annual reports.

Satyam Scandal is a Huge Blow to Indian Tech

The terror attacks on Mumbai were just a tremor for the country’s tech industry compared to the shocks coming from the Satyam scandal. Earlier today, Ramalinga Raju, Satyam’s founder and longtime chairman, admitted in a letter to the board that he had been cooking the books for years to make up for revenue and profit shortfalls. Read the details in this report by my BW colleague, Manjeet Kripalani. In his letter, Raju wrote that the cover-up finally got the best of him: “It was like riding a tiger, not knowing how to get off without being eaten.”
This admission will have a crippling impact on Satyam. Its chances of getting new business are nil. Don’t expect its current customers to abandon the company overnight. That’s not easy in a tech services business where the operations of the client and service provider are so interwoven. On the other hand, it’s possible that the company may collapse financially, in which case clients will have no choice but to flee.
Which brings us to a bigger shock: This betrayal of trust could have a major impact on the entire Indian tech services industry. The industry has spent 20 years building up credibility with Western clients, but this disaster will make many US and European clients rethink their reliance on Indian outsourcing. Don’t expect offshore outsourcing to fall off a cliff, but there will be serious repercussions.
There’s another impact that most people won’t be aware of. Raju, through his Byrraju Foundation, has been a leader in bringing economic development to farm communities in his home state of Andhra Pradesh, and also in providing emergency medical services to people of the state state. Will all of this collapse now?
This guy seemed to be a model citizen. But all that is gone now. It’s a tragedy not just for him and the employees of Satyam, but for the entire country.

The story behind numbers

Talking about numbers reminds us of the mathematics classes in school days, when we would invariably get lost in a maze of numbers?mensurations, formulae, graphs et al. Numbers still remain a put-off. And yet, we seem to share a love-hate relationship with them; otherwise, why do we use them so much and so often?
Through the following story, we will try and demystify some of the most important numbers used in the world of business. The story would come in several episodes. You would find an interesting tale behind each number, only if you care to listen. Our objective is to help you evaluate businesses for investment purposes by making numbers easy to comprehend. After all, ?Owning equity is akin to owning a company?. And it is imperative that you understand the numbers of the company that you invest in, no?
A business can actually be assessed on the basis of several parameters?profitability (whether it is making money), efficiency (if it?s making the best possible use of its resources), leverage (whether it has the right mix of debt and equity), solvency (whether it can pay off its debts), liquidity (whether it has cash to meet its day-to-day needs) and so on. All these point to the overall health of a company?and hence, to the health of its shareholders.
In order to interpret the company on these parameters, we need to know what goes behind the numbers in the balance sheet and the profit & loss statement.
Let us talk about a company that seeks to manufacture soaps. To begin with, it will need a plant in place. Without the plant there would be no operations, right? To know what the company has, the best place to look for is its balance sheet.
Balance sheetA Balance sheet is like a snapshot that captures a mood at a particular instant. It is a financial snapshot of a company at a given point of time.
Gross fixed assets: Coming to our example, to make soap, the company needs a plant. It also requires some land along with other infrastructure to set up an office. Other facilities like pipelines and waste disposal systems are also essential. These together constitute the gross fixed assets of the company.
Accumulated depreciation: But nothing lasts forever, the assets wear and tear and need to be replaced at a future date. So, every year, an amount is set aside to meet these expenses. This amount is known as depreciation charges for the year. And the cumulative amount collected for the given period shows up in the balance sheet as accumulated depreciation.
Net fixed assets: These are nothing but the gross fixed assets less the accumulated depreciation. All they connote is the book cost of the existing assets.
Capital work in progress: When the company grows and expands its operations, there are often unfinished plants, buildings under construction and so on. These are clubbed under capital work-in-progress.
Meanwhile, the plant is ready to commence operations. But can we straightaway get into the act of manufacturing soaps? Not really. Some other current requirements, those of raw materials, need to be met first. The suppliers of raw materials also need to be paid.
Current assets, current liabilities: Liabilities like the creditors (suppliers of raw materials, fuel, etc. on credit) and provisions for tax that need to be paid immediately are called current liabilities. Similarly, there are some current assets. Unlike plants or buildings some assets like debtors and inventory of soaps that are in the company?s godown can be converted into cash more easily. What is crucial here is that the company?s current assets and liabilities balance comfortably; so that it does not face a cash crunch or has surplus of cash. The difference between the current assets and current liabilities is called net current assets.
But all this can happen provided there are funds. So, the company raises funds?
Equity: This is the amount contributed by the shareholders of the company at the initiation of the business. This is simply the number of shares multiplied by the face value.
Reserves and surplus: As we saw in the profit and loss statement, from the total proceeds received, all the expenses have to be taken care of, tax has to be paid, and dividend has to be given to shareholders. The balance is called the retained profit. This is what the company would retain to re-invest in the business to propel further growth. This would get reflected in its balance sheet as reserves and surplus.
Equity and reserves are together known as shareholders? funds?funds at the command of shareholders to be invested in the business. They are also referred to as net worth.
Loans: But the entire business can rarely be funded by shareholders? funds alone. A company usually resorts to debt to bridge the gap between the requirement and the supply. These are called loan funds. Thus, we have the liabilities?funds owed to shareholders and debt holders?these constitute the company?s debts.
Investments: After the operations start, money begins to flow in. Just like you put your surplus cash in stocks and other investment avenues, so does the company and the amount is shown as an asset (hopefully, the company makes sound investment decisions!).
The statement that takes stock of the operations of the company during the entire given period is called the profit and loss statement.
Profit and loss statementWe are very familiar with the figure called net profit. So, what is the story behind this number? We have to cross several hurdles before we can actually understand what net profit means (remember, it is also called bottom line!). Let us take a fast local and halt at important stations that would help us understand net profit better.
Operating profit: It is one of the prime drivers of profitability at the end of the day. If the company produces 10 soaps at a cost of Rs2, spends Rs0.50 on advertising them and pays a commission of Re1 on each soap to the retailer/dealer, then its total production cost works out to Rs35. It then sells each soap for Rs10, earning a total of Rs100, which is its net realization. But, its operating profit works out to only Rs65 (net realisation minus total production cost). Thus, operating profit is a good indicator of a company?s ability to make money from its core operations.
Depreciation: For its operations, the company uses capital?like plant and machinery. Depreciation is a cost that is charged for use of plants and building. It is not cash expenditure. Any asset?be it a plant or a machinery?eventually wears off and needs to be replaced. Depreciation is an amount set aside every year towards replacement of the assets.
Finance charges: The company requires funds to invest in assets and to run its day-to-day operations. After all, a plant has to be put in place and costs incurred in producing and selling the products, before the company can reach the final consumer?and more importantly, before money can be realized! These expenses are funded by a mix of shareholders? funds (called equity) and borrowings from others (debt). Sometimes, the company might also lease a plant from a different party for a periodic payment (just like you might rent a flat). While the company is not obliged to pay its shareholders (after all, it is their company and hence, its risks and rewards are also their own!), it has to pay for using others? funds. Thus, the company has finance charges like interest and lease rentals.
Other income: While operating income can be viewed as salary, other income can be compared to bonus. The company invests its surplus cash in several avenues like debentures and equity of other companies. These investments yield dividends and interest income, which together constitute other income.
Adjustments for extraordinary items: Sometimes, there are one-time expenses in the form of provisions (for tax, dividends, bad debts, etc.), write-offs (treating some bad loans as permanent losses), etc. Then, there may also be a one-time income from sale of certain assets. All these classify as extraordinary items. While analysing performance, one should discount these items to get a better picture of a company?s business operations.
PBT: After paying for all the expenses, this is what is left in the company?s kitty.
Tax: But then, do you carry your entire salary home? Neither does the company. Based on tax regulations it has to shell out Income Tax ? its contribution to the state kitty.
Net profit: Well, home at last! This is one number that summarises the company?s operations.
Dividends: After paying all the other stakeholders in the business, the company pays dividends to its shareholders. But, how often have you bought a stock for dividend purposes only? If fixed payment is what one is looking for, then there are debt instruments after all! So, how else do the shareholders benefit? They gain from capital appreciation, which is linked to the fortunes of the company.
Thus, we see that a company?s net profit is dependent on several factors and prudent management of each would adds to its growth.
Moral of the story:
§ A company invests money in assets to commence operations that are financed through debt and equity.
§ Balance sheet gives a snapshot view of a company?s financial health at a particular point of time.
§ The profit and loss statement summarizes a company?s operations.