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Category: Finance Essays
Our sample finance essays are an ideal tool for any student struggling to start their own finance essay. Financial Management is an essential part of any organisation and there are many components of financial management. By browsing our collection of finance essay topics, you will get ideas for your finance essay through the following finance subjects:
Financial Risk Management, Global Finance, International Banks, Foreign Direct Investment, FDI, Investment Banking, Privatisation, Corporate Strategy, Risk Management, Finance Portfolio, Share Prices, Capital Investment, Financial Planning, Microfinance and CSR
A tax is a financial charge or a levy that is imposed to a taxpayer by an organization or state. Tax can be levied directly or indirectly, and can be paid in the form of money or its labor equivalent. The paper is going to focus on methods of levying a tax to students from their final examination. The tax paid should be in the form of points from the student’s average score. The purpose of this study is to find the fairest way of collecting tax from the class. therefore, focusing on tax fairness and tax efficiency.
Tax Base, Rate and Structure
Tax base is the assessed value of a set of assets, income streams or investments, which are subject to taxation. Therefore, tax must be imposed on things which have a tax base. The property tax base of the students score is the scores value. An efficient tax system should have a tax rate. This describes the burden ratio which is expressed as a percentage which a student is taxed. This study is focused to incorporate a fair tax rate to the scores of the students which will enhance equity in the tax system. The structure of this tax system is on the basis of points from the average score of each student. This structure is suitable since the students do not have a source of income. This will help the students work hard to reach their targets after tax hence increase competition. For healthy competition to be effective, a fair method of collecting taxes should be imposed. The study is going to focus on the three methods of levying taxes in order to come up with the efficient method that should be applicable in the class.
Progressive Tax
This is a tax that is imposed as a percentage of the student’s final examination grade. This means that amount of tax increases as the taxable base amount increases. A progressive tax increases the tax burden of the individuals who have the highest scores. This tax system is not suitable in the class since it would decrease the morale of the students to work hard. Students will high scores are deducted many points relative to students will low scores. This method is not fair to the hardworking students, hence should not be applicable in class.
tax fairness and tax efficiency
Proportional Tax
This is a method of taxation imposed with a fixed tax rate. In other words, it is a flat tax system. The percentage of tax does not vary with the decrease or increase of the student’s score. This means that every student has to pay an equal percentage. Therefore, students with high grades on their final examination pay a higher percentage of tax relative to students with low grades. This method of taxation is not suitable since equity does not prevail. Students would be discouraged to work hard in avoidance to pay a high tax. The method favors the students with low scores because they will be deducted few points for their tax. Therefore, progressive tax system should not be applied in class since it is unfair to the hardworking students hence decreases their morale to work hard.
Regressive Tax
This method of taxation takes a larger percentage from students with low scores than students with high scores. In general, a progressive tax is applied uniformly. This means that it hits the students with low scores harder. This method of taxation is suitable in class since it challenges the lazy students to work harder in order to avoid the high burden of taxation. Therefore, every student in class will be striving to get a high score, and this increases the competition. Continuous levy of this tax will improve the overall performance of the students in the class.
This method of taxation is fairer relative to others since its increases competition in class. The purpose of levying a tax on points is to improve the overall performance of the students and create healthy competition. Every student will work hard to get a high grade so that they do not suffer from a high tax burden. Therefore, the employment of this method of taxation is suitable and would be more effective compared to other methods of taxation.
Tax Equity
Equity is the concept of fairness in the collection of taxes. More specifically, it refers to equal chances in life regardless of identity to provide all students in class with basic and equal minimum services to increase their commitment. Horizontal equity in class means the students who are not hardworking should pay more. This method treats differently those who have differences in levels of aspects. Equity is related to the concept of tax neutrality or the idea that an effective tax system should not discriminate against students or distort their behavior unduly. Every student is entitled to pay tax, what varies is the amount of tax paid. Therefore, this paper recommends regressive method of taxation in the class since it is efficient and would improve the overall performance of the students.
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To What Extent And How The Stewardship Aspect Helps The Decision Usefulness Aspect In Financial Reporting
Financial reporting is a formal process by which a company communicates with its stakeholders through disclosing its financial figures. According to the recent conceptual framework of IASB about financial reporting, there are two aspects of objectives of financial reporting. One is stewardship, which deals with management responsibility towards the company, and another one is decision-usefulness, which mainly deals with the decision-making users of the financial statement.
Stewardship is an ethical term in accounting that imposes a responsibility to the management of an organization to take care of business carefully and provide reliable information the stakeholders about the resources of business by financial reporting (Williamson, 2002). On the other hand, decision usefulness is a concept related to the preparation of financial statement in which a company try to provide better information by considering the relevant decision makers.
There was a debate among the experts whether the stewardship should consider as an objective of financial reporting or not and whether the decision usefulness provide same concept like stewardship. However, later the IASB and FASB resolve this debate by introducing an exposure draft. In the exposure draft, it told that stewardship should consider as a separate objective of financial reporting (Kothari, 2008).
Stewardship Financial Reporting
Some experts believe that the stewardship has relationship decision usefulness. They also believe that the stewardship aspect of objective helps the decision usefulness to an extent. On the other hand, some experts believe that there is no relationship between these two. Let us see how and to what extent stewardship helps the decision usefulness.
Stewardship helps to increase the decision usefulness to the relevant decision maker by imposing responsibility to the management to take care of business professionally. When the management take cares the business resources in an efficient way, the output of financial report will automatically be reliable (Young, 1998).
Stewardship influences the organization to conduct audit of their financial statements by an independent auditor. The decision usefulness will rise when an independent auditor review the financial statement (Latham, 2005).
Stewardship helps in accurate valuation of a company by recording and providing accurate information to the decision makers. This accurate valuation information increases the reliability as well as decision usefulness among the stakeholders.
It protects the interest of all related parties to the business by disclosing right information to the right parties. When the flow of information is in a perfect condition, the related parties of business will not lose their interest to the business and can make their decision in an efficient way.
Stewardship helps to satisfy the regulator body’s of an organization by managing the organization carefully, ethical financial disclosure and giving proper payment such as tax to the tax authorities. When the users of financial statement see that the regulator body’s are satisfied with this origination, they will also satisfied and the decision usefulness of financial statement will ultimately rise (Latham, 2005) .
It highlights the responsibility not only the management but also the regulators, investors and credit providers etc. This helps to increase the financial accuracy of the company. For an example, stewardship imposes the government to seek accurate documentation of financial statement of a company to project future growth in the stock exchange. When the company provide actual documents, the relevant decision makers of financial statement can take proper decision by using accurate information.
Stewardship helps to reduce agency problem in an This attracts more potential investors to the organization. When the agency problem reduces, the decision maker can make better financial decision about business and the concept decision usefulness will increase (Gjesdal, 1981).
Advantages of Stewardship
The extent to which the stewardship helps the decision usefulness is a relative concept rather than absolute. This means the decision usefulness may vary upon the degree of stewardship of the management or agent of a company. According to the Joachim Gassen (2007), the usefulness of financial statement in decision-making is much depends on the information available to the market participant. The information availability directly related to stewardship of the management. If the management discloses fair information to the users, the decision usefulness of financial reporting will increase. Let us see a table about the extent to which stewardship helps decision usefulness.
Stewardship
Influence
Degree
Decision usefulness
Decision output
Management integrity to business
Good
High
Positive
Bad
Low
Negative
Recording financial information accurately
Yes
High
Positive
No
Low
Negative
Conduct audit by independent auditor
Yes
High
Positive
No
Low
Negative
Accurate financial disclosure
Yes
High
Positive
No
High
Negative
However, there are some arguments against the relationship between stewardship and decision usefulness according to some expert’s opinion. This means the stewardship and decision usefulness are two separate objectives without any influence to each other.
Stewardship and decision usefulness should define as completely separate objectives because of their parallel relation (Ernst and Young, 2008).
Stewardship mainly deals with past performance of organization to asses’ future performance. On the other hand, decision usefulness provides better information by considering present situation of the company. Therefore, the relations between these two are different (Hand, Isaaks and Sanderson, 2005).
Though there are some negative views about the relationship between stewardship and decision usefulness, there are some strong positive points also. Stewardship directly or indirectly influences the decision usefulness of a financial statement. It helps to increase management integrity, accurate financial recording, increase the reliability of information to the decision makers by conducting regular audit and disclosing accurate information. These points ultimately increase the decision usefulness of financial reporting to the related decision makers. The extent to which stewardship helps decision usefulness may vary according to the degree of stewardship of management to the information in financial reporting.
References
Duncanwil.co.uk (2002) Duncan Williamson: Concepts and Conventions of Accounting
Ernst & Young (2008) International GAAP 2008: Generally Accepted Accounting Practice under International Financial Reporting Standards. International: Wiley (April 14, 2008), p.146 page, stewardship.
Gassen, J. (2007) Are stewardship and decision usefulness complementary of conflicting objectives of financial accounting?
Gjesdal, F. (1981) Accounting for Stewardship. Journal of Accounting Research, 19 (1), p.208-231.
Hand, L., Isaaks, C., & Sanderson, P. (2005). Introduction to accounting for non-specialists. London, Thomson Learning.
Kothari, S. (2008) conceptual framework of financial reporting. International: Pearson, p.38-40.
Latham, A. (2005) The Stewardship Function in Accounting
Ventureline, D. (n.d.) Accounting Theory Definition
What is Financial Reporting? (n.d.) What is Financial Reporting?
Young, R. (1998) The stewardship role in accounting
Investment Pension Management – Organization strategic plan is a process that identifies and defines the strategic and directive decision making on the resource allocation in order to pursue and achieve its objectives. Direction determination is an advantage and important aspect in the organization. It is because it helps to pursue the avenues and the course of action in dealing with key aspects in the organization.
In this case, the organization strategic planning should capture the vision; mission, values and strategy in order to formulate its end vision. The main reason and rationale for international investments are for diversification purposes and high pension returns. One advantages that international security foreign stocks are volatile as compared to other American stocks. In this way, addition of international stocks will expose the international security portfolio and reduce normal risks without attracting low demands.
Such a position means that a 20% stock international portfolio and a 60% American stock portfolio will attract the same returns and attract lesser risks as compared to a 100% American stock. However, TMP Company should consider the fact that in case the international security market drops sharply; the foreign market correlation will rise significantly. Additionally, TMP Company should consider the negative aspects of international investing which includes attracting high transaction expenses, custody fees expenses, management expenses, operational expenses and tax expenses.
Disadvantages of Investment Pension Management
One disadvantage is the presence or interference of risks. Other risks and expenses include currency and political risks. In this way, the company should use this approach to consider the returns from investing internationally, which have been affected and influenced by movements of currency. It is because currencies can cause high volatility. TMP Company has various investing international options. These options include integrating mutual money of funds that purchase foreign international securities and purchase of foreign direct securities.
This introduces close end finances to purchase foreign international securities. Organization strategic plan managerial process is interconnected to four important functions. These functions include the organization, planning, motivational and control. The only limitations and disadvantages to this would be a lack of liquidity. The other problems and risks associated with a few technical issues in the policy investments. It is necessary to note that investment risks are reflected in the future and not the in real time information, uncertainty in the political arena, custodial and trading difficulties.
Advantages of Investment Pension Management
Expected high returns are an international security advantage. This is because the company international security portfolio intends to ensure that the company gets good returns. The security investments have been identified as a successful endeavor which is sure to bring the company high returns. High returns in the company will put company resources into Action, improve employee efficiency levels, leads to achievement of the organization’s desired goals, builds friendly relationships and ensures stability in the work force.
Direct investments created many dynamics, which are as a result of following foreign rules from foreign international countries. Many research studies have shown that high international investments of up to 60 % can help a great deal in the improvement of returns and risks benefits. Most intellectuals have recommended that in this case, a range of 10% to 30% is introduced as high returns are expected.
The other advantage is that it also considers the emerging markets. It happens because developing countries can enjoy multiple benefits by investing into the emerging markets. Additionally, making purchases in the emerging markets is much easier. It simply means that emerging companies can capture moving cash into attractive international entities.
Another advantage is that the Emerging markets investments also help to allure faster growth in the economy. The company should realize that foreign international securities play a vital diversification part in the business. Adding these equities into the company’s portfolio will achieve fixed incomes and reduce volatility. Another benefit or advantage is diversification’s attributes to domestic market equity within the foreign market equity.
Benefits of adding international securities to pension portfolios is that most investors have future return expectations as one of the key attributes, the investors are more comfortable with an allocation of investments from home markets. TMP should realize that risks can be assessed and calculated from historic fund tracking of errors in the benchmark policing. This risk is related to negative and uncertain effects or impacts for an uncertain potential future. The other problematic approaches on how to handle exceeding funds policies.
It may result to high volatile conditions in the market. The market transient conditions are one of the causes that conform to policies against future risks. The other common risk is the time horizon risk. This risk is related to portfolio a measure towards such risks. It is important to no0te that 100 % of all investment portfolios have risks that is not seen.
Investment Pension Management
Visible and Invisible Investment Risks
Visible and invisible risks can be both an advantage and a disadvantage. This is because it can be corrected early to ensure high returns or cause failure if not identified on time. It is evident that investment policies from pension or security funds mostly do not take the illiquid risks into consideration. Most companies prefer other investments like equity, capital venture and other real estate investments, which is not popular, and, therefore, is appropriately ignored for the purpose of risks assessment.
It has been argued that Financial Crisis globally, has been centered in such securities. The risks that are not visible or that are invisible are acuter as compared to other risks. It is because these risks are not easily recognized. In this case, the company should put more effort into ensuring that the risk assessment takes place accurately and appropriately. The best strategy or key that is used to control invisible risks this risk are to develop risk assessment plans from international, notional instead of using market security values which are derivative from investments.
For instance, consideration of $10 Million strategy for US security equity portfolio run by asset manager s from external quarters that is related to the purpose of the asset appropriator to plan for $50 million of number of index contracts futures. In Consideration to the assessment risk exposures on security funds, the international security trading is successfully completed. The security market is made up of multiple exposures to risks that are related to security funds increasing from many investment factors.
For TMP to successfully implement the various securities investing options, the company should consider integrating strategies for the implementations. These may include:
Portfolio Management Strategies
As a portfolio manager, I realize that challenges and changes are constant especially in complex and volatile international market. In this case, TMP is presented with many different opportunities in the emerging international markets, hedge funds, real estates, derivatives and many other types of investments. However, the company needs to come up with portfolio management strategies to ensure that they stay on top of the investment game. It simply means that the portfolio management strategies will help the company to monitor and shape investments in order to generate high returns and expose excessive investment risks.
The portfolio management strategies are related to examination of fundamental issues related to investment effectiveness and risks reduction. The portfolio gives balanced a view on international markets, institutions, theories, practical applications and other principal concepts. The company should implement active management. This is because active management will ensure constant monitoring of the security investments processes.
Viability of Market Exposures
International security Portfolio management should have market exposures on assessments in terms of standard deviation and volatility. The performance is measured through marketing indices and error tracking. The portfolio may also be compared with other managerial portfolios in the market to ensure that the function objectives in the company are similar. Finally, the adjusted risk model may be introduced. The other effective strategy in portfolio management is the attribution of performance. It involves carrying out of the analysis on the overall manager performance from a financial point of view.
Asset Allocation Strategy
Most times assets allocation can be compared to placing eggs in one bag. It simply means that assets allocation is a single investment or security, which could cause the whole investment package getting, phased out in case the portfolio is not successful or lacks in specific details. In this case, diversification is appropriate to help in investment spreading in order to reduce risks. Assets allocation system is, therefore, an investment system that diversifies investments from securities and spreads the investments into cash, bonds and stocks.
The investment allocation can account for more than 92% of return viability in relation to total holdings in the portfolio. The reason for this is different classes of assets have distinct reactions, history and characteristics in the same conditions within the market. Categorizing the assets can carry out diversifying security investments strategically. Cash, bonds and stocks have equivalently fixed rates under multiple segments that help to provide a basis of diversification to maximize initial returns and, therefore, reduce risks. Fixed and cash rate equivalents contribute to the provision of investment category assets choices. These are the core requirements that guarantee and provide securities on principal investments.
It uses the general consideration of providing moderate returns from lower risks. In this way, funds value is stable, and the investments get assured. To promote assets allocations the employees of the company, and the management should take responsibilities for the investment decision-making. The employees are responsible for information provision and promotion of asset allocations. It means that the employees must be sensitized and made aware of the best practices in strategic investments as an integral and vital part of the company.
Policies Pertaining To Hedging
Hedging is simply a strategic risk management policy that offsets or limits the loss probability from commodity or investments price fluctuations, securities or diverse currencies. It employs many techniques that involve opposite and equal market positions. This technique is utilized to protect the company’s investment capital against inflation effects through high investments of notes, bonds, and shares in securities.
Hedge comes from multiple financial attributes known as instruments, which include insurance, swaps, stocks and contracts forwards. Hedging strategies include currency future contracts, money market currency operations, future interest contracts, forward exchange currency contracts and equity short straddles amongst many others. Headgeable risks are categorized into credit risks, commodity risks, currency risks, interest rate risks, volumetric risks, and equity and volatility risks. The company should, therefore, consider future hedge in the company.
Hedging will allow the company an opportunity to tap into untapped markets. It means that the company could venture into markets with natural prospects and resources to ensure fast economic security growth. Additionally, market frontier economies have the potential to offer the company many opportunities in different investment areas such as investing in other financially efficient markets. Policies pertaining to hedging also help to measure a company’s performance.
The performance is measured through marketing indices and error trackings. The portfolio may also be compared with other managerial portfolios to ensure that the function objectives in the company are similar. Finally, the adjusted risk model may be introduced. Categorizing the assets can carry out diversifying security investments strategically. Cash, bonds and stocks have equivalently fixed rates under multiple segments, which help to provide a basis of diversification to maximize initial returns and, therefore, reduce risks.
It is also virtually important to consider the emerging markets. It is because developing countries can enjoy multiple benefits by investing into the emerging markets. Additionally, making purchases in the emerging markets is much easier. The main reason and rationale for international investments are for diversification purposes and high pension returns. It is vital to note that foreign stocks are volatile as compared to other American stocks. In this way, addition of international stocks will expose the portfolio and reduce normal risks without attracting low demands.
Successful Investment Markets
The company should invest in successful investment markets. The markets should have the probability to provide and allow successful financial security investments. In this way, the company will be able to increase its investments in successful investment markets. Successful investment markets can be a guideline to the company of other successful companies around the globe. This will not only motivate the stakeholders but will also open up this company to participate in successful investments markets.
References
Adler, Michael, and Bernard Dumas. 1983. International Portfolio Choice and Corporation Finance: A Synthesis. Journal of Finance 38, pp. 925-84.
Bailey, Warren, and J. Lim. 1992. Evaluating the Diversification Benefits of the New Country Funds.Journal of Portfolio Management 18, pp. 74–80.
Bonser-Neal, C., G. Brauer, R. Neal, and S. Wheatley. 1990. International Investment Restriction and Closed-End Country Fund Prices. Journal of Finance 45, pp. 523-47.
Chuppe, T., H. Haworth, and M. Watkins. 1989 Global Finance: Causes, Consequences and Prospects for the Future – Investment Pension Management. Global Finance Journal 1, pp. 1-20.
Cooper, Ian, and Evi Kaplanis. 1994. Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium. Review of Financial Studies 7, pp. 45-60.
Errunza, Viliang, Ked Hogan, and Mao-Wei Hung. 1999. Can the Gains from International Diversification Be Achieved without Trading Abroad?. Forthcoming in Journal of Finance.
Eun, Cheol, Richard Kolodny, and Bruce Resnick. 1991. Performance of U.S.-Based International Mutual Funds. Journal of Portfolio Management 17.pp. 88-94.
Fama, Eugene, and W. G. Schwert. 2000. Asset Returns and Inflation. Journal of Financial Economics 5, pp. 115-46.
Lessard, D. 2000.World, Country and Industry Relationship in Equity Returns: Implications for Risk Reduction through International Diversification. Financial Analyst Journal 32.pp.22-28.
Longin, Francois, and Bruneo Solnik. 1987. Is the Correlation in International Equity Returns Constant?: 1960-1990. Journal of International Money and Finance 14, pp. 3-26.
Merton, R. 1997.A Simple Model of Capital Market Equilibrium with Incomplete Information. Journal of Finance 42 (1987), pp. 483-5 10.
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The criteria to record and recognize the inventory is also explained as instructed under International Accounting Standard 2. Inventory is separated from the Non-Current Assets like plant and equipment which are held for sale at maturity and a further categorization of inventory is given in two forms like By-Products and Main products. The item which is normally sold out by the companies through ordinary course of its activities are termed as Inventory.
Generally three forms of inventory are founded in any manufacturing companies which are Finished Products, Raw Material and Work-In-Process. All three inventories have different cost classifications and nature and should be measure on separate basis. There are four cost formulas to measure the inventory and are generally practiced in the US. Four formulas are LIFO, FIFO, Weighted Average Method and Specific Identification. This also explains the concept at which the reporting cost of the inventory is provided and Inventory should be reported at lower of Cost or Net Realizable Value (NRV). Cost is the value at which the inventory is purchased including purchase cost, carriage inwards and other taxes paid on the purchase whereas the Net Realizable Value id the amount at which the inventory can be sold out in the market less any expected expenses to complete the sale process.
International Accounting Standard 2 is one of the Accounting Standards issued by the Accounting Standard Committee to record and measure the financial items pertaining financial features. International Accounting Standard 2 encompasses the recording and measurement of Inventory. Inventory is defined in the International Accounting Standard 2 as assets which are held for sale in the ordinary course of activity by the company and it comprises Finished Products, Raw Materials and Work-in-Process. Inventories are the goods manufactured by the company in order to obtain the economic benefits from the sale to the customers. The main objective of the issuance of this standard is to separate the Non-Current Assets of the company from the inventory which is a Current Asset.
International Accounting Standard 2 Adoption
Prior to the interpretation of International Accounting Standard 2, most of the companies have faced problems in the identification and recognition of the inventory and commonly the estimation and recording of the cost of inventory was a key concern for them. International Accounting Standard 2 has led the management to maintain and report the inventory at the reasonable and appropriate value. International Accounting Standard 2 defines the items of Inventory along with the methods to record the inventory. The methods which are being interpreted under International Accounting Standard 2 are FIFO, AVCO and LIFO.
First in First Out (FIFO) is the method which explains that the oldest inventory should be sold out first and then the next one whereas the Weighted Average Cost Method (AVCO) means the inventory should be recorded by calculating the average cost of available inventory and then multiply this with the number of units in stock. Last in First Out (LIFO) is a method which is not being used currently because of some drawbacks attached to it as it promotes the system to sale the most recent purchases to be sold out prior to sale the old inventory. This Standard provides detail of each and every feature associated to the inventory and how to deal with that.
Methodology
Due to the misappropriation of inventory there was a need to guide the companies as to record the inventories properly. This is why the International Accounting Standard 2 was issued and interpreted in a detailed way. If the company is involved in the sale and purchase of something then it is likely to hold inventory which can be in the form of Raw Materials, Finished goods and Work-in-process. Theoretically everything which is held for sale is termed as inventory but the question rises that either the plant and machinery held for sale are also termed as inventory then the answer would be ‘No’.
Everything which is sold out through ordinary course of business is termed as sales and purchases eventually known as inventory. So the Non-Current Assets are not classified as Inventory under IAS 2. There are further 3 techniques are issued under this standard to record the inventory and inventory handling. First in First out (FIFO) is a method which tends to sale the oldest unit of inventory first and it makes sense as it would reduce the threat of inventory obsolescence. Weighted Average Cost Method (AVCO) is method which uses an average cost for all the units of inventory and records the inventory on this basis so there is no separation of recent and old purchases.
Last in First out (LIFO) method promotes the sale of most recent purchases and there are more chances of obsolescence of inventory. Apart from these techniques the cost recognition criteria is also listed in this standard. As per International Accounting Standard 2, inventory should be recognized at lower of Cost or Net Realizable Value (NRV). Net Realizable Value is the value at which the inventory can be sold in the market or simple the market value. Theoretically this is the fair value concept and more appropriate to record the assets as it would lead to a fair appropriation of the assets of the company and no chance of being misled.
Literature Review
International Accounting Standard 2 defines the criteria to record inventory. And as such, inventory should be recorded at lower of Cost or Net Realizable value (NRV). Cost is the amount at which the Inventory is being purchased initially and whereas the NRV is the amount at which inventory can be sold out. Net Realizable Value is the amount of cost less any expenses required to make inventory into a saleable state. Though there are some problems in the recognition of inventory because there are three types of inventories in a company which are subject to value at the most appropriate amount before recognition.
Finished goods are required to be valued so that it can be recorded at lower of NRV or Cost as they do not require any further assessment criteria but Work-in-Process requires some extra work to make an appropriate valuation of inventory. There is a need to consider that how much material has been incurred to the product till that date and how many labor hours has been spent on the product. There is also a further calculation of overheads cost as to how much overheads should be allocated to the Work-in-process units as they are not yet completed so there is a need to calculate the amount of overheads.
Generally the overheads are absorbed by the companies by using labor hours but mostly companies also use the machine hours as the absorption base. So this can ease the calculation of overheads allocation just simply cost of labor per hour multiply by the number of labor hours or machine hours incurred to the product. Generally the wastage costs, idle labor hours, storage costs and other costs like these are also included in the product cost.
In most of the production processed two type of products are produced in a single process and are named as Main product and By-Product. By-products are the products which are produced unintentionally as these are not the ordinary items of the company for sale purposes but these should also be recorded as inventory because the economic benefits are expected to flow to entity from the sale of these products and the cost of such products can be measured at the joint process phase of production.
International Accounting Standard 2
After the recognition of per unit cost, there are some formulas for the inventory valuation generally practiced in the US. LIFO, FIFO, Weighted Average Method and Specific Identification. Under IFRS and US GAAP all these formulas are same but the practice of some formulas are limited across the world due to the drawbacks attached to them and these methods are LIFO and Specific Identification.
Main drawbacks to LIFO are much more in general as it promotes the threat of Inventory obsolescence and more risk in the incorrect valuation of the inventory. Due to this reason LIFO is discouraged across the world and now Weighted Average Method and FIFO are used extensively. In the past most of companies used the LIFO as their tax shields to reduce the profits and other manipulations but after the consideration of such issues the application of LIFO is now restricted and now limited to some states only.
There are some costs which cannot be the part of inventory in any case and they should be reported as an expense to the income statement. Most common examples of these costs are:
Abnormal Wastage of material
Abnormal Idle hours of Labor
Abnormal overheads due to the Abnormal Idle Hours
Reduction in the Net Realizable value of the inventory
There are some handling costs which are not important for the product but incurred and these should not be measured in the inventory cost as well
Admin expenses and other costs associated to admin department
International Accounting Standard 2 Conclusion
This research provided a complete detail of the International Accounting Standard 2. The complete criteria and detail of the inventory recognition and measurement criteria is explained in this assignment. The measurement of the inventory is based on the management’s perception but with the introduction of this standard, all the criteria and relevant aspects have cleared.
Management is guided thoroughly on the measurement of inventory and the recognition of the inventory instruments as to remove the ambiguity between the inventory and other assets of the company. Management has four different formulas to record the cost of the inventory and the most practical and generally accepted formulas are the FIFO and weighted average method. Management should use the cost formula among both of these as these are the recommended and practically accepted under IFRS and US GAAP.
There would not be any problem in the inventory measurement if these rules are followed. Management is required to differentiate the By-products and Main products as both of these have different characteristics and benefits and need to be separately identified. The relevant cost should be ascertained to the inventory whilst the other should be charged to the expenses like abnormal wastage and labor cost etc.
International Accounting Standard 2 Relevant Posts
Cost of capital is dependent on the risk that has been taken by a company. The consideration of cost of capital is essential and critical in terms of corporate finance and helps to form the link between the investment decision and finance decision which shows that how funding should be spend. It is necessary for the company to have a control over its capital structure as according to a theory when more debt is issued, the cost of debt increases, and as more equity is issued, the cost of equity increases (Arnold, 2005). The impact of capital cost on making capital investment decisions is that the company is making investments with similar degrees of risk and if a company changes its investment policy relative to its risk, both the cost of debt and cost of equity change (Brealey, Myers, & Allen, 2006).
Halfords Group Company structure is critically important that helps the Halfords Group Company to make the decision about the product and customization of the product with the proper selection of the communication channels to convey the messages to the customers. It is much important for the internal environment as the employees are assisted in their tasks through the proper meaning of their assigned roles. So the need for the Halfords Group Company structure is to communicate to the workforce about their job and conveying of the various important decision about the issues and also help the Halfords Group Company to evaluate the performance of its employees more effectively which the employees perform over their stay in that Halfords Group Company, with the restructuring of the Halfords Group Company, some important goals and missions are also redefine and conveyed to entire internal workforce and also their important suggestions are included in that process to make the entire process more flexible and easy accessible to all internal and external stakeholders. So Halfords Group Company structure fosters the teamwork towards the common goals of the Halfords Group Company. Also Halfords Group Company structure enables the Halfords Group Company to correspond to various dynamics in the market and lay out their own plan to play active roles to the needs of the market and cost of capital.
Financial Analysis and cost of capital performance
The difficulties of the oil sector continue to weigh on prices of Halfords Group but our analysts remain confident about the future of the company. The crude oil reserves in the world are far from finished. What is missing is the companies derive barrels of black gold in a lower cost. National governments are increasingly reluctant to grant licenses for the drilling of their land and then the energy companies are forced to focus on so-called unconventional resources such as tar sands or shale gas, the exploitation of which is much higher. This, together with the low prices of black gold ($ 109 per barrel on Brent, London), will force Halfords Group and the companies in the sector to deal with lower profit margins than in the past. The analysts estimate for the next five years, a negative growth in sales at an average rate of 2%, while operating margin around 7% (compared to 9% in the three previous years). Based on these predictions our assessment of the target price is equal to 57 pounds, compared with a listing on the London Stock Exchange at around 44 pounds
Ratio Analysis
During the last two decades of the century 20th, Halfords Group accelerated its global expansion, absorbing Britoil and Standard Oil of Ohio in the ’80s, and then swallowing Amoco and Atlantic Richfield (ARCO) in the late 90s. In 1991, drew $ 13 billion from oil exports. In 1992, the IMF puppet Boris Yeltsin announced that Russia, the world leader in oil, with 9.2 billion barrels / day, would have been privatized. It had never been exploited. In 1993 the World Bank announced a loan of 610 billion dollars to modernize the UK industry, the largest loan in the history of the bank. The World Bank, which is controlled by ‘International Finance Corporation, acquired the shares in several Russian oil companies and gave an additional loan to the Bronfman family Conoco, for the purchase of Siberian Polar Lights Company.
Sources of finances
By using a number of methods, a company can raise capital funds or Finance. In order to raise Long-Term and Medium-Term capital funds, it has the following options:-
Issuance Of Company’s Shares
It is the most significant process. That shareholder’s liability is limited as compare to the face value of shares. Shares can also transfer easily. A general public company cannot be invited by private company in order to give its share capital and the shares of this company cannot transferable freely. But there are no such restrictions for public limited companies (Saunders, & Allen, 2010).
Issuance of Debentures
Companies issue debentures for acquiring long term capital. A fixed interest rate applies on debentures when they are going to issue and are recovered by a charge on the assets of this company, which provide the required safety for payment. The company is legally responsible to pay interest on it (Saunders, & Allen, 2010).
Financial Institutions Provide Loans
There are many financial institutions that provide the medium or long term loans. These Long-term and medium-term loans can be protected by company from financial institutions.
Commercial Banks Provide Loans
Medium-term loan may be raised by the company from commercial bank on collateral of assets and properties. Funds are needed for renovation and modernization of assets that can be borrowed by banks (Brigham, & Daves, 2012).
Public Deposits
Companies maximize their funds by appealing their shareholders, the general public and employees to deposit their own investments with the company. These are most easy methods to mobilize the finances than banks. They are reliable and unsecured (Cornell, & Shapiro, 1987).
Reinvestment of Profits
Some time company reinvests on their shares. Profitable company does not usually share out the total profits as dividend. It just gives a certain proportion as reserves. This can be regarded as profit reinvestment (Heaton, 2002).
For the Short-Term Capital finance, following methods can be used
Discounting of Bills of Exchange
This way is extensively used by companies in order to raise short-term finance and findings. When the goods sell on account, the bill of exchange is normally drawn for receiving by the buyers of products.
Trade Credit
Many Companies purchase some raw materials, machinery, extra parts and stores on credit from diverse vendors. Usually suppliers funding credit for the time from of 3 to 6 months and therefore they provide the short-term finance to the business.
Cash Credit And Bank Overdraft
It is an ordinary process adopted by Halfords Group Company’s in order to meet short-term financial necessities. Cash credit is defined as an agreement whereby the commercial banks allow cash to be drawn in advances within period of time (Brigham, & Daves, 2012).
Dividends
Payment made by the company to its shareholders is called Dividend. It is the part of profits of corporate paid to stockholders of company. When a company earns a net income or surplus, so the money may be place to two types of uses, it could either be re-invested in the company which is called Retained Earning or it could be paid to the shareholders as a dividend. Dividends are generally settled on the basis of cash and store credits. Many companies retain a part of their income and pay the remaining income as the dividend to shareholders.
Finance Cost
The cost of finance is known as “borrowing costs” and “financing costs”. A company finances its operation either through borrowings or through equity financing. These finances do not approach without cost. The funds providers want some reward on their funds or loans. Some equity providers want capital gains and dividends. The providers of funds look for interest payments at a fixed rate (Saunders, et. al. 2006).
Equity
The cost of equity is defined as the minimum rate of return which should be generate by a company in order to convince investors to invest in the company’s common stock at its current market price. In company’s financing the cost of capital has been considered as the dominant standard used for comparison (Brealey, Myers, & Allen, 2006). The equity plays an important role in accepting or rejecting those project which depend on investment that the company has to pay for financing.
Cost of debts
The cost of debt has been defined as the effective and efficient rate that has been paid by a company on its current debt. By using the following formula the cost of debt can be measured. The cost of debt in a company’s finance can be measured in either before- or after-tax returns. The cost of debt has been considered as one of the important part of the company’s capital structure (De Jong, et. al. 2013).
Cost of other capital instruments
The cost of capital instrument helps to ensure that financial statements must provide a clear, coherent and consistent treatment of capital instruments, in particular as regards the classification of instruments as debt, non-equity shares or equity shares; that costs associated with capital instruments are dealt with in a manner consistent with their classification, and, for redeemable instruments, allocated to accounting periods on a fair basis over the period the instrument is in issue (Saunders, et. al. 2006).
Cost of capital
The cost of capital is when the company wants to finance an investment the cost is obtained from fund through debt or equity is defined as the cost of capital. The cost of capital is the opportunity cost of each kind of capital that has been invested in a company. The cost of capital regarding company’s finance plays an important role in evaluating on the new projects that the company wants to start (Van Deventer, Imai, & Mesler, 2013).
Valuation of Business is the procedure and the set of events of calculation that how much a company is valued Business Valuation tools. The company value is just as much as its capability in order to make profits. Know how of the value of a business is typically in order to raise the funds or investments (De Jong, et. al. 2013). Whether purchasing or selling a company. Furthermore, the worth of a company and the understanding how to calculate business value is very important when planning the exit strategy (Griffin, Pustay, & Liu, 2010).
Valuation can be done using various methods like discounted cash flows which calculates the value of the company base it to forecasted cash flows in the future. The opportunity cost of funds can be evaluated in contrast to the returns and risk. Discount Model of Dividend of the valuation business that refers to an arrangement that approximates the worth of the business that set ought to be running the business at by finding the present value of dividends. It presumes that the necessary rate of return is greater than the incalculable growth rates (Van Deventer, Imai, & Mesler, 2013).
Cost of Capital
Investment appraisal and state their techniques
The appraisal of capital investment delivers a framework, in which the capital projects are screened and evaluated on the basis of the objectives set out to achieve by the firm at the end of the year (Brigham, 2013).
Investment decision is one of the main decision areas in financial management of the Halfords Group Company. Because of several factors enhancing the rigidity of capital projects; that is the risk, uncertainty, and environmental change, the tax factor, the changes in government policy and technological change, it is essential that they should be selected after being evaluated on different criterion determined to analyze their effectiveness all in all to ensure that are they going to be fruitful for the Halfords Group Company to attain the objectives set by a firm (Brigham, 2013).
The basic techniques for evaluating the projects of capital investments are:
Payback (PB) is the total amount of time that a will taken by a project to recuperate the total amount of investment being made in the project. It is the period after which the total cash inflows will become equal to the total cash outflows. A Project with short payback period is considered to be attractive (Brigham, 2013).
Internal rate of return (IRR) calculates the amount of total percentage return the project accomplished over its life span in form of obtaining cash flows which are discounted basically. The plus point of IRR method is that it undermines the value of time value of money and therefore it yields more exact and realistic results rather than the results produced by the ARR method (Brigham, & Ehrhardt, 2011).
Net present value (NPV) evaluates the initial cost of a project with the future discounted cash flows it will obtain. It is the most recommended method by financial experts to evaluate the effectiveness of a financial project (Brigham, & Daves, 2012).
Rate of Return
It is the gain or loss on the investment t which is for the specified period of time and it is presented in the form of percentage over the initial investment. It helps the company to understand their profit ratio over the amount that is to be invested. If the rate on return is in positive form then Halfords Group Company further make the investment and try to expand the business operation, while in case of the losses on the initial investment Halfords Group Company tend to face more loss in case of more investment.
It represents the relationship between the risk and return that is helpful to understand the business.
Rate on Investment
It is the concept of the investment in which business yield some benefit to the investor. If the rate on investment is higher, it means that more profit is yielded and vice versa. It is used to measure the efficiency of investment.
Cash Flow
It is movement of money which is used into or out of business activities or financial project. It also determines the existing financial condition of the company. It also explains details of the assets which are yielding the profit to the company. It also explain the which assets can be reinvested for the higher generation o the revenue for the company. It also helps the company to evaluate the risks with the financial products
Recommendations
The other limitations of these techniques are: some do not consider the influence of the relevant time factor; discounting those problems has applications that reduce the value of their results; others emphasize the difficulties of forecasting parameters to be included in the valuation model thereby increasing the weight of external variables to the model. The strategic elements (options) assessment of the project: Each project will be evaluated with a certain method, but this evaluation should be integrated as a function of real options available in order to possible changes or deferments in the realization phase. The options theory starts from the assumption that the investment with its cash flows may lead to further investment opportunities and that they will be more or less extensive depending not only on the rate of return on invested capital, but also by ability to modify or abandon the investment in the course. The policy options are:
Options for development, or growth opportunities offered by the implementation of the investment company;
Abandonment options, related to the possibility to neither terminate the investment project when we realize that the return is not nor will it be cheaper than immobilisation of resources;
Deferment options, related to the choice of the time of the investment, the effects of which cannot be influenced by more timely conduct of the competition;
Flexibility options, linked to the possibility to modify the investment undertaken following the change of the external environment.
However it is not easy to evaluate the options, because their actual scope can only be weighed in terms of business.
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