Found 1748 Articles for Growth & Empowerment

Free cash flow is the capital retained by a company after it has paid all its expenses, including building, rent, tax, payroll, inventory, etc. Companies may use the free cash flow for anything it sees fit.Free cash flow is a true measure of a company’s profitability.Businesses usually calculate free cash flow to take critical business decisions, such as whether to invest the money for expansion or to invest the money in ways to reduce the costs of operations.Investors use the free cash flow metric to check the frauds in accounting, as these measures are stringent and less manipulable than net ... Read More

Financial risk refers to a condition where a company with a certain amount of debt will fail to repay them in a given time period. In other words, financial risk means the risk of losing money by investing it in a lossmaking company.Investors usually remain averse to risky companies and hence calculating the financial risk is of paramount importance to them. In general, the more debt a company has, the more will be its financial risk.Types of Financial RisksFinancial risks can lead to loss of shareholders’ income, as the money is lost while carrying on with a loss-making company. However, ... Read More

Meaning of Capital StructureCapital Structure is the ratio of different types of securities raised by a firm as its long-term finance. Capital structure decision involves two philosophies −Type of securities to be issued in capital structures must be equity shares, preference shares, and long-term borrowings (Debentures).Relative ratio of the securities can be obtained by the process of capital gearing. On the basis of gearing, the companies are divided into two categories −Highly geared companies – The companies which have a proportion of equity capitalization that is small.Low geared companies – The companies the equity capital of which is high in ... Read More

Payback period or simply payback in capital budgeting refers to the time required for the ROI (Return on Investment) to repay the original sum of investment.Payback is a preferred tool because it is easy to understand and apply, irrespective of whether the manager is aware of financial calculations or not.Payback is an effective tool to derive the worth of an investment when similar projects are compared.The payback method is a simple tool to measure the months or years it takes to repay the initial investment of a project.The payback method doesn’t have any specific criteria for the evaluation of investments ... Read More

Classification of LiabilitiesDifferent types of liabilities can fall under the following three categories −Current liabilities are the liabilities that are due and payable within one year. These are also known as "short-term liabilities".Non-current liabilities are the liabilities that have to be cleared after a year or more, hence these are also known as "long-term liabilities".Contingent liabilities are a separate category of liabilities that may or may not arise, depending on a certain event.Current LiabilitiesCurrent liabilities are debts or obligations that need to be paid within a year. Current liabilities should be closely watched by management to ensure that the company ... Read More

The Net Working Capital of a company is the difference between its current assets and current liabilities. We can define the Working Capital Cycle of a company as the duration of time it takes to converts its net working capital into cash.A longer Working Capital Cycle denotes that the company is blocking its capital in working capital without earning any returns on it. Hence, most companies try to reduce the working capital cycle by disposing the inventory quickly and collecting the receivables as early as possible. Sometimes, companies stretch their Accounts Payable (pay their bills slowly) in order to optimize ... Read More

The term "deferred tax" refers to a tax which shall either be paid in future or has already been settled in advance. In this article, we will see why a company may differ its tax to a subsequent fiscal year or why a company may choose to pay the tax in advance.Most companies normally prepare an "income statement" and a "tax statement" every fiscal year because the guidelines that govern the recording of income and taxation are slightly different. It is this slight disparity between the guidelines that creates the scope for deferred tax.Types of Deferred TaxThere are two types ... Read More

Amortization vs. DepreciationBoth Amortization and Depreciation are concepts that are used to account for the consumption of assets and how they lose their value over their useful life.We understand that tangible assets such as plant machinery, furniture, buildings, and vehicles lose their value over a period, which is called "depreciation". But, what about intangible assets such as copyrights, trademarks, patents, agreements, etc.? Such intangible assets too lose their value over a course of their useful economic life.Amortization is a concept similar to depreciation, but it is applied primarily to intangible assets and their periodic reduction in value over time. The ... Read More

We can apply the concept of depreciation in both accounting as well as tax calculations. In this article, we will see how Accounting Depreciation differs from Tax Depreciation, but before that, let us first understand what is depreciation and how it matters.We can define "depreciation" as a concept that is applied for the purpose of writing off the cost of an asset over its useful life. Companies have different types of tangible assets such as plant machinery, factory equipment, vehicles, etc. The fair value of such tangible assets reduce over a period of time. This is what we call "depreciation". ... Read More

As the name suggests, an "installment sale" is an approach where the seller allows the buyer to make payments in installments over a period of time. It is a Revenue Recognition method in which the seller defers the revenues until the payment is received.In an Installment Sale, the revenues and the expenses are recognized at the time when the actual cash flow occurs, rather than at the time of sale. Installment Sales are quite prevalent in real-estate deals.Note that, although the buyer gets the goods at the beginning of the installment period, the ownership is not fully transferred at the ... Read More