Account3

Meaning of Company:  A company is an association of many persons who contribute money or money’s worth to common stock and employs it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company.

Types of a company:

A. Statutory companies

B. Government company

C. Foreign company

D. Registered companies:

E. Companies limited by shares

F. Companies limited by guarantee

G. Unlimited companies

H. Private company

I. Public company

Private company: A private co. is which by its AOA: Restricts the right of the members to transfer of shares Limits the no. of members 50. Prohibits any Invitation to the public to subscribe for its shares or debentures.

Public company: A company, the articles of association of which does not contain the requisite restrictions to make it a private limited company, is called a public company.

Characteristics of a company:

A. Voluntary association

B.  Separate legal entity

C.  Free transfer of shares

D. Limited liability

E.  Common seal

F.  Perpetual existence.

Formation of company:

A.  Promotion

B.  Incorporation

C.  Commencement of business

Equity share capital:

The total sum of equity shares is called equity share capital.

Authorized share capital: It is the maximum amount of the share capital, which a company can raise for the time being.

Issued capital: It is that part of the authorized capital, which has been allotted to the public for subscriptions.

Subscribed capital: It is the part of the issued capital, which has been allotted to the public.

Called up capital: It has been portion of the subscribed capital which has been called up by the company.

Paid up capital: It is the portion of the called up capital against which payment has been received.

Debentures: Debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holder.

Cash profit: cash profit is the profit it is occurred from the cash sales.

Deemed public Ltd. Company: A private company is a subsidiary company to public company it satisfies the following terms/conditions Sec 3(1)3:

1. Having minimum share capital 5 lakhs

2. Accepting investments from the public

3. No restriction of the transferable of shares

4. No restriction of no. of members.

5. Accepting deposits from the investors

Secret reserves: Secret reserves are reserves the existence of which does not appear on the face of balance sheet. In such a situation, net assets position of the business is stronger than that disclosed by the balance sheet.

These reserves are created by:

1. Excessive depot an asset, excessive over-

valuation of a liability.

2. Complete elimination of an asset, or under

valuation of an asset.

Provision: provision usually means any amount written off or retained by way of providing depreciation, renewals or diminutions in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

Reserve: The provision in excess of the amount considered necessary for the purpose it was originally made is also considered as reserve Provision is charge against profits while reserves is an appropriation of profits Creation of reserve increase proprietor’s fund while creation of provisions decreases his funds in the business.

Reserve fund: The term reserve fund means such reserve against which clearly investment etc., 72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some other a/c or group of accounts so that the existence of the reserve is not known such reserve is called an undisclosed reserve.

Finance management: Financial management deals with procurement of funds and their effective utilization in business.

 Objectives of financial management: financial management having two objectives that Is:

1. Profit maximization: The finance manager has to make his decisions in a manner so that the profits of the concern are maximized.

2. Wealth maximization: Wealth maximization means the objective of a firm should be to maximize its value or wealth, or value of a firm is represented by the market price of its common stock.

Functions of financial manager:

A.  Investment decision

B.  Dividend decision

C.  Finance decision

D.  Cash management decisions

E.  Performance evaluation

F. Market impact analysis

Time value of money: The time value of money means that worth of a rupee received today is different from the worth of a rupee to be received in future.

 Capital structure: It refers to the mix of sources from where the long-term funds required in a business may be raised; in other words, it refers to the proportion of debt, preference capital and equity capital.

Optimum capital structure: Capital structure is optimum when the firm has a combination of equity and debt so that the wealth of the firm is maximum.

Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of capital computed by reference to the proportion of each component of capital as weights.

Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient to cover interest

and preference dividend.

Capital budgeting: Capital budgeting involves the process of decision making with regard to investment in fixed assets. Or decision making with regard to investment of money in long term projects.

Payback period: Payback period represents the time period required for complete recovery of the initial investment in the project.

ARR: Accounting or average rates of return means the average annual yield on the project.

NPV: The Net present value of an investment proposal is defined as the sum of the present values of all future cash inflows less the sum of the present values of all cash out flows associated with the proposal.

Profitability index: Where different investment proposal each involving different initial investments and cash inflows are to be compared.