FINANCE HOMEWORK HELP
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What Is Finance?
Business finance refers to capital funds and credit funds invested in the business. Financing means making the money available when it is needed. It can be defined as planning, raising, managing and controlling all the money used in the connection with business. A company’s financial position is analysed through its finance. Financial accounting keeps the record of the financial transactions of the company. The purpose of financial accounting is to give information about the value of the company to others so that they can find a suitable company to invest in.
The financial transaction are recorded, summarized and presented in the form of financial statements. Income statement, Balance Sheet, Statement of cash flows, Statement of shareholders equity are some examples of financial statements. The rules of financial accounting are known as accounting standards or GAAP (generally accepted accounting principles).The financial statements follow these rules because many people use these external financial statements according to themselves.
The financial accounting raises the financial statements as income statement, balance sheet and cash flows. The income statement shows the profitability of the company. Some of the components of the income statement are- loss, gain, revenue (sales revenue, service revenue) , expense (rent, salaries) etc. The balance sheet consists of assets (inventory, cash and prepaid insurance), liabilities (loan, bills payable, creditors) and shareholders’ equity (difference between assets and liability. The change in the cash and cash equivalents during a specific period of time mentioned in the heading of the cash flow statement is known as cash flows. It consists of operating activities, investing activities and financing activities.
NEED OF FINANCE
To meet day to day expenses and to procure fixed assets while commencing a business finance is needed.
To finance the growth and expansion projects of the company.
To meet the working capital requirements when production process is lengthy.
BENEFITS OF FINANCE
To meet the liabilities on time.
To carry the enterprise smoothly.
To make use of the business opportunities.
To adopt latest technology and innovative ideas of production.
To face the recession and depression period of trade cycle.
To face the competition more strongly.
TYPES OF FINANCE
LONG TERM FINANCE: The funds which are invested for the long period in business i.e. more than five years is known as long term finance.
For acquiring the fixed assets long term finance is used.
Large scale business requires more long term finance than small scale business.
Long term finance can be raised by issuing shares, debentures and long term loans.
Long term finance is required for expanding the projects and adopting the innovative techniques.
MEDIUM TERM FINANCE: The funds which are invested for the medium period in business i.e. more than one year but less than five years is known as medium term finance.
Medium term finance is used for the modernisation of plant and machinery etc and introduction of new products.
Most commonly manufacturing industries require this type of finance.
Accepting public deposits, medium term loans etc raise the sources of this finance.
SHORT TERM FINANCE: The funds which are invested for short period in business i.e. up to one year is known as short term finance.
Short term finance is required to meet day to day expenses of the business for e.g. holding of stocks, raw material etc.
Most commonly trading companies require this type of finance.
Credit granted in trade, short term loans etc raise the sources of this finance.
Often it is known as working capital.
SOURCES OF FINANCE
The finance can be generated by the following sources:
OWNER’S FUND: The funds which are contributed by the owners as well as accumulated profits of the business are known as owner’s fund. This fund remains with the business and the business has no liability to return this fund.
PERMANENT CAPITAL: The capital of the owner is non- refundable. It is kept by the business permanently. Thus, it becomes the most suitable fund to meet the problems of the business.
RIGHT TO CONTROL: The decisions are taken by the owners of the business. By contributing in owner’s fund the shareholders have the right to supervise and control the business.
GENERATION OF HUGE FUNDS: In case of Company there is no maximum limit of members. Large number of people can participate. Thus, it can generate huge amount of capital funds.
BORROWED FUND: This type of fund refer to borrowing the fund by way of loans or credit.
FLEXIBILITY: The borrowed fund can be increased by raising more and can be decreased by paying back. Therefore, finance can arranged according to the needs of the enterprise.
INTEREST –AN EXPENSE: The interest which is paid on the borrowed fund is treated as an expense thus; it is deducted from total income earned by the enterprise. So, tax liability is reduced.
NO INTERFERENCE : The holder of the borrowed fund does not interfere in between the functioning of the enterprise. It does not affect owner’s control over management.
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