Fixed Costs and Variable Costs

Fixed costs are costs associated with those inputs which do not vary with changes in volume of output or activity within a specified range of activity or output. Fixed costs, thus, remain constant whether activity increases or decreases within a relevant range. For example, property insurance, rent of office premises, lease payments, depreciation etc. remain the same whether there is an increase or decrease in the volume of activity. However, fixed cost, like any other cost, is subject to change over a period of time. For example, property insurance, rent of office premises may increase in the next period but these increases are not the result of an increase in the firm’s output.

Costs that tend to vary in total in direct proportion to changes in production activity, sales activity or some other measure of volume are referred to as variable costs. Material costs and direct labour costs are examples of variable costs. The cost of these inputs increases or decreases in proportion to increases or decreases in volume.

Characteristics of a Company

A company as an entity has several distinct features which together make it a unique organization. The following are the defining characteristics of a company:-

1.      Incorporated Association

The group of persons or association has to get themselves registered as a company under the Companies Act 1956(India).The Company comes into existence only when it receives the certificate of incorporation and the date mentioned on the certificate is a conclusive proof that company is incorporated and exist in the eyes of laws.

2.      Artificial Legal Person

A company is an artificial legal person created by a process other than natural birth. It is created by law and law alone can dissolve it. It is invisible, intangible, immortal but not fictitious. It is devoid of physical attributes like body, soul etc. of a natural person, but has certain rights and duties at law like a natural person. A company being an artificial legal person can do everything like a natural person except be sent to jail, take an oath, practice a learned profession or marry.

3.      Separate Legal Entity
On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, and borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. Creditors of company are creditors of the company alone and they cannot directly proceed against the members personally.

The landmark case which established the concept of separate legal entity was of Salomon Vs Salomon & Co. Limited (1897).

The case of Salomon V. Salomon & Co., commonly referred to as the Salomon case, is both the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil.

The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr. Salomon.

4.      Separate Property
The Company with its separate legal entity has the right to own and transfer the title to property in any way it likes. A member cannot claim to be the owner of the company's property during the existence of the company or in its winding up. A member does not even have an insurable interest in the property of the company.

5.      Perpetual Succession
A company is an artificial person created by law and law alone can dissolve it and bring an end to its life. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. Even if all the members of a company die, the company does not cease to exist.

6.   Limited Liability
Mostly the companies are limited liability companies and the liability of its members is limited to the unpaid amount  on the shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets.  If the company is limited by guarantee, then the liability of the members extends to the amount each one has guaranteed to pay in the event of the winding up of the company. However, the Companies Act also provides formation of a company with unlimited liability, though companies with limited liabilities are most popular.

7.   Transferability of Shares
The shares of a public limited company are freely transferable and no permission from the company or other members is required to any member for selling their shares. However, in case of a private company, some restriction on the right to transfer shares is essential in its articles as per Section 3(1) (iii) of the Companies Act, 1956 (India).

8.   Common Seal
A company being an artificial person does not have any physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal.

The Company

The word ‘company’ is derived from the Latin words ‘Com’ i.e. with or together; and ‘Panis’ i.e. bread, and originally referred to an association of persons who took their meals together. A company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose.  Perhaps a clear definition of the company is given by Lord Justice Lindley : “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss as the case may be) arising there from. The common stock so contributed is denoted in money and is the capital of the company and the persons who contribute it, or to whom it belongs, are called as members. The proportion of capital to which each member is entitled is his share which is always transferable although the right to transfer them is more or less restricted”.

Chief Justice Marshall describes a corporation to be "an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law” continues the judge, “it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and if the expression may be allowed, individuality properties by which a perpetual succession of many persons are considered, as the same, and may act as the single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity of perpetual conveyance for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use."

A company thus may be define as an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability. It is called an artificial person because of its very nature that law alone can give birth to a company and law alone can put it to an end.

Europe: Response To Green Paper “Audit Policy: Lessons From The Crisis”

The Financial Reporting Council has published its response to the European Commission's audit policy consultation.

With respect to the key proposals within the Green Paper, the FRC supports:

• Efforts to minimise the systemic risk associated with the level of audit market concentration provided that those efforts are not at the expense of audit quality.

• Improved transparency of the audit process. The primary vehicle for greater transparency should be the audit committee report with a requirement for the auditors to report positively on its completeness and fairness.

• The adoption of ISAs in Europe. They suggested that the proposed European Audit

Authority should be responsible for the endorsement process.

• The tightening of auditor independence rules. The UK has recently consulted on this issue and found support from market participants for clearer and more transparent rules, although not for a complete ban on the provision of non‐audit services by auditors to their clients. The revised UK Ethical Standards may be a good starting point for discussion on this topic.

• The establishment of a European Audit Authority to ensure that audit receives appropriate focus within the European regulatory architecture.

• In principle, measures to increase the flexibility for firms to operate within different member states. However any move to “maximum harmonisation” should not be at the expense of existing standards.

FRC do not support:

• A wholesale ban on the provision of non‐audit services to audit clients. The UK’s recent consultation on this issue indicated that investors and other market participants are not in favour of such a ban. We would also be concerned that a ban which included audit‐related services could stifle the development of more innovative audit products.

• The forcible creation of audit‐only firms. Such firms would be unable to offer their staff a wide range of work experiences and compensation packages are likely to be lower than firms can offer currently, making it more difficult to recruit and retain high quality personnel and hence impacting negatively on audit quality.

• The mandatory use of joint audits. There is a risk that some matters fail to be addressed effectively as they are seen to fall between the two firms. Client management may also engage in arbitrage between the two firms, particularly when it comes to difficult or contentious judgements.

Complete Report.

Analysis of Risk and Uncertainty

The analysis of risk and uncertainty is an important element in the capital budgeting decisions. The term risk refers to the variability of the actual returns from the expected returns in terms of cash flows.

The risk involved in capital budgeting can be measured in absolute as well as relative terms. The absolute measure of risk includes sensitivity analysis and standard deviation. The coefficient of variation is a relative measure of risk.

There are four recognised methods of incorporation of risk in the capital budgeting decision framework:

·         Risk-adjusted discount rate approach,

·         Certainty-equivalent approach,

·         Probability distribution approach, and

·         Decision-tree approach

According to the Risk-adjusted discount rate approach, the element of risk is incorporated through adjusting the required rate of return, using higher discount rates for riskier projects and lower discount rates for less risky projects. The Certainty-equivalent approach adjusts the risk through the cash flows associated with the projects. The Probability distribution approach illustrates the analysis of risk in capital budgeting through the application of probability theory. The Decision-tree approach takes into account the impact of all probabilistic estimates of potential outcomes. Every possible outcome is weighed in probabilistic terms and then evaluated.

European Business School Rankings 2010

The 2010 Financial Times European business school ranking sees HEC Paris come first once again. Despite challenges from old adversaries and newcomers alike, the grande école has been Europe’s top school for five years in a row. London Business School is ranked second and Insead third.

HEC’s continued domination of the ranking – a combination of the five business school rankings published annually by the FT – is partly explained by its range of expertise: it is one of only five schools to feature in all of the FT rankings in 2010. The quality of its programmes is apparent. Each is ranked in the top 10 in Europe, including a top place for the customised programmes the school designs to business clients’ specifications.

See the full ranking.

Merry Christmas

Merry Christmas

Basel III Rules on Capital Adequacy and Liquidity

The Basel Committee on Banking Supervision has published the Basel III rules on capital adequacy and liquidity.

These documents present the Basel Committee’s reforms to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector. The objective of the reforms is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.

The Basel Committee is raising the resilience of the banking sector by strengthening the regulatory capital framework, building on the three pillars of the Basel II framework. The reforms raise both the quality and quantity of the regulatory capital base and enhance the risk coverage of the capital framework. They are underpinned by a leverage ratio that serves as a backstop to the risk-based capital measures, is intended to constrain excess leverage in the banking system and provide an extra layer of protection against model risk and measurement error. Finally, the Committee is introducing a number of macroprudential elements into the capital framework to help contain systemic risks arising from procyclicality and from the interconnectedness of financial institutions.

The Committee has further strengthened its liquidity framework by developing two minimum standards for funding liquidity. These standards have been developed to achieve two separate but complementary objectives. The first objective is to promote short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for one month. The Committee developed the Liquidity Coverage Ratio (LCR) to achieve this objective. The second objective is to promote resilience over a longer time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The Net Stable Funding Ratio (NSFR) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities.

Detailed capital adequacy and liquidity rules can be downloaded.

Report of the Committee for Review of Ownership and Governance of Market Infrastructure Institutions

The Bimal Jalan-headed committee that was set up by the Securities and Exchange Board of India (SEBI) to review the structure of market infrastructure institutions (MIIs) such as stock exchanges, clearing corporations and depositories, has proposed that such entities be prohibited from getting listed.

The proposal, if accepted, may hurt the businesses of such entities and prevent new entrants from drawing investors as shareholders may find it difficult to exit their holdings with sufficient gains in the absence of a public offering.

Sebi formed the seven-member committee in February, chaired by former governor of the Reserve Bank of India Jalan, to review the ownership and governance norms of MIIs and suggest changes.

The panel says such entities should not become a vehicle for attracting speculative investments. Further, MIIs being institutions, any downward movement in its share price may lead to a loss of credibility and this may be detrimental to the market as a whole,” it said.

To ensure that MIIs maintain the required transparency and corporate governance norms, the panel suggested that listed company standards be applied to them, with the information posted on the website.

The main recommendations of the panel are:

·         Prohibit stock exchanges, clearing corporations and depositories from getting listed.

·         Allow anchor investors to hold up to 24% in a stock exchange.

·         Restrict holdings of a stock exchange in a depository at 24%.

·         No trading member to be on the board of stock exchanges.

·         Stock exchanges to maintain net worth of Rs. 100 crore at all times; clearing corporations to have a net worth of Rs. 300 crore.

·         Compensation of the key personnel at MIIs to be a fixed sum without any variable component linked to the commercial performance. 

For detailed discussion see here and for downloading the report click here.

Marketing Intelligence

Marketing intelligence is everyday information about developments in the marketing environment that helps managers prepare and adjust marketing plans. The marketing intelligence system determines what intelligence is needed, collects it by searching the environment, and delivers it to marketing managers who need it.

Marketing intelligence can be gathered from many sources. Much intelligence can be collected from the company’s own personnel – executives, engineers, purchasing agents, and the sales force. The company must also get suppliers, resellers, and customers to pass along important intelligence. Information on competitors can be obtained from what they say about themselves in annual reports, speeches and press releases, advertisements and also from business publications and trade shows.

Companies can set up office and circulate marketing intelligence. The staff scans major publications, summarizes important news, and sends news bulletins to marketing managers. It develops a file of intelligence information and helps managers evaluate new information. These services greatly improve the quality of information available to marketing managers.

Inventory

Inventory includes tangible property that

i.                     Is held for sale in the normal course of business, or

ii.                   Will be used in producing goods or services for sale.

Inventories are current assets and reported on the balance sheet and as current assets they can be used or converted into cash within one year or within next operating cycle of the business, whichever is longer.

The measurement of inventory has a significant effect on income determination and financial position of a business enterprise. The American Institute of Certified Public Accountants (USA) states:

“A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues.”

The pricing or costing of inventory is one of the most interesting and most widely debated problems in accounting. Generally, inventories are priced at their cost in conformity with the cost concept. According to AICPA (USA), “the primary basis of accounting for inventory is cost, which is price paid or consideration given to acquire an asset. As applied to inventories, cost means, in principle, the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.”

UK: Judgement in Progress Property Company Limited v Moorgarth Group Limited case

The Supreme Court handed down its judgment today in Progress Property Company Limited v Moorgarth Group Limited [2010]. The issue involved in the case was whether the sale at undervalue of a company’s assets to its shareholder is ultra vires, in accordance with the common law rule, in circumstances where the director who procured the sale (acting on behalf of both the company and the shareholder) subjectively believed the sale to be at a proper market value.

The court unanimously held that the transaction in question was not an unlawful distribution and set out guidance in this regard.

See complete judgement here.

Bank of America Unit Settles Complaint on Municipal Bonds

Bank of America has agreed to pay $137 million to settle charges from the Securities and Exchange Commission and state and federal authorities related to its participation in a bid-rigging scheme in the municipal securities market as part of a continuing federal investigation.

The four-year old investigation has found “widespread corruption” in the markets for municipal reinvestments. In those markets, state and local governments and related entities take money that they have raised for public projects, temporarily parking it in securities like guaranteed investment contracts and repurchase agreements until the money was needed to pay for work done on the projects.

Complete news.

Review of Remuneration Policies and Practices in Irish Retail Banks and Building Societies

The Central Bank of Ireland today published the findings of a review of remuneration policies and practices in a number of Irish retail banks. The review assessed whether banks have changed how they remunerate employees, particularly those in senior executive positions, to reflect incoming regulatory standards and the lessons of the crisis. In particular, it examined if banks have ended remuneration practices which fostered inappropriate risk taking or inadequate risk management. The review was conducted in September and October 2010.

The main findings from the review include:

• There is little evidence that banks have self-consciously made a link between their risk appetite and their incentive structures. This exposes banks and, by extension the State, to the consequences of inappropriate risk taking;
• The governance and oversight of remuneration practices is poor. Non-executives need to step-up their scrutiny of remuneration arrangements, and in particular make sure that senior executives’ remuneration is aligned to a bank’s willingness and capacity to take risk;
• In the majority of banks, procedures to determine remuneration are not clear, well documented or internally transparent. There was little evidence of consideration of risk, or collaboration with risk management functions to ensure remuneration policies are aligned with long term strategic plans;
• The majority of banks were found to have given little or no consideration to preparing for the implementation of impending European requirements and guidance on remuneration, which will become effective in Ireland on 1 January 2011. The Central Bank of Ireland expected to find that banks were much more advanced in their arrangements for compliance with these important requirements;
• Some banks are tightening their approach to paying guaranteed bonuses. There is also some evidence of tightening of severance pay, with some banks imposing stricter conditions on golden parachutes. There is, though, further to go;
• All banks reviewed disclose certain information on remuneration externally, but there is little evidence of banks moving to the fuller disclosure required by incoming regulations and guidance from the EU.

Continue reading.

Court case over toilet paper dispenser

A Michigan woman says she can't work or crochet and her bowling game has suffered since her right hand was broken by a toilet paper dispenser in a restaurant bathroom.

The Michigan Supreme Court, in a 4-3 order, has refused to throw out Sheri Schooley's lawsuit against Texas Roadhouse in suburban Detroit. Liberal justices were in the majority in a decision that raises questions about what businesses need to do to protect themselves from liability in strange situations.

Schooley, 58, acknowledged it's a "bizarre story." She and her husband were out for dinner on New Year's Eve 2007 when she visited the restroom.

"I reached and the cover of the toilet paper dispenser fell down on my hand," the South Rockwood woman told The Associated Press on Monday. "It looked like the dispenser was up but it wasn't latched. At first I thought I was all right. I thought it was just bruised."

But the pain didn't fade, she said, and her husband had to cut her steak. When Schooley returned to work, she couldn't use a stapler. Diagnosis: broken bone.

Three years later, "I still cannot use the hand. I have no grip," said Schooley, who had to quit her job as an administrative assistant because she couldn't type.

Complete news.

Indian Depository Receipt (IDR)

An IDR is a receipt, declaring ownership of shares of a foreign company. These receipts can be listed in India and traded in rupees. Just like overseas investors in the US-listed American Depository Receipts (ADRs) of Infosys and Wipro get receipts against ownership of shares held by an Indian custodian, an IDR is proof of ownership of foreign company’s shares. The IDRs are denominated in Indian currency and are issued by a domestic depository and the underlying equity shares are secured with a custodian. An Indian investor pays in Indian rupees for the IDR whereas a shareholder in the issuer’s home country pays in home currency.

The underlying shares for IDRs will be deposited with an overseas custodian who will hold the shares on behalf of a domestic depository. The domestic depository will accordingly issue receipts to investors in India. Investors will get an entry in their demat accounts reflecting their IDR holding.

Learn more.

IFRS Practice Statement

The International Accounting Standards Board published a non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRSs. The framework takes the form of an IFRS Practice Statement titled Management Commentary.  The IFRS Practice Statement Management Commentary provides a broad, non-binding framework for the presentation of management commentary that relates to financial statements that have been prepared in accordance with International Financial Reporting Standards (IFRSs). The Practice Statement is not an IFRS. Consequently, entities applying IFRSs are not required to comply with the Practice Statement, unless specifically required by their jurisdiction. Furthermore, non-compliance with the Practice Statement will not prevent an entity’s financial statements from complying with IFRSs, if they otherwise do so.

Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity. It also provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. Users routinely use the type of information provided in management commentary to help them evaluate an entity’s prospects and its general risks, as well as the success of management’s strategies for achieving its stated objectives. For many entities, management commentary is already an important element of their communication with the capital markets, supplementing as well as complementing the financial statements.

Download the IFRS Practice Statement Management Commentary.

Corporate governance: A sad tale

Indian Institute of Management-Ahmedabad don and ET columnist T T Rammohan made a telling critique of the functioning of independent directors on company boards on Dec 9.

Research shows that standard prescriptions to raise corporate governance have all failed: separation of the offices of the chairman and the CEO, having a quota of independent directors, having directors with domain knowledge, knowledge of finance and auditing, etc. Corporate governance, despite the best efforts of the regulators and policymakers, remains a check-the-box exercise.

Prof Rammohan then goes on to critique a solution offered by Harvard Business School senior lecturer Robert C Pozen, of making independent directorships a profession itself, and of reducing the size of the board to seven: the CEO and six independent directors. Four of them should have domain expertise, one should have expertise in accounting and only one should be generalist. But how can a director be expected to act in a truly independent manner when the remuneration and perks for his services are borne by the company?

In many instances, remuneration includes all-expenses paid holidays for self and spouse, loads of stock options and other goodies. What could, however, help is independent thinking and action by nominees of the institutions who have invested in the company, suggests Prof Rammohan. As Prof Rammohan points out, sincerity, commitment and willingness to rock the boat in the pursuit of management accountability to shareholders count more than knowledge and expertise.

Read more.

Laffer Curve

The Laffer curve is the graphical representation of the relationship between tax rates and absolute revenue these rates generate for the government. The principle thought behind the Laffer curve is that a zero tax rate would produce zero revenue and a 100% tax rate would also generate zero revenue, as there would be no incentive to work. This means there must be an optimal tax rate that will yield maximum revenue for the government.

Economist Arthur Laffer discovered this relationship that came be known as the Laffer curve. It is based on the idea that at a particular tax rate evasion will make no sense as the cost, in terms of the money and time going into it, would be higher than benefits.

There are two effects that come into play whenever the tax rates are changed — the arithmetic and the economic effect. Simple mathematics says that other things being equal, if tax rates are lowered, tax revenues will drop in the same proportion.

Any increase should also make collections grow, but this happens only up to a point. Economic effect works at a more subtle level and recognises that an unduly high tax rate will mean people will be less inclined to work or will look for ways to avoid taxes. For instance, individuals and companies could think of moving their assets and business to a less taxing jurisdiction. Therefore, arithmetic logic of higher rate leading to greater collections is countered by be adverse economic effects.

Continue reading.

Working Capital

The need for working capital or current assets arises from the operating or cash cycle of the firm. The operating cycle refers to the length of time to convert the non-cash current assets into cash. In other words cash cycle refers to the time involved in completing the following sequence of events: conversion of cash into inventory, conversion of inventory into receivable and conversion of receivables into cash. If it were possible to complete these sequences instantaneously, there would be no need for current assets. But since nature of these activities is such that a perfect synchronisation is not possible, a certain minimum level of current assets is necessary.

The working capital can be divided into permanent or temporary, depending on the need of the firm. The permanent component reflects the need for a certain irreducible level of current assets on a continuous and uninterrupted basis. The temporary portion of the working capital requirement is needed to meet seasonal and other temporary requirements.

The working capital requirements are determined by a variety of factors. In general the following factors are relevant for proper assessment of the quantum of working capital required: general nature of business, production cycle, business cycle, production policy, credit policy, growth and expansion, availability of raw materials, profit level, level of taxes, dividend policy, depreciation policy, price level changes and operating efficiency.

UK: Corporate Tax Reform

Last month the Mirrlees Review tax reform conclusions and recommendations were published. The Review concluded, amongst many other things, that the UK's current system of corporate taxation favoured debt finance over equity finance and that the systems lack of integration with other parts of the tax system led to distortions over choice of legal form. One reason why debt finance is attractive is that the interest on it is tax deductible.
For complete report see here.

Depreciation

The costs relating to the use of long-term assets should be properly calculated and matched against the revenue earned so that periodic net income can be determined. These use costs or expense or periodic write off are known by different names for different category of assets as shown below:

Types of Long-term Assets                                                                          Term of expense or write off

1.       Tangible Assets

i.                     Land                                                                                       None

ii.                   Plant, Building, equipment tools,                                          Depreciation

Furniture, fixtures, vehicles, etc.                                                                                      

iii.                  Natural resources such as coal, oil etc.                               Depletion

2.       Intangible assets such as patent, copyrights,

Trademarks, goodwill                                                                       Amortisation

The term depreciation refers to periodic allocation of the acquisition cost of a tangible long-term asset over its useful life. These long-term or fixed assets have a limited useful life, that is, they will provide service to the entity over a limited number of future accounting periods. Depreciation makes a part of the cost of asset chargeable as an expense in profit and loss account of the accounting periods in which the asset has helped in earning revenue. Thus, allocating the capitalised cost of an asset into expense for different accounting periods is known as depreciation.

Currency Futures

Theoretically, a currency futures is a contract to exchange one currency for another at a specified date in the future at a price that is fixed in advance. The system was originally designed to protect against the risk of volatile currencies, especially for businesses having receipts or outgo of foreign currency as a part of their routine operations. However, today, currency futures are most commonly used by traders to speculate on the rate of the dollar and other currencies at a future date.

Who can profit from it?

Suppose an edible oil importer wants to import edible oil worth $100,000 and places his import order on January 15, 2010, with the delivery date being four months ahead in April. At the time when the contract is placed, one US dollar was worth, say, Rs 45.50 in the spot market. Now, suppose the rupee depreciates to Rs 45.75 per US dollar when the payment is due in April 2010, the value of the payment for the importer goes up correspondingly. If the importer locks in a particular rate for April 2010 (by buying a currency futures contract) he is not affected by this rise in rate.

The same is true for a jeweller who is exporting gold jewellery, and fears an appreciating rupee. But we repeat, currently the product is mostly being used by individual traders who make money every time their prediction on the rate of the dollar is proved right.

Read more.

Apple Lawyers Up for Patent Showdowns With Nokia

Apple is squaring off this week against Nokia Oyj, the world’s largest mobile-phone maker, before the International Trade Commission. The dispute, in which each side alleges intellectual property violations, is also a precursor to Apple patent battles with Motorola Inc. and HTC Corp.

At stake is leadership in the U.S. smartphone market. Cupertino, California-based Apple is trying to protect its right to import the iPhone, while shutting out rivals, particularly those with devices powered by Google Inc.’s Android operating system, the world’s most popular smartphone software. Android- based phones also are made abroad.

Complete news.

Statement of changes in financial position

A statement of changes in financial position (SCFP) shows where the financial resources (funds) have come from (sources) and where they have gone (uses). SCFP is generally prepared on working capital basis and cash basis. Working capital based SCFP explains increase or decrease in working capital for a specified period of time. It reports:

·         Amount of changes in working capital associated with the operating activities of a firm.

·         Long term financing or other sources that cause an increase in the working capital.

·         Long term investment activities or other uses that cause a reduction in the working capital.

Cash basis SCFP, also known as cash flow statement, summarises the flow of cash in and out of the firm over a period of time. It focuses on various items which bring out changes in the cash balance between two balance sheet dates. It covers all items which increase or decrease the cash of a business enterprise.

Balance Sheet

Balance Sheet shows the financial position of a business on a certain date. It is also called statement of financial position. Balance sheet indicates the investing and financial activities of a business at a point of time and shows a firm’s assets, liabilities and equity capital usually at the close of the last day of a month or year.

Assets are economic resources and provide future benefits to a firm such as cash, inventories, debtors, building, plant, patents, goodwill etc. Liabilities are creditors’ or outsiders’ claims on the assets of a business enterprise such as creditors, accounts payables, salaries payable, income tax payable, debentures etc.  Liabilities include shareholders’ equity as well which are in the form of ordinary shares, preference shares, and retained earnings.

The balance sheet is prepared from the trial balance after all the nominal accounts and accounts relating to goods have been closed by transfer to trading and profit and loss account. The balance sheet is described as a classified summary of debit and credit balances existing in the trial balance after the trading and profit and loss account has been prepared.

The balance sheet should provide information in respect of:

·         The nature and cost (or book value) of the assets;

·         The nature and amount of the liabilities;

·         The amount of capital;

·         Whether the firm is solvent and

·         Whether the firm is overtrading.