Tag: Financial Management Osmania University B.com Notes

Plagiarism means presenting someone else’s work as your own. In academic writing, plagiarizing involves using words, ideas, or information from a source without including a proper citation.

Plagiarism is the representation of another author’s language, thoughts, ideas, or expressions as one’s own original work. In educational contexts, there are differing definitions of plagiarism depending on the institution. Plagiarism is considered a violation of academic integrity and a breach of journalistic ethics. It is subject to sanctions such as penalties, suspension, expulsion from school or work, substantial fines and even incarceration. Recently, cases of “extreme plagiarism” have been identified in academia. The modern concept of plagiarism as immoral and originality as an ideal emerged in Europe in the 18th century, particularly with the Romantic movement.

Generally, plagiarism is not in itself a crime, but like counterfeiting fraud can be punished in a court for prejudices caused by copyright infringement, violation of moral rights, or torts. In academia and industry, it is a serious ethical offense. Plagiarism and copyright infringement overlap to a considerable extent, but they are not equivalent concepts, and many types of plagiarism do not constitute copyright infringement, which is defined by copyright law and may be adjudicated by courts.

Plagiarism can have serious consequences for students and researchers, even when it’s done accidentally. To avoid plagiarism, it’s important to keep track of your sources and cite them correctly.

Within academia, plagiarism by students, professors, or researchers is considered academic dishonesty or academic fraud, and offenders are subject to academic censure, up to and including expulsion. Some institutions use plagiarism detection software to uncover potential plagiarism and to deter students from plagiarizing. However, plagiarism detection software does not always yield accurate results and there are loopholes in these systems. Some universities address the issue of academic integrity by providing students with thorough orientations, required writing courses, and clearly articulated honor codes. Indeed, there is a virtually uniform understanding among college students that plagiarism is wrong. Nevertheless, each year students are brought before their institutions’ disciplinary boards on charges that they have misused sources in their schoolwork. However, the practice of plagiarizing by use of sufficient word substitutions to elude detection software, known as rogeting, has rapidly evolved as students and unethical academics seek to stay ahead of detection software.

An extreme form of plagiarism, known as “contract cheating”, involves students paying someone else, such as an essay mill, to do their work for them.

Academia

No universally adopted definition of academic plagiarism exists. However, this section provides several definitions to exemplify the most common characteristics of academic plagiarism. It has been called, “The use of ideas, concepts, words, or structures without appropriately acknowledging the source to benefit in a setting where originality is expected.”

This is an abridged version of Teddi Fishman’s definition of plagiarism, which proposed five elements characteristic of plagiarism. According to Fishman, plagiarism occurs when someone:

• Attributable to another identifiable person or source.
• Uses words, ideas, or work products.
• In a situation in which there is a legitimate expectation of original authorship.
• Without attributing the work to the source from which it was obtained
• In order to obtain some benefit, credit, or gain which need not be monetary.

Type:

Accidental Plagiarism

Accidental plagiarism occurs when a person neglects to cite their sources, or misquotes their sources, or unintentionally paraphrases a source by using similar words, groups of words, and/or sentence structure without attribution. Students must learn how to cite their sources and to take careful and accurate notes when doing research. Lack of intent does not absolve the student of responsibility for plagiarism. Cases of accidental plagiarism are taken as seriously as any other plagiarism and are subject to the same range of consequences as other types of plagiarism.

Self Plagiarism

Self-plagiarism occurs when a student submits his or her own previous work, or mixes parts of previous works, without permission from all professors involved. For example, it would be unacceptable to incorporate part of a term paper you wrote in high school into a paper assigned in a college course. Self-plagiarism also applies to submitting the same piece of work for assignments in different classes without previous permission from both professors.

Direct Plagiarism

Direct plagiarism is the word-for-word transcription of a section of someone else’s work, without attribution and without quotation marks. The deliberate plagiarism of someone else’s work is unethical, academically dishonest, and grounds for disciplinary actions, including expulsion.

Mosaic Plagiarism

Mosaic Plagiarism occurs when a student borrows phrases from a source without using quotation marks, or finds synonyms for the author’s language while keeping to the same general structure and meaning of the original. Sometimes called “patch writing,” this kind of paraphrasing, whether intentional or not, is academically dishonest and punishable even if you footnote your source.

Avoiding plagiarism

• When you want to express an idea or information from a source, paraphrase or summarize it entirely in your own words.
• When you want to include an exact phrase, sentence or passage from a source, use a quotation.
• Always cite the source when you quote, paraphrase, or summarize.

Measures to overcome Plagiarism

Paraphrase your content

Do not copy–paste the text verbatim from the reference paper. Instead, restate the idea in your own words.

Use Quotations

Use quotes to indicate that the text has been taken from another paper. The quotes should be exactly the way they appear in the paper you take them from.

Cite your Sources

Identify what does and does not need to be cited.

Any words or ideas that are not your own but taken from another paper need to be cited.

Cite Your Own Material If you are using content from your previous paper, you must cite yourself. Using material you have published before without citation is called self-plagiarism.

Maintain records of the sources you refer to

Use multiple references for the background information/literature survey. For example, rather than referencing a review, the individual papers should be referred to and cited.

Independent and Dependent Variables

In general, experiments purposefully change one variable, which is the independent variable. But a variable that changes in direct response to the independent variable is the dependent variable. Say there’s an experiment to test whether changing the position of an ice cube affects its ability to melt. The change in an ice cube’s position represents the independent variable. The result of whether the ice cube melts or not is the dependent variable.

Intervening variables

An intervening variable, sometimes called a mediator variable, is a theoretical variable the researcher uses to explain a cause or connection between other study variables usually dependent and independent ones. They are associations instead of observations. For example, if wealth is the independent variable, and a long life span is a dependent variable, the researcher might hypothesize that access to quality healthcare is the intervening variable that links wealth and life span.

Moderating variables

A moderating or moderator variable changes the relationship between dependent and independent variables by strengthening or weakening the intervening variable’s effect. For example, in a study looking at the relationship between economic status (independent variable) and how frequently people get physical exams from a doctor (dependent variable), age is a moderating variable. That relationship might be weaker in younger individuals and stronger in older individuals.

Constant or Controllable Variable

Sometimes certain characteristics of the objects under scrutiny are deliberately left unchanged. These are known as constant or controlled variables. In the ice cube experiment, one constant or controllable variable could be the size and shape of the cube. By keeping the ice cubes’ sizes and shapes the same, it’s easier to measure the differences between the cubes as they melt after shifting their positions, as they all started out as the same size.

Extraneous variables

Extraneous variables are factors that affect the dependent variable but that the researcher did not originally consider when designing the experiment. These unwanted variables can unintentionally change a study’s results or how a researcher interprets those results. Take, for example, a study assessing whether private tutoring or online courses are more effective at improving students’ Spanish test scores. Extraneous variables that might unintentionally influence the outcome include parental support, prior knowledge of a foreign language or socioeconomic status.

Qualitative variables

Qualitative, or categorical, variables are non-numerical values or groupings. Examples might include eye or hair color. Researchers can further categorize qualitative variables into three types:

• Binary: Variables with only two categories, such as male or female, red or blue.
• Nominal: Variables you can organize in more than two categories that do not follow a particular order. Take, for example, housing types: Single-family home, condominium, tiny home.
• Ordinal: Variables you can organize in more than two categories that follow a particular order. Take, for example, level of satisfaction: Unsatisfied, neutral, satisfied.

Quantitative variables

Quantitative variables are any data sets that involve numbers or amounts. Examples might include height, distance or number of items. Researchers can further categorize quantitative variables into two types:

• Discrete: Any numerical variables you can realistically count, such as the coins in your wallet or the money in your savings account.
• Continuous: Numerical variables that you could never finish counting, such as time.

Composite variables

A composite variable is two or more variables combined to make a more complex variable. Overall health is an example of a composite variable if you use other variables, such as weight, blood pressure and chronic pain, to determine overall health in your experiment.

Confounding variables

A confounding variable is one you did not account for that can disguise another variable’s effects. Confounding variables can invalidate your experiment results by making them biased or suggesting a relationship between variables exists when it does not. For example, if you are studying the relationship between exercise level (independent variable) and body mass index (dependent variable) but do not consider age’s effect on these factors, it becomes a confounding variable that changes your results.

Identification of research problem refers to the sense of awareness of a prevalent social problem, a social phenomenon or a concept that is worth study as it requires to be investigated to understand it. The researcher identifies such a research problem through his observation, knowledge, wisdom and skills.

The identification of a problem to study can be challenging, not because there’s a lack of issues that could be investigated, but due to the challenge of formulating an academically relevant and researchable problem which is unique and does not simply duplicate the work of others. To facilitate how you might select a problem from which to build a research study, consider these sources of inspiration:

Relevant Literature

The selection of a research problem can be derived from a thorough review of pertinent research associated with your overall area of interest. This may reveal where gaps exist in understanding a topic or where an issue has been understudied. Research may be conducted to:

1) Fill such gaps in knowledge.

2) Evaluate if the methodologies employed in prior studies can be adapted to solve other problems.

3) Determine if a similar study could be conducted in a different subject area or applied in a different context or to different study sample [i.e., different setting or different group of people].

Also, authors frequently conclude their studies by noting implications for further research; read the conclusion of pertinent studies because statements about further research can be a valuable source for identifying new problems to investigate. The fact that a researcher has identified a topic worthy of further exploration validates the fact it is worth pursuing.

Personal Experience

Don’t undervalue your everyday experiences or encounters as worthwhile problems for investigation. Think critically about your own experiences and/or frustrations with an issue facing society, your community, your neighborhood, your family, or your personal life. This can be derived, for example, from deliberate observations of certain relationships for which there is no clear explanation or witnessing an event that appears harmful to a person or group or that is out of the ordinary.

Interviewing Practitioners

The identification of research problems about particular topics can arise from formal interviews or informal discussions with practitioners who provide insight into new directions for future research and how to make research findings more relevant to practice. Discussions with experts in the field, such as, teachers, social workers, health care providers, lawyers, business leaders, etc., offers the chance to identify practical, “real world” problems that may be understudied or ignored within academic circles. This approach also provides some practical knowledge which may help in the process of designing and conducting your study.

Interdisciplinary Perspectives

Identifying a problem that forms the basis for a research study can come from academic movements and scholarship originating in disciplines outside of your primary area of study. This can be an intellectually stimulating exercise. A review of pertinent literature should include examining research from related disciplines that can reveal new avenues of exploration and analysis. An interdisciplinary approach to selecting a research problem offers an opportunity to construct a more comprehensive understanding of a very complex issue that any single discipline may be able to provide.

Deductions from Theory

This relates to deductions made from social philosophy or generalizations embodied in life and in society that the researcher is familiar with. These deductions from human behavior are then placed within an empirical frame of reference through research. From a theory, the researcher can formulate a research problem or hypothesis stating the expected findings in certain empirical situations. The research asks the question: “What relationship between variables will be observed if theory aptly summarizes the state of affairs?” One can then design and carry out a systematic investigation to assess whether empirical data confirm or reject the hypothesis, and hence, the theory.

Research is a method to dig up a subject to its core and gain knowledge and make theories from it. Anything can be termed as research which helps you to gain knowledge about science, culture, or sociology. There are mainly three types of research scientific, artistic, and historical researches. All the theories and facts that come up from these researches are determined from different methods and steps.

Research Method

Research Method mean the research techniques or tools to be used for conducting research irrespective of whether the research belongs to physical or social sciences or any other disciplines.

Groups.

• The first group includes methods dealing with collection and description of data.

• The second group consists of techniques used for establishing a statistical relationship between variables.
• The third group deals with methods used to evaluate the reliability, validity, and accuracy of the results discerned by the data.

Research Methodology

The research methodology is a way to study the various steps that are generally adopted by a researcher in studying his research problems systematically, along with the logic, assumptions, justification, and rationale behind them. Process of governing the research methods. Its analysis which way the research method is moving to and guides the methods to the right path to fulfil the objective of the experiment. This is huge two-dimensional planning in which research methods are just a part. It consists of many processes after the research methods. A successful scientific methodology leads to a successful experiment.

The researcher takes an overview of various steps that are chosen by him in understanding the problem at hand, along with the logic behind the methods employed by the researcher during study. It also clarifies the reason for using a particular method or technique, and not others, so that the results obtained can be assessed either by the researcher himself or any other party.

A researcher’s methodology aims at answering such questions as:

• How has been the research problem defined?
• Why was this particular group of people interviewed and not the other groups?
• How many individuals provided the answers on which the researcher’s conclusions were based?
• In what way and why has been the research hypothesis formulated?
• Why were these particular techniques used to analyze data?
• What level of evidence was used to determine whether or not to reject the stated hypothesis?

Research without a pre-drawn plan is like an ocean voyage without Mariner’s compass. The preparation of a research plan for a study aid in establishing direction to the study and in knowing exactly what has to be done and how and when it has to be done at every stage.

Marketing Level

• Price
• Product
• Place
• Promotion
• Sales
• Customer

Organizational Level

• Finance
• HRM
• Production
• Organizational Effectiveness and Success.

Environmental Level

• Competitors Analysis
• Technological innovations
• Industry fears
• New Market entry
• New product development

• It is the process of giving clear and precise meaning and accepted definitions to various concepts and variables used in the area of research undertaken. All terms and concepts should be defined clearly. Vague ideas will lead to inadequate and un-interpretable research findings. A not “too broad or too narrow” definition is to be given to understand the full meaning of the terms and concepts used. It should also specify the depth and magnitude of empirical reality that needs to be explored for investigating the problem.
• The social researcher guided either by a desire to gain knowledge or by an urgency to solve a problem scientifically works out a plan of study. In the beginning, this scope is generally vague and tentative. It undergoes many modifications and changes, as the study progresses and insights into it deepen. The considerations which enter into making the decisions regarding the what, where, when, how, constitute a scope of the study or a study design.
• A research plan prescribes the boundaries of research activities and enables the researcher to channel his energies in the right work. With clear research objectives in view, the researcher can proceed systematically toward their achievement. The design also enables the researcher to anticipate potential problems of data gathering operationalization of concepts, measurement, etc.

Significance

Research design is significant simply because it allows for the smooth sailing of the various research operations, thus making research as efficient as possible producing maximum information with nominal expenses of effort, time and money.

Research has its special significance in solving various operational and planning problems of business and industry. Operations research and market research, along with motivational research, are considered crucial and their results assist, in more than one way, in taking business decisions.

Market research is the investigation of the structure and development of a market for the purpose of formulating efficient policies for purchasing, production and sales. Operations research refers to the application of mathematical, logical and analytical techniques to the solution of business problems of cost minimization or of profit maximization or what can be termed as optimization problems. Motivational research of determining why people behave as they do is mainly concerned with market characteristics. In other words, it is concerned with the determination of motivations underlying the consumer or market behaviour.

All these are of great help to people in business and industry who are responsible for taking business decisions. Research with regard to demand and market factors has great utility in business. Given knowledge of future demand, it is generally not difficult for a firm, or for an industry to adjust its supply schedule within the limits of its projected capacity. Market analysis has become an integral tool of business policy these days. Business budgeting, which ultimately results in projected profit and loss account, is based mainly on sales estimates which in turn depends on business research.

Once sales forecasting is done, efficient production and investment programmes can be set up around which are grouped the purchasing and financing plans. Research, thus, replaces intuitive business decisions by more logical and scientific decisions. Research is equally important for social scientists in studying social relationships and in seeking answers to various social problems. It provides the intellectual satisfaction of knowing a few things just for the sake of knowledge and also has practical utility for the social scientist to know for the sake of being able to do something better or in a more efficient manner.

The design assists the researcher to organize his ideas in a form whereby it will be possible for him to watch out for flaws and inadequacies. This type of design can also be given to others for their comments and critical evaluation. In the absence of such a strategy, it will likely be challenging for the critic to supply a comprehensive review of the offered study.

Descriptive research design provides accurate description of variables relevant to the problem under consideration and generally used for preliminary and exploratory studies. The descriptive study is more formal and less flexible as it involves both qualitative and quantitative information and can be used for both positivist test and non-positivist test research. The commonly used techniques under this category are panel research design or longitudinal research. The panel design involves the continual or periodic information collection from a fixed panel or sample of respondents. The longitudinal analysis involves repeated measurement of the same variables to facilitate a variety of inferences to be drawn about the behaviour of the elements of the panel. Participant observation and field studies use such methods.

Cross sectional design is aimed are taking a one-time stock of the situation or the phenomena in which the decision maker is interested. Cross sectional designs give the picture of situation at a given point of time. Opinion polls and market service use such kind of methods.

Experimental Research Design is where the researcher actively tries to change inputs like the situation, circumstances or experience of participants which may lead to a change in behaviour or outcome for the participants of the study. It establishes the causality between dependent and independent variable and test hypothesis. The participants are ideally randomly assigned to different conditions and variable of interest for measured. This is done to eliminate all extraneous variables. Hawthorne studies of Elton Mayo are class examples of such experimental design. This is a method which is most often associated with natural sciences in which we change variables in a controlled environment. This method is mostly used for positivity is to research or quantitative research as it aims to keep prejudices and biases away while doing the research. Experimental research attempts to determine how and why something happens. Experimental research tests the way in which independent variable affect the dependent variable. Due to high objectivity data obtained through such methodology are more reliable.

Comparative method is used to compare the social phenomena to arrive at generalized conclusions. It is a method which is suggested as an alternative to the experimental research in sociology but is based on the similar sets of principles. According to Haralambos and Holborn in the Sociology: Themes and Perspectives, 2013, the comparative method is based on what has happened or is happening in society rather than upon situation artificially created by the researcher. It was more popular with the early sociologist. Durkheim was the first sociologist to discuss this method at length in the rules of Sociological Method, 1895. He regarded it as a method of sociology to identify dependent and independent variables. The crime study of suicide is a classic example of use of this methodology. Ginsberg use this method in the study of primitive societies. If a particular social phenomenon is studied in different social contexts and the causes are found out then a cause and effect relationship can be established.

Value Added Approach:

Under this approach, the income is measured with the help of the value added by the firm during a particular period and the same is determined by the differences between the value of the product/output over the cost of raw materials including stores and necessary components which are purchased from outside and are used in this production process of the concern. In this respect, it must be remembered that the prices so paid for the purchase of materials, stores etc. are to be deducted from that value of the product.

The value added is to be a distributed among:

(i) The worker to whom wages are paid

(ii) The supplier of non-manual services to whom expenses are paid

(iii) Supplies of capital to whom interest is paid

(iv) Maintenance of capital by way of depreciation etc.

(v) To the owner to whom profits are to be paid.

To sum up, value added of the firm amounts to:

Wages + Expenses + Interest on Capital + Depreciation + Profit.

The Balance Sheet Approach:

This approach is also known as capital maintenance approach. Increase in assets is the result of income. As such, measurement of income requires the measurement of net increase in assets (of a specific accounting period) which are made for the period after maintaining the capital intact.

Under this approach, the opening assets of a business constantly bring a change. As soon as a transaction occurs, there is a change in assets, either in their shape or in their nature. It is also known to us that a flow comes out of stock and, similarly, an income comes out of capital. Therefore, the income after mixing up with capital is circulated again and again for generating further income which usually increases the volume of total assets although a major portion of fixed assets do not bring any change.

It is to be noted that measurement of net asset needs valuation of both fixed and current assets. There is difference of opinion among accountants as to the valuation of assets. In case of current assets, of course the difference is not so important. But, in case of fixed assets, there is a wide difference of opinion among accountants as to their valuation.

The decrease in value of fixed asset, as a result of use, deterioration in the form of depreciation or any other factor should also be considered, i.e., market value should be taken into consideration in order to maintain the capital intact.

The Activities Approach to Income Measurement:

This approach differs from the previous approach, viz. the transaction approach, in the sense that it expresses a description of the activities of a firm rather than on the reporting of transactions alone. In other words, income is believed to arise when certain events or activities take place and not as a result of certain transactions.

For example, activity incomes are recorded at the time of planning, purchasing, production and sales including collection process (i.e., it is an expansion of the transaction approach). Therefore, the fundamental difference between the two approaches is that the former is based on the reporting process which measures an external event, i.e., transaction, whereas the latter is based on the real-world concept of event or activity.

The Transaction or the Operation Approach to Income Measurement:

This is the more conventional approach used by accountants and most of the business enterprises adopt this method.

This approach indicates that the changes between asset and liability valuations arise as a result of transactions.

Revenues and expenses are recorded as soon as they arise from the external transactions. The problems arise of timing and valuation for recording each transaction. But the fundamental principal problem is to make a proper matching against the related revenues during a particular period.

The different concepts of incomes can be incorporated into the transactions approach by making proper adjustments to revenues and expenses at the time of recording each transaction and by making adjustments to asset valuations. Therefore, the current accounting practice is a combination of maintenance of capital concepts; operational concept and transaction approach.

Advantages:

• The incomes from operations and from external causes can be reported separately.
• Under this method, profit earned from each product can be determined separately. As such, it provides more useful information to the management.
• Recording and analysing the external transactions are essential for efficient managerial work.
• It supplies a basis for the determination of the types and quantities of assets and liabilities which exist at the end of the period and, consequently, other valuation methods can easily be applied.

An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that hopefully generate a profit.

A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. Some consultants or analysts also build models to assign a dollar value on intangible items, such as the benefits and costs associated with living in a certain town.

An expense is defined in the following ways:

• Depreciation expense, which is a charge to reduce the book value of capital equipment (e.g., a machine or a building) to reflect its usage over a period.
• A prepaid expense, such as prepaid rent, is an asset that turns into a cash expense as the rent is used up each month.
• Office supplies use up the cash (asset).

Before building a new plant or taking on a new project, prudent managers conduct a cost-benefit analysis to evaluate all the potential costs and revenues that a company might generate from the project. The outcome of the analysis will determine whether the project is financially feasible or if the company should pursue another project.

In many models, a cost-benefit analysis will also factor the opportunity cost into the decision-making process. Opportunity costs are alternative benefits that could have been realized when choosing one alternative over another. In other words, the opportunity cost is the forgone or missed opportunity as a result of a choice or decision. Factoring in opportunity costs allows project managers to weigh the benefits from alternative courses of action and not merely the current path or choice being considered in the cost-benefit analysis.

A cost-benefit analysis (CBA) should begin with compiling a comprehensive list of all the costs and benefits associated with the project or decision.

The costs involved in a CBA might include the following:

• Indirect costs might include electricity, overhead costs from management, rent, utilities.
• Direct costs would be direct labor involved in manufacturing, inventory, raw materials, manufacturing expenses.
• Intangible costs of a decision, such as the impact on customers, employees, or delivery times.
• Cost of potential risks such as regulatory risks, competition, and environmental impacts.
• Opportunity costs such as alternative investments, or buying a plant versus building one.

Earnings quality, also known as quality of earnings (QoE), in accounting, refers to the ability of reported earnings (income) to predict a company’s future earnings. It is an assessment criterion for how “repeatable, controllable and bankable“A firm’s earnings are, amongst other factors, and has variously been defined as the degree to which earnings reflect underlying economic effects, are better estimates of cash flows, are conservative, or are predictable.

A company’s quality of earnings is revealed by dismissing any anomalies, accounting tricks, or one-time events that may skew the real bottom-line numbers on performance. Once these are removed, the earnings that are derived from higher sales or lower costs can be seen clearly.

Even factors external to the company can affect an evaluation of the quality of earnings. For example, during periods of high inflation, quality of earnings is considered poor for many or most companies. Their sales figures are inflated, too.

In general, earnings that are calculated conservatively are considered more reliable than those calculated by aggressive accounting policies. Quality of earnings can be eroded by accounting practices that hide poor sales or increased business risk.

Conversely, an organization can have low-quality earnings if changes in its earnings relate to other issues, such as:

• Elimination of LIFO inventory layers
• Aggressive use of accounting rules
• Inflation
• Increases in business risk
• Sale of assets for a gain

Factors

An assessment of earnings quality would therefore be based on other factors, such as:

• A correlation between reported earnings and underlying economic activity.
• The permanence and sustainability of reported earnings.
• The relationship between reported earnings and market valuation.
• The extent and impact of discretionary accruals.
• The transparency and completeness of disclosures.
• The impact of low reported earnings on corporate image.
• The company’s handling of “bad news,”
• The degree to which earnings are good estimates of cash flows.

Accruals

Accruals are a major consideration when evaluating earnings quality because they contribute to the difference between economic performance and reported earnings. Because accruals are non-cash, estimated journal entries, they may not always properly represent a company’s economic performance. For example, a company should record an estimate for sales returns and allowances. Accounting for future sales returns and allowances is appropriate and relevant because sales will be overstated if future returns are not considered. However, the subjective nature of this accrual, which is made before any return actually happens, makes it less reliable to investors. This trade-off between reliability and relevance is why earnings quality is such an important consideration.

Total Accrual to Assets Ratio

During a valuation, investors can use the following ratio to evaluate the prevalence of accruals in a company’s financial statements:

Total accruals to assets = (Net Income – Operating Cash Flow) / Beginning Total Assets

Net Income Vs. Cash Flow Ratio

Another way that investors analyze the effect of accruals on earnings quality is by comparing net income to operating cash flow. Analysts use these two measures to calculate the quality of earnings ratio as follows:

Quality of earnings ratio = Net cash from operating activities / Net income

Earnings Management

Public companies are under intense investor scrutiny, and the pressure to increase earnings every quarter can lead companies to engage in earnings management. Earnings management refers to the use of subjective estimates, changes in business practices, and accounting techniques to intentionally manipulate a company’s earnings. Because earnings management improves reported earnings without improving economic performance, increased earnings management leads to a decrease in earnings quality. Engaging in earnings management could damage investors’ perception of the reliability of your company’s financial statements. Private equity firms, hedge funds, and other investors will likely be hesitant to invest in a company that they believe is trying to artificially inflate earnings.

Profitability analysis is especially useful and essential for growing companies. Profitability analysis help businesses identify growth opportunities; since things aren’t as stable yet as compared to a more established business, profitability analysis can spell the difference between shutting down and keeping afloat. In the long run, profitability analysis can help propel that business into the future, and allow that business to grow the potential that allowed it to exist in the first place.

Profitable Customer or Market

A profitable customer is a person, organisation, business or a company that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing that customer.

A profitable market is a market for the business that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing the group of customers with which they trade within that market.

Cost Allocation

Direct costs are those costs incurred to generate revenue, such as the purchase or production cost of units sold or services delivered

Indirect costs or overheads are those costs that cannot be directly attributed to generating revenue, such as the cost of finance, marketing, communications and administration.

The challenge of any profitability analysis is to find a way of allocating the indirect costs to the significant customers or markets. To allocate indirect costs fairly, the key drivers for those costs need to be identified. Examples of drivers for indirect cost are:

• Labour cost or time
• Revenue
• Production cost or time
• Time spent servicing the customers or markets
• The number of transactions, such as purchase orders or sales orders.

Profitability control

This is simply because profit is like money in the bank. For a bootstrapped company, profit may be the corporation’s only capital. For an invested company, financing can be used to sustain a company for a certain period of time but ultimately it is a liability, not an asset. Therefore, businesses need to analyse the profitability of their various products, regions, customer groups and channels.

Past research over the years has shown that:

• 20-40 percent of a company’s products are unprofitable and up to 60 percent of their accounts generate losses
• More than half of customer relationships are not profitable. Also, 30-40 percent are only marginally profitable. More often than not, a mere 10-15 percent of company’s relationships generate most of its profits.

Identifying the functional expenses

The company needs to determine the expenses being incurred for the marketing activities such as selling, advertising, distribution, packing, billing, and collection, et al. Next task is to break each expense and allocate it to different marketing functions. For example, if most salary went to sales representatives and rest went to advertising manager, packing, office accountant, then the total salary will be allocated according to these activities. Finally, all the natural expenses of salary, rent, etc are mapped onto each functional expense of say, selling, advertising, billing, etc.

Assigning the functional expenses to the marketing entities

The next step in the Marketing-Profitability Analysis is to measure how much functional expense is associated with each type of channel. For example, based on the number of orders placed through each channel, the company can allocate accounting expenses. Also, based on the number of ads placed for each channel, the advertising expense can be allocated. This way an average cost can be calculated based on the total number of ads. Based on the amount of sales efforts required for each channel, the cost for the sales calls can be allocated to the specific channel.

Preparing a profit-and-loss statement for each marketing entity

The last step is to prepare a profit and loss statement for each type of channel. The cost of goods is assigned according to the number of sales for each channel, e.g. if one channel achieved half of the total sales then the cost of goods allocated to that channel will be half of the total cost of goods sold.

From this gross margin, one can deduct the proportion of each of the functional expenses including selling, advertising, billing, packing, etc. This overall calculation will give the net profit for each of the channels. The key inference from this calculation is that the gross sales from a specific channel does not equate to a higher profit from that same channel.

While determining the correcting action based on the profit and loss statement, the company also needs to consider factors related to buyers, market trends, marketing strategies, etc. before concluding which channels are the best to continue investing in and which channels need to be dropped. Marketing management can evaluate alternative actions more specific to the channels that are not doing so well.

Off-balance sheet (OBS), or incognito leverage, usually means an asset or debt or financing activity not on the company’s balance sheet. Total return swaps are an example of an off-balance sheet item.

Some companies may have significant amounts of off-balance sheet assets and liabilities. For example, financial institutions often offer asset management or brokerage services to their clients. The assets managed or brokered as part of these offered services (often securities) usually belong to the individual clients directly or in trust, although the company provides management, depository or other services to the client. The company itself has no direct claim to the assets, so it does not record them on its balance sheet (they are off-balance sheet assets), while it usually has some basic fiduciary duties with respect to the client. Financial institutions may report off-balance sheet items in their accounting statements formally, and may also refer to “assets under management”, a figure that may include on and off-balance sheet items.

Differences between on- and off-balance sheets

Traditionally, banks lend to borrowers under tight lending standards, keep loans on their balance sheets and retain credit risk the risk that borrowers will default (be unable to repay interest and principal as specified in the loan contract). In contrast, securitization enables banks to remove loans from balance sheets and transfer the credit risk associated with those loans. Therefore, two types of items are of interest: on-balance sheet and off-balance sheet. The former is represented by traditional loans, since banks indicate loans on the asset side of their balance sheets. However, securitized loans are represented off the balance sheet, because securitization involves selling the loans to a third party (the loan originator and the borrower being the first two parties). Banks disclose details of securitized assets only in notes to their financial statements.

Leasing:

It is the oldest form of off-balance-sheet financing. Leasing an asset, allows the company to avoid showing financing of the asset from its liabilities and lease or rent is directly shown as an expense in the Profit & Loss statement.

Special Purpose Vehicle (SPV)

Special purpose vehicles or subsidiary companies are one of the routine ways of creating off the balance sheet financing exposures. It was used by Enron, which is known for one of the high profile off-balance-sheet financing exposure controversies.

Hire Purchase Agreements

If a company cannot afford to purchase assets outright or obtain finance for the same, it can enter into a hire purchase agreement for a certain period with financiers. A financier will purchase the asset for the company, which in turn will pay a fixed amount monthly until all the terms in the contract are fulfilled. The hirer has the option of owning the asset at the end of the hire purchase agreement.

Factoring

It is a type of credit service offered by Banks and other financial institutions to their existing clients. Under factoring, finance is obtained by selling account receivables to Banks. Banks offer immediate cash to the company after taking some cut from account receivables  for offering the service.

Purpose:

• Better solvency ratios ensure maintaining a good credit rating, which in term allows the company to access cheaper finance.
• To maintain solvency ratio like Debt-to-equity ratio below a certain level and obtain funding which company would not have been able to obtain otherwise.
• It makes balance sheet finance appear leaner, which prima facie may attract investors.

Key Features

• There is a change in the Capital structure of the company.
• It results in the reduction in existing assets or exclusion of assets going to be created from the balance sheet.
• It involves the use of creative accounting and financial instruments to achieve off-balance sheet finance.
• Assets and liabilities are both understated, and it gives a leaner impression of the balance sheet finance.