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CHAPTER NO. 3 MANAGEMENT OF EARNING.
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CHAPTER NO. 3MANAGEMENT OF EARNING
The term management of earnings means how the earnings of a firm utilized i.e. How much is paid to the shareholders in the form of dividends & how much is retained & ploughed back in the business. The way the companies apportion their earnings between dividends & retention is known as management of earnings ‘Management of income includes the management of each phase of the company’s business because, the minutest activity of the business usually involves income or expenditure” GERSTENBERG management of earnings
MANAGEMENT OF EARNINGS INCLUDES 1. (A) DETERMINATION OF PROFITS (B) DETERMINATION OF SURPLUS (C) CREATION OF RESERVE 2. PROVISION FOR DEPRECIATION & DEPRECIATION POLICY 3. DECLARATION OF DIVIDEND & DIVIDEND POLICY 4. RETAINED EARNINGS & PLOUGHING BACK OF PROFITS (SELF- FINANCING) SCOPE OF MANAGEMENT OF EARNINGS
For correct reporting to the shareholders For declaration of dividends, For ascertaining the operating efficiency of the company For deciding about the future expansion &growth For ascertaining the intensive use of capital For determining the credit worthiness of the firm For payment of correct taxes For determining the basis of mergers and amalgamations For ascertaining the importance of the industry in the national economy DETERMINATION OF PROFITS
Surplus according to one school of thought The balance remaining after deducting the liabilities and share capital from the total assets is known as surplus. In the opinion of other school Surplus represents the undistributed earnings of the company i.e., the balance of profits remaining after paying dividends to the shareholders. Still there are others in whose opinion Surplus is a left over which represents an addition to assets that is carried over on the equity side. surplus
1. Uses of EARNED SURPLUS 2. USES OF CAPITAL SURPLUS • Reducing the value of fixed & working capital • Writing off intangible assets • Equalizing the rate of dividend • Financing schemes of expansion & growth • Absorbing the shocks of business cycles • Supplementing other reserves • For expansion & growth • For protecting investments against a decline in values • For providing funds to working capital • For writing down of operating losses • For absorbing depreciation Uses of surplus
UNDER VALUATION OF ASSTS OVER STATEMENT OF LIABILITIES • Charging excessive depreciation • Charging capital expenses as revenue • Writing off assets by charging against surplus • Showing a contingent liability as an actual liability • Use of fictitious liabilities • Providing excessive provision for taxation METODS TO HIDE SURPLUS
It refers to that amount set aside out of profits to cover any liability, contingency, commitment or depreciation in the value of assets. If amount equal to reserve are invested in out side investments the reserve is called reserve fund. IN MODERN DAYS The term reserve used only in connection with restriction on, or appropriation of retained earnings. RESERVES
The ploughing back of profits is a technique under which all profits of a company are not distributed amongst the shareholders as dividend, but a part of profits is retained or reinvested in the company. This process of retaining and utilization year after year in the business is known as ploughing back of profits. This is also known as self financing process Internal financing process Inter financing process PLOUGHING BACK OF PROFITS
FORMULA OF COST OF RETAINED EARNINGS FORMULA OF COST OF RETAINED EARNINGS TO MAKE ADJUSTMENTS OF TAX & COST OF PURCHASING NEW SECURITIES Kr = COST OF RETAINED EARNINGS D = EXPECTED DIVIDEND NP = NET PROCEEDS OF SHARE ISSUE G = RATE OF GROWTH Kr = COST OF RETAINED EARNINGS D = EXPECTED DIVIDEND NP = NET PROCEEDS OF SHARE ISSUE G = RATE OF GROWTH T = TAX RATE b = COST OF PURCHASING NEW SECURITIES, OR BROKERAGE COSTS COST OF RETAINED EARNINGS
