EVOLUTION

Evolution of financial accounting can

be divided into three major phases

• The traditional phase

• The transitional phase
• The modern phase
TRADITIONAL PHASE
The main focus of financial management
was mainly on certain episodic events
such as:

• FORMATION
• ISSUANCE OF CAPITAL
• MAJOR EXPANSION
• MERGER
• REORGANISATION
• LIQUIDATION
 TRANSITIONAL
PHASE
The financial management during this
phase had similar nature with that of
traditional phase, but the focus
shifted to working capital
management . Greater emphasis was
put on day-to-day problems of
financial managers in the field of:

• Fund analysis
• Planning
• control
 MODERN PHASE
The basic features of modern phase
are:
• Considered to be rational matching
of funds to their uses as to maximise
the wealth of shareholders.
• The approach became more
analytical and quantitative.
 Goal of FM
•
To maximise the wealth of its current shareholders.
•
Critics view
•
Certain critique arguments & defenders

Capital mkt sceptics Financial economists


Shares fails to reflect long
term value rather managers
make more reliable decision
s of value creation

In developed capital mkts
shares are less biased &
gives estimation of value
creation.managers cannot
asses value in comparison
to investors
Strategic visionaries 
It is true ,however,
beyond a certain

Firm should have point this goal
product market goal comes at the cost
directly influence the of shareholders
wealth of shareholders. value.
Balancers

Firms should seek the 
Not practical.
balance between the There is no way to
shareholders, customers, figure out the right
suppliers, community balance
etc.
 Alternative goals

Max of profit

Max of earning per share

Max on return on equity

LIMITATIONS

Not give a proper guide for decision making.

Comparisons cannot be made at diff time &
durations.

Uncertain, based on probability distribution.
Shareholders orientation in
India

Previously firms showed sporadic concern
about shareholders but the trend is changing.

Factors contributing to the goal of
shareholders wealth max is-

Foreign exposure

Greater dependence on capital mkt

Growing imp of institutional investors

Abolition of wealth tax on financial assets
 Summarize


There are greater benefits &
incentives attached in creating value
for shareholders. Firms like Reliance &
Mahindra has communicated this new
thinking clearly in their annual reports.

Fundamental objective of firm:

Enhancement of long term shareholders value

Protecting the int of other stakeholders
 Risk – Return Trade Off

Financial Decisions involve evaluation
of alternative course of action

To an every course of action there is
a diff risk return implications
attached

Financial decision = calculated
amt of risk n return involved =
creating the value for the firm
 AGENCY PROBLEM
• Conflict between shareholders and
managers
arises due to personal
interest of mangers over shareholders
interest

• Agency cost
Difference between the value of
an actual firm and value of an hypothetical firm.
 BUSINESS ETHICS AND SOCIAL
RESPONSIBILITY
• FRAUD
violating the law for e.g. satyam
case

• UNETHICAL BEHAVIOUR
breaching the code of ethics or
moral behaviour.
 Benefits of ethical behaviour

• Avoid fines and legal expenses

• Attract and retain talented people

• Build public trust

• Create goodwill
 CORPORATE SOCIAL
RESPONSIBILITY
Contribute to economic devlopment
while improving the quality of life of
the work force and their families as
well as for the community

for e.g.
• TATA IN JAMSHEDPUR
• MUNJALS IN DHARUVERA
 TATA MOTORS CORPORATE
SOCIAL RESPONSIBILTY
• Annual expenditure on R&D is approximately 2%
of turnover.
• Set up two in house engineering research center
that house India’s only certified crash test facility.
• Tata motor has planted as many as 80,000 trees
in the work as and the township and the more
than 2.4 million trees have been planted in
jamshedpur
• CNG vehicles like buses
ORGANISATION OF THE
FINANCIAL FUNCTION
 CHIEF FINANCE OFFICER

TREASURES CONTROLLER

CASH CREDIT FINANCIAL COST

MANAGER MANAGER ACCOUNTING ACCOUNTING
MANAGER MANAGER

CAPITAL FUND DATA

TAX
BUDGETING RAISING PROCESSING
MANAGER
MANAGER MANAGER MANAGER

PORTFOLIO MANAGER INTERNAL AUDITOR

 FUNCTIONS OF FINANCIAL
SYSTEM

POOLING OF FUNDS.
TRANSFER OF RESOURCES.
RISK MANAGEMENT.
COORDINATING DECENTRALISED
DECISION MAKING.
DEALING WITH INCENTIVE PROBLEM.
 Financial Institutions Funds
Funds Commercial Banks
Insurance Companies
Mutual Funds Loans
Provident Funds
Deposits/Shares Non-Banking Financial
Companies

Suppliers of
Funds Demands of Funds
Individuals Individuals
Businesses Businesses
Governments Governements

Fund
s Financial Markets
Funds
Securiti Money Market
es Capital Market
Securities