Asset Management CHAPTER NO: I INTRODUCTION SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 1 Asset Management INTRODUCTION OF FINANCE Financial management is essential for every business enterprise to carry out its activities. Because finance is basic foundation of all kinds of modern economic activities of all the factors of production namely land, labor, capital, and organization capital are the most important factors. All economic activities have their base in finance. Finance is the master key that provides access to all resources for being employed in business activities. Finance is regarded as the “LIFE BLOOD OF BUSINSS”. Financial management is a specialized activity which is concerned with the collection or raising of finance and its effective utilization for the attainment of common objectives of the business enterprise .It includes financial planning, financial administration and financial control. Financial management is concerned with the management decisions that results in the acquisitions and financing of long term and short term credits for the firm as such it deals with the situations that require selection of specific assets or combination of liabilities as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected inflows and outflows of funds and their effects upon managerial objective. Meaning of finance Finance is one of the major elements, which activates the overall growth of the economy. Finance is the lifeblood of economic activity. A well-knit financial system directly contributes to the growth of the economy. An efficient financial system calls for the effective performance of financial institutions, financial instruments and financial markets. SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 2 Asset Management Importance of finance:- Ensure that there are adequate funds available to acquire the resources needed to help the organization to achieve its objectives. Ensure costs are controlled. Ensure adequate cash flow Establish and control profitability levels. One of the major roles of the finance department is to identify appropriate financial information prior to communicating this information to managers and decision makers in order that they may make informed judgments and decisions. Finance also prepares financial documents and final accounts for managers to use and for reporting purposes (AGM etc…….) Meaning of management In the present day industrial world, management has become universal. The principles of management are being applied not only for managing business concerns, but also to manage various other service sector institutions like hospitals, educational institutions, etc. It is in this context both finance and management functions gained substantial significance in the industry. Meaning of Financial management: Financial management is the part of management activity which concerned with planning and controlling of firms financial resources .It is deals with finding out sources of finance, arranging for finance, application of funds, and distribution of profits. Definition of Financial management: According to EZRA SOLOMAN, “Financial management is concerned with the efficient use of important economic resources, namely capital funds”. “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation” SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 3 Asset Management By Joseph and Massie Objectives of Financial management 1. Specific objectives: Profit maximization:-Maximization is the condition of achieving the maximum target profit with available resources in an economic and efficient manner. Wealth maximization:-It refers to the maximization of wealth by maximization in the market value of shares of a company. 2. General objectives:- Balance sheet structure: -A proper balance between fixed and current assets is an important factor for efficient management funds. Liquidity: -Liquidity refers to available cash and it is an indication of positive growth of the company. Efficiency: - Efficiency and effectiveness are very much necessary in controlling the flow of funds. Decisions of Financial Management:- Investment decision: - This decision involves both short term and long term investments which in other words means both capital assets and current assets.The investment in current assets will depend on the credit and inventory policies pursued by the enterprise. The credit policy is determined keeping view the need of growth in sales and the availability of finance. Financing decision: - This decision involves selecting appropriate sources of funds for raising money. It is a major challenge for a financial executive. Provision of funds required at the proper time is one of the primary tasks of the finance manager. Every business activity requires funds and hence every financial manager is confronted with this problem. He has to identify the sources from which the funds can be raised. SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 4 Asset Management Dividend decision: - The primary objective of any organization is to fulfill the desire of the investors by promising a good percentage of dividends on their investments. INTRODUCTION OF ASSET In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the monetary value of the assets owned by the firm. It is money and other valuables belonging to an individual or business. Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, while fixed assets include such items asbuildings and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examplesof intangible assets are goodwill, copyrights, trademarks, patents and computer programs, and financial assets, including such items as accounts receivable, bonds and stocks. DEFINITION OF ASSET An asset is a resource controlled by the entity as a result of past events or transactionsand from which future economic benefits are expected to flow to the entity. MEANING OF ASSET SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 5 Asset Management The term asset means resources, things or rights of value owned by a business which benefit future period. ASSET CHARECTARISTICS: Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board. The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise." This means that: The probable present benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services; The entity can control access to the benefit; The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred. TYPES OF ASSET 1. Fixed assets 2. Current assets Fixed assets Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land,buildings, machinery, furniture, tools, IT equipment,e.g., laptops, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. Asset is important factor in balance sheetThese are also called capital assets in management accounting. SWAMY VIVEKANANDA RURAL FIRST GRADE COLLEGE Page 6 Asset Management Intangible assets Intangible assets lack of physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Tangible assets Tangible assets are those that have physial substance, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals. Current assets Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: 1. Cash and cash equivalents :- it is the most liquid asset, which includes currency, depositaccounts, and negotiable instruments (e.g., money orders, cheque, bank drafts). 2. Short-term investments :- include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3.