Archive for November, 2017

Formulation of Strategy

Formulation of strategies is a creative and analytical process. It is a process because particular functions are performed in a sequence over the period of time. The process involves a number of activities and their analysis to arrive at a decision.

Though there may not be unanimity over these activities particularly in the context of organizational variability, a complete process of strategy formulation and implementation can be understood.

The process set out above includes strategy formulation and its implementation, what has been referred to as strategic management process. The same process can be applied to both strategy and policy. The figure suggests the various elements of strategy formulation and process and the way they interact among themselves. Accordingly, the various elements are organizational mission and objectives, environmental analysis, corporate analysis, identification of alternatives, and choice of alternative. Up to this stage the formulation is complete. However, implementation is closely related with formulation because it will provide feedback for adjusting strategy.

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Why are caps and collars considered insurance products?

Insurance products are contingent claims. The insured party pays a premium for the contract (for example, an automobile policy). Should the specified condition (for example, an automobile accident) not occur, no payment is made under the policy. However, if the condition does take place, the insurer pays according to the contract’s terms. Caps and collars work exactly in this way. A borrower who wishes to limit its interest rate exposure pays a premium to the writer of the contract. Should interest rates remain below the cap or within the collar, no payment is made to the borrower. However, if rates move outside the specified limits, the writer of the contract reimburses the borrower, in this case by the amount of the interest payment resulting from the difference between the actual and contract rates.

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What are the Contingent Liabilities

Contingent liability is a potential obligation which may in the future develop into actual liability or may dissolve without necessitating any outlay. The crucial characteristics of contingent liability is uncertainty i.e, whether it will or will not develop into a real liability. Thus a contingent liability is that which may or may not arise after the preparation of balance sheet.

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Which party bears interest-rate risk exposure in a fixed rate loan? in a floating rate loan?

To the extent that risk means future uncertainty, both parties bear risk when interest rates are floating that they do not bear when rates are fixed. However, most lenders and borrowers are primarily concerned with the possibility that interest rates will move against them. Accordingly, the risk depends on the direction in which rates might move. In a fixed rate loan, the risk comes from not being able to benefit from a change in rates. The lender bears the risk that interest rates will rise, and it will be unable to increase the rate it is charging; the borrower bears the risk that rates will fall, and it will be unable to reduce the rate it is paying. In a floating rate loan, the risk comes from being hurt by a change in rates. The lender bears the risk that interest rates will fall, and so will its earnings; the borrower bears the risk that rates will rise, and so will the amount it is paying in interest.

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Usual Contents of Work Paper File

The following are the usual contents of work paper file:

1. A complete list of all the books in use, and the names of the clerks in charge of each of each should be prepared.

2. All cash and cheques in hand on the closing date of the audit period should be sent to bank, if possible, and if not, the Cash book should be kept written up to the date of the auditor’s visit.

3. A statement reconciling the Bank balance as per cash book with that of the Bank statement should be ready together with a Bank Certificate.

4. All postings, additions, carry-forwards etc, should be ready written in ink, the requisite balances extracted and trial balance agreed.

5. Schedule of debtors, creditors, duly agreed with their control account in the general ledger should be kept ready with confirmation of the parties regarding balance due to or by them.

6. All important contacts, title deeds and other documents having any bearing on accounts to be kept ready for reference.

7. Minutes books, copies of Partnership Deed or Memorandum and Articles of Association and Prospectus etc. to be kept at hand.

8. All vouchers should be available arranged in order of books entries.

9. Bills receivables, post-dated cheques, bonds and securities and investments should be ready for production when required and a list thereof kept ready.

10. List of all prepared expenses, advances, accrued income and of outstanding expenses etc, to be prepared and kept ready.

11. A complete list of stocks of stores should be prepared.

12. A list of over-dues and doubtful debts included in the schedule of debtors stating suggested provisions deemed desirable against possible loss should be prepared.

13. The draft Profit and Loss Account and Balance sheet be prepared, and in case of limited company, should be passed by the Directors.

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Why would any company purchase a floor

Why would any company purchase a floor, since it keeps its interest payments up when interest rates fall?

While borrowers do not purchase floors by themselves for this reason, they do purchase them along with caps to create collars. Since the insurer benefits from a floor, it is willing to sell a collar for a lower premium than just a cap alone. The borrower gets the protection of the cap at a lower price than by simply purchasing the cap alone.

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Meaning of Interim Dividend

Interim Dividend is that which is paid before the final dividend is declared. it is a dividend paid in between the two final dividends. It is a dividend which is paid between the two annual general meetings. It is a dividend which is completely within the powers and authority of the directors and for which the sanction of the shareholders is not legally required. It is paid when in the opinion of directors sufficient profit has been made.

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Companies enter into swaps for reasons of return and/or risk

Either they wish to lower the cost of their financing or better match their financing to the cash flows from their operations, thereby providing some hedging. Each of the three types of swaps usually lowers the cost of financing. In addition each changes the company’s risk exposure:

a. A basis swap? A basis swap is an exchange of loan obligations based on different underlying reference rates. A company can reduce its financing risk if it can match the basis of its financing to the characteristics of its income stream.

b. A fixed-floating swap? A fixed-floating swap is an exchange of loan obligations where one is at a fixed rate and the other at a floating rate of interest. A company can reduce its financing risk if it can match its interest rate exposure to the characteristics of its income stream.

c. A currency swap? A currency swap is an exchange of loan obligations where the interest payments, principal payments, or both are denominated in different currencies. A company can reduce its financing risk if it can match its foreign currency exposure to the characteristics of its income stream.

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Importance of An Accurate Valuation of Inventories

The auditor examines the particular thing to assume himself of its existence. Physical examination requires identification of the item. One must be convinced that he has examined the specific theory which he is supposed to be verification of genuineness and quality.

The applicability of its techniques is restricted to those assets which are either material or some tangible evidence of existence such as count, inventories, fixed property, etc and stock-in-trade should be valued by expert values. As the amounts of debtors and creditors can not be correctly ascertained, the purchaser should be recommended not only to take them over, but merely to collect and pay them on behalf of the vendor and account for the net proceeds, therefrom to him.

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How does a collar make a floating rate loan become more like a fixed rate loan?

A collar limits the amount of interest rate movement that can affect a borrower. A collar with a wide band has very little effect, cutting off only drastic changes to interest rates. As the bands of the collar narrow, the borrower is insulated from greater interest rate movements. At the extreme of a very narrow collar, the borrower is hardly affected at all by interest rate movements, and its payments against the loan are (nearly) the same as if the loan carried a fixed rate in the first place.

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