SAM! You hurt me......

A poet of urdu says in his poetic verse that...

"Naram Naram Lafzon Se Bhi Lag Jati Hain Chotain Aksar...
Dosti To Bara Nazuk Sa Hunar Huwa Karti Hai...."

(A little word can hurt you a lot, and friendship is even a too sensitive relation)
When somebody hurts you, it really painful. And when he / she reacts that he / she did not know, then it hurts even a lot. And you hurt me and then criticize upon my attitude and reaction. Its very painful.

You hurt me SAM!!!

Personal Finance

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.

A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:
Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
Setting goals: Two examples are "retire at age 65 with a personal net worth of $1,000,000" and "buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one's employment income, or investing in the stock market.
Execution: Execution of one's personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.
Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs for children, medical expenses, and estate planning.
The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:
1 - Financial Position: this area is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.
2 - Adequate Protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.
3 - Tax Planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant impact upon your success.
4 - Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following: a - purchasing a house b - purchasing a car c - starting a business d - paying for education expenses e - accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.
Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person.
5 - Retirement Planning: retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meet any income shortfall.
6 - Estate Planning: involves planning for the disposition of your asset when you die. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. You can leave your assets to family, friends or charitable groups.

Best of Luck for Salman Cecil...

As Salman Cecil from Faisalabad is going to Mumbai, India for participating in Sa Re Ga Ma Pa Challenge 2010 of Zee TV India, a famous music talent hunt programme, my best wishes for win is for him only. Saregamapa 2010 is going to start soon. Auditions have already completed and Salman Cecil is achieved the entry level success. Zee Television Channel announced audition dates and venue for the singing talent hunt reality show Sa Re Ga Ma Pa 2010 for age group of 16 to 28 years. The auditions for Sa Re Ga Ma Pa 2010 has started from 14th May. Salman Cecil after qualifying from Dubai, now he is India for a big show.
Sa Re Ga Ma Pa, formerly known as Sa Re Ga Ma before Shaan's debut, is a musical contest shown on Zee TV. It was last hosted by Aditya Narayan and directed by Gajendra Singh. The contest is named for the first few notes of the standard octave in Indian classical music. The first episode aired on May 1, 1995 and was hosted by Sonu Nigam; the show was extremely popular at that time.
From 1999 till 2001, the show was hosted by the brothers Amaan Ali Khan and Ayaan Ali Khan, sons of legendary sarod-player Amjad Ali Khan.
After that, Shaan started hosting the show. Later, the name "Sa Re Ga Ma Pa" became known as the "brand name" of the series and completely changed the concept of the show to include public interaction through voting. This was first done in 2005, when the old show concept was completely scraped and Sa Re Ga Ma Pa Challenge 2005 was introduced.
After Sa Re Ga Ma Pa Challenge 2005, Gajendra Singh departed from Zee TV and joined hands with Star Network, along went some others like Shaan. The concept rights are not clear yet, but Zee TV claims rights on the format of the shows originally made for Zee TV, like Sa Re Ga Ma Pa and Antakshari. In February 2007, Real Media - Zee TV in Dubai, produced and started airing Sa Re Ga Ma Pa Middle East - Pakistan Challenge 2007 for the Middle East and Pakistan viewers based on the original format of the show, without Gajendrra Singh.
Zee TV Telugu has also started "Sa Re Ga Ma Pa" in 2007 and successfully run 2 series named "Sa Re Ga Ma Pa Seniors" and "Sa Re Ga Ma Pa Little Champs" and has started a new series "Sa Re Ga Ma Pa Super Seniors" for aged group above 35 years.
Zee Marathi also has its own version of "Sa Re Ga Ma Pa."
The last episode, Sa Re Ga Ma Pa Challenge 2007 aired in the year of 2007 and was hosted by Aditya Narayan. Highlights from Sa Re Ga Ma Pa 2005 and 2007 are currently aired under the title "Rock the Dhunn".
The third installment Sa Re Ga Ma Pa Challenge 2009 is being aired and premiered on July 4. Aditya Narayan returns as the host with three new mentors, who join Himesh Reshammiya.
The concept and "elimination" process was very different from today's format of public voting. Each week, a contestant would challenge the previous week's winning contestant through various different rounds such as singing a song from their own choice, singing a song of the judge's choice et cetera. The contestant who got the most points at the end of the episode would go ahead into. In total, there were usually four contestants per episode, two girls and two boys. The main goal of the contestants was to get a streak of continuous wins each week from which if they were successful would be given a break into the musical industry in India.

Salman, my ever best wishes is for you munnah!!!

"While the attitude that luck is the primary difference between success and failure would be a good excuse to easily accept the defeatist position in life, it is one that is untrue. Many, many successful people met what appeared to be insurmountable challenges on their way to achieve success."
All of us have bad luck and good luck. The man who persists through the bad luck -- who keeps right on going -- is the man who is there when the good luck comes -- and is ready to receive it.

Common Size Financial Statements

Common size ratios are used to compare financial statements of different-size companies, or of the same company over different periods. By expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:
Common Size Ratio = Item of Interest / Reference Item

For example, if the item of interest is inventory and it is referenced to total assets (as it normally would be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory / Total Assets

The ratios often are expressed as percentages of the reference amount. Common size statements usually are prepared for the income statement and balance sheet, expressing information as follows:
• Income statement items - expressed as a percentage of total revenue
• Balance sheet items - expressed as a percentage of total assets
The following example income statement shows both the dollar amounts and the common size ratios:

Common Size Income Statement

Income Statement Common-Size Income Statement
Revenue 70,134 100%
Cost of Goods Sold 44,221 63.1%
Gross Profit 25,913 36.9%
SG&A Expense 13,531 19.3%
Operating Income 12,382 17.7%
Interest Expense 2,862 4.1%
Provision for Taxes 3,766 5.4%
Net Income 5,754 8.2%

For the balance sheet, the common size percentages are referenced to the total assets. The following sample balance sheet shows both the dollar amounts and the common size ratios:

Common Size Balance Sheet

Balance Sheet Common-Size Balance Sheet
ASSETS
Cash & Marketable Securities 6,029 15.1%
Accounts Receivable 14,378 36.0%
Inventory 17,136 42.9%
Total Current Assets 37,543 93.9%
Property, Plant, & Equipment 2,442 6.1%
Total Assets 39,985 100%

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities 14,251 35.6%
Long-Term Debt 12,624 31.6%
Total Liabilities 26,875 67.2%
Shareholders' Equity 13,110 32.8%
Total Liabilities & Equity 39,985 100%


The above common size statements are prepared in a vertical analysis, referencing each line on the financial statement to a total value on the statement in a given period.
The ratios in common size statements tend to have less variation than the absolute values themselves, and trends in the ratios can reveal important changes in the business. Historical comparisons can be made in a time-series analysis to identify such trends.
Common size statements also can be used to compare the firm to other firms.

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the same point in time. A common-size analysis is especially useful when comparing companies of different sizes. It often is insightful to compare a firm to the best performing firm in its industry (benchmarking). A firm also can be compared to its industry as a whole. To compare to the industry, the ratios are calculated for each firm in the industry and an average for the industry is calculated. Comparative statements then may be constructed with the company of interest in one column and the industry averages in another. The result is a quick overview of where the firm stands in the industry with respect to key items on the financial statements.

Limitations

As with financial statements in general, the interpretation of common size statements is subject to many of the limitations in the accounting data used to construct them. For example:
• Different accounting policies may be used by different firms or within the same firm at different points in time. Adjustments should be made for such differences.
• Different firms may use different accounting calendars, so the accounting periods may not be directly comparable.

Qualification On The Usefullness Of Financial Statements

Although financial statements provide information useful to decision-makers, there is much relevant information that they omit. Factors of market demand, technological developments, union activity, price of raw materials, human capital, tariffs, government regulation, subsidies, competitor actions, wars, acts of nature, etc. can have a dramatic effect on a company's prospects.

A critical assumption in the use of financial statements (aside from stewardship), is often made that the past will predict the future. For trends that have continued for many years this will usually be true, at least for the near future. Ratio analysis for a single company or within an industry using similar accounting methods will be the most fruitful way of using the data provided by financial statements.

Study of Behavior on Empirical Controllers

Questionnaires were sent to controllers of the 500 largest American industrial firms with a 53.8% response. The accountants were asked to evaluate the adequacy of current reporting procedures. The disclosure rated as more deficient, accounting for human resources, was ranked fifth in importance. Effects of price-level changes were deemed the second largest deficiency, but ranked sixth in importance. The rate of return on investment was rated third in deficiency, but first in importance [Francia and Strawser,1972].

Study of Behavior on Empirical Investors

Extensive studies were conducted of three categories of investors: individual investors, institutional investors and financial analysts. Both individual and institutional investors regarded long-term capital gains as more important than dividend income which was more important than short-term capital gains. Both individual and institutional investors with portfolios under $10,000 rated short-term capital gains higher than investors with large portfolios [Most and Chang,1979].

All groups in the USA regarded financial statements as the most important source of information for investment decisions. In the United Kingdom, only institutional investors made that judgement. Financial analysts regarded communications with management as the most important source, whereas individual investors preferred newspapers and magazines. Financial statements were found to be equally important for "buy decisions" as for "hold/sell decisions" [Chang and Most,1981].

Study of Behavior on Empirical Investors (2)

A survey of bank lending officers revealed that half of them would refuse to loan to a company that did not submit financial statements, even though these might not be explicitly requested. Bank lending officers exhibited no preference for inventory or depreciation methods, but believed that consistency in the use of accounting methods is important [Stephens,1980].

Another study attempted to compare General Price Level (GPL) and traditional ratios in the prediction of bankruptcy. GPL data was found to be neither more nor less accurate than historical data. To justify the expense of preparing GPL statements, GPL data would have to be more useful. The investigators noted that GPL data may or may not be of value for other uses of accounting data [Norton and Smith,1979].

An extensive study was made of ratio tests in the prediction of bankruptcy. All nonliquid asset ratios performed better than any of the liquid asset ratios -- including the highly-touted current ratio and acid-test ratio -- for anywhere from one to five years in advance of bankruptcy. The researcher explains that a firm with good profit prospects in a poor liquid asset position rarely has trouble obtaining necessary funds. Another surprising discovery was that the failed firms tended to have less rather than more inventory -- contrary to what the literature might suggest [Beaver,1968].

Footnotes

There are generally two kinds of footnotes. The first type identifies and explains the major accounting policies of the business. The second type provides additional disclosure, such as details of long-term debts, stock option plans, details of pension plans, previous errors, lack of internal control and law suits in progress.

Although the footnotes are required, there are no standards for clarity or conciseness. Footnotes often seem intentionally legalistic and are awkwardly written [Tracy,1980].

Window Dressing

If these methodological variations are not enough to make the would-be investor wary, he or she should be aware that those who prepare financial statements often have an intention to misinform rather than to inform. Reduction in discretionary costs (research, adverstising, maintenance, training, etc.) can increase net income while having a detrimental effect on future earnings potential. A new management may similarly write-down the value of assets to reduce depreciation and amortization expenses for future years. A businessman may avoid replenishing inventory during the period prior to closing the books so as to increase his current ratio. Temporary payment of a current debt just prior to the financial statement date will achieve the same result. Retained earnings can be appropriated for future inventory price decline and later reported as net profit. Often an analysis of a series of annual statements, rather than those of a single year, will highlight such methods. More extreme practices are generally avoided by firms that must answer to regulatory agencies to be quoted on the stock exchange.

Examples of Striking Effects of Accounting Methods

Superior Oil Company owned 1.4% of Texaco, Inc. which was carried at a cost of $64 million, despite its market value of $118 million. A major brewery using LIFO inventory valuation revealed that the average cost method would increase inventory value by $33 million [Kiesco and Weygandt,1982]. High interest rates and a drop in oil prices caused Texaco, Inc. to reduce its LIFO-valued inventories by 16%, netting $454 million. A loss year was thereby turned into a profit year. General Motors doubled its net earnings in 1981 by changing its "assumed rate of return" on its pension plan from 6% to 7% [Bernstein,1982]. With its many old and historical-cost undervalued plants and buildings, Ford Motor Company showed historical cost earnings of $9.75 per share in 1979, despite a current cost income of $1.78 [Greene,1980].

Patents may represent unrecorded assets insofar as their true earning value far exceeds their costs. Goodwill is another asset with a true value which is hard to assess.

What Different Classes of Statement Users Look For

Government officials are generally concerned that reporting and valuation regulations have been complied with -- and that taxable income is fairly represented. Labor leaders pay particular attention to sources of increased wages and the strength and adequacy of pension plans (which tend to be chronically underfunded). Owners, shareholders and potential investors tend to be most interested in profitability. Many investors look for a high payout ratio (cash dividend/net income). Speculators pay more attention to stock value insofar as growth companies tend to have a low payout ratio because they reinvest their earnings. Bondholders are inclined to look for indicators of long-run solvency. Short-term creditors, such as bankers, pay special attention to cash flow and short-term liquidity indicators, such as current ratio. Both classes of creditors prefer lending to firms with low (usually no higher than 40-50%) leverage ratios, such as debt to total assets.


As indicated earlier, management can use financial statements for diagnostic purposes -- with different managers paying attention to different ratios. A buyer may look closely at inventory turnover. Too much inventory may mean excessive storage space and spoilage, whereas too little inventory could mean loss of sales and customers due to stock shortages. A credit manager may be more interested in the accounts receivable turnover to assess the correctness of her credit policies. A high sales-to-fixed-assets ratio reflects efficient use of money invested in plant and in other productive or capital assets. Higher levels of management, as with investors, tend to look at overall profitability ratios as the standards by which their performance is judged [Tamari,1978].

Differing Accounting Methods

Much of the incomparability of financial statements between businesses can be traced to different accounting methods. The most striking differences occur in (1) inventory valuation (FIFO, weighted average, etc.) (2) depreciation (straight-line, sum-of-the-years'-digits, etc.) (3) capitalization versus expense of certain costs, eg. leases and developmentof natural resources (4) investments in common stock carried at cost, equity, and sometimes market (5) definition of discontinued operations and extraordinary items [Kieso and Weygandt,1982].

Example of Ratio Analysis Use

Ratios are useful to indicate various symptoms. Usually those symptoms require more detailed analysis. For example, ratio analysis may reveal an increase in sales volume relative to inventory and receivables. But inventories could have increased less rapidly than sales due to reduced cost of goods, inability to replace inventory items, change in inventory policy or a change in inventory valuation. Receivables could have increased less rapidly than sales because of a more efficient collection policy, a larger proportion of cash sales or a change in policy with regard to the extension of credit. Sales volume could have increased due to plant expansion, an aggressive sales campaign, price increase, price decrease or extension of sales territories. Ratio changes lead managers to ask pointed questions.

Examples of Ratio Variation Between Businesses

A five-year average (1960-1964) of current ratio stands at 4.56 for hardware stores, 1.95 for grocery stores, 4.11 for cotton cloth mills and 1.70 for building construction contractors. Note the variation between types of retailer and manufacturer. These industry standards are not unhealthy. Another interesting ratio is fixed assets (depreciated book value) per tangible net worth. Five year percentages for this ratio are 5.7% for manufacturers of womens' coats, 80.1% for manufacturers of bakery goods, 59.9% for grocery stores and 10.2% for furniture stores. In general, this ratio is best kept low for new businesses, which should rent land and buildings until the future of the business is ensured. Experience has shown that small businesses should attempt not to exceed 66% and large businesses should avoid exceeding 75% [Foulke,1968].

Current Ratio - The Patriarch Ratio

Current ratio (the ratio of current assets to current liabilities) was perhaps the earliest ratio to gain widespread use as a measure of solvency. On the theory that $2 in current assets could safely cover $1 of current liabilities (with enough remaining to operate) a 2-to-1 value became an inflexible standard. But inventories can vary greatly in their liquidities. Oil, for example, can be rapidly liquidated, but inventories of service parts could take years to sell -- hardly "current assets". Also, small businesses can often liquidate their inventories more rapidly than large ones, indicating that current ratio may not be comparable for different size firms. Moreover, the relative investment in inventory rose from 77% of working capital to 83% of working capital between 1950 and 1962 for American corporations [Miller,1966]. Just-In-Time (JIT) inventory control using computers has dramatically decreased the amount of inventory held. Thus, indicators from the past might not be useful for the future. A 1-to-1 "acid-test" ratio which excluded inventory from current assets was a suggested replacement for current ratio, but the liquidity of the receivables portion of current assets is still open to question without information on collectability. In a strike or a recession, the business might have to pay its current liabilities by liquidating its current assets. Yet it is questionable if this could be done without a loss in operating capacity -- especially serious in a recession. In the case of an airline, cash flows are more a function of its current assets than of its non-current assets.

Types of Ratio Analysis

Careful financial statement analysis usually means the extraction of meaningful ratios from the statements. These ratios have been classified as measuring (1) liquidity (current ratio, acid-test ratio, etc.) (2) activity (receivables turnover, inventory turnover, etc.) (3) profitability (profit margin on sales, rate of return on assets, earnings per share, etc.) and (4) leverage (debt to total assets, times interest earned, etc.) [Kiesco and Weygandt,1982]. Ratios are often used to assess performance or as diagnostic tools to point up potential problem areas. Given the extremely varied entities for which financial statements are made -- and even the extreme variation between industries of an entity type -- the most productive use of these ratios is probably made either against industry standards or against ratios for previous years of the entity in question.

Characteristics of Entities Having Financial Statements

Non-profit organizations such as government and charities typically present statements which exhibit their resources and the way those resources are distributed or held. Stewardship and responsibility are the focus for these statements. Financial statements for private individuals focus on resources and obligations -- helping the person to assess his or her financial condition and to plan financial affairs (or obtain a bank loan) [Rosenfield, 1981]. Retailers are typically highly mortgaged, rely on credit to wholesalers (following a desire for a large and varied stock), often offer extensive credit to customers (or no credit, on a strictly cash basis) and reside in high-rent locations. Wholesalers tend to be characterized by large inventories, large sales volume (with small profit margin) and chronic credit problems with retailers. Manufacturers tend to have a substantial investment in fixed assets (machinery, equipment and buildings) and often face major problems due to a large work-force [Costales,1979]. Service industries -- such as railroads, airlines and public utilities -- have less of a problem with flow of inventory. Their focus tends to be on balancing operating revenue against operating expenses dominated by fixed assets (depreciation, repairs, replacement, maintenance, etc.). Companies with high proportions of current assets tend to be financed through short-term borrowing and shareowner investment. Industrial corporations tend to be financed primarily through shareowners, whereas public utilities and railroads are more often financed by long-term borrowing (bonds) [Holmes, et al,1970].

Comparability of Financial Statements

Comparison of financial statements forms the basis for much financial analysis. Four main types of comparison are made: (1) comparison of statements for the enterprise between successive years (2) comparison of a firm's statements with those of a specific competitor (3) comparison of a firm against an industry standard and (4) comparison with a target, such as a company's budget. Comparisons between different organizations may be difficult or even meaningless because of differences in (1) size of the organization (2) type of organization and (3) accounting methods used by the organization. Often, both the size and type of organization will dictate the kind of accounting methods used.

Kinds of Financial Statements

The balance sheet provides the user with data about available resources as well as the claims to those resources. The income statement provides the user with data about the profitability of the enterprise detailing sources of revenue and the expenses which reduce profit. The statement of changes of financial position shows the sources and uses of a firm's financial resources, demonstrating trends in the alteration of its capital structure. The statement of retained earnings reconciles the owners' equity section of successive balance sheets, showing what has happened to generated revenue.

Financial Statements: By Whom, For Whom?

Financial statements are summaries of monetary data about an enterprise. The most common financial statements include the balance sheet, the income statement, the statement of changes of financial position and the statement of retained earnings. These statements are used by management, labor, investors, creditors and government regulatory agencies, primarily. Financial statements may be drawn up for private individuals, non-profit organizations, retailers, wholesalers, manufacturers and service industries. The nature of the enterprise involved dramatically affects the kind of data available in the financial statements. The purposes of the user dramatically affects the data he or she will seek.